The New China Syndrome

Do any of you remember the 1979 film ‘The China Syndrome’? In it, a news reporter (Jane Fonda) and her cameraman (Michael Douglas) are unintentional witnesses to a SCRAM incident, an emergency core shutdown procedure at a nuclear power plant in California. The crew prevents a catastrophe, but the plant supervisor (Jack Lemmon) begins to suspect the plant is in violation of safety standards, and tries desperately to bring it to the attention of the public, fearing that another SCRAM incident will produce an atomic disaster.

You may ask why was it called ‘China Syndrome’ when the action took place in California. The answer is that the nuclear meltdown scenario in the film is based the fanciful idea that there would be nothing to stop the meltdown tunnelling its way to the other side of the world, i.e. China.

This week we have seen another form of ‘China Syndrome’ in the cryptocurrency markets. Bitcoin, Ethereum, Cardano and others have plummeted in value after Beijing renewed efforts to rein in the sector by cutting power to bitcoin miners in Sichuan province over the weekend, one of the country’s largest producers of the digital currency, writes Robert Hart at Forbes.

China accounts for 80% of global bitcoin operations and the crackdown in Sichuan has cut the country’s bitcoin production by more than 90%, according to China’s Global Times. This state media source also says, “regulators in other key mining hubs in China’s north and southwest regions have taken similar harsh steps.”

The move has cut bitcoin’s hashrate and caused bitcoin to drop to its lowest value in nearly two weeks. As you’ve probably noticed, the altcoins suffered as well.

China has an abundance of cheap electricity, making it an ideal location for energy intensive bitcoin mining, and Sichuan has an abundance of hydropower, hence its regional domination of the sector. However, a great deal of the energy used for mining coming from coal power stations, which means the industry is at odds with China’s new climate goals…and Elon Musk’s thinking.

This sounds commendable for a cleaner energy future, but that is not the only reason China has clamped down on mining. According to Hart, “China is also keen to prevent cryptocurrencies from “infringing” upon financial order, prompting a ban on financial services facilitating crypto trade.”

China has been causing problems in the cryptocurrency market since May when it announced its intention to intensify its regulatory crackdown on cryptocurrencies, something it does periodically.

Shentu Qingchun, CEO of Shenzhen-based blockchain company BankLedger, told the Global Times on Sunday: “We had hoped that Sichuan would be an exception during the clampdown as there is an electricity glut there in the rainy season. But Chinese regulators are now taking a uniform approach, which would overhaul and rein in the booming Bitcoin mining industry in China.”

And then he added, “As a result, Chinese miners must form alliances to migrate overseas, to places such as North America and Russia.”  It sounds like a move that might stop the meltdown that is currently tunnelling from China to the rest of the world.

Panic over: it’s time to buy crypto again

June has not been a wonderful month for cryptocurrencies, but Dan Morehead, CEO of Pantera Capital, is confident that “we’ve seen the most of this panic” and that the sell-off is slowing down.

I read his newsletter published on 14th June with interest. He names three things that caused the markets to fall sharply:

  • China banning bitcoin (again)
  • Tax day
  • Elon Musk

The first point, regarding China, he says is one that happens in a cycle, as China has ‘banned’ bitcoin in 2013, 2017 and 2021. So, that’s every four years. Will they do it again in 2025? It’s hard to say, but by that time the cryptocurrency markets will look rather different one suspects. Morehead warns “Investors who sell on China “bans” usually end up bummed.”

Tax day is also something that comes around with an inevitable regularity. It is also important for crypto prices. In 2013 and 2017 when we also had spectacular bull runs, “bitcoin peaked four months before Tax Day and hit a low about a week before Tax Day.” People sell their crypto to pay their tax bills, especially when they are being asked to pay on their crypto gains. As for Elon Musk’s swivel over bitcoin, Morehead stays silent on that. He’s right, enough has been said to inflate the entrepreneur’s sense of himself as a market mover.

What Morehead does address is human behaviour and our love of acting in cycles. As he says, “Humans have an innate herd instinct.” He explains it like this:

  • It’s human nature that we want to buy when the market is surging up — when the FOMO devil is whispering in our ear.
  • When the markets are crashing – and our spouse/friends/boss are all WTF, we want to flee…we want the pain to stop..

And that is what happened in May and June. Although, Morehead does add another warning: “I could imagine that the traits we imprinted on the plains of the Serengeti might not be optimal for trading early-stage protocol tokens.”

It is worth noting that the Pantera Bitcoin Fund is the oldest cryptocurrency fund, so Morehead speaks with some authority when he says of this moment in the markets, “The volatility has presented a very compelling opportunity.  We are eager to deploy assets of the new Pantera Blockchain Fund on June 30th.”

Buy in the dip is not a new message, but when the evidence is clearly laid out, as Morehead has done, then it injects investors with renewed confidence that the panic is over and it’s time to buy. 

 Read the full Pantera Capital newsletter

Can bitcoin encourage renewable energy development?

At Bitcoin Miami there were cheers when El Salvador announced it was making bitcoin legal tender. It was welcome news after Elon Musk’s tweets about bitcoin mining’s excessive energy use, and El Salvador’s president announcing that they planned to use geothermal energy from the country’s volcanoes to power crypto mining enhanced it.

The bitcoin community is not only celebrating a new Central American haven for the leading cryptocurrency, it is also pointing to El Salvador as being a proving ground for ‘green’ bitcoin. Geothermal plants draw their energy from an existing, naturally occurring heat, in this case it is El Salvador’s volcanoes, meaning they have a minimal carbon footprint. 

Michael J. Casey believes there is an even greater opportunity. He said, “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.”

What he suggests is that Nayib Bukele’s 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.

As Casey says, there is a narrative about bitcoin destroying the planet that needs to be addressed. Miners prefer low-cost green sources of power and for that reason they can be a considerable force in leading the way to a green energy infrastructure, and not just in El Salvador. Casey adds, “If executed properly, El Salvador’s bitcoin project could achieve a host of the United Nations’ Sustainable Development Goals (SDGs).”

Across the world, bitcoin miners are already tapping into existing renewable or stranded energy sources, such as wasted natural gas destined for flaring and underwriting the development of green electricity infrastructures to serve wider communities. 

Furthermore, Harry Sudock, vice president of strategy at mining infrastructure provider GRIID, told Casey his company is seeing relentless demand from wind, hydro and solar developers for bitcoin mining and that co-locating facilities offers revenue guarantees that allow communities to expand renewables to serve local people. Casey says, “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.”

He suggests finding funding for “community-based green power projects run as regional microgrids.”

Most importantly, he adds, “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.”

We must acknowledge that at the moment bitcoin miners do use large amounts of fossil fuel energy, but the moment to change that is right now.

Bitcoin is legal tender…in El Salvador

On 9th June 2021 something quite historic happened: the government of El Salvador voted to recognise bitcoin as legal tender. The bill didn’t pass with a slim majority, it got a supermajority vote in the nation’s legislature, and it was expected that President Nayib Bukele would sign it into law immediately. The next step after that is to discuss it with the International Monetary Fund.

President Bukelele presented the parliament with his vision for the leading cryptocurrency, pitching it as an effort to boost financial inclusion in a country where only 30% of citizens have access to financial services. Furthermore, he said in a Twitter conversation that bitcoin users would not be pressed to use a government-issued wallet for their funds.

The president also said that the new law would mandate “all businesses to accept bitcoin for goods or services,” but added, “the government will act as a backstop for entities that aren’t willing to take on the risk of a volatile cryptocurrency.” He described how this will work: the government will set up a trust at the Development Bank of El Salvador to instantly convert bitcoin to U.S. dollars and this fund will assume merchants’ risk. It will hold about $150 million in dollars, and will keep the fund topped up by selling bitcoin for dollars.

Bukele ssiad: “If there’s an ice cream parlor, he doesn’t really want to take the risk, he has to accept bitcoin because it’s a mandated currency, but he doesn’t want to take the risk of convertibility, so he wants dollars deposited in his banking account, when he sells the ice cream, he can ask the government to exchange his bitcoin to dollars. Of course, he can do that in the markets also, but he can ask the government to do it immediately.”

Bitcoin mining and volcanic energy

Bukele also indicated that the government may promote bitcoin mining, and it looks as if it is ready to make use of its excess geothermal energy for this purpose. Less than 14 hours after getting approval for his bill, Bukele was talking to El Salvador’s geothermal company, LaGeo and directing them to let power-hungry bitcoin miners plug into his country’s volcanic resources. He tweeted “I’ve just instructed the president of @LaGeoSV (our state-owned geothermal electric company), to put up a plan to offer facilities for #Bitcoin mining with very cheap, 100% clean, 100% renewable, 0 emissions energy from our volcanoes.” The 39-year-old leader then added, “This is going to evolve fast!”

He did admit that he hadn’t really thought about an efficient use for all his volcanic energy before now, but since he had a lightbulb moment, he’s ready to tap into the country’s hundreds of megawatts of untapped geothermal potential as well as a network of underutilized power plants. It’s a well-spotted opportunity and the speed at which Bukele has moved with respect to bitcoin as legal tender and the use of excess energy for mining underscores the levels of power this young president has.

Residency only costs 3 Bitcoin

And there was other good news for anyone looking for a new country of residence: President Bukelele announced that he is creating a new law that will allow any individual who invests three BTC into El Salvador’s economy to have permanent residency. With bitcoin today at $36,841, that means residency would only cost around $110,000. It could be time to investigate the benefits of being an El Salvador resident.

Last night Bukele tweeted, “Every day is going to be a new idea.” As they say: watch this space, and the rest of Latin America.