Cryptocurrency Mining in 2020 Part 2 – The Politics, Power and Potential

Recap

Last week, we wrote a journal piece about cryptocurrency mining which covered a general introduction to the process, expected costs for start-up operations, established pro’s and con’s and concluded with an interview of 3 members of the Cryptonary community who have active mining operations.

 

Global Arms Race

The past few years have been inundated with irregularity and unclarity on the regulatory and legal status of cryptocurrencies as a financial entity. The US has been a global economic hegemony for almost a century, but over the last decade - since the birth of cryptocurrency – it has largely failed to evolve and even inflicted self-damage by openly discouraging potential innovation.

As a result, the influence of America as the world’s financial steward is under threat. Whether that status in the first place was a good thing is a whole other question, but what is clear now is that people in power and influence aren’t happy about this dawning fate and their rising competition.

 

Crypto-adoption

China’s dominance of the hash power of Bitcoin at an estimated 65.08%, in comparison to the US at 7.24% and Russia at 6.90%, has created a new battleground for hostile warfare within foreign policy. This is the paradox of an arms race for economic power in a technology designed inherently for decentralisation.

Executive chairman of Ripple Chris Larsen went as far as to say that the scenario with foreign adversaries resembled a ‘tech cold war’.

On the one side you have China - a country operating wide-scale testing of the first Central Bank Digital Currency (CBDC), dominating the mining market with gigantic data factories full with thousands of ASIC rigs and well-ahead of the technology curve with billion-dollar government investments yielding impressive advancements in 5G, Artificial Intelligence and Internet of Things amongst others.

On the other side you have the US - occupied by the sluggish pace of their industry to even notice the possibilities of the future. Entities like the SEC, Congress and Federal Reserve have been largely hostile in their approach and unwilling to embrace to innovation. America has become a shadow of the Silicon Valley days that crowned it as successor in the internet revolution.

 

Mining Perspective 

One of the miners we interviewed in the first journal of this series (Tim at TKInvestments), spoke about the difficulties that his operation faced in Wyoming due to stringent laws and regulations, as well as high-charges received from exchanges such as Gemini.

However, it seems the pressure of demand is finally forcing change. The Wyoming State Banking Board has made notable progressions in recent weeks with the approval of two applications for crypto-banks filed by exchange Kraken and crypto start-up Avanti. This comes after chartered trust management firm Two Ocean Trust were awarded the status of ‘qualified custodian’ to offer a portfolio of crypto custody services in the state.

 

Biden's Vision

So, what does the future hold? In a compelling piece for Foreign Affairs, President-elect Joe Biden excoriated the tenure of Trump on all accounts of domestic and foreign policy. In a testament to regain leadership on the domestic front, he noted:

“There is no reason we should be falling behind China or anyone else when it comes to clean energy, quantum computing, artificial intelligence, 5G, high-speed rail, or the race to end cancer as we know it. We have the greatest research universities in the world. We have a strong tradition of the rule of law. And most important, we have an extraordinary population of workers and innovators who have never let our country down.”

Strong words they are, but what are the crucial policies in place to achieve this vision?

 

Impact of Politics

Although the US President has yet to concede last month’s election – an outlier in the 120-year election tradition - it is all but certain that there will be a new face in the White House come January 20^th.

As the world continues to battle the pandemic, economic hysteria and countless other challenges, Joe Biden and his team - following inauguration day – can expect high-levels of scrutiny, pressure and anticipation to solve the unique challenges of the present and begin constructing plans for the future.

Our focus in this section will be on the impact this new Presidency will have on our industry of cryptocurrency, Biden’s economic ideals and what impact his policies and decisions will have on the mining industry.

 

Biden's Background

President-elect Joe Biden is a life-long democrat, judged to be positioned at centre-left on the political spectrum. His ideals and historical policy making have favoured the assistance of middle-class and working-class families. On the economic front, he has always taken the side of consumers. Not necessarily against corporation and capitalism, but rather for the people.

During Obama’s second term, he strongly supported the Dodd-Frank Act which implemented a structure within the financial system to avoid future catastrophe like that of 2008, as well as developing a culture of transparency and accountability within finance.

As President, Biden will enter a uniquely tumultuous landscape in what has been a memorable year for all the wrong reasons. Remaining focused on economics, the IMF predicts a plummet in U.S. economic output this year by 4.3%.

Some of his recovery visions have already been documented - to increase taxes for the highest-earners (1%), make far-reaching investments in green infrastructure totalling $400 billion and to create alliances with international relations to force China’s compliance on intellectual property and technology disputes.

 

Stance on Bitcoin

On the topic of Bitcoin, Biden doesn’t have an official stance. In fact, his only public encounter with cryptocurrency market as a whole came this summer during the market-defaming Twitter hack whereby over 125 political and celebrity accounts were compromised, instructing their followers to send Bitcoin payments.

The following day Biden tweeted, clearing up the matter:

“I don’t have Bitcoin, and I’ll never ask you to send me any. But if you want to chip in to help make Donald Trump a one-term President, you can do that here.”

Despite Biden not being an outspoken advocate of cryptocurrency, rumours of his early decisions on cabinet member elections offer some promise of political cohesion in the space.

 

Pro-Crypto Cabinet Additions

Thought leader and budding entrepreneur Andrew Yang has recently joined Biden’s team as a group member on a small businesses and entrepreneurship advisory board. Yang’s vision as a so-called ‘present-ist’ enriched the mainstream narrative during his underdog 2020 presidential run, spearheaded by his arguments for universal income. The result - he inspired new conversations about future technologies such as AI and the real demand of digital currencies in modern society.

Speaking on Crypto Joe’s podcast, ‘The Coin Chat’, Yang alleged his alignment to the values of the space and later called for more clarity and transparency on the rules for market participants:

"My vision of the economy is very consistent with the people who are in the cryptocurrency community. A national framework for regulating these assets has failed to emerge, with several federal agencies claiming conflicting jurisdictions.”

Former chairman of the Commodity Futures Trading Commission (CFTC), Gary Gensler has recently been appointed to support with financial policy transition to the Biden-Harris administration. An advocate of blockchain, Gensler described the technology as a “catalyst for change” in a CoinDesk opinion piece in December 2019.

On cryptocurrencies, Gensler was cautiously praising: “crypto initiatives have spurred incumbents to update payment solutions and explore new approaches to finance and multiparty database management.”

While they “may not fulfil the heightened expectations of maximalists” they “may be Nakamoto’s most enduring early contribution.”

With Gensler’s team includes former economist at the Federal Reserve Bank of New York’s supervision group and original co-creator of a paper proposing US research and implementation of a digital dollar, Lev Menand. The paper became an essential tool of education for growing discussions in Congress about the prospect of a centralised digital asset.

Other notable figures with a pro-crypto-bias who have been selected as expert advisers on the Biden-Harris team are digital currency researcher Simon Johnson, law professor and fin-tech figure Chris Brummer and banking law professor and witness on cryptocurrency and blockchain regulatory Senate discussions Mehrsa Baradaran.

 

Anti-Crypto Cabinet Additions

Despite several positive influences, there may be some incoming opposition to cryptocurrency within Biden’s new team. According to a Wall Street journal publication yesterday, the Biden team is finalising plans to appoint seasoned economist Janet Yellen to the post of Treasury Secretary in the coming days.

Those familiar with the fiat markets will recognise Yellen from her time as Chair of the Federal Reserve between 2014 – 2018. Traditionally a ‘dove’ (to use a Wall Street term), Yellen will encourage the use of monetary policy to promote employment over currency deflation.

She had a historical bias of skepticism on Bitcoin during her time as Chair. With growing interest within the walls of the Federal Reserve on the prospect of a ‘digital dollar’, it remains to be seen whether her perspective has been altered any since 2018.

 

Overall Sentiment

Most cryptocurrency commentators agree that Biden will be a net-positive for the space, reversing the naive sentiment of his predecessor. Gaining control of the Senate – which will be decided in the new year in Georgia’s ‘runoff races’ - will be a crucial factor in the scope of the Biden presidency to enable genuine policy change in the cryptocurrency space.

One area that his plans will impact some cryptocurrency participants is taxation. Biden has proposed a reversed increase in income taxation for the high earning bracket >$400,000 per year. These folks would see a rise in their rate from the current 37% to 39.6%. On capital gains, Trump had plans to approve a Billionaires Tax Cut from the current 23.8% to 15%. Now Biden holds power, he pledges to increase from the current value up to 39.6%.

Biden’s campaign message was simple: “Trump rewards wealth, Biden rewards work”.

Although, Biden’s education on cryptocurrency may not be wide-reaching, it is clear to see that he has the intelligence to integrate experts from all areas of technology into his team and the personality to actively listen to the advice provided to support his decision making.

His policies may harm those Americans searching for a crypto moon, but his endeavours in infrastructure, innovation and investments will likely be positive for the entire eco-systems development, not just the growth of a few.

 

Environmental Impact

Despite the fierce competition for an edge on the economic stage, each country on earth shares a unifying commonality – the fight against greenhouse emissions and climate change. And this is where China’s lead in cryptocurrency mining may begin to slip.

 

Are China Losing Ground?

Despite the advantageous perks of cheap labour, electricity and an acquired climate, China’s issues with sustainability due to the use of coal and oil could lure miners elsewhere in their operations.

There are growing alternatives in the Sichuan province such as hydropower which is the cheapest, cleanest option at $0.01 to $0.02 per kWh, but most miners still use coal, thus experiencing costs of around $0.035 per kWh, as well as a poor environmental footprint. The Nordic countries and North America are cultivating discussions in the mining community as more favourable spots for their operations for their year-round sustainable power and political leniency.

 

Economies of Scale

Although in parallel to the ideals of decentralisation, economies of scale and the increasing scarcity of Bitcoin may provide better conditions for eco-innovation in crypto mining. Greater leverage to negotiate on pool fees, infrastructure, ASIC equipment and more will give large-scale institutions the ability to choose higher start-up locations such as North America with the expenditure saved.

Financial firms such as Fidelity are an ever-growing player in the mining world, taking a bigger share of mining operations each year. They too will begin focusing their efforts on sustainability in the coming years, supporting the growing trend amongst miners to endeavour for renewable energy sources. The best option is in the form of hydro-power, wind and solar.

One of the miners in our community from the UK, Party Ferret related to this: “solar power was the only thing that kept the operation profitable during bear season.”

 

Ethereum 2.0

Ethereum’s transition from Proof-of-Work (POW) to a Proof-of-Stake consensus algorithm, which begins on the 1^st December, is largely down to resolving scalability concerns on the network. However, the company also cited sustainability on their website as one of the key reasons for the original ETH2 vision:

“Once the beacon chain and the shard chain upgrades are up and running, work will begin on docking main-net with the new system. This will turn main-net into a shard so that it’s secured by ETH and far less energy intensive.”

 

Biden's Green Vision

Biden is a life-long climate activist and supporter of a societal transition to green energy. Back in 1986, he introduced the first climate change bill in Congress which, although denied, set precedence for his consistent effort to enact environment reform.

Fast-forward to today, his sustainability vision to achieving the goal of net-zero emissions by 2050 is backed by a $400 billion federal pledge on clean energy, strategic research and innovation. On the latter, he outlines a mission to “drive dramatic cost reductions in critical clean energy technologies” … “renewable hydrogen and advanced nuclear.”

This green vision is draws comparisons to the path cryptocurrency mining must take over the next few years which means that the receptivity and actions of the Biden administration could not only be a positive for cryptocurrency legislation and adoption, but also environmental sustainability in the space.

 

Mining in the 20’s

A review of the first year of the 20’s would probably take the whole of 2021! On cryptocurrency mining, the pandemic has certainly stunted the progress of operations globally, but with time that will recover. Economically, this has been a chance to prove use-case of new technology, especially digital assets.

 

Green Economy?

All of the three miners we spoke to last week commented on the importance of Ethereum’s upcoming transition to Proof of Stake in dictating the future profitability of their mining careers. In this new age for mining, some miners will be forced out, some will survive.

Forced by legislation and governmental incentives, an evolution to symbiosis between kaizen-growth and eco-sustainability will be the highest agenda for mining operations, especially those with the largest global footprint owned by corporations and financial entities.

Despite signs of early potential, it remains to be seen whether the Biden administration will embrace or denounce the cryptocurrency market and its participants. What will the state of play be in four years when a new President and next Bitcoin halving is imminent? In a few words: an unrecognisable landscape of efficiency and hyper-productivity built with technology around the people.