The end of 2020 has eased crypto-centric subreddits and Bitcoin hodler feeds, as the hunger for the digital precious metal hits an all-time high.
The explosion was accelerated through the adoption of the network by PayPal, along with the long-sought stamp of approval from revered figures such as Michael Saylor, Jack Dorsey and Paul Tudor Jones.
The associated price valuation and general awareness of, among other things Maisie Williams and the most recent institutional buy-in from MassMutual continue to support the price and sentiment around Bitcoin (BTC).
The tide continues to rise as the dynamics of home working drive digital transformation, and it increasingly looks like 2021 will be an action-packed year for the next chapter in the evolution of the Bitcoin network.
Let’s take a look at some of the key areas to keep an eye on in 2021.
Bitcoin miner rating and its comparison to gold
Bitcoin mining has many fundamental similarities to gold mining; However, there are important differences to be explored in the complex task of valuing Bitcoin miners’ activities. As an example, we’ll focus on Riot Blockchain, an American Bitcoin miner headquartered in Colorado.
Riot began mining in 2017 and recently released plans to increase their hash rate with a delivery of mining hardware expected this spring of 2021. Currently, Riot has a hash rate of 1.5 exahashes per second, which accounts for about 1.11% of the Bitcoin network. total current hash rate of 135 EH / s.
According to the third quarter, the company has mined 224 BTC earnings released on November 9, with sales of $ 4.1 million to $ 18,500 per BTC.
Given the above figures, investors will ask: How can a company justify a market capitalization of $ 670 million with only $ 8 million in revenues and massive operating (electricity) costs?
Even with over 1,000 BTC on the balance sheet, that’s $ 18.5 million at the current BTC price, the valuation is very stretched to say the least.
Two considerations come into play here that could justify a much larger Riot market cap, along with other crypto miners, assuming the network continues into a bull market.
The expectation for future price increase
You don’t have to dig deep to find a wide variety of optimistic Bitcoin price targets in a year. The range extends from Mike Novogratz’s $ 65,000 estimate up to PlanB is $ 288,000 based on the popular stock-to-flow model.
Meanwhile, CitiBank recently requested $ 318,000; the Winklevoss twins have proposed $ 500,000, and Catherine Wood, CEO of Ark Investment, seems to agree with the latter.
These price targets are the reason why miners got through the 2018 bear cycle and at times operated at a loss. They expect the network to be there in the near future. Miners also know that there is strength in serving as validators of network transactions, and the continued rise in the network hash rate shows that Bitcoin is becoming more secure and competitive every day.
That paltry 224 BTC that Riot mined in the third quarter would expand its revenue stream to a larger, more ambiguous number if the upper limit of Bitcoin’s price is not defined. This means that Riot’s earnings estimate would be unbound if BTC undergoes another parabolic rally, even if the current valuation makes no sense for the “lifting cost” of mining one Bitcoin and the amount of BTC mined.
Lack of mining hardware
Worrying aspects of getting behind a Bitcoin miner are the low barrier to entry and the hugely efficient and competitive proof-of-work network that Michael Saylor described like a nest of “cyber-hornets”.
Anyone can dedicate their computing power to mining Bitcoin, albeit with a very low probability of successfully mining a block and be the first to solve the hash algorithm.
As the hash rate increases, miners bundle into pools and use increasingly powerful hardware to have the best chance of successfully mining a block. While anyone could theoretically start mining, you won’t get very far unless you have Bitmain’s latest Antminer S19, which won’t be in stock until April 2021.
The last time Bitcoin went parabolic, that was in 2017, there was a shortage of ASIC chips and other mining hardware, and suppliers, such as AMD, Nvidia, and Bitmain, couldn’t keep up with demand.
If this situation reoccurs with Bitmain and MicroBT, all miners currently owning the next generation of equipment will have an advantage until more hardware comes into play.
Conversely, prospectors have a proven source of the metal underground. Gold miners need the right drilling and digging equipment as well as rights to the land, which serve as barriers to entry mining gold.
Should the price of gold double to $ 4,000 an ounce, prospecting would increase and the rate at which gold is extracted from Earth would increase. This, in turn, would break the activation energy for entry and balance supply and demand, causing the price to drop if the supply exceeds the demand.
However, no matter how much the mining hardware arms race continues, Bitcoin cannot be mined faster than 6.25 BTC every 10 minutes thanks to the supply schedule and difficulty adjustment that Satoshi Nakamoto built in the protocol. This greatly affects the dynamics of Bitcoin supply and demand, which I will get into later.
GBTC vs Bitcoin
Grayscale’s Bitcoin Trust (GBTC) trades over the counter and allows investors to gain exposure to the underlying digital currency in common brokerage accounts, such as a closed fund.
Each share represents 0.00095346 Bitcoin net of GBTC’s annual fee and 2% premium. Below is a comparison of GBTC versus Bitcoin performance over the past four months.
As evidenced by the widening asset price gap in late September, GBTC fares slightly worse than BTC during a period of price consolidation.
GBTC slightly outperforms the underlying as the premium increases and increased market demand hinders the inefficiencies of the OTC investment vehicle relative to the real-time price of the underlying.
This can be seen in the widening gap during the price hike over the past two months.
The chart below shows even more details about GBTC’s premium over the past 12 months, in addition to its net asset value compared to the share price.
The premium bottomed out at around 10% during times of bearish BTC price action (in April, July and September) and rose to 30% to 40% during the rapid price surges that took place in February and August.
Bitcoin’s recent price acceleration from $ 11,000 to $ 19,000 raises the premium in line with this trend. It remains to be seen what closed funds from competitors offering Bitcoin exposure would do for GBTC as it is the only product of its kind in the US market.
On November 25, VanEck launched a Bitcoin exchange-traded note trading on the German Böerse Xetra stock exchange, and with SEC Chairman Jay Clayton to step down in December, there may be a greater likelihood of approval from a US-traded fund if the newly appointed SEC chairman is more favorable to the assets.
Supply and demand
Put on your seat belt. Every 10 minutes a block is mined and 6.25 new Bitcoin is created as the block reward a fee.
To put this in perspective, 37.5 BTC is mined every hour. That equates to 900 new BTC per day. Before the May 11 Bitcoin halving, this figure was 12.5 BTC every 10 minutes, and will decline further to 3.125 BTC in 2024.
The daily addition to Bitcoin’s market cap is approximately $ 16.7 million in newly minted coins at current prices. GBTC itself reported a daily inflow of $ 115 million on Nov. 12, which is an 11x increase from the weekly $ 50 million in the previous month.
This demand is 6.9x the new supply and to quantify the demand from Square, PayPal and exchanges around the world. So it is clear that there is an ever-widening gap between the demand for Bitcoin and the newly mined coins entering the market. Historically, this dynamic has appeared in the year or so after block pay halved.
Last time, in the four-year cycle, it led to the 2017 run that put crypto briefly in the eyes of mainstream retail investors as the price had jumped 20x from $ 1,000 in January to $ 20,000 by the end of the year.
If Bitcoin were to compare to gold’s status as a global store of value, the $ 9 trillion gold market would be the benchmark that investors have on their radar.
This would represent a 25-fold increase from Bitcoin’s current market cap, assuming the two could co-exist amicably.
As we continue to digest this rapidly changing digital ecosystem at our own unique pace, the Bitcoin network buzzes and continues to gain traction without taking prisoners.
What developments will 2021 bring for us to grapple with and discuss?
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trade move carries risks, you should do your own research when making a decision.