It cost BTC holders an annualized run rate of $17B to run the bitcoin blockchain. Ethereum costs a lot, too, but the cost goes away by switching to proof of stake this year. Hence, bitcoin’s cost problem is big for BTC holders. Here’s why:
BTC may enjoy a compelling narrative as a store of value, however, BTC runs at a permanent net loss, in part because transaction fees are paid to miners, not to BTC holders. Yesterday, it cost BTC holders $45M to run the bitcoin blockchain. Today, ethereum runs on a net loss because, like bitcoin, ethereum’s transaction fees are paid to miners, and proof of work is expensive in general. Later this year, ethereum is stopping mining forever and switching to proof of stake. Ethereum’s switch from mining to proof of stake creates cost savings and increased economic security. As a result, ethereum will generate massive cash flow for ETH holders, especially as eth’s app ecosystem grows.
Is it possible that, in the future, bitcoin could generate massive cash flow for BTC holders? imo, it’s not possible. I don’t think that bitcoin has any chance of generating cash flow for BTC holders without major architectural changes to bitcoin. For starters, cash flow comes from revenue, and BTC’s revenue potential is severely limited because bitcoin doesn’t support smart contracts. Bitcoin wasn’t designed to be an app platform. That’s why yesterday, eth’s fees were 6x bitcoin’s fees after normalizing by market cap.
BTC’s scheduled halvenings might seem like a solution to the cost problem. After all, halvenings reduce inflation, and the cost problem is related to inflation. But, half of a $20B per year problem is still a $10B per year problem. To dig into halvenings a bit further, consider that the next bitcoin halvening is in ~3 years. If, as BTC holders hope, the price of BTC at that point is $200k+, it’ll still cost BTC holders $90M+ per day to run the bitcoin blockchain after that next halvening.
With this context out of the way, let’s explore exactly why bitcoin’s cost problem is real:
BTC holders are on track to pay ~$17B this year to run the bitcoin blockchain. On average, that’s ~$17B of real hardware and electricity expenses. To get a sense of the size of bitcoin’s cost problem, when we say that “yesterday, it cost BTC holders $45M to run the bitcoin blockchain”, what we mean is that yesterday, somebody had to buy ~$45M of BTC before anyone sold any BTC, just for the price of BTC to stay flat. To make matters trickier for BTC holders, most or all of bitcoin’s credible competitors, especially ethereum, don’t or soon won’t use mining and don’t have this cost. Every day, BTC holders must pay $45M to keep BTC flat. With PoS, ETH holders must pay ~$0 to keep ETH flat.
After eth switches to proof of stake, imo, the ETH/BTC price will go up by default every day. It’s because if BTC costs $45M to stay flat, and ETH costs ~$0 to stay flat, then all other things equal, there is BTC sell pressure, pushing BTC down, and increasing ETH/BTC. I think that the ETH/BTC price may go up a lot every day. $45M per day of BTC sell pressure might appear to be inconsequential, yet if you’re selling $45M of BTC per day 365 days a year, it seems like it’s going to decrease BTC’s market cap by a lot more than $45M per day.
In short, here’s why I think bitcoin’s cost problem is real and urgent for BTC holders:
BTC cost problem #1:
With the cost savings of proof of stake, ETH’s market cap may get closer to BTC’s market cap at a fast rate, representing a risk (from the perspective of BTC holders) of ETH flipping BTC and, imo, an associated loss of confidence in BTC.
BTC cost problem #2:
Regardless of bitcoin’s competitors, it costs a huge amount of money just to keep the price of BTC flat. Somebody has to buy $45M of BTC every day just for BTC to stay flat. If they skip a day, BTC’s market cap seems to go down by a lot more than $45M. Can bitcoin’s cost problem be solved? Yes, but as far as we seem to know, only if the bitcoin community was open to switching to proof of stake or another big architectural change. Instead, they seem committed to never changing the bitcoin protocol.
To be fair, the bitcoin community seems to love that their protocol never changes. And that their proof of work mining is simpler and relies on fewer assumptions than proof of stake. That might be ok, except that bitcoin’s cost problem is real. Personally, I’m not bullish on the bitcoin community solving the cost problem on a reasonable timeline. I want to own crypto assets that may credibly 10x in price. If BTC were at $500k, it would cost BTC holders $450M per day to keep BTC flat. For that reason, I own no BTC. – Ryan Berkmans