Bitcoin ‘fire of truth’ soaked in a bucket of water

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Michael Saylor, co-founder of MicroStrategy, a symbol of arrogance during the dotcom boom that has become full-fledged bitcoin since then, describes the cryptocurrency as follows: “A swarm of electronic hornets serving the goddess of wisdom, feeding on the fire of truth, and growing exponentially smarter And faster and stronger behind a wall of encrypted energy.”

Wonderful, wonderful. That patter is enough to fan the cultured fire of the laser-eyed crowd and lure junk bond investors when times are good, liquidity is plentiful, and interest rates are at rock bottom. But with soaring commodity prices, supply chain risks, and war painting inflationary expectations accompanied by economic stagnation, the scorching smell is not so much from the fire of truth as speculative assessments soar into smoke.

Bitcoin’s 50% drop in six months highlights its flaws in times of stress: it is a sucker for energy at a time when energy prices are rising and it doesn’t make any profits on the back of high interest rates; It also attracts more regulatory scrutiny. This is in addition to significant scalability issues that have hampered its adoption of payments, not all of which have been resolved by the Lightning Network on display in El Salvador. His nickname may be appreciated by cybercriminals, but today people prefer hard cash.

The promise of bitcoin as an inflation hedge is crumbling as the cost of the electricity that fuels it increases. Energy accounts for nearly half of the overhead for mining companies that funnel ever-increasing computing resources into Bitcoin. While the price of the token is still about twice the break-even rate for 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, where cryptocurrency mining is expected to require more energy than Houston – the fourth most populous city in the US – by mid-2023. Sustainability was a major reason cited in the proposal. Successful Wikimedia community to stop accepting cryptocurrency donations.

As energy needs increase, so does the level of demand required to keep the price of Bitcoin steady. William Quinn, co-author of “Boom And Bust: A Global History of Financial Bubbles,” estimates that the Bitcoin network spends $32.9 million a day in energy costs, based on February data. It might be higher now. This is a fairly large gap to fill in for new gamblers.

However, all of the sailors in the world won’t convince consumers to place bigger bets if their liabilities pile up. In a world of pricier necessities, where even a subscription to Netflix Inc. It’s becoming a luxury, and it’s easy to see why the risk-fueled day traders at Coinbase Global Inc are fading away. or Robinhood Markets Inc.

When cash is king, bitcoin ends up looking more like a leveraged gamble than digital gold. Even MicroStrategy is feeling the enormity of the impairment fee as Bitcoin bounces close to the company’s average purchase price of $30,700.

what happened after that? Crypto promoters acknowledge more pain in the short term but also promise that great things will follow for people holding on to dear life. Early adoption boosters compare the emerging world of cryptography to the early days of the Internet.

It is certainly true that whether it is boomerang hedge fund managers having a ballooning time trading volatile cryptocurrencies, or poorly managed emerging markets embracing cryptocurrency as a pathway to fintech fortunes, crypto is increasingly becoming part of the speculative community’s furniture. The 50% drop to around $30,000 is just a real wound for long-term Bitcoin fans, which have gone through several boom and bust cycles since its inaugural white paper in 2008.

But the technology adoption narrative requires the ability to distinguish between Google crypto and Pets.coms, and to determine whether Bitcoin itself is vulnerable to disruption by public or private competitors. It also assumes that El Salvador’s incomplete and blissful proposal will become an example that other countries will want to emulate.

What fans should really worry about is the selling pressure hitting stablecoins – like Tether and Terra – which are managed using algorithms or with coin reserves to avoid extreme price swings. Even if they are showered with cash, that’s less fuel for the broader crypto market.

Perhaps one day the “fire of truth” will prove the likes of Saylor right. But for now, Bitcoin seems like an excellent way to burn off one’s purchasing power while burning the planet.

More from Bloomberg Opinion:

• Gold’s Strange Behavior Shows It Has No Recourse: Jared Delian

• Recreating the Davos Collection in the Crypto Metaverse: Lionel Laurent

Crypto-Backed Mortgages Are As Crazy As They Look: Mark Jonglove

This column does not necessarily reflect the opinion of the editorial staff or Bloomberg LP and its owners.

Lionel Laurent is a columnist for Bloomberg Opinion covering cryptocurrency, the European Union, and France. Previously, he worked as a reporter for Reuters and Forbes.

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