miners

Apr 07 2021

China’s Bitcoin Mining Industry Could Derail Climate Targets: Researchers

As China’s bitcoin mining industry grows bigger, some researchers believe the electricity-gulping bitcoin mining may prevent China from achieving its climate goals.

This was made known in a recent study published in the Journal Nature by the researchers.

Increasing Concerns Over Climate Security

The study reveals that China powers approximately 80% of the world trade in cryptocurrency.

Given the fact that Bitcoin operates on the blockchain, every transaction is encrypted by a network operated by miners, which use high electricity consumption in the process.

The miners use high-powered computers to validate transactions, which consumes huge electricity and may have implications on climate security.

However, the Journal Nature report shows that 40% of China’s Bitcoin is powered by coal. This is where the problem starts.

Researchers believe that since most of these big coal plants emit carbon, they may have adverse effects on the climate’s health.

While China projects to overcome carbon emissions before 2030 and become carbon neutral by 2060, the researchers warned that the lofty objective might be impossible with rising Bitcoin mining activity.

Also, Nature Study projected that China’s Bitcoin mines might accumulate approximately 130.5m metric tons of carbon emission by 2024.

The study gathers that the availability of affordable electricity in China and access to hardware-enabled companies in China controls about 78.89% of the global bitcoin blockchain.

The activities of these companies involve mining coins, tracking and monitoring cryptocurrency transactions.

However, the co-author of the piece, Wang Shouyang, warned that continued Bitcoin mining activities could have grave consequences on the climate if left unchecked.

Way forward On China’s Crypto Mining Industry

Experts have recommended some alternative paths that the Chinese government could take in managing cryptocurrency mining and preserving its climate security policy.

In this regard, Shouyang advised the government to concentrate on upgrading the power grid to create a stable power supply from renewable energy sources.

He explained that renewable energy sources provide cleaner energy and are also cost-effective, adding that this will even motivate the miners to relocate from coal-powered regions to clean-energy regions.

According to a Cambridge University’s Bitcoin Electricity Consumption Index, it is envisaged that the crypto-mining industry will consume 0.06% of the globe’s electricity production.

However, experts enjoined the Chinese government not to raise carbon taxes as a form of deterrence. Instead, they should work in providing alternative solutions.

China imposed a blanket ban on cryptocurrency in 2019 but has allowed the cryptocurrency mining industry to continue.

China’s coal-rich regions are imposing stiffer measures on Bitcoin miners, given their policy in curbing emissions. For example, In April, the provincial government of Inner Mongolia has rolled out plans to outlaw cryptocurrency mining before the end of April.

China’s Bitcoin Mining Industry Could Derail Climate Targets: Researchers

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Mar 23 2021

Ethereum’s high gas fee crisis won’t be solved by EIP-1559: Coin Metrics report

A report by analytics provider Coin Metrics has delved into the world of Ethererum transaction fees noting that they’re still at highest-ever levels and even a much touted approaching network upgrade is unlikely to alleviate the problem.

According to the Ethereum Gas Report by Coin Metrics, median fees on Ethereum have been consistently over $10 for most of 2021. Comparatively, the average Ethereum transaction fee reached just $5.70 at the height of the 2017/2018 bull run.

It attributed some of this increase to the increase in ETH prices themselves which will make gas more expensive. Since the beginning of 2021, ETH has surged 125% to current prices despite a correction of 19% from its all-time high of $2,050. However, over the same period, the median gas price has increased by 532%.

Different types of transactions require different amounts of gas — a simple ERC-20 token transfer uses much less gas than a complex smart contract operation for an automated market maker for example. However, it noted that rather than DeFi being the root cause of the high gas fees, it is simply more transactions in general.

“Since January 2020, the amount of gas used per transaction has trended downwards. This shows that increased transaction complexity is not responsible for high transaction fees.”

Ethereum transactions are currently auctioned, with those paying more gas taking miner priority and getting faster transactions than those that have set a lower gas limit.

The report noted that the current high fees are because the blocks are consistently full, around 95%, and have been since mid-2020 and the DeFi boom. For March 2021, Ethereum blocks have been 97%-98% full, the research found.

It explained that miners need to specify which transactions to include when mining new blocks and each block can only include a limited number of transactions (on average 160 to 200) due to the maximum block size.

“So miners naturally prioritize the transactions with the highest gas prices since they will earn them more money if these transactions are included.”

The report concluded that the highly anticipated EIP-1559 network upgrade, which has been designed to change the auction mechanism and burn some of the fees, is unlikely to solve the problem of high gas costs, and only scaling solutions will be the true long-term fix.

Coin Metrics explained that the upgrade will only help make fees more predictable as the cause of high fees is the scalability problem.

“If Ethereum can only process a few hundred transactions (on average) per block, there’s going to continue to be high fees as long as DApp usage keeps increasing. Gas prices will continue to be high as long as there’s high competition for block space.”

Ethereum\’s high gas fee crisis won\’t be solved by EIP-1559: Coin Metrics report

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Mar 21 2021

Bitcoin mining stocks have outperformed BTC by 455% over the past 12 months

Despite the top publicly-listed Bitcoin mining firms operating at losses, their share prices have dramatically outperformed BTC over the past 12 months.

Appearing on CNBC, Fundstrat’s vice president of digital asset strategy, Leeor Shimron, shared his analysis into the market performance of the four-largest publicly-traded mining firms — Marathon Digital Holdings, Riot Blockchain, Hive Blockchain, and Hut 8, each of which represent a market cap of more than $1 billion.

Over the past 12 months, Shimron found the average return for shares in the mining firms to have been 5,000%, while BTC has gained 900% over the same period. Unsurprisingly, the stocks were found to have a “high positive correlation” with BTC.

The researcher concluded that for every 1% price move in BTC, Bitcoin mining shares move by 2.5% on average. However, the observation applies to both upward and downward price moves, meaning mining stocks are likely to plummet with more than twice the aggression of BTC during bearish market conditions.

“They’ll probably be hit hard as Bitcoin draws down,” he said.

Shimron attributed the wild volatility in miner stocks to the lack of regulated crypto investment products in the United States, speculating that “until a Bitcoin ETF is approved, investors may view public mining companies as one of the only ways to get exposure to Bitcoin.”

“Since the primary source of revenue is Bitcoin, these companies are fundamentally long [on] the industry — so investors are essentially making a ‘picks and shovels’ bet when they invest in miners.”

Noting that Coinbase’s shares are “trading at a roughly $100 billion valuation in the private markets,” Shimron added: “Clearly there is investor appetite to gain exposure to operators within the crypto space, and miners are just another segment within that.”

Shimron also noted that supply chain disruptions amid the coronavirus pandemic were beneficial to the four largest mining firms — who were able to stock up on next-generation hardware, such as Bitmain’s Antminer S19 series.

“They’ve made a huge capital investment and operate at a loss to position themselves for the current bull run,” he said, adding:

“By building up their cash rate capacity and increasing their operating leverage, they effectively shield themselves from competition amongst new miners. So they’ve increased their economies of scale to retain market share, and I believe that should pay dividends going forward.”

Bitcoin mining stocks have outperformed BTC by 455% over the past 12 months

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Mar 17 2021

Bank of America analyst slams Bitcoin : Buying 1 BTC is ‘like owning 60 cars’

Bank of America analyst Francisco Blanch has slammed Bitcoin as “exceptionally volatile”, “impractical” and an environmentally disastrous asset that’s useless as a store of wealth or an inflation hedge.

For good measure Blanch also asserted the cryptocurrency is an impractical method of payment as it can only handle 1,400 transactions per hour compared to the 236 million transactions processed by Visa.

The report — which echoes the hardline stance taken against crypto by traditional financial institutions in years past — is in stark contrast to other major banks such as Goldman Sachs and JPMorgan, which have since embraced Bitcoin as an asset.

Contradicting the notion that Bitcoin’s fixed supply of 21 million will inevitably drive price growth over time, Blanch argues BTC’s price is driven by supply and demand — asserting that because the supply is fixed, fluctuating demand is the only thing driving the price.

Blanch also dismissed the idea that Bitcoin is a safe haven asset. “Bitcoin has also become correlated to risk assets, it is not tied to inflation, and remains exceptionally volatile, making it impractical as a store of wealth or payments mechanism,” the Bank of America researcher stated.

“As such, the main portfolio argument for holding Bitcoin is not diversification, stable returns, or inflation protection, but rather sheer price appreciation, a factor that depends on Bitcoin demand outpacing supply.”

Given many investors are mainly concerned with returns, Bitcoin’s track record of appreciation as the best performing asset over the past ten years may see them dismiss such criticisms.

However, perceptions about Bitcoin’s negative environmental impact may pose a threat to increasing corporate and institutional adoption, as it conflicts with the ‘triple bottom line’ accounting that climate conscious shareholders are increasingly focused on.

BoA states that Bitcoin has a higher carbon footprint than any other human activity in terms of dollar-for-dollar inflows, with the report estimating that Bitcoin’s energy usage has grown more than 200% in the past two years and is now comparable to the Netherlands, Greece and the Czech Republic.

While Bitcoiners often cite figures suggesting that between 39% and 76% of Bitcoin mining uses renewable energy, BoA’s report asserts that in fact three quarters of BTC mining occurs in China where more than half of electricity is produced by coal. Further, it states half of all Chinese mining occurs in Xinjiang province where 80% of power comes from coal.

(This ignores the seasonal migration of miners to Sichuan to take advantage of cheap hydroelectric power during the rainy season. Coinshares estimates that it’s actually miners in the Sichuan province that account for 50%-66% of global hashrate.)

BoA states that rising prices drive up mining difficulty which inexorably adds to Bitcoin mining’s carbon output.

“The rising complexity of the system creates ultimately a vicious environmental cycle of rising prices, rising hashpower, rising energy consumption and, ultimately, rising CO2 emissions.”

BoA calculated that a $1 billion investment in Bitcoin produces the same carbon emissions as 1.2 million petrol powered cars over the course of a year — which means Tesla’s $1.5 billion investment is equivalent to adding 1.8 million petrol powered cars onto the roads each year, undermining the electric car maker’s environmental credentials.

And retail ‘wholecoiners’ weren’t spared from environmental blame with the analyst claiming: “A single Bitcoin purchase at a price of ~$50,000 has a carbon footprint of 270 tons, the equivalent of 60 ICE [petrol] cars.”

Leaving no criticism alone, Blanch also noted 181 companies faced risks linked to Bitcoin around “money laundering, corruption, bribery, fraud, and breaches of data privacy” and that Central Bank Digital Currencies also pose tremendous long term threats to Bitcoin.

It’s worth noting the BoA report is the view of a single analyst and opinions vary within large organizations. Even at the overall pro-Bitcoin Goldman Sachs, some divisions have made similar criticisms of Bitcoin, while other divisions talk up Bitcoin as the future.

It’s clients may also disagree with the analysis. Bank of America’s January fund manager survey found that going ‘long Bitcoin’ was the ‘most crowded trade’ of the month.

Bank of America analyst slams Bitcoin : Buying 1 BTC is ‘like owning 60 cars’

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Feb 04 2021

Justin Mart, Ryan Yi from Coinbase take a Closer Look at Ethereum, DeFi Growth, Also Review OCC, FinCEN Developments

Digital asset exchange Coinbase recently published its Around the Block #11: “A snapshot of decentralized finance (DeFi) and two sides of the crypto regulatory spectrum” (report), which aims to cover important issues in the crypto and blockchain industry.

In this latest edition, released on February 3, 2021, Justin Mart and Ryan Yi take a close look at the current state of DeFi and the evolving digital currency regulatory space.

During the current crypto bull market, DeFi has “continued its strong rise,” the report confirmed. It pointed out that starting in the summer of last year, DeFi initiatives experienced dramatic growth in Total Value Locked or TVL (as tracked by DeFi Pulse and many other sites).

Coinbase’s report noted that DeFi’s meteoric rise is still “spurred” by the yield farming phenomenon. According to the US-based exchange, this includes “a virtuous cycle: Yield farming mechanics induce participants to add capital → which increases TVL → which drives governance token valuations → which increases yield farming subsidies → which continues the cycle.”

As stated in the report:

“Nevertheless, true zero-to-one innovations in DeFi cannot be discounted as part of the growth story. These are things like synthetic assets (e.g. Synthetix, UMA, and Mirror), increased capital efficiency in financial products (e.g. Aave, Compound), open financial access (including flash loans and emerging remittance use cases), and composable protocols that layer DeFi projects together like Yearn.”

Total Value Locked in DeFi protocols (TVL) currently stands at over $32B at the time of writing, a remarkable 2700% growth year-over-year. Meanwhile, the number of DeFi users has grown to exceed 1.2M, as “defined by the number of unique addresses accessing DeFi services,” the report revealed. It also noted that mainstream protocols such as Uniswap and Compound now claim around 200–500K users, with “most other DeFi apps between 25–50K users.”

DEX (or decentralized / non-custodial crypto exchange) volume has also maintained its steady growth since July 2020. Total DEX volume has “surpassed most centralized exchanges, topping $10B per day in January 2021,” the report confirmed. It also mentioned that volume has been “driven by growth in DeFi, but also tailwinds from broader crypto bull markets and sustained traction in categories where DEXs enjoy competitive advantages.” These include “access to the long-tail of novel DeFi tokens; and efficient swaps between highly correlated assets (e.g. stablecoins),” the report added.

But DEXs today settle trades on the Ethereum mainnet, and are subject to “oppressive” gas prices during periods of increased activity. This “drives continued interest in scaling solutions, with a notable milestone as Synthetix has launched on Optimism (a rollup-based scaling solution),” the report added.

The report further noted:

“DeFi is moving too quickly for any single person to keep track.”

But some major themes include:

DeFi projects are embracing composability: New DeFi projects “either introduce new primitives, or bundle existing primitives to create net new products.” Think of these primitives “as lego bricks, 6 months ago we were designing and building single bricks.” Today we are “combining these bricks into cars, planes, and castles.”
Composability is “extending into DeFi versions of partnerships: DeFi projects are wrestling with key questions around moats, defensibility, and top-line growth.” Most projects seem to “embrace open community collaboration, believing communities create moats (you cannot fork a community).” This exact vision “initially led to the governance token and yield farming phenomenon, and today is evolving into creative partnerships and collaborations, most notable in Sushiswap’s 2021 roadmap.”
Scalability is “becoming a bottleneck, but solutions are coming: As the base Ethereum chain struggles under scale, several protocols are openly exploring integrations with Layer-2 networks or other blockchains.” Look for “significant progress in 2021, especially in Ethereum rollups.”
Regulatory uncertainty impacts development: “In tandem, the SEC lawsuit against Ripple and CFTC lawsuit against BitMEX demonstrate that regulatory bodies are paying close attention to crypto, and not afraid to charge the largest players in the space.” It’s reasonable to “expect increased attention on DeFi based projects, and this uncertainty continues to impact feature development in regulated jurisdictions.”

During the last quarter, FinCEN and the OCC have introduced several crypto regulatory policies, the report from Coinbase noted. While both are under the purview of the US Treasury Department, the guidance appears to be on “the opposite ends of the spectrum toward crypto friendliness,” Coinbase claims.

They explained that FinCEN is responsible for ensuring that companies follow applicable KYC/AML regulations, which are really important for digital currency exchanges (or VASPs — virtual asset service providers) such as Gemini, Kraken, Coinbase, among others. Digital asset exchanges must verify their users’ identities (KYC) and use blockchain or DLT forensic tools to examine digital currency transactions to ensure deposits don’t come from illicit sources.

FinCEN has proposed an amendment to the Bank Secrecy Act’s FBAR regulations, which is specific to cryptocurrencies or VASPs. The new amendment will require US residents to report their cryptoc-asset holdings and transfers valued at more than $10,000 regardless of where these assets are being held.

The amendment could require US citizens to report crypto holdings in excess of $10,000 that are maintained in overseas accounts, and also require exchanges or digital wallets to store client details related to any transfer valued at more than $3,000, and also report these details to FinCEN for any transfers valued at over $10,000.

The public notice only had a 15-day comment period over the recent US holiday break, which made it quite challenging for VASPs to respond properly.

Many crypto firms (Coinbase, Fidelity, Square, CoinCenter, ErisX, among others) have issued strong responses which have noted that the suggested rules may create issues. These companies or organizations have also criticized the rushed nature of the proposal. Since then, the US Treasury decided to extend the comment period, but the future still “remains unclear given the new administration,” Coinbase claims.

The Office of the Comptroller of the Currency (OCC), an independent bureau in the Treasury which is responsible for assisting with the “charter, regulation, and supervising banks,” appears to have “come out on the other end of the spectrum with recent guidance,” Coinbase stated in its report.

Federal Banks are allowed to operate public blockchain infrastructure (January 2021]
Federal Banks are permitted to engage in stablecoins (September 2020)
Federal Banks are allowed to custody crypto-assets (July 2020)

Coinbase added:

“It’s clear that national banks may now participate in the crypto economy through custody and settlement. Notably, Jan 2021 guidance which legitimizes public blockchains as settlement infrastructure, placing blockchains on par with ACH or SWIFT. … federal banks can serve as large validators on blockchains (e.g. miners), or more practically, banks may ultimately settle transactions on Bitcoin, Ethereum, or through stablecoins.”

The exchange further noted:

“This is the first step in regulatory action required to bridge the crypto economy into traditional financial infrastructure. … while the OCC is the federal regulator, it is not the only regulator. There will be an interplay between the interpretation of this guidance from the state vs federal level.”

The report concluded:

“Separately, adoption will take time — blockchains are still relatively new and lack some core features (e.g. privacy, scalability), but this is a promising development. To their credit the Treasury has since extended the comment period, and the proposal potentially hangs in limbo with the incoming Biden administration.”

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