Bitcoin, Cryptocurrency and Blockchain Discussion Thread
Here are my basic observations.
In the Short Oil thread, we have had substantial discussion of the financialization of oil. The idea is that so many investors want to hold oil as financial hedge, i.e. a store of value, that the market price for oil becomes driven not by demand for physical oil, but by demand for a financial asset. This has had the consequence of driving up oil production to the point of a multi-year glut. This financialization of oil was also encouraged by cheap money from the Fed. The Fed was pursuing quantitative easing to help the economy recover from mortgage lending crisis and the Great Recession. All that surplus cash in the system needed to go somewhere, so a bunch of it went into overinvesting in oil. Not only did the oil glut lead to painful economic dislocations, but it was downright nasty for fighting climate change.
So what an economy to do with surplus cash? Any attempt to funnel that into commodities can have ruinous consequences. It's not good to overproduce commodities just because we have a financial need to store value in something. And yet when there is more cash than useful investments for that cash, there is a genuine need to have some place to safely park the cash. Moreover, we depend too much on central banks to bail the economy out, even though pretty much the only thing they can do in a recession is flood the economy with cash. Enter bitcoin.
Bitcoin is sort of the Seinfeld of commodities. What was the show about? Nothing, absolutely nothing. When cash need a safe parking lot, it can load up on bitcoin. No matter how high demand for bitcoin soars, the supply of bitcoin will not budge. The supply is perfectly inelastic. This avoids the risk of commodity risk. How? The commodity is nothing, and no matter how much you pay for nothing, you can make more nothing than nothing. Granted the bitcoin miners might burn through more CPU hours and MWh, but no matter how much they put into it they cannot make more of it than was predetermined. At the end of the day what incremental value did all the cost create? Absolutely zero? Bitcoin is literally the biggest nothing on the planet, and that may be what makes it so valuable. From an environmental and economic point of view, sometimes the best thing to do with excess cash is absolutely nothing.
Many energy investors seem to want a basic store of value. The perceive that energy assets have some intrinsic value to the economy and they want to hitch a ride to it. Bond investors are heavily dependent on fossil fuel deal flow. Renewables are so cheap that they can't fully replace all the fossil fuel deal flow. Energy will increasingly need less capital to supply the total amount needed for the global economy. This shrinkage of fossil assets is a big problem. And it is made much worse when central banks and governments are trying to goose the economy. There is way too much cash chasing energy and other commodity investments. Can bitcoin help? Well, maybe it it better to store wealth in bitcoin than to drill another oil well. And if there is a glut of renewable energy anywhere, it is better to mine bitcoin from the surplus capacity than to remain dependent on thermal generators for occasional power. Bitcoin puts a global floor on the price of renewable energy. (Green hydrogen can do this too, but may require much more capital investment to tap the surplus).
So maybe bitcoin can avoid overinvestment in fossil, the financialization oil, and energy gluts. It is not a perfect solution and by no means a complete solution, but sometimes we do need a safe place to park excess cash.
