Bitcoin might have outperformed the global bond market in 2019, but it remains a bad investment, believes Roy Sebag of GoldMoney (TSX: XAU).
The founder & chief executive officer last week presented bitcoin as a system that spends billions of dollars off its annual earnings to merely survive. He referred to miners, a network of cryptocurrency diggers, that roughly contribute 65,000 Petahashes worth of computation power to maintain the Bitcoin blockchain.
That power comes from annual electricity consumption worth around $7.5 billion. Furthermore, the cost of preserving mining rigs brings the total yearly spendings to operate the Bitcoin blockchain to about $10 billion – more or less.
“And that $10 billion a year is owed to the miners by the owners of the coin,” explained Sebag. “And so, when you look at the coin even today, when it’s valued at $13,000, that’s about $220 billion of market value. You have a monetary system, which is worth $220 billion, that’s costing about four to 5% a year just to perpetuate its own existence year over year. That, to me, is worse than any negative yielding building bond.”
The only way bitcoin can work long-term is by increasing its value over time, added Sebag. Investors will need to buy bitcoins from mining pools upfront in exchange for fiat money. By doing so, miners will get to keep running the system indefinitely. These diggers will eventually decide whether or not they mine on a particular network based on their incentivization. The lesser the income goes, the more the chance of their departure from that blockchain increases.
“So,” explained Sebag, “if they want to, if they’re not getting incentivized – the same way an executive isn’t getting paid to perform their function – they could argue. They have the bargaining power in this equation to essentially enforce that, at some point in the future, the person that bought a Bitcoin in the past has to pay more.”
The coming-together of miners is visible across the history of blockchain-based payment networks. Jihan Wu, the owner of Chinese cryptocurrency mining company Bitmain, forked Bitcoin to create Bitcoin Cash by bringing together several mining pools. It was a move to support a system that reportedly incentivized miners better. Sebag said there is always a risk of such events. Because miners are “working in Congress in an industry.” It is no different than a pricing control board.
Mining is an organization, added Sebag, producing bitcoins with an intent to make a profit. That makes the cryptocurrency a security asset. It is valuable as long as its backers are willing to allocate their money-hungry resources to it. If they don’t continue supporting it, then it would lead to a decline in hashpower. That would eventually choke bitcoin price’s ability to surge any further, impacting the transaction speeds, trust, and whatnot.
“And in the worst case, if we’re thinking about tailrisks, you can get what you saw with Ethereum classic recently, where you get just afull on 51% attack, someone comes in and mines a bunch of fake blocks, and then you’ve got to fork it again.”
Bitcoin isn’t going to replace gold, stressedSebag in response to crypto bull Barry Silbert’s #DropTheGold campaign.
The investor, nevertheless, added that both bitcoin and gold are in a potato sack race against the fiat system. But the cryptocurrency should first fix its core issues. Excerpts:
“Where I’m more concernedabout is Bitcoin’s future, because Bitcoin is, on the one hand, trying to align itselfwith the Keynesians, with the fiat money system, especially when it starts to attack gold, but on the other hand, isn’t addressing these fundamental design flaws.”
Sebag added that noted economist Nouriel Roubini and famous gold investor Peter Schiff presented bitcoin’s core flaws accurately. The cryptocurrency users are not correctly using it for payments, hedging, or even exchanging anymore.
“And when you try to just say, well, what are the Bitcoin evangelist telling us to do? HODL. Hold on to dear life.”
Last modified: March 4, 2021 2:38 PM