Bitcoin and the Coming Energy Crisis
Bitcoin, the high-flying honey badger asset, may be facing its Blackout Swan Event. How will the crypto industry tackle an onslaught of political headwinds as regulators look for scapegoats?
When news broke that Elon Musk would debut as host for Saturday Night Live on May 8, 2021, interest in cryptocurrencies was at a fever pitch. Dogecoin was the meme token of the day having catapulted the fortunes of eager loyalists to new heights ahead of the much anticipated event. The hype buoyed the entire sector as Bitcoin was lifted to $60,000/coin.1
It became the classic buy-the-rumor-sell-the-fact moment as Dogecoin’s momentum began eroding minutes before the go live extravaganza. Doge had crashed 50% just four days later and Bitcoin plunged by over $20,000/coin 11 days post-event. The ebullient crypto-bears were certain the bubble had burst. Undeterred crypto-bulls continued the cause, pressing ahead as just another growing pain along the revolutionary technology’s trajectory to Alpha Centauri and beyond.
Fast forward to early October 2021, crypto-mania is once again in full swing following the SNL-induced “Elon Correction.” Prices for cryptocurrencies began surging in mid-July after Bitcoin dipped below $30,000/coin. Rotations into the crypto majors Bitcoin and Ethereum have sparked new hope and excitement for the industry just as the bulls predicted. Dogecoin is still floundering at $0.25, or one-third of its all-time high reached pre-SNL leaving Doge “hodlers” behind at least in this round of the recovery.2
Energy consumption to support the Bitcoin network, a lagging indicator for price movement, is rallying per the University of Cambridge Bitcoin Electricity Consumption Index.3 According to this index, Bitcoin would effectively rank as the 34th country by electricity consumption just behind the Netherlands.4 This will set the stage for what I believe is the next major headwind for cryptocurrencies globally.
Rising energy prices have begun to make headlines across the world. Ahead of winter in the United States, natural gas monthly contracts are trading at prices we haven’t seen since for this time of year since September 2009 at over $6/MMBtu.5 As winter approaches, liquefied natural gas (LNG) exports from the US are sailing into Asia and Europe as countries scramble to secure reserves ahead of peak usage months.6
Natural gas is commonly the fuel that serves as the marginal source for electricity generation given the inherent characteristics of natural gas power plants. They are often the most responsive power generators available to grid operators to meet the next megawatt of demand by consumers. At all times the grid must be balanced between supply and demand to ensure reliability of the system—keeping the lights on and the beer cold.
This is where cryptocurrencies may face their biggest political risks yet. Countries in the northern hemisphere who experience anything but mild winters will have stressed power grids and fuel supplies to contend with. With economic stimulus wearing off in the United States and political relationships facing immense strain globally, the world enters a precarious situation ahead of a potential energy crisis. During times like these, politicians and regulators will be eagerly looking for scapegoats to deflect blame. Bitcoin, already consuming as much electricity as all the refrigerators in the United States, may be the low-hanging fruit they are looking for.7
While Bitcoin has been the most tenacious asset in recent memory, a healthy dose of caution may be warranted. If the United States is forced to shutdown or curtail LNG exports to Europe, watch out. Difficult decisions will have to be made as grid operators are obsessed with one primary task: reliability. China has already limited manufacturing output by shutting down factories and limiting days of operation.8
We are in October. This is a low energy use time as we transition from summer air conditioning load. Industrial output is the first to be curtailed ahead of residential customers viewed as absolute firm load—demand you only cut as a last resort. Given that consideration, Bitcoin miners and their server farms may be the most politically palatable to face renewed criticism. If regulators choose to scrutinize these mining entities, to pull the plug on these hubs, Bitcoin will have to once again regroup and reassess as it has countless times past. This time, however, may be different.
Coinbase. (October 9, 2021). “Bitcoin Price [Chart].” https://www.coinbase.com/price/bitcoin
Coinbase. (October 9, 2021). “Dogecoin Price [Chart].” https://www.coinbase.com/price/dogecoin
University of Cambridge Bitcoin Electricity Consumption Index. (October 8, 2021). “Historical Bitcoin network power demand [Chart].” https://cbeci.org/index
University of Cambridge Bitcoin Electricity Consumption Index Comparisons. (2021). “Country ranking, annual electricity consumption [Chart].” https://cbeci.org/index/comparisons
CNBC. (October 8, 2021). “Natural Gas (Nov’21) [Chart].” https://www.cnbc.com/quotes/@NG.1
Upstream Online. (September 30, 2021). “Gas prices continue to surge as Europe and Asia compete for LNG cargoes.” https://www.upstreamonline.com/lng/gas-prices-continue-to-surge-as-europe-and-asia-compete-for-lng-cargoes/2-1-1075340
University of Cambridge Bitcoin Electricity Consumption Index Comparisons. (2021). “Industrial & Residential [Chart].” https://cbeci.org/index/comparisons
World Politics Review. (October 6, 2021). “China’s Power Outages Could Have Global Implications.” https://www.worldpoliticsreview.com/trend-lines/30019/china-electricity-shortage-could-have-global-implications