Maximalist dogma does no one any good.
While much has been written about Bitcoin maximalism’s impact as a cultural force (and its inevitable decline), less has been said about how the ideology drives financial markets – including its influence on deployment decisions for institutional capital. This is worth examining because digital asset allocations may now be poised for a revolutionary shift towards the Ethereum blockchain.
Bitcoin (BTC) miners, in particular, may face a new opportunity as Ethereum’s potential value is unlocked. This opportunity may help offset and reverse the pressured margins that have dominated the sector starting in 2022, and may continue for some time.
Sam Tabar is chief strategist for Bit Digital, a bitcoin mining company listed on Nasdaq (BTBT).
Next year, the number of bitcoins that can be mined per block will drop from 6.25 bitcoin to 3.125, making it harder for miners to turn a profit – unless, of course, the BTC price rises and/or network competition declines enough to compensate. Some believe this is exactly what will transpire, and much has been written on the Bitcoin blockchain’s supply/demand mechanism and its impact on mining economics. But from a simplistic, point-in-time perspective, at the exact moment of halvening, miner revenue will be instantly cut in half (assuming all else remains equal, admittedly a big assumption).
Ethereum, at first glance, may seem like an unlikely contender to add value to bitcoin miners. The network’s recent transition to a “proof-of-stake” (PoS) model eliminates the role of mining altogether. However, a PoS model for consensus allows Ethereum validators to receive passive ether (ETH) rewards, something currently not possible with Bitcoin. The mining sector is sitting on massive bitcoin reserves that have limited use as a financial instrument, outside of converting to cash to cover operations, and holding for the long term as bitcoin’s value recovers.
Ethereum’s network and its possibilities, by contrast, are always changing. Ethereum developers have fueled a proliferation of use cases, including the rise of decentralized exchanges (DEX), stablecoins and non-fungible tokens (NFT). Ethereum’s successful transition to PoS (aka “the Merge” in September 2022) marked a major milestone in the history of blockchain. Looking ahead, the network will undergo several new upgrades, including the Shanghai upgrade in March and sharding thereafter (both are expected to ease network congestion and establish the prerequisite for major adoption). The future of Ethereum is more exciting than ever, and the growth of layer 2 systems (i.e., Polygon, ZK rollups, Optimism and Arbitrum, to name a few) will further enhance Ethereum’s scalability.
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Despite criticisms of blockchain from certain environmental groups, Ethereum has become increasingly environmentally friendly. Post-Merge, Ethereum’s energy consumption decreased by an estimated 99.95%, and worldwide electricity consumption will be decreased by 0.2%, according to co-founder Vitalik Buterin. Coupled with a prior upgrade, EIP-1559, the Merge dramatically reduced the net issuance of ETH, and many believe ETH supply will be deflationary in the long term. A total of 2.8 million ETH representing $8.8 billion has been burned since the implementation of EIP-1599 in August 2021, increasing the scarcity of ETH, which would also suggest its long-term value.
A PoS blockchain like Ethereum can serve as a welcome complement to bitcoin mining operations. Bitcoin rewards can be converted to ETH, and then staked for rewards. Staked ETH can function like an interest-bearing asset, with balances compounding over time. This creates a flywheel-like effect between the two largest digital assets. From there, miners can devise additional creative ways to derive value. What might initially serve as a treasury management tool could, through innovation and development, become an additional line of business.
Ethereum and Bitcoin both have unique advantages and limitations. Bitcoin is the original proof-of-concept for decentralization, and has proven resilient even amid extreme market conditions that have tested it as a store of value. On the other hand, Ethereum is relatively versatile and encourages innovation. Iterations are being made to Ethereum continuously to extend its functionality and fix its imperfections for its vision of “a digital future on a global scale.” In the future, we expect Bitcoin and Ethereum to both serve integral roles in the global financial system and society at large.
Both concepts, proof-of-work (PoW) and PoS, can work in tandem. Bitcoin miners are in a unique position to realize how the two can complement one another to drive revenue, monetize stranded energy and realize the future of decentralization.
Author’s views are his own and do not necessarily reflect the views of his company.