Integrating Mining Facilities with National Infrastructure
Bitcoin’s primary feature is the security of it’s blockchain. Bitcoin enthusiasts love to boast how Bitcoin’s unrivaled level of security, measured by its hashrate, enables Bitcoin’s “Store of Value” narrative to emerge. The cost to attack the Bitcoin blockchain is so insurmountably high, that no one would ever have the resources, or incentive, to attack the network, and violate the Store of Value narrative.
For those who are ‘inside’ the world of Bitcoin and cryptocurrency, this makes absolute sense. However, traditional finance and “old money” are much less easily convinced. Much of the world outside of cryptocurrency still considers Bitcoin to be a nascent experiment. Information that truly reflects the level of security that Bitcoin has is hard, if not impossible, to come by, leaving the skeptical, the unconvinced, and the naysayers plenty of reason to remain on the sidelines. Communicating the Store of Value thesis is an uphill battle, as Bitcoin seems never be worth the same price.
Regardless, as time has gone on, more people are found believing in Bitcoin. While perhaps coincidental, the number of active Bitcoin wallets appears highly correlated with the hashrate of the Bitcoin blockchain, leaving room to make the argument that increased network security leads to increased levels of consumer trust. More people across the world are attracted to Bitcoin, the more secure it becomes.
Logically, this begins with small-time consumers, who are willing to risk their weekly paycheck on Bitcoin. While the early days of the Bitcoin network had appropriate levels of security for retail investors, higher levels of capital investment would require increased levels of network security.
Bitcoin can only attract a level of investment that is proportional to the security of it’s network.
Banks, hedge funds, venture firms, or any financial institution however are far less willing to trust Nakamoto Consensus in a nascent form. These parties will likely need additional indicators of security before they begin to store some of their assets in the Bitcoin blockchain. If capital preserving entities are collectively allocate trillions of dollars of investment into the Bitcoin asset, the Bitcoin blockchain needs to have commensurate levels of security. When it comes to attracting future investment, Bitcoin needs to put the cart before the horse.
The security of Bitcoin comes from a wide variety of factors.
Concrete measures of security are
- The higher the hashrate, the more equipment is required to attack Bitcoin
- The higher the price, the more financial incentive there is add hashrate to Bitcoin
- Number of distinct miners
- The more distinct miners there are, the harder it is to get miners to cooperate in an attack
- Number of distinct nodes
- The more distinct nodes there are, the harder it is to get nodes to cooperate in an attack
While most people simply pay attention to the crazy growth in Bitcoin’s price, all other metrics of Bitcoin’s security have grown in an equally astounding fashion. Nakamoto consensus’ unique design forces the growth of any one of the above characteristics to have a positive influence on the others.
Hashrate, Price, Miners, and Nodes have all grown at a exponential rate since Bitcoins inception. Because these characteristics feed off each other, the positive feedback loop creates a strong example of the Lindy Effect at work.
The Lindy effect is a concept that the future life expectancy of complex systems is proportional to their current age, so that every additional period of survival implies a longer remaining life expectancy.
In order for the Bitcoin network to fail, one of the four listed security metrics for Bitcoin needs to break. For the 9 years of Bitcoin’s life, the worst case scenario has been that only two of the four metrics would be growing. For the large majority of Bitcoin’s lifespan, all four metrics tend to be increasing at a steady rate.
The interaction between these different parts of the Bitcoin system is what gives Bitcoin its security. One metric cannot trend downwards for too long, before the value-proposition of the others provide some foundational support.
Stability from the Bottom Up
The Bitcoin experiment has been a resounding success ever since its inception. The success of the system has amassed millions of different stakeholders to become invested it’s health. However, Bitcoin and cryptocurrencies at large are still met with plenty of skepticism from the traditional finance world. This should come as no surprise; the acceptance of cryptocurrency by traditional investors requires a significant shift in trajectory of a very old system. Traditional finance is largely concerned with preserving capital, instead of risky speculation. The volatile and unpredictable Bitcoin prices are extremely unattractive for the average investor whose primary concern is capital preservation.
Adding new levels of security to the Bitcoin might be the most viable path to achieving stability for both the Bitcoin blockchain and the Bitcoin price. Large-scale, professionalized Bitcoin mining facilities, with reduced operational risks, can offer new levels of protection to the Bitcoin system. New facilities are showing up that are designed to profitably operate under extremely low Bitcoin prices. These facilities achieve this by owning their own electricity generation, which allows them both diversity in income and protection from outside market forces.
The professionalization and integration of new mining facilities represent the next steps forward in terms of Bitcoin stability and adoption by more risk-averse investing entities.
Integrating with the Economy
Facilities that own their own power are able to return their value to the local economy, while buffering them from local political risks. By aligning the needs of local economies to the health of Bitcoin, Bitcoin is able to foster relationships with people that are outside its direct sphere of influence. The nationalizing of Bitcoin to the United States will aid in a new narrative surrounding the cryptocurrency. New mining facilities are being built that return their value to the local economy. By producing surplus electricity to the local grid, and protecting a power generation facility from low electricity prices, consumers and businesses in the proximity receive reduced utilities costs.
This sends a strong and clear signal to the world; Bitcoin is able to benefit consumers and businesses in ways that promote local economies. The profit margins behind Bitcoin mining are reducing at such a rate that no Bitcoin mine will be profitable without producing excess electricity. Soon, wherever there is a Bitcoin mine, there will be energy surpluses for the local grid.
Stabilizing the Asset
Bitcoin is known for the volatility and unpredictability. Partly a function of its young age, this volatility scares away risk-averse investors. Many different factors play into Bitcoins crazy movements, including the irregular supply of Bitcoin that is sent to the secondary market. For all of Bitcoins life, profit margins for miners have been as unpredictable as the price of Bitcoin itself.
The professionalization and long-term focus of new age Bitcoin mines will offer a strong solution to the unpredictable future of Bitcoin prices. As the mining world matures, and price-speculation is replaced by consistent cash flows, the supply of Bitcoin onto the secondary market will smooth. Bitcoin miners being able to project long-term costs accurately, will be able to keep their Bitcoin mine financially secure, and the flow of Bitcoin onto the secondary market stable.
While miners cannot stop the secondary market itself from speculating on Bitcoin, they can keep the foundation of Bitcoin more predictable. As these new miners come to the Bitcoin network, the stability given to mining and Bitcoin’s fundamentals might begin to attract a wider range of investors who are ready to give Bitcoin a small portion of their portfolio.
More significantly, additional consumer and investor interest is likely to benefit the health of the Bitcoin system. While all of cryptocurrency seems to be speculative and volatile, Bitcoin is the most stable and liquid cryptocurrency. This is simply a function of its adoption as a whole; Bitcoin has the most exchanges, with the most volume, and is the most globally accessible.
Increased network security brings increased investor confidence. Increased investor confidence creates larger highways of liquidity. Higher liquidity inspires more exchanges, and importantly, more professionalized exchanges, which can feed back into investor confidence. These ever-growing feedback loop doesn’t have a starting-point; growth in one area inspires growth in another. However, it is reasonable to assume that the level of network security can act as an accelerator of the mechanisms inside feedback loop, and illustrates the importance of working to improve the foundation of Bitcoin.
Bitcoin’s place in the world is ever-changing. Progress is made on many different fronts, in parallel. The most skeptical and risk-averse will require significant progress in all arenas for Bitcoin to be accepted into Wall Street and other capital preserving entities. The biggest impact for aiding the removal of risk, and adding stability to Bitcoin is through improved mining infrastructure. Next-generation mining facilities will be able to secure Bitcoin far into the future, while enabling a ‘rebranding’ of Bitcoin from a negative image to a positive one. As Bitcoin becomes more “green” and consumer friendly, these effects will work their way upstream to the most risk-averse investors, who might finally consider allocating a portion of their portfolio to Bitcoin.