Bitcoin's Liquidity Death Spiral
For a lot of groups, Bitcoin is the one true crypto coin. Satoshi Nakamoto can do no wrong. She is a pure, unadulterated genius. The bitcoin zealots marketing team have sold the world on that. Especially the code and how the economic model works. However, the code is the future cause of Bitcoin's death spiral. Well, that and miner's power costs.
These power costs are the price of securing the Bitcoin network. The current market cap of 843.66 Billion USD. How much energy does it cost to secure this 843.66 Billion USD Bitcoin network? According to the University of Cambridge, about 162.90 TWh (terrawatt hours).
| Theoretical lower bound | Estimated | Theoretical upper bound | |
|---|---|---|---|
| GW | 8.81 | 18.58 | 49.31 |
| Annualised consumption (TWh) | 77.22 | 162.90 | 432.26 |
| KWh (1) | 77,220,000,000 | 162,900,000,000 | 432,260,000,000 |
(1) 1 Terawatt Hour = 1,000,000,000 Kilowatt Hours
So how much does 162,900,000,000 KWh cost in USD. In Idaho $0.0922 per KWh USD for 2023 from the U.S. Energy Information Administration but Cambridge says the global average $0.05 per KWh. So, let us build a table. The calculation is simple Power Cost x KWh. Here is the table for $0.05 - $0.13.
| Power Cost in USD | Theoretical lower bound | Estimated | Theoretical upper bound |
|---|---|---|---|
| $0.05 | $3,861,000,000 | $8,145,000,000 | $21,613,000,000 |
| $0.06 | $4,633,200,000 | $9,774,000,000 | $25,935,600,000 |
| $0.07 | $5,405,400,000 | $11,403,000,000 | $30,258,200,000 |
| $0.08 | $6,177,600,000 | $13,032,000,000 | $34,580,800,000 |
| $0.09 | $6,949,800,000 | $14,661,000,000 | $38,903,400,000 |
| $0.10 | $7,722,000,000 | $16,290,000,000 | $43,226,000,000 |
| $0.11 | $8,494,200,000 | $17,919,000,000 | $47,548,600,000 |
| $0.12 | $9,266,400,000 | $19,548,000,000 | $51,871,200,000 |
| $0.13 | $10,038,600,000 | $21,177,000,000 | $56,193,800,000 |
The U.S. National average per KWh is 12.91 cents for commercial usage, again from U.S. EIA. I'll low-ball the situation in this article. $0.09 x 162,900,000,000 = $14.661 Billion. Securing the network costs 14.661 / 861.46 = 0.01701878206 or ~1.7% of BTC market cap.
The problem is actually worse. We know that the vast majority of BTC hasn't moved and probably isn't going to. Bitcoin Supply Inactive for a Year Hits Record High of 70%. That means that we actually have % of actual liquidity x Market Cap, i.e. this 0.3 * 843.66 = $253.098. How much is that in BTC? 14,661,000,000 / 43,043.83 (current BTC price) = 340606.307570679 BTC. Or to re-phrase: ~933.17 BTC per day.
Which is terrible, cause currently only ~900 BTC are mined per day, and it is only going to get smaller. BTC price is currently at $43,043.83. Miners are currently floating around the break even of $44,630 per BTC. They are currently losing money every day unless they have better rates than 9 cents.
For network security to stay at the same level, it is currently either the price of BTC has to be above ~44k. Around March, when the halving happens, things are going to get worse. Well, because every block is going to make less BTC. That break even point, doubles to $89,260 USD. Doubling the break even point holds true after every halving.
Well. Miners will have to start depending on transaction(TX) fees to support themselves. Or go out of the miner business. That means that TX fees will go up, and network security will go down as we lose miners no longer able to support themselves. As TX fees go up, more and more users' liquidity is cut off. Especially for smaller holders of BTC, as those TX fees start to represent a large percentage of the total transaction. Currently, the Average transaction fee is $12.25 (0.00029 BTC) if we look at addresses richer than $ we see that already prices out a lot of people.
| $1 | $100 | $1,000 | $10,000 | $100,000 | $1,000,000 | $10,000,000 |
|---|---|---|---|---|---|---|
| 45,450,230 | 19,842,825 | 8,901,803 | 2,717,053 | 450,436 | 89,209 | 7,403 |
End
Let us talk about whether Bitcoin as a solid as a store of liquidity. It is not. 70% of BTC has not moved in forever and the lower end of accounts will be cut off as transaction fees increase. Lightning isn't going to save you, either. For wholly different reasons, but its structure is not able to support itself. But, but, but... I hear you saying, and you are right, there are a lot of assumptions I am making. The point is, Bitcoin is not a safe or stable store of liquidity if anything close to the terrible outcomes happen. All of this is dependent on the genius of the current Bitcoin devs. Remember, every time the TX fees go up you are cutting off liquidity available cause some portion of BTC holders can no longer afford to transact.
P.S Don't believe me? Check the math in the spreadsheet.