Re: Crypto/BTC-Supply/Demand & The “Tantalus Tease.”

I wanted to drill down a bit deeper specifically around the supply/demand dynamics around BTC, although some of this discussion also pertains to other crypto.

Much ado is made about the scarcity of supply of BTC. The 3 main sources of supply inelasticity are: 1) mathematical scarcity (21 mm coin limit), 2) HODL effect, 3) permanently lost coins.

The mathematical construct seems ingenious in that it was engineered specifically to beat even gold’s high stock-to-flow ratio, as defined by “stock” of existing supply to “flow” of new supply.

The theory of money “hardness” suggests that the best stores of value have the highest stock-to-flow ratios, and BTC bulls love touting this feature.

So much so in fact that simple strategies of loading up right after each 4-year miner reward “halving” seems to yield an automatic, perpetual profit machine.

It’s as if one of the fundamental economic laws of gravity (“the cure for high prices is high prices”) has been dispelled. “BTC fixes this,” and a New Paradigm for Valuation has dawned upon us that “few understand.”

By the way, while I don’t believe in Efficient Market Theory (I wouldn’t have spent my career in money management if I did), I also don’t believe that making $ consistently is that stupidly easy.

I remind myself constantly that “bull markets (and ZIRP/QE) make geniuses out of just about anyone.” This is one of the biggest reasons why I am 70/30 skeptical on crypto valuations.

Yes, inelastic supply curves can create massive price moves when demand curves shift up/right. BUT the sword of inelastic supply cuts both ways, and demand curves can and do shift left/down.

What troubles me about BTC (and much of the crypto universe) is that the entire ecosystem seems built upon an (imho shaky) edifice of ever-increasing demand.

Ever-decreasing block rewards + ever-increasing computation/energy use works great as long as demand keeps pushing prices higher. But what if the opposite happens? Does a virtuous circle become a vicious circle?

For instance, what if the “Hail Mary” use case as a Hyperinflation Hedge doesn’t pan out? I don’t think it will, and I explain why here:

Furthermore, what if REAL inflation of “opex commodities” like oil/gas force the input costs of electricity higher at the same time those same forces shunt liquidity away from “inflation capacitors” like BTC?

Elon Musk, backpedaling from his recent refusal to accept BTC due to ESG reasons, now says he will accept BTC once mining is predominantly based on renewable energy.

To me, this is a cop-out excuse and sets an unachievable goal like the ever-receding pool of water that plagued Tantalus in Greek mythology. I call it the “Tantalus Tease.”

First, electricity use is fungible, and any use of electricity to mine BTC REGARDLESS of how the energy is sourced takes away energy supply from regular “opex” uses in an energy-starved world.

Second, STRANDED renewable supply of electricity (like China’s hydropower during monsoon season that can produce electricity at 1c/kWh) is more the EXCEPTION than the norm.

Because electricity transmission costs are high, energy sources are usually located relatively close to population centers. It is NOT COMMON to have gross oversupply of stranded renewables unless there was gross capital misallocation in the first place as happens in China.

Oh wait, but isn’t China cracking down on its miners, forcing BTC hashpower into regions that are LESS LIKELY to have the confluence of massive oversupply of renewable energy with no population centers to feed?

All of which is to say that BTC mining is going to move into higher cost regions where renewable energy sources, along with fossil fuels, will be sorely needed for regular “opex” uses.

So what happens when miners begin to see input costs rising at the same time those same input cost pressures are shunting liquidity AWAY from “inflation capacitors” like BTC?

Furthermore, if I am right about “inflation capacitors” discharging due to earlier- than-expected tapering as well as my other points about geographic advantages giving the USD breathing room, the “Hail Mary” hyperinflation use case for BTC looks weaker and weaker.

To me, all of these factor chisel away at the edifice of a valuation construct that REQUIRES ever-increasing demand. Without that, the more INELASTIC supply is, the MORE prices drop ironically. HODLers, be careful what you wish for.

I’ll end it here. Sorry to be so long-winded, but I’ve been pondering these issues quite a lot and invite comment.

With respect to non-BTC crypto, I will add that a lot of the yield farming constructs in other coins are built upon the same edifice of ever increasing demand because “cash flows” are not extrinsically sourced.

Weaving this thread into the “Tantalus Tease” discussion because ESG is going to severely challenge the world’s “opex” energy needs as is. BTC mining exacerbates this problem.

The Jenga-tower edifice upon which this is all built is starting to lose some bricks from the bottom...