This article about the latest pullback in the price of Bitcoin makes it sound like Bitcoin is some kind of epic battle ground where superhuman forces slog it out for dominance. There are institutional buyers, super-rich whales, and Bitcoin miners. Everybody but the miners are buyers. Reading between the lines, we're supposed to conclude that institutions and whales are bigger and stronger than miners, and that the battle will be won by the buyers, sending the price of Bitcoin to new highs. However, the article reveals a truth that I pointed out back in 2017. Bitcoin requires energy for its mere existence. Miners aren't selling Bitcoin for no good reasons. They are sellers because they have to pay the bills.
The fatal flaw of Bitcoin is its dependence on energy. But the cost of this isn't carried equally within the Bitcoin community. The miners are stuck with bills while Bitcoin investors can hold Bitcoin virtually free of charge. It's no surprise then that it's the miners that are driving the price down. Energy is getting more expensive. They have to sell for millions of dollars every month just to stay in business.
One might argue that this need to sell Bitcoin is no different from gold miners needing to sell gold in order to stay in business. But this is a false equivalence. Bitcoin miners double as transaction enablers. Without Bitcoin miners, the network goes down and Bitcoin becomes worthless. This is not the case with gold. If gold miners go belly up, gold will not only remain valuable, it's likely to go up in price.
Bitcoin is completely dependent on its network, and this must be paid for by people who have two options only. They can sell Bitcoin or they can hike transaction costs. But transaction costs would have to go up a lot in order to pay the bills, so much so that it would crush the attractiveness of Bitcoin as an investment. Furthermore, jacking up transaction costs by a meaningful amount might stop so many people from transacting in Bitcoin that the miners end up no better off.
For Bitcoin to remain up and running, miners have to sell Bitcoin. Miners constitute in this way a permanent pool of sellers. However, Bitcoin is not used for anything outside of speculation. There's no industry that require it for its operations. Bitcoin has a permanent pool of sellers, with no corresponding pool of buyers. Bitcoin can go bid-less, in which case its price goes to zero.
This is in stark contrast to gold which has a permanent pool of buyers in industries ranging from jewellery to high tech medical equipment and computers. But there's no guaranteed pool of sellers. If gold miners go belly up, there will be no guaranteed supply. Gold has a permanent pool of buyers, with no guaranteed pool of sellers. Gold can go offer-less, in which case its price goes to infinity.
 |
| Cryptocurrency mining farm |
No comments:
Post a Comment