White House energy report delineates the costs, with little mention of benefits, of PoW mining
Inflation numbers remind us that macro factors continue to be of utmost importance for financial markets
A rare technical analysis event appears for bitcoin
White House Report Paints a One-Side Picture for PoW Mining
Late last week, the White House Office of Science and Technology Policy (OSTP) released a report titled “Climate and Energy Implications of Crypto-Assets in the United States.” The report, requested by the White House in its March 9th Executive Order “Ensuring Responsible Development of Digital Assets,” outlines the energy consumption, greenhouse gas (GHG) emissions, and environmental impacts of Proof of Work (PoW) mining. Like many of the other reports published at the request of the White House under this Executive Order, it is largely an information repository and data resource, with suggestions for next steps, such as GHG emission minimization, energy reliability assurances, data monitoring, and standards setting, but with no explicit regulatory or legislative directives. However, unlike previously published reports, which were more muted in tone, this one could be construed as more hawkish for the industry, particularly PoW miners. Notably, it takes pains to outline the electricity and emission costs of PoW mining without making much attempt to explain its advantages. The only positive notes in the report are passing mentions of methane reductions, curtailed energy usage, or bootstrapping clean energy sources.
We find it instructive to pull out the most important statistic from the report: global PoW mining is responsible for “0.2% to 0.3% of global (CO2) emissions and 0.4% to 0.8% of U.S. emissions, respectively.” This is not far off from our finding in our Bitcoin Net Zero report that Bitcoin mining, which was about 2/3 of the global PoW mining industry before Ethereum’s move to Proof of Stake yesterday, represented 0.1% of total global CO2 emissions in 2020. Now, this is not zero emissions, as much as we would like, but neither are any other economic activities measured in the report, such as data centers, refrigerators, and lighting. The difference is that no one doubts the benefits of lighting and refrigerators, yet many are still skeptical about the benefits of a decentralized digital asset of fixed supply controlled by no single entity. One’s view on the debate can come down to the perceived benefits, which admittedly are difficult to measure, juxtaposed with its costs, which are easy to measure.
Greenhouse gases produced in the PoW mining process do represent an impediment to the White House’s environmental goals, but then again so do many other types of economic activity, named and unnamed in the report. It is incumbent on the digital asset industry to continue to increase its usage of renewable energy and, because of its mobility, to seek sources of energy that would otherwise go wasted or curtailed. The OSTP has 12 months to update the report with new findings and address any shortcomings in the analysis. We encourage it to think about how this novel technology can be part of the solution rather than an impediment to achieving its goals of reducing GHGs.
It is also worth noting that the U.S. Senate Committee on Agriculture held a hearing yesterday (9/15) on bipartisan legislation that would give the CFTC regulatory authority over digital asset commodities like Bitcoin. That legislation (in its current form) requires the CFTC to complete a report studying the energy consumption and sources of energy used in connection with the creation and transfer of digital commodities. Of the many proposed piece of federal legislation on crypto, this bill seems to be one of the most likely to become law in the coming year. As such, we believe it is significant that the chosen bipartisan approach is to gather the facts and produce a report rather than take a more aggressive approach without sufficient data.
Hotter than Expected Inflations Remind Crypto Investors that Macro is still a Dominating Force
On Tuesday morning, the Consumer Price Index (CPI), one of the most widely recognized measures of US inflation, was reported for August by the Bureau of Labor Statistics. The numbers, which were higher than expected, were received poorly by financial markets, sending the price of nearly every asset class sharply lower: bitcoin, stocks, bonds, and even the traditional inflation hedge, gold. The news and market reaction are a stark reminder that the macroeconomic environment still has a tight grip on the direction of financial assets, including bitcoin.
The news was disappointing in the sense that there had been hopes that inflationary measures had begun to cool over the past few months, driven by higher interest rates, supply chain bottleneck alleviations, and declining energy prices. This dynamic, in theory, would give monetary policymakers evidence they needed to lessen their hawkish stance on interest rates. Unfortunately, the recent reading appears to have reversed that apparent trend. As a result, market expectations for next week’s FOMC Fed Funds rate decision favor a 0.75% rate increase but open the door to a possible 1.00% increase as well. And forward rate expectations continue to rise. The Fed Funds rate 12 months in the future, as determined by the Fed Funds futures trading in the market, is sitting at 4.3%, significantly higher than the current target range of 2.25% - 2.50%.
Unfortunately, the macro news has pushed correlations between bitcoin and traditional asset classes, such as US equities, back towards the highs after declining over the summer months.
However, these higher correlations are not just for bitcoin, but for all types of asset class pairs, making asset allocation a challenging exercise. For example, the bedrock of the 60/40 equities/bonds portfolio, the inverse correlation with stocks and bonds is being challenged. Not only have their correlations been positive, but they are at nearly their highest levels of correlation in over 10 years.
Bitcoin Continues to Trade Below its 200-Week Moving Average
Bitcoin continues to trade below its 200-week moving average, a rare technical analysis event in its trading history. Bitcoin’s price at its last weekly close, $19,819, is 15.0% below its 200-week moving average (200w MA) of $23,326. This is one of the largest discounts to this average on a weekly close, second only to the 15.4% discount seen on the week of August 22, 2022. Bitcoin has not often traded below its 200w MA. Of the 436 weeks measured, bitcoin has only closed below its 200w MA 17 times, or 3.9% of the measured weeks, grouped in three “episodes”, including the current one. Of the two previous episodes in which bitcoin had closed below its 200w MA, the forward 12-month return have been +153.8% (from 8/17/15) and +1,004.2% (from 3/9/20). While no guarantee of future returns, we thought it was important to show the rarity of the current trading paradigm.
Market Update
Financial markets struggled this week with most major asset classes declining. Bitcoin was up 2.2% on the week, driven by a short-squeeze driven rally last Friday which was then mostly retraced in Tuesday’s sell off. Equities fell on the week, with both the S&P 500 and Nasdaq Composite down 2.6%. Despite the higher-than-expected inflation numbers, gold fell 1.2% on the week. Bonds were no safe haven either, with Investment Grade Bonds down 0.7%, High Yield Bonds down 2.1%, and Long-Term US Treasuries down 0.1% on the week. Real yields and inflation expectations both increased on the week with the higher-than-expected inflation numbers.
September 21st – Next FOMC interest rate decision September 30th – CME bitcoin futures and options expiry October 7th – United States Non-Farm Payrolls
October 13th – Consumer Price Index
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