About Bitcoin’s Double-Faced Outlook

The biggest challenge of the current “crypto winter” isn’t in the token prices’ stagnation, which many investors are used to and know how to deal with, but in the ‘silent profitability killer’, galloping energy consumption. According to Forbes, as Bitcoin (BTCUSD) struggles to jump out of a bear market, the mining sector struggles too. Specifically, miners are seeing their profit margins dwindle as Bitcoin’s price falls and Bitcoin’s mining difficulty continues to rise. Bitcoin mining revenue potential, defined as its hashprice, has fallen some 68% from its 2021 peak and 58% from 2021’s average.

As we all know, two factors affect Bitcoin’s hashprice: Bitcoin’s actual price and Bitcoin’s mining difficulty, which impacts the likelihood of solving a [memory] block and obtaining a reward of 6.25 BTC (approximately $187,500). The difficulty increases if miners produce blocks too quickly (like in the preceding two weeks), and conversely, difficulty decreases if miners produce blocks too slowly. This ensures that miners propagate blocks as closely to the 10 minute average targeted by Bitcoin’s code. In this respect, during the last year, 18 of the last 26 adjustments were positive and four of the negative adjustments were a result of April 2020’s China’s nationwide mining ban.

When difficulty rises, it becomes more energy intensive to mine Bitcoin and other cryptos, so hashprice drops. Hashprice also drops when Bitcoin’s price drops, and right now, Bitcoin’s price is de-facto stagnating at a time when difficulty is at an all-time high.

As Bitcoin mining profitability decreases, most Bitcoin mining stocks have tumbled 60% or more during the current market rout. Leading mining companies such as Marathon, Riot, Bitfarms, Hut 8, Hive, Core Scientific, Argo Blockchain, Iris Energy, DMG Blockchain, and Cleanspark, have seen their prices tumble 50-60% on average.

However, as trading of cryptocurrencies becomes less attractive, what keeps Bitcoin afloat is its growing importance as an anti-inflationary investment. In this respect, the main financial regulator of the EU’s financial markets, ESMA, recently issued a warning about the growing interest in Bitcoin from a wide range of investors exactly in conjunction with the currently elevated global inflation. In Argentina and Turkey, where consumer price growth rates have been demonstrating double-digit levels for several years, cryptocurrencies have long been in high demand. So, for example, in Argentina, where inflation rate jumped to 58% in April, as it was back in the Covid-pandemics engulfed 2020, the country experienced a selective default – already the 9th in a row.

Because of this, Argentines show one of the highest levels of awareness of the crypto industry in Latin America. According to surveys by consulting firms Opinaia and Muchnik with a sample audience of 2,400 people, 90% of respondents said they had previously heard about cryptocurrencies, and 74% of those surveyed are planning or have already bought cryptocurrency as an investment asset, a previously unheard-of share of a society. In terms of trust, cryptocurrencies are on a par with stocks, but so far greatly below the U.S. dollar, which is traditionally used by Argentines for savings.

A similar situation is observed in Turkey, where inflation jumped to 70% due to Recep Erdogan's unconventional monetary policy, dubbed "Erdoganomics". The Turkish lira has halved against the U.S. dollar in the last year alone. Demand for cryptocurrencies in Turkey is growing every year, despite Erdogan’s declared “war” on digital assets and increasing regulatory pressure. The Turks show the greatest interest in stablecoins, and the USDT/TRY pair occupied a 30% share in their trading activity back in winter. According to Triplea, 3% of the total population or about 2.5 million people already own cryptocurrency.

Against the backdrop of 50-70% annual inflation, a 55% drawdown of Bitcoin from its historical maximum no longer looks so daunting, while the built-in deflationary mechanism and the limited issuance suggest further growth in value in the long term.