Money Reimagined: Bitcoin’s Green Savior?

Well, the giant Bitcoin Miami ~~love fest~~ conference turned out to be more than just late-night beach parties. It actually delivered some news – a bombshell announcement big enough to quell concerns about the event being a COVID-19 superspreader event. All week, the crypto world has been alight with the news that the Central American country of El Salvador will become the first nation to treat bitcoin as legal tender.

The implications of that announcement dominate this week’s newsletter. In particular, the main column focuses on the prospect of also spurring renewable energy development across the country via a system of bitcoin-funded community microgrids.

The accompanying “Money Reimagined” podcast departs from an otherwise all-bitcoin newsletter to explore the second edition of Sheila Warren’s and my dive into the governance challenges and opportunities for new forms of organizational decision-making posed by decentralized finance (DeFi) and distributed autonomous organizations (DAOs).

Have a listen after you read the newsletter.

Bitcoin and green energy: El Salvador’s leapfrog chance

Possibly the only thing this week that got bitcoiners more excited than El Salvador President Nayib Bukele’s move to make bitcoin legal tender was his followup that bitcoin miners will get access to geothermal power from volcanoes.

The bitcoin community is not only celebrating a new Central American haven but pointing to El Salvador as a proving ground for “green” bitcoin. Because geothermal plants draw their energy from an existing, naturally occurring heat, their carbon footprint is minimal.

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But I think El Salvador (population 6.4 million), one of the poorest countries in the Western Hemisphere, has an opportunity to make a far more groundbreaking energy play than the buzz generated by linking a volcano to a bitcoin mine.

A humble proposal: The government should work with miners, local community leaders and foreign investors to strategically fund the expansion of the country’s electricity coverage, specifically via a decentralized network of cheap, clean, cyber-secure, and community-empowering solar or wind-power microgrids.

The best way to overturn the flawed narrative – most recently furthered by U.S. Sen. Elizabeth Warren – that bitcoin will destroy the planet if we don’t curtail it is to demonstrate the opposite: that miners prefer low-cost green sources of power and that they can be a force multiplier for green energy infrastructure at large. If executed properly, El Salvador’s bitcoin project could achieve a host of the United Nations’ Sustainable Development Goals (SDGs) in one shot. That’s a story I’d love to tell.

Underwriting green economic development

While Warren, Elon Musk and others have been beating the drum about Bitcoin’s energy usage exceeding Sweden’s, bitcoin mines are being deployed in multiple locations across the world, not only to tap existing renewable or stranded energy sources such as wasted natural gas destined for flaring, but to underwrite the development of green electricity infrastructure to serve wider communities.

In a recent episode of our “Money Reimagined” podcast, Harry Sudock, vice president of strategy at mining infrastructure provider GRIID, told us his company is seeing relentless demand from wind, hydro and solar developers for bitcoin mining; co-locating facilities offers revenue guarantees that allow communities to expand renewables to serve local people. Without those guarantees, these enterprises tend to stall because they depend on bureaucratically administered and sparsely distributed government subsidies to fund their rollout.

In other words, bitcoin mining can serve as that missing piece of risk capital needed to kick-start infrastructure projects, not only to shift the world toward renewable energy but also to foster economic development. There are deep-pocketed companies ready to do this – payments provider Square, for example, which is investing $5 million into a new bitcoin-driven solar facility run by Blockstream.

To maximize the social impact of this effort, we need to look beyond large-scale, state-run, centralized energy projects such as El Salvador’s geothermal plants and seek ways to fund community-based green power projects run as regional microgrids.

A decentralized network of such grids would provide what power experts call “redundancy,” creating multiple backups to offset the vulnerability of the centralized national grid to outages caused by weather or other disruptions. (For a sense of why centralized systems are more vulnerable, think of the tens of millions of people along the U.S. Eastern Seaboard who were impacted by a single ransomware attack on the Colonial Pipeline. A decentralized structure gives hackers a smaller payoff in terms of disruption.)

Most importantly, if bitcoin miners source their power from local, community-based grids, their payments for it – transferred in newly legal tender bitcoin – will go to those communities, providing a steady long-term source of income. (Ideally, microgrids would be governed as cooperatives, or even as distributed autonomous organizations, or DAOs, to ensure wide distribution of proceeds and that there is accountable reinvestment in sustainable development.)

With those funds in hand and new, more widely distributed, reliable, low-cost sources of electricity available, local entrepreneurs could, for example, build out a network of charging stations, creating the foundation for local businessmen to spin up electric vehicle transport services. There’d be power to pump water into farmers’ irrigation systems. They could expand cell phone services, which are vital for bitcoin payment apps such as Lightning-based Zap, whose CEO, Jack Mallers, was instrumental in President Bukele’s bitcoin awakening.

The geothermal mining proposal is not antithetical to this idea. Bitcoin payments to the national geothermal energy company, LaGeo, would go to upgrading and maintaining the national system into which the microgrids are integrated to provide greater security and reliability. Or, in a direct application of the so-called “money battery” concept, energy tariff payments to the government by bitcoin miners could fund the development and maintenance of the microgrids in other places.

Flip the debate

For those who believe bitcoin’s offer of a censorship-resistant, programmable, universally accessible source of digital currency is a positive force for the world, projects like this provide an opportunity to sway public opinion and get people to recognize that it can drive sustainable growth opportunities if managed properly.

We need to table the dysfunctional debate about bitcoin’s environmental impact. Critics focus on bitcoin’s energy consumption, but it’s the wrong lens. El Salvador and so many other poor countries need to consume more, not less, energy if they are to prosper. And excessive consumption is only a problem if the resource is finite, which is not the case with solar, wind or geothermal energy.

The problem is bitcoin’s mining’s source of energy. And the reality, one that too many crypto advocates ignore, is that bitcoin does access a massive amount of fossil fuel energy. Its carbon footprint is by no means small and will grow bigger as usage expands unless deliberate actions are taken to reduce it.

We need policy actions that can put both sides of this debate into a more reasonable context. El Salvador can lead the way – especially given the interest among other Latin American leaders to follow its example.

Still, to ensure the spoils of development are spread among host communities and to keep miners and grid operators in a symbiotic contractual relationship that serves the interests of both, regulation is needed. Rules can be set for minimizing mining activity during peak hours to manage the “duck curve” problem caused by unused solar capacity and for ensuring there is constant reinvestment in capacity for the community at large.

The question is, will Bukele’s government, which has been accused of authoritarianism and has resisted efforts by U.S. President Joseph Biden to expand regional anti-corruption efforts, seize the initiative to spread the wealth? Or will corrupt officials and wasteful state companies monopolize the bitcoin windfall?

Well, here’s an opportunity for the Biden Administration to strike a deal.

Deeply poor El Salvador is one of the biggest sources of undocumented immigrants crossing through Mexico into the United States. If the U.S. sees the big picture here, it should take a more positive stance towards El Salvador’s Bitcoin policy than we’re currently hearing from Washington – the U.S.-dominated International Monetary Fund expressed concerns Thursday about it. It can help the country leverage the opportunity to develop prosperity among the very communities that are sending their people on those treacherous journeys to the U.S.

This is a unique opportunity for everyone. Let’s not squander it.

Off the charts: Whither the whales?

In the first Money Reimagined newsletter of 2021, we looked at how so-called “whale” bitcoin addresses with more than 1,000 BTC had grown significantly before and during the price rally that started in mid-2020 and accelerated into the end of the year. We contrasted that with 2017, when whales started shedding positions mid-year while the price was not even a quarter of the $20,000 peak it would later hit in December, before it plummeted to levels below $8,000 in early February. We saw in this a potential sign of sustainability for the 2020 rally because it indicated that the gains were driven by big, lasting bets by institutional investors.

So, now that we’ve had a big pullback, let’s look at how whales have been behaving.

Once again, the whales led the price decline. As the chart above shows, addresses with more than 1,000 BTC increased sharply during the first two months of the year while the price of bitcoin also soared. But then, around March, whale accounts dropped sharply, as if concluding that the small, retail investors now rushing into bitcoin were once again taking things too far.

Unlike the 2017 rally/bubble, the price response came only a couple of months after the whale drawback began, whereas there was a delay of six months in 2017. Then, the price increased four-fold during that gap period whereas this year, the increase was less than 50% – still huge, but less parabolic.

To me, this speaks to how important large, institutional accounts were in this most recent rally. They were the reason for it – the founding narrative being that “the suits” are coming – even if in the latter stages it was fueled by a small investor influx. When the institutions got cold feet – primarily because of environmental concerns – the market couldn’t sustain itself.

What now, then? Well, it’s probably too early to say, but there is a small uptick in whale addresses this past month. Just as importantly, as CoinDesk’s Omkar Godbole reported this week, even if whale addresses haven’t increased, existing addresses have been accumulating coins, adding a total of 80,000 BTC since the price crashed to $30,000 on May 19. For now, at least, the bigger players seem to see buying opportunities in these lower prices.

The Conversation: A house divided

Crypto Twitter riled up this week when U.S. Sen. Elizabeth Warren, the prominent liberal Democrat from Massachusetts, came out with a tweet and a video that described bitcoin as an “environmental disaster” and “scandalous.”

Notably, this came two days after a bitcoin put-down by someone otherwise seen as the diametric opposite of Warren: former President Donald Trump.

The differential here is that Trump’s view is based on a blatant appeal to raw state power that comes with the dollar’s dominance – a state of affairs that most fans of bitcoin seek to escape – whereas Warren’s is couched in the interests of the planet rather than nationalism.

Putting that aside, the convergence of anti-bitcoin voices from both sides of the political aisle is important. To many in the bitcoin space, it’s a galvanizing moment. It’s now all about “us” versus “them,” they say, where ”they” are the centralized establishment, Democrat or Republican, that the peer-to-peer technology of Bitcoin is intended to bypass.

Crypto Twitter exploded in angry retort. But that was to be expected. More intriguing were the pro-bitcoin responses from within “the establishment.”

First, let’s hear from Ohio Congressman Warren Davidson, a Republican who has embraced a pro-Trump stance. Davidson is a member of the Congressional Blockchain Caucus and he took Warren to task:

Next, a former Democratic presidential candidate who is now running for mayor of New York City. On CNBC, Andrew Yang laughed down a question about environmental concerns and struck a decidedly pro-crypto stance. (Audio a bit rough, but thanks to @SonamSSol for capturing the video.)

One measure of bitcoin’s power is its capacity to make strange bedfellows.

Relevant reads: Bitcoin’s savior?

High school Spanish question: Translate “el salvador.”

News that a country would declare bitcoin legal tender was always bound to elicit “to the moon” high fives among the cryptocurrency’s loyal community. But with the price well off its highs and concerns abounding over China’s regulatory crackdown and a backlash from environmentalists, bitcoiners had even more reason to cheer this development than ever. It’s almost as if Nayib Bukele, a bearded, baseball cap-backwards, self-styled rebel of 39 years of age has emerged as their savior – you know, in the religious sense.

As reported by Zack Seward, Colin Harper and Danny Nelson, it began at the Bitcoin Miami conference with an emotional, almost evangelical presentation by Zap CEO Jack Mallers, who shared a videotaped announcement in which Bukele told the whooping audience that “El Salvador is set to be the first bitcoin country.”
But is Bukele the Messiah bitcoin needs? Per a day-after profile by Daniel Kuhn, it’s complicated. The young, anti-establishment president eschews “left” or “right” labels, while actions such as sending in armed soldiers to the legislature and removing Supreme Court judges have seen him described as a “hipster authoritarian.” Meanwhile, in providing direct assistance to the poor during the COVID-19 pandemic, he earned sweeping approval from voters but copped the epithet of “populist” from conservatives.
Either way, Bukele has sparked what could be described as a movement – maybe even a religion – among like-minded politicians across Latin America. Legislators from Argentina, Mexico, Panama, Brazil, Colombia and Paraguay adopted pro-bitcoin “laser eyes” Twitter profiles. And Paraguayan Congressman Carlos Rejala promised to introduce a bill that would open his country’s hydropower resources to bitcoin miners. In an interview with Andreas Engler, Rejala sounded almost Pentecostal: “The [Bukele] announcement prompted me not to be afraid and to think that this can be real in my country.”
And now Rome is displeased. As anyone who has read the financial history of Latin America knows, throughout much of the past 50 years the International Monetary Fund has been an economic master to the region’s countries. In fact, in requiring them to sustain their debt commitments, it has become known among the Latin American left as a brutal taskmaster. With that quasi-colonial history in mind, it was striking at the end of the week to hear IMF spokesman Gerry Rice citing “macroeconomic, financial and legal issues” with El Salvador’s law.