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digital
daily

digital daily: Elasticity

Nature’s law of elasticity says that bodies return to their original position after a stretch. The magnitude of the stress is proportional to the force used to cause the stretch. In the bitcoin mining space, this force is leverage. Elasticity applies to last year’s gold rush in bitcoin mining through the structure of its financing. A series of miner expansions occurred, propped up by over $4 billion in debt in response to bitcoin’s euphoric price movement. So far from its cost of production, capital was freely flowing. But the debt-to-capital ratio for most miners was extreme. Soon, soaring energy costs, weaker bitcoin prices, and increased computational competition led to a delinquency spiral among major public miners, lending firms, and hosting companies. The shakeout is not over, though no longer surprising. Machines will remain plugged in as long as they are still profitable on the margin. As computational power requirements continue to surge, the system will continue to self-correct, and less efficient machines will be rendered obsolete. The survival of miners is directly tied to their marginal costs – most importantly, power. Power defines the commodity cycle of bitcoin. It should be the normal expectation. But this cycle is different. In addition to paying expensive power bills, miners now have expensive debt to service. Debt is the elephant in the room. It is likely that aggregate computational power will continue to grow, fueled by cheap and poorly structured legacy debt that ignited the gold rush. And eventually, should something break, ownership of the collateral will transfer to the lender. Snap. The law of elasticity in motion, the rubber band that stretched too far.

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