Cyrus de la Rubia, the Chief Economist of the Hamburg Commercial Bank, has crunched the numbers to price bitcoin using what we are calling the electricity model.
As you all know there’s a ‘hard’ process to creating bitcoin using electricity and semiconductor asics chips.
These are very valuable commodities for which bitcoin competes with other sectors, like computers, machine learning, or indeed your cooking oven.
Thus Rubia argues at a certain point of global energy consumption, market forces would make energy allocation to bitcoin mining less desirable than for other activities, so putting a cap. He says:
“The moment these other energy-intensive goods, for example steel or aluminum, are in greater demand than additional units of the cryptocurrency, the relative attractiveness of Bitcoin decreases. Then the upper price limit is reached.”
He puts this ‘moment’ at about 2% of global energy consumption, which gives bitcoin a price of $100,000 currently.
He argues this is the upper limit. We’d suggest this would be the floor as the upper limit has other factors, like temporary sell-side liquidity crisis.
Generally however the electricity model is something that has always been used as a hard floor or raw price evaluation especially during bear markets, with Rubia saying because of the halvenings, the relationship between energy and price changes.
As the mining reward halves, 2% of current global supply would give bitcoin a floor – or in Rubin’s view an upper limit – of $200,000 in three years. By 2030 thus, we get to one million.
There’s quite a few points to make however. The main slightly abstract one is that $100,000 is a moving measurer, not fixed.
What was $100,000 last decade is not the same as this decade with this best shown by the fact you could buy a house in London for $20,000 in the 90s, while now you need half a million.
So this number $100,000, let alone $1 million in a decade, is a very imperfect measurer of something like bitcoin even in the very short term as America and Europe have doubled their monetary supply this year and are expected to continue doing so.
The other less abstract point is that energy is not a finite resource. Energy in fact can be created from what is practically nothing by harnessing the waterways or the sun.
Therefore it is not necessary for miners to compete with current energy supply as they can create their own energy supply, and in fact do so especially with hydropower.
Hence we’ll probably not meet a situation anytime soon as raised in his rhetorical question: “why should people still ask for Bitcoin when food can no longer be produced due to a lack of electricity?”
Nonetheless energy is not infinite either at least as far as our current capabilities are concerned because there are only so many waterways or desert fields you can solar farm. But we are very very far from current global supply being the total available energy supply. Thus that 2% of global energy consumption changes too.
If we add these considerations, then the specific number he comes up with becomes a much more fluid one. However, the fundamental analysis is most likely generally sound and putting a number to it, even if a very rough one as he himself admits, is a start.