Bitcoin’s ‘fire of truth’ was splashed with a bucket of water

MicroStrategy co-founder Michael Saylor, a symbol of hubris during the dotcom boom that has since become full bitcoin, describes the cryptocurrency this way: “A swarm of cyber hornets serving the goddess of wisdom , feeding on the fire of truth, growing smarter, faster and stronger behind a wall of encrypted energy.”

cool cool. That crackle is enough to fan the cult flames of the laser-eyed mob and attract junk bond investors when times are good, liquidity is plentiful and interest rates are at their lowest. But with soaring commodity prices, supply chain risks and a war in Europe painting a stagflationary outlook for the world as a whole, that burning smell comes not so much from the fire of truth as from valuations. speculation that go up in smoke.

Bitcoin’s 50% drop in the past six months highlights its flaws in times of stress: it’s an energy vacuum at a time when electricity prices are rising and offers no dividends in an environment of rising interest rates around the world as central banks act against inflation. It also began to attract increased regulatory scrutiny. That’s on top of the big scalability issues that have hampered its adoption in payments, not all of which are solved by, say, the Lightning Network on display in El Salvador. His pseudonym may be popular with cybercriminals, but people today prefer hard cash.

Bitcoin’s promise as an inflation hedge is also collapsing as the electricity that powers it becomes more expensive. Power accounts for about half of the overhead of mining companies that funnel ever-expanding computing resources into bitcoin. Although the price of the token is still around twice the breakeven rate of these companies, they have bills to pay and capital expenditures to fund, which means selling Bitcoin for dollars.

Miners should also plan for alternatives to hotspots like Texas, a US state where crypto mining is expected to require more energy than Houston, the fourth most populous city in the US, by mid-2023. . Sustainability was one of the main reasons cited in the Wikimedia community’s successful proposal to stop accepting crypto donations.

As energy needs increase, the level of demand required to keep the price of Bitcoin afloat also increases. William Quinn, co-author of Boom And Bust: A Global History of Financial Bubbles, estimated that the Bitcoin network burns $32.9 million a day in energy costs, based on February data. It’s probably even higher now. This is a pretty big hole for new bettors to fill.

Yet not all the Saylors in the world will persuade consumers to place ever-bigger bets if their own debts pile up. In a world of more expensive necessities, where even a Netflix subscription becomes a luxury, it’s easy to see why the risk-fueled day traders of Coinbase Global or Robinhood Markets are disappearing from view.

When cash is king, Bitcoin ends up looking more like a leveraged bet than digital gold. Even MicroStrategy is feeling the heat from the impairment charges as Bitcoin rebounds near the company’s average purchase price of $30,700.

What happens next? Crypto proponents acknowledge that more short-term pain is ahead, but also promise that great things will follow for people clinging on to life. Early adoption boosters compare the nascent crypto universe to the early days of the internet.

Now, it’s certainly true that whether it’s booming hedge fund managers trading volatile tokens, or emerging markets with weak governance embracing crypto as a pathway to fintech wealth, crypto is increasingly part of the speculative furniture of society.

A 50% drawdown at around $30,000 is just a wound for longtime fans of Bitcoin, which has gone through several boom and bust cycles since its first white paper in 2008.

However, the narrative of technology adoption requires the ability to tell the difference between Googles and Pets.com of crypto, and whether Bitcoin itself is vulnerable to disruption by public or private sector rivals. It also assumes that El Salvador’s uneven and glitchy deployment will become an example that other nations will want to emulate.

And what should really worry fans is the selling pressure on stablecoins, like Tether and Terra, which are run algorithmically or with currency reserves to prevent wild price swings. If even they are dropped for cash, that is less fuel for the broader crypto market.

Maybe one day the “fire of truth” will prove Saylor right. But for now, Bitcoin seems like a great way to burn purchasing power while burning the planet.

Lionel Laurent is a Bloomberg Opinion columnist covering digital currencies, the European Union and France

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