8 trends

CoinDesk: 8 Trends That Will Shape Bitcoin Mining in 2022

https://www.coindesk.com/business/2021/12/15/8-trends-that-will-shape-bitcoin-mining-in-2022/

Author: Aoyon Ashraf, Eliza Gkritsi

CoinDesk’s first ever year-end survey of crypto miners reveals a competitive but mature business with potential for merger activity to accelerate.

If you thought 2021 was a wild ride for crypto mining, you’d better strap yourself in for 2022.

The past year saw one of the biggest shake ups in mining history. Swathes of Chinese miners had to look for new homes due to the most intense regulatory crackdown in the country to date, while an ongoing global chip shortage capped the capacity of new mining machines globally.

But thanks to these developments, North American miners had a stellar year. With China out of the game, and their machine orders already in place, the U.S. and Canada have quickly risen to be the uncontested hashrate capitals of the world.

Read more: How Bitcoin Mining Works

As the price of bitcoin hit historic heights, mining profit margins were as high as 90%. The industry entered a “gold rush” period, said Amanda Fabiano, the head of mining at New York based Galaxy Digital, citing the high profitability of the miners.

At the same time, a subtler change took place. “Mining seems to have crossed the line where it was very risky and uncertain,” said Didar Bekbau, co-founder and CEO of Kazakhstan-based miner Xive. The global industry is now becoming more like traditional business, where risk is lower and investors are throwing money in and are ready to wait two or three years to get their return, he added.

However, the landscape for the digital asset mining industry in 2022 is shaping up to change significantly once again, as the delay in supply of new mining rigs starts to normalize and competition becomes more intense.

“As more miners enter the sector, margins will likely shrink, particularly for new entrants, as long as the bitcoin price stays stagnant,” Fabiano added.

With competition ramping up next year, some miners will start to feel the margin squeeze, leading to potential for increased mergers and acquisitions. “I think there’s going to come a time, in the not too distant future, where there are companies that have raised money, have machines on order and have not deployed them yet that are in a cash crunch,” said Fred Thiel, CEO of Marathon Digital, one of the largest publicly traded bitcoin miners.

“When that happens, you get some very interesting opportunities, because now you don’t have to integrate a company; you’re just acquiring their assets,” he added.

To be sure, this is not bad news for the industry in the long term. More consolidation and competition will not only make the industry more mature but will also help usher in the age of more efficient mining operations and incentivize use of more renewable sources of power.

“With the overall expansion of market boundaries, such a positive feedback mechanism will elevate the bitcoin mining industry to a more competitive and dynamic stage,” said Edward Lu, senior vice president of Canaan, one of the industry’s largest manufacturers of bitcoin mining machines.

Hashrate doubling

It’s unanimous; the hashrate for the Bitcoin network will increase significantly next year. Some estimates project it will double as more miners join the network. The hashrate is a measure of computational resources used to conduct mining activities and secure the Bitcoin blockchain, and it is an important metric of competition.

Read more: What Does Hashrate Mean and Why Does It Matter?

Along with new entrants, Chinese miners who exited the region have been coming back online outside of China and will continue to do so next year. This will add to the hashrate and consequently the difficulty of the network, according to April Luo, an institutional sales representative for Asia at BlockFi, a company that provides structured financial products to miners and also started mining colocation with Blockstream.

Echoing the sentiment, Juri Bulovic, vice president of strategy at Foundry, the Digital Currency Group (DCG) subsidiary focused on mining and crypto staking, said that “mining difficulty will continue to increase and will exceed the previous all-time high next year, as miners continue to expand their operations, but also due to the increased efficiency of the latest generation of mining machines.” (CoinDesk is also a subsidiary of DCG.)

In fact, some industry participants are calling for hashrate reaching within the range of 300-350 exahash/second (EH/s) by the end of next year, which will be 70%-100% higher compared to around 179 EH/s as of Dec. 14, according to data from analytics firm Glassnode.

One such observer is Rob Chang, CEO of bitcoin miner Gryphon Mining, who thinks it’s possible for the hashrate to reach 300 EH/s by the end of 2022. Meanwhile, Ben Gagnon, chief mining officer of Bitfarms, expects the hashrate to be between 300 and 350 EH/s by the end of next year. Bekbau of Xive also anticipates the hashrate doubling in 2022.

However, Bitmain-backed mining platform BitFuFu’s CEO Leo Lu doesn’t expect the uptick to kick in until March, because miners in Kazakhstan will likely continue to face power rationing while the build-out of new operations in the U.S. and Russia will slow down over winter. Meanwhile, Chinese authorities are intensifying their crackdown in the country and are actively blocking mining pools.

Read more: Kazakhstan’s Crypto Miners Face New Regulations After Contributing to Power Shortages

Margin compression

As the hashrate and difficulty increases, miners will have to try harder to remain profitable, as long as there are no dramatic fluctuations in the price of bitcoin.

“If our top end scenario of 300 EH/s comes to pass, the effective doubling of the global hashrates would mean that mining rewards will be cut in half,” Gryphon’s Chang said.

As competition eats away at the high margins of the miners, companies that can keep their costs low and are able to operate with efficient machines will be the one that will survive and have a chance at thriving.

“Miners with low costs and efficient machines will be best positioned while those operating older machines will feel the pinch more than others,” Chang added.

New miners will be especially affected by smaller margins – and there are a lot of them. Power and infrastructure are among the key cost considerations for miners. New entrants have a harder time securing cheap access to these, due to a lack of connections and increased competition over resources.

“We anticipate that the inexperienced players will be the ones to experience lower margins,” said Danni Zheng, vice president of crypto miner BIT Mining, citing costs like electricity and data center construction and maintenance.

Miners like Argo Blockchain will strive for ultra-efficiency while growing their operations. Given increased competition, “we have to be smarter about how we grow,” said Argo Blockchain’s CEO Peter Wall.

“I do think that we’re in this kind of super cycle that is different from previous cycles but we still have to keep our eye on the prize, which is being very efficient and having access to low-cost power,’’ Wall added.

Rise in M&A

As winners and losers emerge from the hashrate wars, larger, more capitalized companies will likely gobble up smaller miners who struggle to keep pace.

Marathon’s Thiel expects such consolidation to pick up in the middle of 2022 and beyond. He also expects his company Marathon, which is well capitalized after raising nearly $700 million, to grow aggressively next year. This could mean acquiring smaller players or continuing to invest in its own hashrate.

Hut 8 Mining, which recently closed a $173 million public offering of common shares, is ready to follow the same playbook. “We’re cashed up and we’re ready to go, regardless of which way the market turns next year,” said Sue Ennis, head of investor relations for the Canadian miner.

Other than large miners, it’s also possible that big entities, such as power companies and data centers, may want to join the buying spree, if the industry becomes more competitive, and miners face the margin crunch, according to Argo’s Wall.

Several such traditional companies have already entered the mining game in Asia, including Singapore-based real estate developer Hatten Land and Thai data center operator Jasmine Telekom Systems. Malaysian miner Hashtrex’s Gobi Nathan told CoinDesk that “corporations around Southeast Asia are looking to set up large-scale facilities in Malaysia next year.”

Similarly, Europe-based Denis Rusinovich, co-founder of Cryptocurrency Mining Group and Maverick Group, sees a trend for cross-sector investments in mining in Europe and Russia. Companies are seeing that bitcoin mining can subsidize other parts of their business and improve their overall bottom line, Rusinovich said.

In Russia, the trend is apparent with energy producers, whereas in continental Europe, there tend to be small mines that integrate waste management with mining or take advantage of small bits of stranded energy, he added.

Cheap power and ESG

Access to cheap power has always been one of the main pillars of a profitable mining business. But as the criticism around mining’s impact on the environment has grown, it is all the more important to secure renewable sources of energy to stay competitive.

“We think more mining businesses will follow the trend of carbon-neutral or renewable-powered mining next year as ESG [environmental, social and governance] compliance continues to be a must for most tech companies,” said Igor Runets, CEO of BitRiver, a hosting provider for green cryptocurrency mining.

Read more: Crypto’s Carbon Footprint Could Hinder Adoption: Deutsche Bank

Miners are already leaning toward securing sustainable power sources, including solar, wind, hydro and nuclear, for their operations to reduce their carbon footprint.

A recent survey by the Bitcoin Mining Council, an industry forum, found that 58% of the total energy used in crypto mining globally during the third quarter of this year was sustainable, up 3% from the second quarter. The increase is partly due to the rapid expansion of North American mining amid the exodus from China, and miners rotating toward more sustainable energy and modern mining techniques.

Read more: China Crypto Bans: A Complete History

As mining becomes more competitive, “energy-saving solutions would be a game-determining factor,” said Arthur Lee, founder and CEO of Saitech, an Eurasia-based, clean-energy driven digital asset mining operator.

“The future of crypto mining would be empowered and sustained by clean energy, which is the shortcut towards carbon neutrality and a key to alleviating worldwide electricity shortage whilst improving miners’ return on investment,” Lee added.

In addition, there are likely going to be more energy efficient miners, such as Bitmain’s latest Antminer S19 XP, that will also come into play, which will make the businesses run more efficiently and have less impact on the environment.

However, efforts toward a more sustainable business model for the mining sector shouldn’t just be limited to more environmentally friendly mining but should also include the “social” part of ESG. With more new miners entering states such as Georgia, Texas and New York, community engagement in these regions will be even more important heading into the next year, according to Zach Bradford, CEO of bitcoin miner CleanSpark.

Read more: Why Shouldn’t the Navajo Mine Bitcoin?

“I think that community involvement is going to be incredibly important [in 2022]. You’re either going to be in with the community that you’re in or you’re going to be on outs,” he said. “Especially with some of the non-U.S. groups that are coming in, I think they’re going to have a harder time than U.S. domiciled companies,” he added.

Fast money versus value investors

One of the main reasons many new players are flocking to the crypto mining sector is due to its high margins as well as support from the capital markets. The mining sector saw a slew of IPOs and new funding from institutional investors this year. As the industry becomes more mature, the trend is expected to continue in 2022.

“Capital markets will continue looking to deploy capital in bitcoin and miners,” Bitfarms’ Gagnon said. He noted that so far it seems that initial fundraising (pre-IPO) is significantly easier for investors in the sector, as many are looking for a quick flip. However, the outlook for long-term value investors is still unknown, as it remains a largely untapped market, he added.

Currently investors are using miners as a proxy investment for bitcoin. But as institutions are becoming more experienced, they will change how they invest in mining, according to Gryphon’s Chang. “We are noticing that they are focusing more on the things institutional investors traditionally place a lot of emphasis on, which are namely: quality management, experienced execution and companies that act like blue chip organizations [established companies] as opposed to stock promoters,” he said.

But as more traditional finance looks to dabble in crypto mining, the higher the scrutiny of the sector. “It’s not so rosy. It’s a positive development in the sector, but we should pay attention to these other developments,” such as short-seller interest, Rusinovich said.

Another trend that is likely to grow among the miners is the shift towards structured financial products, as they increasingly try to lock in margins, generate additional income from their mined coins and hedge the rise in competitive landscape, according to BlockFi’s Luo.

Supply chain: The big uncertainty

A conversation about crypto miners’ outlook wouldn’t be complete without assessing the supply-chain issues that have been a big constraint for the industry this year and are likely to spill into 2022.

“The chip shortage is one of the defining supply chain issues of 2021,” said Philip Salter, chief technology officer of Genesis Digital Assets. (Note: Genesis Digital Assets is different from Genesis, the crypto lending firm owned by CoinDesk parent company Digital Currency Group.)

Driven by Covid-19′s impact on global trade, as well as rising geopolitical tensions between the U.S. and China, the global chip shortage has impacted 169 industries, from cars to soap manufacturing.

Bitcoin miner Blockware Mining Inc.’s CEO Michael Stoltzner explained that before 2021, mining rig orders placed directly with manufacturers would be delivered within six weeks. Now, only large orders are confirmed in the first place, and manufacturer’s order books are filled well into 2022 and even 2023.

Blockware Mining has navigated these issues by planning ahead and determining the best way to negate the supply-chain challenges for miners that are looking to ramp up production.

However, the industry is divided on whether the chip shortage issue will be resolved heading into 2022.

“My hope is that supply chains are going to get better, probably mid-year, call it June, July,” said CleanSpark’s Bradford. He thinks that, right now, the squeeze in the supply chain is more pronounced given there is higher priority for holiday-related shipping.

If the supply chain issues get resolved next year, the smaller and newer companies that are feeling the brunt of the challenges currently will be able to enter the industry swiftly and compete with the larger miners, said Jonathan Manzi, the CEO and co-founder of Beyond Protocol, a blockchain technology company.

On the flip side, Gryphon’s Chang expects the supply chain bottleneck to last until at least mid-2023, as the chip manufacturers have stated that the global semiconductor shortage will extend through to 2023. And when chip manufacturers are eventually able to resume normal supply, the larger industries, such as cell phones, medical equipment and transportation, will be first in line before bitcoin miners get their fill, he added.

But other than the availability of rigs, where to put them will increasingly be a bottleneck. Both BitFuFu and BlockFi identified rack space as a major constraint for the coming year; BlockFi’s Luo specifically highlighted this problem within the U.S.

The second life of rigs

Following the China mining shutdown and consequent migration, thousands of mining rigs were abandoned in the country. While many have already been shipped overseas, others have yet to be snatched up in second hand markets and deployed.

Some miners will find opportunity in this secondhand market in 2022, even if the rigs don’t have the latest technology. “It clearly offers a lot of opportunity for some players … to develop their hashrate,” Rusinovich said, adding that “people were already saying for a couple of years that S9s were out [of the game], but they are still around.”

In the future, the latest mining rigs will be first deployed in regions with “stable laws and regulations as well as developed infrastructures,” like the U.S. and Europe, BitFuFu said.

Meanwhile, inferior rigs from these countries will then flow to Kazakhstan, Southeast Asia and other crypto-friendly places with less-developed infrastructures. Old mining rigs will be installed in Russia and Africa, facing a certain level of policy and regional risks. All these can create new opportunities.

“It’s a matter of risk, you don’t want to send a S19j pro to a certain country where they might disappear or be turned off,” but an S9 that costs much less is an easier loss to stomach, said Alejandro de la Torre, founder of ProofofWork.Energy consulting firm.

New technologies in mining

As efficient mining becomes a more important tool in order for miners to stay ahead of the competition, companies will increase their focus on not just better mining computers but new innovative technologies to maximize their overall profit. Currently the miners are leaning toward using technology such as immersion cooling to boost the performance and lower the cost of mining without having to buy additional computers.

“Aside from reducing power consumption and noise pollution, the immersion liquid-cooled miner occupies significantly less space, with neither pressure fans, water curtains nor water-cooled fans needed to achieve a better heat dissipation effect,” Canaan’s Lu said.

Read more: Cryptocurrency Miners Turn to Exotic Cooling Systems as Competition Heats Up

Such technology will be able to increase the efficiency of the mining machines and the entire facility.

Most recently, CleanSpark bought 20-megawatt-powered immersion cooling infrastructure for its Norcross, Georgia, bitcoin mining facility and is aiming to increase its mining efficiency by over 20%.

Riot Blockchain, one of the world’s largest bitcoin miners, also said in October that it plans to increase its mining hashrate up to 50% by using 200 megawatts of immersion-cooling technology at its Whinstone facility in Texas.

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The Three elements of The Future Parallel World: Computing Power, Electricity and Heat

In 1900, Planck introduced the concept of energeticons to overcome the difficulties of classical theory in explaining the laws of blackbody radiation, which laid the cornerstone for quantum theory. Then, Einstein proposed the light quantum hypothesis in response to the contradiction between the photoelectric effect experiments and the classical theory, and successfully used the energetic subconcept in the problem of specific heat of solids, which opened the way for the development of quantum theory.

We previously proposed a macroscopic perspective i.e. understanding computing from the perspective of entropy: computing can be thought of as the entropy-reducing act of using electrical energy and raw data as raw materials to make disordered data orderly and valuable, with a one-to-one correspondence between computing demand and energy consumption.

So what does the act of computing look like in the microcosm? We divide computing into three main processes, namely, electrical energy transfer, chip computing, and heat dissipation. Based on quantum theory, we extend a new perspective.

First, the electrical energy is transferred to the chip through the wire, and this process is done by electrons. Based on quantum theory, it can actually be understood that the electrons surrounding the metal atoms are driven by energy to leap from one end of the wire to the other in turn to indirectly realize the rapid transfer of energy.

Then, the chip uses electrical energy to complete the computing task, the process of the chip’s software algorithm and hardware structure can be understood as the consumption of energy to encode, according to the encoding way to consume the electrical energy to produce a pre-desired result.

Finally, the chip will produce heat after completing the computing, the macrocosm performance is through the chip 100% of the electrical energy into more than 99.9% of the heat and a small part of the electromagnetic wave, while in the microcosm is to drive the electron constantly jumping change in the energy due to changes in the nature of the metal atoms around the electron can not continue to jump and heat in the form of energy to the surrounding environment (air) to transfer.

Based on quantum theory and relativity, we can extend many early physical concepts: the conservation of mass is the conservation of energy, various particles (atoms, electrons, photons) are different manifestations of energy, and all changes in energy tend to turn into heat and tend to stabilize.

Back to the macro world, we know that the development of society is essentially driven by energy (steam – electricity), the progress of science and technology is essentially to discover more energy and improve the efficiency of energy utilization, computing and computing power as a more efficient way to use energy will certainly play an increasingly important role in the future development of society. In the era of industrial revolution along with the discovery and utilization of oil, the largest giant ever born in the business world – Standard Oil Truss, we believe that in the future will certainly produce a similar giant to provide energy services for computing.

The current demand for energy is mainly in electricity, oil and heat, which are the basic elements to support the normal operation of society and normal human life, but what many people have not yet noticed is that our demand for computing power is now ubiquitous, and all services such as cell phones, networks and software are based on computing power, and the demand for computing power is growing exponentially, which is exactly why our country has proposed This is where the “new infrastructure” is important.

In addition to finding more energy supply (e.g. clean energy), energy as a finite and scarce resource, we have been trying to do everything possible to improve the efficiency of its use, so we see the emergence of new technologies in various fields, as well as in the field of computing: chips are also evolving to reduce the power consumption ratio. With technology and cost bottlenecks, in addition to improving efficiency, energy reuse is increasingly being emphasized. So we have seen the use of waste heat from high grade heat in industry, is there such an opportunity in computing? The answer is yes! Because people’s demand for computing power at the same time, behind the large demand for electricity and produce the corresponding amount of heat, these heat used to need to consume more electricity to dissipate heat, now we can collect them its to meet the heat demand, so that both the secondary use of energy and reduce the cost of demand from all sides.

From the perspective of quantum theory, people’s heat demand based on electricity is essentially the process of converting the electrical energy of electrons into heat energy, and chip computing is likely to be the optimal process to achieve this path because it can accomplish both the computing task and solve the heat dissipation demand of chips and people’s heating demand.

According to our previous theory of Energy Profit Efficiency (EPE) EPE = (revenue – energy cost) / time, society will evolve toward increasing energy profit efficiency. For example, the Internet and mobile Internet have been a large amount of information transmitted through the network, which not only saves the cost of information transmission and shortens the transmission time, but also the huge computing power can quickly process the massive amount of data to get more valuable information, which has undoubtedly greatly improved the efficiency of energy profit.

If we want to further improve the efficiency of energy profits, how should society evolve? In contrast, the pain points of our real life are mainly manifested in two aspects: 1. time and space is still the biggest limitation of human activities; 2. the growth rate of computing power is still unable to meet the exponential growth of computing needs.

From horse-drawn carriages to high-speed trains and airplanes to spaceships, the space and displacement speed of human activities have increased greatly, and the time required to move has been gradually shortened with the progress of technology, but airplanes are still late, and it still takes half a day to travel from Beijing to New York; the Internet links and stores a huge amount of information around the world, and powerful search engines can let you know almost everything that happens around the world at any time and anywhere, but AlphaGo can beat human Go masters, but it still can’t calculate the mystery of the entire 3 billion base pairs of genetic sequence and the countless stars in the universe. Technology, especially medical advances, has greatly extended the average life expectancy of contemporary humans, but everyone still faces aging and death, and once dead, all the information and consciousness in the brain will not be stored and perpetuated.

From the biological point of view, the processing process of human brain is similar to that of a computer, which is a process of different signals (visual, auditory, tactile, taste, smell) input to the brain, processed according to different compilation programs (logical thinking), and the result output, and this processing can be detected with instruments to detect the changes of different electrical signals; similarly, a small DNA stores a huge amount of biological information, and with enough Similarly, a small DNA stores a huge amount of biological information, which can eventually be compiled and expressed as a complete conscious human individual with sufficient energy support. Just like the plot in the movie “The Transcendentalist”, we can’t help but think that if there is strong enough computing power and advanced enough brain-computer interface technology, can human beings transfer their consciousness, thus breaking through the time and space boundaries of carbon-based life, and based on more powerful computing power to travel infinitely in the silicon-based world?

Back to the present, we have to consider, even if such a parallel world can one day become a reality, what are the necessary elements to drive its realization? In our opinion, whether it is the further evolution of the real world or the eventual realization of the parallel world, there are three basic elements necessary:

1. computing power. As time goes on, we will continue to generate sky-high amounts of data, requiring increasingly powerful computing power to process that data and generate more valuable information. Computing power is enabling a full range of traditional alternatives: information processing (manual to computer), information delivery (cart and horse to network), and value delivery (gold fiat to digital assets). Powerful computing power can process larger amounts of data in the same amount of time, while reducing the time and energy consumed to process the same amount of data. The computing power is so powerful that it can instantly simulate the entire planet in full detail, down to a single grain of dust on the windowsill of one of its inhabitants, and can calculate the full range of possible directions of change including where this grain of dust should float down.

The computing power is based on electricity and heat, the chip and its integrated computing power is like a compiled energy usage instructions, using electricity to process the data in a set way and feedback the results, while the electrical energy is all converted into heat and emitted into the air.

2. Electricity. The clean and sustainable nature of electricity, easy storage and transmission, and high energy density make it the most promising secondary energy source. From Internet messaging to electric cars and robotic arms, electricity is both the source of power for the digital world and is gradually becoming the core driver of the real world. The world is concentrating on promoting the full popularity of clean power generation and electric power substitution, and photovoltaic power, wind power and hydropower, as clean and sustainable power generation methods, will gradually become the main way of power generation.

According to the current development trend, electricity will become the most core end-consumption energy, and at the same time, as the basis of arithmetic power, the growing computing power must consume more electricity, so each link related to electricity production and consumption (power generation, transmission, storage and consumption) has a lot of space for further optimization.

3. Heating power. Theorem of thermodynamics is extended, we will find that human beings have been solving the problem of heat since the beginning: human beings draw carbohydrates from food and decompose them into energy in the body to maintain the continuation of life; in ancient times, the heating by fire makes protein easier to digest and absorb, and promotes the improvement of primitive human intelligence; biological survival needs heating and hot water, and the use of heat extends the boundary of biological survival in cold areas. Crops can continue to grow in the heated hut in winter, and humans can even soar in the space of the universe close to absolute zero; thermal power generation is the use of heat generated by fuel to promote the rotation of the turbine, but also faces the serious problem of unit cooling; power transmission to reduce resistance as much as possible, too much resistance will lead to the transfer of power into a large amount of heat, both a waste of electricity and cause the risk of fire; chip computing The large amount of heat generated by the chip needs to be dissipated quickly to ensure that the chip can continue to work stably.

More efficient heat dissipation and lower cost heat supply will continue to be the way of development and progress of human society, and the way to improve energy profit efficiency.

 

Based on such a concept, we at SAI have been conducting technology research and commercial exploration, and have launched our product SAI Energy Calculation Center, which is based on the chip energy technology to reduce the three core costs of computing power, heat and electricity, and SAI Energy Calculation Center can realize the triple network supply of computing power, heat and electricity and form a large energy calculation network, which is distributed in various regions of cities and places around the world. We believe that through our continuous efforts, we can reduce the cost of computing power, electricity and heat for more people and create more value for the society through the SAI Energy Center. We look forward to future technological advances that will enable human beings to make great leaps in computing power, electricity and heat, so that everyone can use cleaner and more affordable computing power, electricity and heat resources, and based on which we can truly have the opportunity to realize a more perfect and superior parallel world.

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Computing & Energy – The Fourth Technology Revolution Driven by Computing

I. God’s Perspective on Bitcoin’s Revelation and Driving Role

Bitcoin has been in existence for more than ten years. In a completely free market competition, it is undoubtedly the most successful case so far. Instead of discussing the price of Bitcoin, we’ll look at what Bitcoin brings to the table and what it drives from a more fundamental perspective.

1.Evaluating BTC by monetary standards – the globalization case for technology cost reduction

Bitcoin’s rapid growth is tied to the fact that it solves crucial core problems with technical means.

Issuance rules, BTC uses code to lock in the fact that the total number of 21 million cannot be increased. In contrast to the hyper-inflationary situation of fiat currencies in many weak sovereign countries, BTC uses technology to support the consensus that no additional issues can be issued.

Interchangeability, compared to traditional currencies, BTC’s interchangeability is undoubtedly superior. No third-party permission is required, and mastering the private key holds true ownership, independent of any third-party influence.

Trust costs, Bitcoin uses technology to ensure the security and verifiability of transactions, greatly reducing the cost of trust for parties who do not know each other.

Circulation costs, as a digital asset, Bitcoin has a higher flow rate and lower circulation costs than any physical currency, which creates a positive feedback mechanism that makes more transfers willing to choose Bitcoin as the path.

2.Analyze BTC mining with computing industry ideas – leading the chip computing industry

We all know that Bitcoin is mainly obtained and recorded through the act of “mining”, mining is more like a traditional industry, requiring a lot of hardware investment and construction costs and a long period of capital return expectations.

From the perspective of chips, mining is inseparable from mining machines. Let’s look back at the development history of Bitcoin mining machines. From the earliest personal computer CPU era, to the later GPU and FPGA era, to the ASIC era, the power consumption of mining chips With rapid iteration, the overall computing power is also showing an exponential increase. From the perspective of chip development, Bitcoin mining machines have promoted the large-scale application of ASIC chips and the rapid progress of the process. In the future, it is believed that Bitcoin mining machines are likely to adopt more advanced nano-processes on a large scale earlier than mobile phone manufacturers. Following the pace of Bitcoin mining machine chips, we have seen the rapid development of AI, and artificial intelligence chips have also begun to transform to ASIC, beginning to use 28nm or even 16nm for small-scale applications. I believe that with the rapid development of AI and marginal computing needs, we will also see the mass production, application and development of AI chips.

From the dimension of stand-alone power consumption, over the years we have seen the mining machine from a single several hundred watts to about 1.5kw in the 16nm era and then to 2-3kw in the latest generation, the stand-alone power consumption is getting bigger and bigger. To the current 2-3kw stage, we will see many hardware technology bottlenecks: for example, the production of a single 2-3kw large power supply stability and yield rate has been a problem, 2-3kw single power consumption of power distribution / cable have put forward a new level of requirements, cooling problems are more serious, the original air-cooled can no longer meet the current higher heat flow density of cooling needs, some manufacturers even need two sets of violent fans to ensure the heat dissipation effect. Energy costs have become more prominent, both in terms of energy consumed by computing and energy consumed by cooling, reaching a new order of magnitude, with both individual energy consumption and total industry energy consumption entering the next phase of rapid growth. All of these changes are driven by the demand for computing power, all of which has freely and rapidly evolved to where we are today. Regardless of the Bitcoin mining machine, we will find that the upcoming 5G era, 5g base stations are also developing in this direction and facing the same problem. 4g base stations have a server stand-alone power consumption very close to that of 16nm era miners, while 5g base stations now have a standalone power consumption of 3-4kw and need 3-4 times the number of 5g base stations to achieve good signal coverage compared to 4g, which means that telecom operators face huge energy consumption costs. At the same time, 5g base stations with such large power consumption pose a challenge to power distribution, many scenarios do not have the corresponding power distribution standards, changing power distribution facilities lead to higher cost investment, so we see that Huawei launched 5g base stations with a battery, which is to solve the problem of power distribution, the same large power consumption will also face serious heat dissipation problems, especially in outdoor conditions in the four seasons of the year, the ambient temperature difference may reach more than 60 degrees Celsius.

From the perspective of the data center, although the Bitcoin mining farm is currently very extensive compared to the traditional IDC computer room, which is mainly constrained by cost and policy, the total load of the Bitcoin mining farm is close to 10 million kilowatts (according to the full Bitcoin Network 100E computing power computing, considering the average power consumption of the new generation of mining machines 60w/T, the average power consumption of the whole network mining machine can be roughly regarded as 100w/T), the growth rate of this scale exceeds that of traditional IDC data centers and will grow rapidly. Similarly, with the rapid development of AI, 5G, and IoT, there will be exponential growth in computing demand and corresponding data center power load. At the same time, Bitcoin mining as a highly sensitive industry to electricity costs, the free hand of the market allows miners and mine owners to take the initiative to discover high quality and cheap power resources in the country and around the world, accordingly bringing additional revenue for owners of idle power. When a large amount of data will generate demand for edge computing and distributed computing in the future, energy consumption cost will also become a common problem for them.

In summary, we see many similarities between Bitcoin mining and traditional data centers and future trends in AI and edge computing, which is no coincidence as these can be categorized as high-performance chip computing industries and are rapidly iterating with the rapid growth of computing demand.

3.Energy perspective on the POW mechanism – energy-based liquidity premium

POW (Proof of work), the consensus mechanism of Bitcoin, plays a crucial role for Bitcoin. The above analysis of Bitcoin mining is also a category in the computing industry, let’s extend one more step to think about the nature of mining. Miners know that mining has two main costs, one is the cost of the mining machine which can also be considered the cost of the chip, and the other is the cost of electricity, which as an ongoing cost input tends to take up the lion’s share. But if we look at the cost of electricity in a different way, the cost is the essence, so the essence of mining is the production of electricity-based activities, and the role of miners is like a globally distributed workforce that uses electricity as a raw material to produce the product Bitcoin. Treating Bitcoin as a commodity, then its cost is critical, and we all know that businessmen must have an incentive to find and use lower production costs, so miners will actively seek out cheap electricity. Further, if a commodity like Bitcoin is produced with electricity as the main cost, then Bitcoin can also be seen as a high value added product of raw materials like electricity. At this point for the owner of the electricity or the corresponding energy source (coal, natural gas, etc.), is it better to choose to sell the electricity and other energy sources as cheap raw materials or to produce Bitcoin on site for higher value added?

At this point we can see Bitcoin as a high value-added product of electricity (energy). Combined with Bitcoin’s own high circulation rate and low circulation cost, it is equivalent to providing global liquidity for globally dispersed energy resources such as coal, natural gas, and electricity. In the context of globalization, energy owners will have another revenue option besides selling through trade channels.

II. High-performance Computing is The Core Driver of The Fourth Technological Revolution

1.Computing is the bridge between the physical world and the virtual world

We analyze the flow path of energy in computing activities from the point of view of physics: (To simplify our analysis, we isolate the focal part of computing activities which is the chip) 100% of electrical energy passes through the chip and is converted into more than 99% of heating energy (and a small part of electromagnetic waves, which can be neglected), while completing the task of computing. Computing, whether processing data and information or completing computation, is a way to bring order to the means of production in the virtual world, so it can be seen as an entropy-reducing activity with electrical energy as input and heating energy as output. As long as it is computing, it will definitely consume the corresponding energy. Through computing, the production materials such as energy of the physical world and the production materials such as data and information of the virtual world achieve a real correlation, and we can even macroscopically think that the result of each computing is the mapping of the energy of the physical world in the virtual world.

2.Chip is the engine of high performance computing

From the third technological revolution to today, the accumulation dimension of production materials has been extended from the previous physical world to the virtual world, data, information and other digital production materials began to accumulate in large quantities, and the next 5G, IoT, AI and blockchain development will bring exponential growth of production materials in the virtual world, corresponding to such huge production materials, need very powerful computing power to complete processing tasks, and accordingly The same amount of energy is needed as input, and high-performance computing chips are the core role.

With the exponential growth of computing tasks, the chip from the performance and number of two dimensions of rapid iterative evolution, the performance of a single chip more and more powerful, power consumption is getting lower and lower, the total number of chips is getting larger and higher total power consumption. It is foreseeable that the future demand for a large number of computing, will bring the explosive growth of the chip industry, will also lead to the explosive growth of related industries providing energy services for computing. The chip is compared to the engine, electricity is like fuel, how much fuel can run how far, to how much electricity can complete the corresponding number of computing tasks, which is consistent with the reality of our perception of the computing industry.

3.High performance computing is all about energy-based POW

Putting aside Bitcoin mining and taking a global view of the high performance computing industry, this is an industry that uses electricity as a means of production and a major cost of production, so it is also an energy-based industry. Here we look at the Proof of work mechanism, where work is defined as “workload” in the Bitcoin mining mechanism, but work itself is the concept of physics doing work. Therefore, we can completely define computing as a class of behavioral activities in which electricity does work, so from this perspective all high-performance computing can be considered as proof of work mechanisms.

4. Energy is the source of all scientific and technological revolutions

Looking back at the successive technological revolutions, the first industrial revolution of steam, the second industrial revolution of electricity, the third technological revolution of atomic energy and information technology, all achieved rapid progress in productivity after the energy change. The fourth technological revolution will have a sky-high amount of digital production materials that need to be processed by high-performance computing, and perhaps this is the core of the fourth technological revolution, that is, energy-based high-performance computing to bring about the large-scale value of digital assets production materials. In this way, it seems that energy remains the source power of the fourth technological revolution, which is consistent with the objective law.

If each technological revolution is regarded as a cycle, then the production activities in the cycle is more of a demand-determined supply, that is, energy and productivity has achieved a breakthrough, by the market demand to determine how much productivity supply is needed, and constantly optimize the cost of productivity (i.e., energy costs). In the phase of cycle change, due to the rapid breakthroughs in productivity and the rapid increase in the amount of energy, greatly liberated the original productivity constraints reduce the cost of production, so this phase is the supply determines demand, for example, in the past to deal with a certain scale of data requires several supercomputers to spend a lot of electricity to deal with a month or even a few years, while the future to deal with the same amount of data only requires a chip to consume very little electricity with less than 1 second to complete the time.

III. The Great Integration of Energy, Finance and Technology

1.Energy & Computing

As mentioned earlier, both Bitcoin mining and high performance computing integrate the two industries of energy and computing through chips, and the computing industry can be considered as a production manufacturing industry with energy as the main means of production and production cost.

Let’s analyze the energy industry separately. At present, 8%-10% of global electricity consumption is used for computing. With the rapid development of the computing industry in the future, since electricity is currently the only direct energy source for the computing industry, this proportion will rise rapidly. Related research predicts that in the next 5 years, the power consumption for computing will account for 15-20% of the total global electricity consumption. We think this is a relatively conservative forecast. We analyze from the power consumption side that the demand market for manufacturing and living purposes (lighting, heating) is an industry that is closely related to population and national development. In the future, there will be no exponential growth trend, and the computing demand market is due to 5G The popularity of technologies such as AI and AI will produce an exponential growth trend, so the proportion of power consumption in the computing market will increase rapidly. In the last round of the popularization of the Internet and mobile Internet, a large amount of storage and computing demand has pushed up the overall power consumption of the computing industry. The rapid popularization of this round of new technologies requires both the volume of data and computing tasks and the speed of generation. It is much faster than the previous round, so the growth of power consumption in this round of computing market should also be much faster than before. If we look further, then in the future virtual world as a parallel world mapped by the real world, the total scale of its digital production materials should not be smaller than the existing physical world, and the energy consumed by these production materials should be processed by computing. It should be very large, so we might as well make a bold assumption: the computing industry will reach 50% or more of the global electricity consumption in the future.

At the same time, the rapid growth of electricity demand in the computing market will also drive changes on the supply side of electricity, and how to meet the demand for such rapid electricity growth will be a critical issue. Here regardless of the need to consider the growth space of power scale, but also need to consider the cost of electricity, because the cost of electricity will directly affect the cost of computing, and eventually return to the end-user cost of computing power. On the other hand, changes in the supply side of power generation will also extend to other related energy fields, nuclear power, thermal power, hydropower and other corresponding power generation methods will participate in this fast-growing market, the upstream energy supply (including oil, natural gas, coal, etc.) will have a linkage effect, and the global energy consumption market pattern will produce a new round of changes.

If we make further guesses, the cost of computing power, i.e. energy cost, will keep falling as technology advances, but the overall demand will rise rapidly, then will it reach a tipping point where the return on energy flow to other uses starts to be lower than the flow to computing uses, then this is when more energy resources start to actively flow to the computing demand market. This situation is already reflected in the global market for Bitcoin mining, and I believe it will show up in more high performance computing areas in the future.

2. Finance & Computing

Modern finance and computing are closely related, both in the global trading markets and in the independent data centers of financial organizations, which perform a large number of computing tasks every day. With further globalization, we believe that the financial industry will rely more and more on the computing industry: the rapid growth of demand for mobile payments, trading markets, customer data, market analysis, etc. will also drive the rapid growth of the computing market.

When we look at energy through the lens of finance, we find more relevance. If we were to give finance a key word, I think “liquidity” would be one of the most appropriate. As an asset, the price of energy (roughly, price = value) can be considered to be composed of two parts, one is the use value, which is the value of the use properties as fuel, power and other usage scenarios; the other part is the subsidiary value, which includes the value of a commodity in the secondary market influenced by supply and demand and liquidity. The aforementioned Bitcoin is more like a liquidity premium for energy, which is actually a reflection of the way in which use value and subsidiary value are combined. In addition to Bitcoin, the entire computing industry is actually combining the use value of energy with the collateral value to a fuller extent, bringing out the greater value of energy.

Therefore, looking at the above relationship between energy and computing, finance and computing, we can summarize: computing brings the two industries of energy and finance together closely, and in the future development, the rapid growth of computing and finance will drive the rapid growth of energy consumption.

3.Technology & Computing

Back to computing itself, the main carrier of computing is the chip. The chip industry is currently one of the core of the global cutting-edge technology industry, almost all intelligent devices and modern services are inseparable from the chip, for example, cell phones, computers and other intelligent terminals will be directly built-in chip, large data centers, edge computing centers are through the large-scale high-density chip to provide services to end users. The surrounding industrial ecology around the chip also basically concentrates all the most advanced technologies and enterprises, from the production of wafer flow to the production of PCB version, involving hundreds of disciplines such as materials, materials, mathematics and chemistry.

At the same time, the development of computing industry will also promote and attract the evolution and gathering of the whole technology industry. More advanced materials and technologies will flow into the chip manufacturing, more and more professional talents and enterprises will invest in the research and development of the chip computing industry, and more powerful services and resources will gather in the chip computing industry.

In summary, the computing industry will promote the integration of energy, finance and technology industries, energy, finance and technology itself is the three pillar industries of modern society, which are inextricably linked to each other, while computing is more like the intersection of energy, finance and technology, and in the demand for the promotion of this intersection of the three industries in the proportion of expanding.

IV. The Great Transformation of Energy, Finance, and Technology

1.The core of the computing industry – computing and energy

In physics, the relationship between force and work can be simplified with E=a*F*t (where E represents energy, that is, the amount of work done, F is the size of the force, t is the time, a is a parameter and has different values for different forces and energies), for example, the formula for doing work in Newtonian mechanics is W=FS=F*v*t, W=P*t in electricity, the force and energy in these scenarios are can be distilled using the simplified formulas we described above.

So how do we represent computing power? A straightforward way to represent it is to define the number of calculations per second or the ability to complete them, for example, the current Bitcoin miner’s computing power is in the tens of T/s, but such a representation does not see a direct relationship between computing power and energy. As we analyzed earlier, computing is an entropy-decreasing process that must consume energy and require energy input, while computing power is a momentary state that does not represent the result of the entire entropy-decreasing process of computing. For instance, the computing power of a mining machine is determined, but the results it can produce in one second of work and in one year of work are completely different, and the energy consumed is also completely different, just like the energy consumed in real life to move different weight of bricks to different floors is also different.

What is the best way to evaluate the results of computation? Similar to the relationship and definition of power and kinetic energy in physics, we define the energy of computing to complete the task over a period of time as computing and energy. We have analyzed earlier that computing is highly correlated with energy consumption, and if we approximate the matter of computing as a process in which the chip consumes electrical energy to complete the computing, from the perspective of the first law of thermodynamics of energy conservation, then we can use the consumption of electrical energy to indirectly represent the computing and energy, so the computing and energy is equal to the total amount of electrical energy consumed by the computing.

In the actual process, a device used for computing is studied as a unit, in which the vast majority of electrical energy is used for computing of chips and other electrical components, but there is also a part used for peripheral services such as heat dissipation to maintain the stable working condition of the chip. Therefore, we know that in order to improve the utilization of electrical energy to improve the calculation of energy, we must minimize the consumption of non-computational work on electricity.

At the same time, in addition to improving the utilization of electricity, improving the efficiency of energy calculation itself is also a very worthy direction to think about. The so-called efficiency is just two parameters, namely cost and revenue, so to improve the efficiency of computing and energy should start from reducing the cost of computing power and improving the revenue of computing power. And we look more macro, want to improve the efficiency of computing and energy, we need to reduce the cost of electricity and chip power consumption ratio, improve the processing power of the chip. This thing is happening from the first day of the computing industry, chips continue to use more advanced technologies and processes to reduce power consumption, data centers are constantly looking for cheaper electricity and reduce the total power consumption of the way.

2.Computing power drives energy reform

Continuing with the concept of computing and energy, the development of the computing industry will bring three main changes to the energy industry because of its close relationship with electricity consumption: 1. the total amount and share of energy used for computing will grow rapidly; 2. lower cost and more stable energy sources will account for an increasing share of the energy required by the computing industry; and 3. more types of energy resources will be converted to electricity.

As we said before, the current electricity consumption of computing accounts for 5%-8% of the total global electricity consumption, we should not underestimate this figure, because the demand for computing will be exponential growth, so the growth of computing electricity consumption will also show exponential trend, so this figure will grow rapidly in the next 10 years. From the perspective of electricity supply, the surplus of electricity production capacity can meet the growth of computing demand, but after a certain scale, we should start to consider the redeployment of electricity demand market, and the electricity from the original low output value of electricity-consuming industries will be shifted to the high output value of computing industries. After that, the deployment of the stock power market can not meet the global demand for electricity, more primary energy will be put into power generation to drive more rapid growth of the incremental power market.

Energy cost has always been the core proposition of human society development, so the computing industry can’t escape the constraint of energy cost. From a macro perspective, the growth of computing and energy demand will bring exponential growth of electricity demand, so more cheap or even unused electricity will be utilized, while more primary energy such as natural gas and coal will be concentrated into electricity to serve the computing industry. As the operation and maintenance service provider of computing power, it will have more incentive to adopt more advanced technologies to reduce the PUE of the whole data center, such as adopting more energy-efficient heat dissipation methods to reduce heat dissipation energy consumption, and adopting better infrastructure to reduce the loss of power transmission.

To add another point here, according to the above, people should first worry about the energy cost of quantum computing while worrying about the security threat brought by quantum computing.

3.Computing drives financial reform

Due to the substantial increase in computing power, the processing capacity of digital production materials has increased significantly, and the combination of the financial industry with the computing industry has led to a significant increase in efficiency and a significant decrease in costs, so the financial industry will also evolve in this direction: through the Internet and advanced technology to reduce the cost of trust, circulation costs, and transaction costs in the financial industry, while also driving the continuous growth of computing demand in reverse. Therefore, mobile payment, e-commerce, digital finance, global transactions will remain a long time in the future rapid development of the industry, computing power will penetrate the traditional financial industry from all dimensions, which is more like a process of empowerment, not simply Internet finance, but computing and energy finance, smart finance.

4.Computing drives technology reform

The computing power itself is also relying on technological advances continue to evolve, 5nm or even 3nm process will bring more low-power high-performance chips, the development of new materials will bring better heat dissipation. At the same time, with the rapid spread of 5G, AI, the IoT and edge computing rely on the computing power of the empowerment began to highlight the value of technology will promote each traditional products will have data access and computing power, these computing power will further promote the development and evolution of computing power.

Computing power may surpass atomic energy weapons to become the the country’s core competitiveness in the future. By then, all advanced science and technology will flood into this industry. The increase in computing power demand will bring about rapid growth in related industries, which has recently been favored by capital. The chip industry, as the country’s core strategy, will get more resource tilt and rapid development opportunities for a long time, and will drive the rapid development of chip peripheral industries and computing and energy service industries.

Just as the Internet has driven the development and growth of e-commerce, giving rise to giant enterprises including Alibaba and Amazon, which serve the needs of e-commerce, the rapid growth of demand for energy and the rapid development of the chip industry will also lay a solid foundation for the possible birth of future energy service giants.

 

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Re-discussing Bitcoin: The Block Theory and Leverage Theory of Wealth

Rational survival is more important than anything else to the next ten years

I. Preface

The reason for writing this article can be traced back to the two books I read before and the two “thunders” that exploded recently. Two books, one is “Economic Interpretation” by Mr. Zhang Wuchang just finished yesterday, a scientific and objective economics book with strong explanatory power; the other is “Small Island Economics” by Schiff and his son. An easy-to-understand primer on economics.

Two “thunders”, one is the “thunderbolt of U.S. stocks” that melted twice this week, and the other is the “thunder of Bitcoin” that followed the 60% drop, both of which have had a huge and far-reaching impact on the global economy. Both have had a huge and profound impact on the global economy.

In my previous article “Bitcoin Price, Dow Jones Index and US Presidency”, I discovered and analyzed the high positive correlation between Bitcoin and US stocks and US presidency, breaking all the “cycle myths” of the cryptocurrency mining circle, and found that the root cause of the cyclical performance of Bitcoin price lies in the economic policies of the US president after he took office. Therefore, in order to know the future price of Bitcoin, we must judge the whole global economic situation, and in order to deduce the future economic development and possible crisis, we must go deeper into the underlying nature, in order to come up with explanatory and predictive conclusions. That is the main purpose of this paper.

 

 

II. What Is Wealth

Borrowing the story of “Small Island Economics” to make some adjustments: suppose a group of people living in a closed island, fish as the only source of food, people at first only rely on fishing for a living, then the fish in the island is the real “wealth”. Everyone fishing level is different, some people are very clever invention of fishing nets, some people are strong with a fishing net can make up a lot of fish, so there is a division of labor overall production efficiency. Later, more and more fish can not be eaten every day, that is, “wealth” has a “balance”, then some people began to operate warehouses, you can store fish to save for later. Later on, families stored more and more fish, with the clear division of labor, material materials more and more abundant, some people use 100 fish in exchange for others to build a house, and so on and so forth more and more frequent transactions, people found that the direct use of fish to move around the transaction is very inconvenient, people need easy to carry, easy to divide, stable state of the alternative, from special stones, to shells, and then to special metal; later More and more people, under the tribe to tribe competition and trade have a sense of leadership managers and credit, so the tribal leaders invented paper fish coupons, more portable and trading, and the promise of a fish coupon can be exchanged for a fish in the warehouse at any time, from then on the trade is more developed, to promote further development of productivity.

At this point in the story, we can understand how “money” is created, but we should think more deeply about what is “wealth”, “money” and ” warehouse”? To be precise, “fish” is wealth, and “money” is only the storage vehicle and unit of measurement of wealth. Continuing the view of Mr. Zhang Wuchang’s “Economic Interpretation”, wealth is a resource, and resources are “lacking”, thus generating demand, trade and competition.

 

III. Wealth Needs to be Stored and Measured

The story of fishing on a small island we can know that transactions create wealth, wealth also needs to accumulate and measure. In the ” Economic Explanation”, Mr. Zhang put forward a “warehouse theory”, saying that the accumulation of wealth requires warehouses, and that human life is finite, and that warehouses allow wealth to continue, and that houses, stocks, collectibles, and currency are all different forms of “warehouses”. Regarding “money”, Mr. Zhang’s view is that “the purpose of money is to facilitate transactions, so the price should be relatively stable”.

Back to reality, I think the accumulation of wealth and transactions are often integrated, for example, if you have $1 million cash in hand to buy a car at some point in the future, “cash” achieves both the “storage” of wealth and “”measurement””. Meanwhile, in the “warehouse theory”, the classification of “warehouse” is only distinguished from the perspective of infinite and limited number of warehouses and whether the warehouse itself has a rental value, and simply lists several “warehouses” such as houses and collectibles “However, these two dimensions do not cover all the characteristics of warehouses in real life. Therefore, I reorganized the types of “warehouses” that exist in reality, and proposed the “block theory”.

IV. Block Theory

1. Definition of “Block

The term “block” comes from the term Block in Bitcoin technology, which originally refers to the data of recorded transactions packaged into a data block every 10 minutes or so, and this immutable data block is the proof of wealth accumulation and transactions. I therefore invoke the concept of a block to the broad field of wealth for defining the vehicle in which wealth is stored and traded.

We classify carriers into four main categories based on whether the overall number is limited and whether the supply issuance mechanism is centralized, decentralized currency blocks (A), decentralized asset blocks (B), centralized asset blocks (C), and centralized currency blocks (D). I will first put up the most important one, the table of wealth blocks, and then slowly explain.

We have re-defined the “assets” in the market as “wealth” and the “blocks” that accumulate and measure wealth. From a macroscopic point of view, there are only three states of “fish” wealth, i.e., “constant”, “increasing” and “decreasing”. “Let’s quantify the specific numbers, for example, the initial 2,000 fish, and discuss the two basic cases of growth to 3,000 or reduction to 1,000. Assuming that each fish is the same and requires a box of the same size for storage, this “box” is the “block”; the “box” is limited by production costs and materials. Therefore, in the absence of intervention, in order to facilitate transactions, the number of fish should be produced at any time how many “boxes” to store and trade, that is, the “block A” type; of course, if there is no intervention, many businesses producing ” Boxes” will also compete to reduce costs or increase revenue, such as using better materials to store longer, or better methods to compress fish so that a box can hold several fish, this quality “box” is often limited, that is, ” Block C” type; there is also a possibility that each tribe has a designated person who can produce “boxes”, and when the transaction becomes complicated, there may be some boxes that do not contain fish and are traded in the market as “empty boxes”, i.e. “Block D” type. When D becomes risky, people start looking for block B to keep their wealth for a long time.

 

2. “Block” classification

We map “fish” and “boxes” to real-life “wealth” and “blocks” for storing and trading wealth. “We further categorize “blocks” as follows.

“Block A”: also known as decentralized currency block, the total amount is unlimited, the supply of issuance is not affected by the centralized role, the value is stable and conducive to trading; gold was once promoted as such a role, but the value of gold itself fluctuates greatly, and mining is slow there is no way to ensure the growth of wealth one-to-one correspondence, and small daily transactions are not convenient The silver, then the paper money linked to metal (such as the US dollar), then the paper money linked to paper currency (such as the Hong Kong dollar), then the unanchored currency (now the fiat currency of each country), then the digital currency (such as BTC), people have thought of countless alternatives to find the best choice of “block A”.

Considering the value stability, that is, a unit of block A needs to be relatively stable to buy a certain amount of fish, and the general trend of the total wealth of human society is definitely growing, then in order to achieve the stability of purchasing power, the total amount of block A must be infinite, and it can be quickly and dynamically adjusted to the amount of wealth one-to-one correspondence, and also cannot be subject to the intervention of individual will. At present, there is no perfect Class A block in the real world. The Class A block envisioned by Mr. Zhang Wuchang in his “Economic Interpretation” is the RMB that anchors dozens of basic products (such as rice) around the world and circulates freely without regional restrictions.

People holding Class A blocks (realistically limited mostly to Class D blocks) often do so to achieve the most basic and high-frequency immediate need for transactions, and partly for the purpose of storing value and obtaining the average market rental value (interest). This is also in line with the reality of the situation, there is excess wealth so that will often be in the form of fiat currency in the bank, the most mainstream transaction measurement of the carrier is fiat currency (the volume is not the largest because the C class centralized asset blocks can be leveraged to rapidly expand, making the nominal value of the block relative to the D class greatly increased).

“Block B”: also known as decentralized asset blocks, the total amount is limited, and the supply issue is not affected by the centralized role, which is conducive to long-term investment and avoiding the risk of centralized currency blocks; including gold, collectibles have this type of qualities, while Bitcoin is still in the early stage, the market acceptance is limited, but the characteristics of Bitcoin itself compared to gold and collectibles.

As a decentralized asset, Bitcoin maintains the security and stability of the entire system through computation and open source, lower mining (issuance) costs, lower circulation costs (through the network), and lower storage costs (private keys) than gold and collectibles. We know that without intervention, the market will definitely evolve towards greater efficiency and lower cost (choice), so we believe that Bitcoin will have great potential to replace gold and collectibles in the future.

Gold in also experienced a long period of imbalance between usage and mining leading to significant price fluctuations, as well as numerous centralized currencies and asset crises fueling the consensus for decentralized assets to secure wealth. Bitcoin has only been around for ten years and is still a very long way from a universal consensus, but will take less time to complete this journey than gold due to its inherent characteristics that lead to low cost of popularity.

“Block C”: also known as centralized asset blocks, the total amount is limited, favorable for investment, higher risk and higher return; the vast majority of financial assets or risk assets in the market belong to this category, including the stock market, housing market, bond market, etc., which are chosen by people who have settled their food and clothing with certain savings, and pursue investment returns higher than their savings.

Asset-based blocks are directly associated with a certain wealth (resources), and it can be said that asset-based blocks are themselves a kind of wealth. For example, stocks directly correspond to the income and intellectual property of a certain company, and property corresponds to the right to use land and space.

“Block D”: also known as centralized currency blocks, which imply force or legal power and are artificially priced by the owner in the power area to facilitate regulation; such blocks are mainly legal tender issued by countries, but of course also include mandatory points, etc., issued by organizations or individuals in their own right, whose quantity, circulation, etc., are issued by the issuers themselves The quantity and circulation are decided by the issuer.

“Parameter 1” and “Phenomenon 1”: Because block A corresponds to real wealth, parameter 1 represents the real price change in fiat currency, and because gold is given the function of decentralized currency, parameter 1 can also be understood as the fiat currency-denominated Gold price change, phenomenon 1 is the visual representation of the real world when parameter 1 changes, representing people’s choice when avoiding the risk of centralized currency.

“Parameter 2” and “Phenomenon 2”: Parameter 2 represents the change in the price of fiat-denominated asset class blocks, which is the trend of people’s choice to pursue higher returns when they satisfy their basic needs and save their wealth balances; the change in Parameter 2 that is, phenomenon 2 reflects the overall economic development and trends.

 

3. Conceptual distinction.

The main purpose of money is to facilitate the transaction of wealth, so it needs to be stable in value, divisible and easy to flow, so the total amount of unlimited, stable unit value of the block is conducive to improving transaction efficiency and reducing transaction costs. Money itself is not wealth (not a resource, not “lacking”, can be understood as a specific person printed out of paper), is a unit of measurement of wealth, money because there is no lack of so no rent value, that is, can be understood as the same amount of money under ideal conditions, the purchasing power of the same amount of money does not change, or the same amount of money does not generate additional revenue.

The main purpose of assets is to facilitate the accumulation of wealth. Investment, savings and consumption are one and the same thing, all are using the existing wealth as a cost (consideration) to exchange for some future demand, the total amount of assets is limited, the unit value is variable; assets need to have the ability to increase in value, and thus there will be the risk of decline, the value will be more volatile, assets have two main characteristics of liquidity leverage and borrowing leverage, will be introduced later in the leverage theory. The asset itself is often also wealth (is a resource will be missing), there are specific uses other than trading, for example, land can be built, houses can be lived in, stocks can be used for dividends, gold can be used for decoration, Bitcoin provides liquidity for energy. By giving assets the function of money, you will encounter problems such as gold, shells, and Bitcoin coin value instability hindering transactions.

Centralization and decentralization mainly lie in whether the issuance method is subject to human interference (single point of failure), while inflation and deflation are the ratio of the amount of centralized currency D relative to the real wealth (decentralized currency A), which will have both growth and decline, corresponding to the assets will produce 6 scenarios, which is why in the case of market perceived inflation, asset class blocks and currency class blocks go up and down.

Let’s continue the example of fishing, the initial state has 2000 fish as wealth, according to a certain ratio with blocks A/B/C/D storage and measurement, after a period of time the fish may grow to 3000 or may be reduced to 1000, at this time the parameters 1 and 2 is the change of the individual wealth blocks. If mapped to the real world, gold and U.S. stocks represent the global economic state, and both are denominated in U.S. dollars, we can derive the trend of change in the real world based on parameters 1 and 2.

 

4. Key explanation

The rise and fall in Phenomenon 1 and Phenomenon 2 are changes relative to the initial steady state, and the multiplier multiplied is the magnitude of the change. In reality, it is often one of the six states that changes to the other.

The most direct example, according to the trend of gold and U.S. stocks, we can judge that the United States in 17-19 years in the economic growth of inflation, and into the early 20 the onset of the crisis and gold U.S. stocks to verify the U.S. economy into a short-lived recession and deflation, at this time the centralized assets (U.S. stocks) from 2 times up to twice the rate of decline, is 4 times the effect of the decline, just also verified the history of the emergence of this week rare two meltdowns in U.S. stocks. We can further predict that the short-term by the epidemic and many aspects of the impact of the overall economy is still in recession, the current countries have introduced the water release policy to make the economy if the recessionary expansion state, compared to the current recessionary crunch gold will rise quickly, the U.S. stocks slowly; then the gradual recovery of the economy water release continued and the effect gradually appear, the U.S. stocks will enter a rapid rise phase.

 

5. Risk-averse assets

The so-called risk-averse assets, in order to avoid ambiguity, should be said to be risk-averse blocks, as to what type of risk to avoid will have to be discussed by situation.

centralized currency inflation: whether during economic growth or recession, decentralized currency blocks (gold) will rise, especially in recession will rise rapidly.

Centralized currency deflation: asset blocks (relative to fiat currencies) will fall, meaning that the purchasing power of the centralized currency will increase at this time, when cash is king.

According to the above table, we can determine what kind of wealth blocks are more suitable for hedging under different circumstances.

 

V. Leverage Theory

We have the wealth block table in the block theory divides the blocks into asset-based blocks and currency-based blocks. Asset-based blocks include decentralized asset blocks and centralized asset blocks, and since they are all wealth carriers with limited unit value changes in total, and the assets themselves are also wealth or directly related to resources, I will use leverage theory to elaborate on the value changes and risk sources of asset-based blocks.

 

1. Liquidity leverage

To give an extreme example of stocks, stocks in circulation on the exchange, issued 10,000 shares issued price of 1 yuan per share, of which 9,999 shares in my hands do not move, the other 1 shares in the market circulation transactions, then I left hand 100 yuan to sell the right hand 100 yuan to buy, at this time the display price should be 100 yuan, the market value from 10,000 yuan to pull 1 million yuan (stock market coin circle are the same, this extreme situation want to pull how much pull to (how much). But is it that I can sell all 9999 shares in my hand for 100 yuan per share to get 999,900 yuan in cash? Obviously not possible.

Real estate is actually the same, the same neighborhood on the chain of 1000 households, of which there are 5 households want to sell their houses, there is a household because of the urgent need for money to sell 20,000 yuan / square meter price, showing that the recent transaction price of this neighborhood is 20,000 yuan / square meter, at this time you also come to buy can buy this price? Obviously not necessarily. Maybe the other four sellers are not in a hurry to sell, the price listed is 40,000 yuan / square meters, if you are in a hurry and must buy now, you can only buy 40,000 yuan / square meters of the house; if at this time there are 999 households in 1,000 households to sell and are very anxious to use the money, then in the case of not many buyers can only offer lower prices, and will be lower and lower, lower to the floor.

Real life is not so extreme, but this example is showing that the asset class block itself is not 100% liquid, so the value of the liquidity leverage, want to rise without providing 100% of the corresponding funds, the rise is fast fall also fast.

Another layer of liquidity leverage is that it magnifies the imbalance between supply and demand, because not all blocks are held by everyone and not all blocks are in circulation, so when a large amount of new buying capital appears in a short period of time, there will be a price spike, and when selling demand increases the lack of buying capital, there will be a price spike.

 

2. Borrowing leverage

The “Economic Explanation” focuses on borrowing inflation, pointing out that historically crises brought about by borrowing inflation have hit the economy hard. The subprime mortgage crisis of ’08 was a cascading crisis caused by the inability to repay debt when the risk of overleveraging came to a head. The core reason for the surge in the U.S. stock market in ’17-’20 was the soaring stock prices due to stock buybacks (which themselves had liquidity leverage, amplifying price volatility and supply imbalances), while the epidemic and the oil price crash caused stock prices to plummet. The huge drop in Bitcoin in March 20 years came from the high leverage of lending, many people pledged their BTC for a part of USDT, then use USDT to buy BTC to pledge for USDT, and so on and so forth according to the 60% pledge rate minus the commission, so the operation down originally 1 BTC can probably be operated as 2 BTC, so once the price of the coin rises will get nearly twice the return compared to the previous; the same mining market also has lending leverage, the exchange also has lending. All of these lending levers bring excess returns on the upside and excess losses on the downside.

The right kind of collateralized lending can be used to alleviate a liquidity crisis, which can be seen formally as pledging asset blocks for currency blocks, and because the price of currency blocks is stable, the pledged asset blocks are within the margin of safety if they fall sharply at the right collateralization rate. However, if the pledged currency block is then used to buy the asset block, then there is a risk that both asset blocks will fall at the same time.

 

3. Borrowing leverage crisis

With regard to the leverage crisis, leverage is a false boom that doubles the cost of overdrawing one’s wealth in pursuit of excess returns, bringing in inflows of capital and rising prices. The crisis may come from a liquidity crisis of its own, such as high interest rates or failure to return the principal at the end of the contract, or from external market volatility that forces the liquidation of positions due to insufficient collateral. There are countless real-life cases where when a crisis occurs and the bubble bursts, what is lost is the wealth that has been accumulated and the wealth that will be created in the future, so it takes several times the wealth accumulation to get back to the current level of false prosperity that should not have occurred in the first place. So real-world borrowing and leverage crises all take quite a long time to recover slowly and do tremendous damage to the economy.

 

V. The Value of Bitcoin

1.U.S. stocks are the inevitable choice for wealth allocation in the past decade

The United States is the world’s largest economy and the past decade has been a period of economic recovery and growth after the U.S. subprime mortgage crisis, while the U.S. government’s monetary policy continues to deflate, according to the wealth block table, it is necessary to allocate wealth in U.S. dollars to avoid the risk of dollar overdraft and obtain higher returns. asset class blocks. In the U.S. centralized asset block, why U.S. stocks instead of U.S. housing and debt markets?

Because after the subprime mortgage crisis, the U.S. real estate is in a state of collapse, the main path of the U.S. government’s fiat currency over-issuance is also the U.S. stock, the U.S. stock itself also represents the world’s most recent advanced productivity (wealth), and therefore become the U.S. economic vane, but also become one of the world’s three major bubbles, so people also prefer to choose U.S. stocks in the wealth allocation when choosing asset class block, rather than property or bonds, the data also confirms this The data also confirms this fact, with the average wealth allocation of Americans accounting for 28% of U.S. stocks ranking first in the asset class block.

 

2. Why is Bitcoin not moving like gold but like the Dow?

We mentioned in “Bitcoin Prices, the Dow and the U.S. Presidency” that Bitcoin’s monthly K-line overlaps highly with the Dow’s monthly K-line and that there is a proportional relationship between volatility, and this week’s sharp drop once again validates that conclusion.

It was mentioned above that wealth should be allocated more to the dollar-denominated asset class block given the economic conditions of the past decade, and based on the reality, U.S. stocks are the best choice, and this has in fact been verified. The Dow Jones Index is the bellwether for U.S. stocks, with 30 constituents with a total market capitalization of more than $10 trillion, representing almost the world’s leading business enterprises. As a result, the Dow has also become a global economic bellwether and a major wealth allocation target for the asset class segment.

As mentioned earlier gold is given a decentralized currency function and will be considered more of a decentralized currency block when it comes to wealth allocation. Bitcoin, in turn, as a standard decentralized asset block, has the following similarities to the Dow Jones Index:

a. All are asset-based blocks with proven liquidity leverage and lending leverage (exchanges, lending services).

b. All are denominated in U.S. dollars, with U.S. dollar compliant fiat currency access, global capital trading, and high liquidity.

Therefore, when the market chooses to allocate its wealth to dollar-denominated asset class blocks, it naturally finds similarities between Bitcoin and US stocks and allocates more or less a certain percentage, which is why Bitcoin and the Dow move so similarly.

 

3. Bitcoin’s Short-Term Goal – Global Energy Technology Finance Index

The energy, technology and finance industries are major forces in global technological advancement. Asset class blocks are wealth in themselves, with energy, technology and finance stocks accounting for over 80% of the Dow Jones constituents, and Bitcoin is tied to the energy, technology and finance industries.

On the energy side, the Bitcoin system itself maintains security and stability through mining (computing). We mentioned in ” computing and energy – The Fourth Technology Revolution Driven by Computing” that computing is energy-based, so it can be assumed that Bitcoin maps globally distributed energy (electricity) and brings a liquidity premium to energy owners (higher than direct higher returns from selling electricity).

Financial aspects, and the decentralized nature of Bitcoin itself, in large cross-border transactions and anonymous security and become a major highlight of the global financial sector, itself become a high-quality wealth trading carrier, while tens of thousands of exchanges around the world 24H trading, its liquidity to exceed the U.S. stock.

Technology, Bitcoin computing requires high-performance chips, and semiconductors (chips) and is the main force driving the progress of technology in the past 50 years, Bitcoin servers to promote the rapid development of ASIC chips, the first to use the 7nm process, bit mainland also become one of TSMC head customers.

If we consider Bitcoin as a company’s stock, then this company has no centralized management team and leaders; employees are developers, miners, mining machine manufacturers, application service providers, energy owners all over the world, and users from all over the world; the value created includes: providing a liquidity premium for energy owners, providing a medium of exchange for the safe and fast flow of funds, providing fiat currency disadvantaged and financial service deficient areas To provide decentralized and inclusive financial services, to provide global investors with a high-quality decentralized asset block to fight inflation, etc.

Dow Jones 30 constituent stocks, energy, finance, technology companies with a total market value of $ 5 trillion, today’s BTC market value of about $ 100 billion, and as an asset class block itself has the circulation leverage (a large number of users influx to amplify the contradiction between supply and demand and price increases) and lending leverage (this March 20 years of lending leverage rupture will remove a lot of risk potential), the long-term future of BTC will certainly create greater value.

 

4. Bitcoin’s long-term goal – the largest decentralized asset class block in scale

The current market cap of Bitcoin is very small and the user participation size is not more than 50 million people, which is still very large compared to the global population of over 7 billion people. In the block theory of wealth, we mentioned that Bitcoin as a decentralized asset block has very big advantages over gold and collectibles, including lower issuance costs, circulation costs, and storage costs. Combined with the popularity of the Internet and young people’s awareness of new finance, Bitcoin is very promising to gradually surpass gold and collectibles to become the largest decentralized asset block.

 

VI. Rational View of Bitcoin

Recent studies and reflections have taught me to look at issues rationally and discover the essence of the problem, for example, I believe that

Bitcoin does not have a so-called halving cycle, this cyclicality, like US stocks, is derived from global (US) economic conditions, monetary policy and the frequency of water releases.

Bitcoin does not yet have currency block properties and should encourage the emergence of competing coins. On the one hand, the Bitcoin market is too small, the volume and crowd consensus is still far from gold; on the other hand, Bitcoin itself is unstable and volatile in value and slow to confirm transactions are not conducive to market trading behavior, which may be solved in the future or replaced by more decentralized currency block properties in the competition.

Bitcoin is a quality choice for wealth allocation under specific economic and monetary conditions, although of course in the long run economic growth and fiat currency overdraft is the norm.

Bitcoin should not be the entire source of personal wealth growth, it is more recommended to create and acquire more wealth through hard work and then if you really agree with the value of Bitcoin, you can choose to allocate part of your wealth to Bitcoin in asset class blocks, don’t dump it all and don’t use borrowing leverage because the wealth block table tells us that it will fall faster when we encounter a black swan (this week’s crash is a living case in point)

Bitcoin is not the freedom of de-government, is the freedom of personal perception and choice, should not be used to engage in illegal and harmful behavior (asset transfer and illegal tax evasion), do not be opposed to the government’s pursuit of freedom, freedom is always the freedom of restraint; government is also composed of people, like the company, will make mistakes in decision-making will have a variety of problems, but do not forget that the current security and stability and the world’s most impressive infrastructure is also this “From the economics point of view, the government is an inevitable choice for the market to evolve and improve its efficiency.

Bitcoin is a good tool to learn economics, do not be biased only to see the Austrian school of economics, to learn more about Keynes, Chicago, Washington and other schools of theory, economics is not a good or bad values, should be a scientific logic can have the power to explain the inference of world affairs.