引用:Betting Against Bitcoin

I hold what amounts to a bet against bitcoin, expressed in terms of options and shorts on public market bitcoin-related companies. Given that crypto discourse tends to be dominated by bulls and boosters because that’s who shows up, I wanted to share my bear case.

This is, emphatically, not investing advice. The position represents only a small part of my portfolio, and is something of a hobby project. The market can remain irrational, and all that. Nonetheless, it’s fun to write about, so here we are.

Mining Economics
My bet is primarily expressed as bets against companies that mine bitcoin, rather than companies that “hodl” it. Originally, that was an accident of circumstance: mining companies are capital intensive and have the most pressure to raise the sort of capital that only public markets can offer, so when I went hunting they were what I found. They also tend to be bitcoin pure-plays, which makes for a cleaner bet.

Once I dug into the economics of the mining industry, though, I realized that many of these companies feel overpriced almost regardless of future scenarios for bitcoin. I’ll start by covering the bear case specific to miners, and then return to the more general aspects.

Mechanics of Mining
To analyze miners, it helps to have a model of how mining works. A basic sketch is that all miners are presented with an endless series of puzzles. The first miner to solve each puzzle wins a prize, consisting of:

A pre-determined amount of newly minted bitcoin
Some amount of transaction fees
The relative share of the two has varied over time, but the newly minted bitcoin have always made up the bulk of the reward. Currently, it accounts for about 98% of the total; transaction fees make up the remaining 2%.

The more compute power (aka hash rate) a miner has, the more likely they are to be the first to solve a puzzle and receive the prize. Profitable miners are driven to expand their hash rate (and hence their profit). This additional capacity does not “expand the pie” — bitcoin are always mined at a fixed rate by design. Instead, adding capacity is a zero-sum activity that just increases that miner’s share of the pie by diluting the share of other miners.

Not only is it impossible for mining competition to grow the pie, the pie itself shrinks over time through a process called halving: every four years, the “new bitcoin” component of the reward is cut in half.

These facts make for a very tough environment for miners: it takes major CapEx just to tread water, let alone to grow their market share. Miners burn an enormous amount of capital just to capture the same slice of a diminishing pie, but they take advantage of investor confusion over how mining works to frame it as investing in growth. The pie does grow when the price of bitcoin increases, at least until the next halving, but most mining companies at current valuations are not efficient ways to bet on the price of bitcoin going up compared to just, you know, buying bitcoin. For the same reason, they are a tempting way to express the other side of that bet.









これらの事実は、採掘業者にとって非常に厳しい環境であることを物語っています。市場シェアを拡大することはおろか、経営を維持するために大規模な設備投資が必要です。採掘業者は、減少するパイの同じスライスを獲るた めに膨大な資本を費やすが、採掘の仕組みに対する投資 家の混乱を利用して、それを成長への投資と見なしてい る。ビットコインの価格が上昇すれば、少なくとも次の半減期まではパイが大きくなりますが、現在の評価額では、ほとんどのマイニング企業は、ビットコインを買うだけと比較して、ビットコインの価格が上昇することに賭ける効率的な方法とは言えません。同じ理由で、彼らはその賭けの反対側を表現する魅力的な方法なのです。

Competitive Position
Another strike against mining companies is that they have no real competitive moat. Bitcoin is fungible, so nobody cares (or even knows) who mined one. On the other hand, miners are at the mercy of upstream suppliers who do enjoy a good competitive position: only a handful of companies make hardware that is able to mine efficiently enough to profit. The supply of this specialized hardware is a bottleneck on growth of big mining operations, so its manufacturers have substantial pricing power. Publicly traded miners are also on the wrong side of an information asymmetry, because their suppliers can look at published data and figure out pretty easily just how much marginal value each mining rig generates for them.

So far everything I’ve talked about has been specific to mining companies. Let’s return to bitcoin itself.

Network Sustainability
Bitcoin is touted as both a secure and non-inflationary asset, which brushes aside the fact that those things have never simultaneously been true. As we’ve seen, Bitcoin’s mining network, and therefore its security, is heavily subsidized by the issuance of new bitcoin, i.e. inflation.1 It’s true that bitcoin will eventually be non-inflationary (beginning in 2140), but whether it will remain secure in that state is an open question.

This isn’t a problem we can punt to posterity, either, because the nature of halving is that the reward drops exponentially. By the sixth halving in 2032, the subsidy will be an eighth of what it is today. Unless the price of bitcoin goes up significantly in that period, or transaction fees increase enough to compensate, the cost of an attack on the network will fall accordingly.

To date, the network hash rate of bitcoin has continued to rise in spite of halvings, due to increases in the price of bitcoin offsetting decreases in the bitcoin-denominated mining reward, and improvements in mining hardware. But those hardware improvements become available to honest and dishonest miners alike, and an asset that needs to double in value every four years to sustain a level of security is just a slow-moving wheat and chessboard problem.

The security of bitcoin matters for two reasons. First, because bitcoin’s legitimacy as the crypto store of value stems from it. Out of a sea of coins, the two things that bitcoin indisputably ranks first in are its security and age. In combination, these make bitcoin a natural Schelling point for stored value. If halvings cause bitcoin’s security to fall behind another coin, its claim to the store of value throne becomes a more fragile one of age and inertia alone.

The second reason is the tail risk of an actual attack. I consider this a remote possibility over the timeframe of a decade, but with every halving it gets more imaginable. The more financialized bitcoin becomes, the more people who could benefit from a predictable and sharp price move, and an attack on the chain (and ensuing panic) would be one way for an unscrupulous investor to create one.








Environmental Cost
The bitcoin mining market is in equilibrium when miners can no longer add compute capacity to the network and expect to profit. I’ve described above how this creates a poor competitive environment for the miners, but all that computation also has a massive environmental cost.

A tempting retort here is “but {cruise ships, private jets, SUVs, etc.} are also bad for the environment”, which of course is true, and is why those things are (rightfully) also subject to frequent scrutiny over their environmental impact. But there are three aspects of bitcoin that make it unique as an environmental threat:

It resists efficiency improvements by design. Hardware companies continue to produce equipment that can mine more per kilowatt. The lower cost of operation (energy being a large cost component) means that miners can run more of these machines profitably. The bitcoin network responds by raising the amount of work miners need to do (the difficulty rate), effectively absorbing the efficiency improvement. This is an extreme case of the Jevons paradox, without the upside: if more fuel-efficient planes mean that there are more flights, at least more people get to fly. By contrast, the rate of bitcoin mining is fixed; efficiency improvements are consumed by the network.
In equilibrium, the energy use is proportional to the price of bitcoin between halvings. Because the bulk of the reward is a fixed amount of bitcoin, a rise in the price of bitcoin increases the amount of energy that miners can profitably put towards it. People rooting for bitcoin to reach $100k are implicitly rooting for significantly more energy to be spent mining bitcoin than already is.
It’s all wealth redistribution, not value creation. As much as cruise ships are not my scene, I acknowledge that they use energy in service of directly creating value for people who enjoy them. Bitcoin has value in the sense that you could trade it to someone for (say) a cruise, because they believe they will be able to trade it to someone for something of value later on, and so on. But the act of minting a bitcoin doesn’t create another spot on a cruise ship, it just adds more claims to the value of one to a ledger.
There is no shortage of rationalizations for the environmental impact. The industry has more or less gaslit itself into believing that bitcoin is not just not an environmental problem, but is a solution (e.g.). I’m not going to rehash the argument here, but suffice it to say, I think it will age about as well as when cigarette companies had doctors say smoking was good for you.

This essay is about my bear case, though, not my moral stance. We can put aside entirely the question of whether bitcoin is actually bad for the environment, because the perception alone that it is bad for the environment is enough to cause it problems. We saw this in action when Tesla stopped accepting it as payment over environmental concerns, and the price immediately dropped. This no doubt gave pause to any other CEOs who considered following Tesla in putting some of their treasury in bitcoin. Environmental concerns are also a cloud hanging over lawmakers and regulators as they write laws and policy that impact bitcoin.

These concerns are particularly salient at a time when proof-of-work, the consensus algorithm at the root of bitcoin’s environmental problems, is falling out of favor relative to proof-of-stake. When ethereum completes its transition to proof-of-stake, bitcoin and dogecoin will be the only remaining proof-of-work coins in the top ten by market cap, down from six at the beginning of 2017. We could debate the merits of alternate consensus approaches, but it’s becoming harder to make the case that the environmental cost of proof-of-work is necessary when competing cryptocurrencies are increasingly able to avoid it.






Legacy Technology
I’m personally skeptical of NFTs and DeFi, but I can’t ignore that a bunch of capital is flowing into cryptoworld as a result of them. Bitcoin is left almost entirely out of the fun, due to its low throughput and less sophisticated smart contract functionality, both of which are perennially tied to decisions that are more or less frozen in 2009.

I often hear that this is no matter to bitcoin, it is a store of value; it does not need to do other tricks. But if another coin grows a bigger network on the back of providing some utility (or perceived utility), it stands to reason that that coin could also become a better store of value, even if by accident, like cigarettes in a P.O.W. camp. To the extent that demand for a coin’s utility is uncorrelated with speculative interest, that utility has a stabilizing effect — something people appreciate in a store of value, even if they have no desire to consume the utility value themselves. It’s often argued that bitcoin’s value comes from network effects, but by the same token, it’s vulnerable to another network growing larger. Packy McCormick has written a detailed argument on one path that this could take, which is a fun read.

The Wildcard: Tether
If you’re not familiar with Tether, the broad strokes are: Tether is a token issued by a company of the same name, its value is pegged to (and ostensibly backed by) $1 USD, there are 69 billion of them, and nobody but Tether (the company) knows where the corresponding $69 billion USD is.

Tether says it has the $69 billion, but they have been cagey about where it might be, changing their answer whenever evidence mounts that their last answer wasn’t true.

The reason this matters to bitcoin is that, to the extent that the money was piled into bitcoin, it presents a systemic risk to bitcoin itself. This would be true if that amount of borrowed capital were concentrated in any asset (remember Archegos?), but there’s long been speculation that a large amount of it is in bitcoin because Tether (the company) is connected to a bitcoin exchange. More recently, in an article describing Tether as “practically quilted out of red flags”, Bloomberg reported that these assets include “billions of dollars [of loans] to other crypto companies, with bitcoin as collateral.”

If I could short Tether directly for USD, I’d be tempted. It’s only possible to short Tether on crypto exchanges, though, and nobody knows how deeply a Tether collapse could bring down other parts of the crypto ecosystem. Given that Tether may well be sitting on a large pool of bitcoin that it would need to liquidate quickly in the event of a run, I see betting against bitcoin as an indirect way to bet on a run on Tether.2

I’ll end off with what I fully admit is the most subjective argument of the bunch: bitcoin culture has become cringe. For most investments this wouldn’t be a factor. Value investors can buy boring equities and laugh at people who call them “unfashionable” all the way to the bank every dividend cycle. But bitcoin has no dividend, its value entirely depends on being able to sell it at a later date. However you dress it up in terms like hyperinflation and Metcalfe’s Law, the core investment thesis is always that it will continue to be fashionable to own bitcoin.

For a while, bitcoin was surrounded in an air of mystery and danger, owing to the unknown identity of Satoshi and the Silk Road association. If not a status symbol, it was at least a conversation starter.

These days, there’s not much secret about it, and the people elevated by the community aren’t the most thoughtful or interesting, but the loudest and most steadfast believers. There’s a characteristic lack of self-awareness that leads to the most prominent voices proclaiming that bitcoin will create world peace and cancel cancel culture and whatever the hell this is. From the outside, it has the feel of an MLM, where preposterous promises act as a loyalty test to solidify the in-group, as do the tired laser eyes avatars. This year’s Bitcoin gathering in Miami drew comparisons to Fyre Festival and the infamous final Bitconnect Annual Ceremony (I wonder why). A local Miami news article quoted an Uber driver describing event participants he drove as “nice, just weird and obnoxious-sounding”, which is a fine summary of the persona I associate with the community these days. It’s not the worst thing you can be called, but it’s also not something that makes me think I want to join them.

Beyond the weirdness, there’s a whiff of desperation to the whole affair. The community has bonded over an “us vs. them” mentality, which is good for solidarity but makes it awkward to then try to convince the them to join in so the price can go up. Non-converts are taunted to have fun staying poor, as if they need bitcoin more than bitcoin needs them. On some level, bitcoiners understand that if everyone does decide to “have fun staying poor”, their own bitcoin investments won’t make them rich.


これはビットコインには関係ない、ビットコインは価値の貯蔵であり、他の芸当をする必要はない、という話をよく聞きます。しかし、他のコインが何らかの効用(または効用と認識されるもの)を提供することでネットワークを大きくすれば、そのコインもまた、P.O.W.キャンプでのタバコのように、偶然であってもより優れた価値の貯蔵物となり得ることは理に適っている。コインの効用に対する需要が投機的な興味と相関しない限り、その効用は安定化効果を持つ。つまり、たとえ効用価値を自ら消費する欲求がなくても、人々は価値貯蔵品に感謝するのである。ビットコインの価値はネットワーク効果から生まれるとよく言われますが、同じ意味で、別のネットワークが大きくなることに弱いのです。Packy McCormickは、このようなことが起こり得る一つの道筋について詳細な議論を書いており、楽しく読むことができます。



このことがビットコインにとって重要な理由は、その資金がビットコインに積み上げられた程度では、ビットコイン自体にシステミックリスクをもたらすからです。その量の借り入れ資本がどの資産にも集中していればそうなるのだが(Archegosを覚えているだろうか)、Tether(会社)がビットコイン取引所とつながっているため、その多くがビットコインにあるという憶測が以前から流れているのだ。最近では、テザー社を “実質的に赤旗のキルティング “と表現した記事で、ブルームバーグが、これらの資産には “ビットコインを担保にした他の暗号企業への数十億ドル(の融資)”が含まれていると報じています。




最近では、ビットコインの秘密はあまりなく、コミュニティによって持ち上げられるのは、最も思慮深く、興味深い人たちではなく、最も声が大きく、最も堅実な信者たちである。ビットコインが世界平和を作り出し、文化を崩壊させると宣言する最も顕著な声や、これが一体何であるのかを示す自己認識の欠如が特徴的である。外から見ると、MLMのような雰囲気がある。とんでもない約束が、疲れたレーザーアイのアバターと同様に、仲間を固めるための忠誠心テストとして機能するのだ。今年のマイアミでのビットコインの集まりは、Fyre Festivalや悪名高いBitconnectの最終的な年次式典と比較された(なぜだろう)。マイアミのローカルニュースでは、あるUberドライバーが運転するイベント参加者を「いい人、ただ変で不愉快な音」と表現しているのを引用していますが、これは私が最近コミュニティから連想する人物像を見事に要約したものです。最悪の呼び方ではないが、彼らの仲間に入りたいと思わせるようなものでもない。


Final words
If my thesis on bitcoin is right, it’s hard to say how long it will take for the market to reflect it. It could be in a few halvings when the impact on network security is felt, or a Tether implosion could bring the whole thing down tomorrow. What I like about miners is that they are a more time-boxed bet. Their valuations reflect assumptions about market share and price that either will or will not materialize over a few-year period.

The paradox of mining is that for miners to succeed, bitcoin needs to succeed, but for bitcoin to succeed, miners can’t indefinitely siphon off enough value to justify their current valuations. Miners currently extract about $20 billion per year from the bitcoin economy (if you don’t trust my math, take it from Pomp). This money doesn’t come from thin air; it’s effectively a tax that bitcoin holders pay in the form of dilution. Current mining company valuations seem to bake a belief that this number will go up in the long run, in spite of halvings. I don’t buy it.

To reiterate, none of this is investing advice. Do your own research, or better yet, just avoid this stink altogether and go outside or something.

I’m referring to monetary inflation (increase in money supply), rather than price inflation. This is also the sense that bitcoiners mean when they call bitcoin non-inflationary. ↩︎

Some people mistakenly believe that if the Tether peg broke it would actually drive up the price of Bitcoin, since people fleeing Tether will be willing to trade increasing amounts of Tether for a bitcoin as the former devalues. It’s true that this would drive up the price of bitcoin as denominated in Tether, but that’s because the value of Tether would go down, not because the value of bitcoin (as expressed in any non-Tether denomination) would go up.







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