Crypto's Climate Comeback

Exploring the transformation of value in the digital age

By Michael J. Casey, Chief Content Officer

Mar. 18, 2022

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A knife-edge vote in the EU Parliament that saw a proposal to ban bitcoin mining fail. An historic acquisition by the most valuable NFT project of the second-most valuable project. The first U.S. interest rate hike in more than three years.

It was another busy week in crypto. This week's newsletter touches on all the above while the column addresses the opportunity that suddenly confronts blockchain developers to contribute to climate solutions.

And in the podcast we talk to AZA Finance CEO Elizabeth Rossiello about AZA's deal with crypto exchange FTX to build Web 3 infrastructure across Africa. An OG in this space with a deep understanding of the continent, Rossiello discusses the crypto innovation happening there and the important place it occupies in the geopolitical struggle emerging around financial technology.

Have a listen after reading the newsletter.

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From Pariah to Partner: Crypto's Climate Answers

Rachel Sun/CoinDesk

A tiny seed of awareness seems to be taking root among policymakers and the public at large, a realization that cryptocurrencies might not be the environmental death knell their critics harp on about.

This week saw the narrow failure of a move to ban energy-intensive proof-of-work mining in the European Parliament (EP). That came after last week's executive order from President Biden on blockchain and cryptocurrencies technologies, which, among other edicts, called for U.S. agencies to produce a report on "the potential for these technologies to impede or advance efforts to tackle climate change at home and abroad" and on "the impacts [they] have on the environment."

These two political developments reflect core foundational shifts in thinking that could pave the way for the crypto community to take an important place in global efforts to curb climate change.

Firstly, there's an emerging recognition that, whether people like them or not, these new, essentially unstoppable systems are not going away. Many MEPs who'd considered supporting the so-called "Bitcoin ban" likely didn't, not because of some great appreciation for cryptocurrencies but because they recognized it was futile. They understood that, if prohibited from operating in the European Union, miners would simply move to other regions with far dirtier fuel sources than those of the EU.

Beyond that begrudging acceptance, there are also signs of a wider, more positive interest in crypto's potential to drive climate positive outcomes.

Biden's EO called for a report analyzing "potential uses of blockchain that could support monitoring or mitigating technologies to climate impacts," and the "implications for energy policy, including as it relates to grid management and reliability, energy efficiency incentives and standards, and sources of energy supply."

As I've discussed previously, I believe energy policymakers should start to treat bitcoin miners as partners, not enemies. With calibrated tax and subsidy models, private-public pacts geared toward infrastructure development, and compensation contracts that commit miners to power down their machines during peak demand, mining capacity expansion projects can help communities fund and develop smart, renewables-based electricity grids. It's heartening to see the highest office in the land alluding to such ideas, even if obliquely.

Read the full column here .

Off the Charts

A Tale of Two Bitcoin Markets

Bitcoin's selloff since record highs in November has spurred all sorts of analyses. Mainstream observers are asking: why, if bitcoin is supposed to function as a hedge against inflation and political uncertainty, did it fall as global prices surged higher and as Russia started a war with Ukraine?

As we noted in a newsletter two weeks ago, bitcoin's correlation with the S&P 500 stock index has swung from being quite low some time ago to quite close as it has moved in tandem with equities and other "risk assets." Why? New York Times columnist Kevin Roose ran through some of the answers to that question this week.

My pet interpretation is that the bitcoin market actually comprises two markets, at least in terms of the biggest traders capable of moving prices. On the one hand, there are traditional financial institutions and, on the other, "HODL whales," diehard bitcoiners who believe it will eventually be massively held around the world.

The former treat bitcoin as a speculative "risk asset," something to buy when broader market risk appetite is up and to sell when the mood shifts to risk aversion. The latter view it as the ultimate store of value, a means to protect their family's wealth for decades hence. The HOLD whales are always looking to buy, but will studiously wait for the institutions to sell off their holdings during risk aversion moments before topping up. At different phases in Bitcoin's life, one or the other has had greater influence on price direction. In recent months, it has been the institutions.

One measure of that is the decline in the price premium that the futures market has been paying for the CME bitcoin contract, the most popular bitcoin derivatives product among institutions. As you'll see from the blue line in the above chart produced by CoinDesk's Sage Young, in October the seven-day moving average for the premium on the one-month CME bitcoin futures briefly stood at more than 16% above bitcoin's spot market price. Since then, the premium has come all the way down and at one brief moment in January it even flipped into thin discount territory. This suggests institutions were dumping their exposure, which in turn drove the spot price lower.

The good news is that the premium seems to have settled and remains marginally positive. Is this a sign that the institutions have capitulated and the HODL whales are now ready to start accumulating again? We shall see.

The Conversation

12 Zeroes

On Wednesday, the U.S. Federal Reserve announced a quarter-point increase in its federal funds interest rates, the first rate hike in more than three years. Meanwhile, Chairman Jerome Powell said it was "clearly time" to "begin the balance sheet shrinkage," signaling the Fed would also start selling some of the financial assets it acquired during the massive "quantitative easing" (QE) campaigns with which it has bolstered stock and bond markets for more than a decade. Selling those assets would compound the monetary tightening effect of rate hikes.

Then came an especially timely follow-up announcement on Thursday: that balance sheet had surpassed a whopping $9 trillion. Crypto commentators, for whom QE has long been a focal point of the pitches to sell dollars and buy bitcoin, leapt on it.

Dylan LeClair, Bitcoin Magazine's head of research, played it straight, achieving maximum impact by spelling out the number in full: $9,000,000,000,000.

An account using the name AJ Nobody and the handle @orion_kos pointed out that if you represent one dollar as one second, the figure is equivalent to 285,000 years.

But the absolute number counts less than how quickly the balance sheet has grown. Here, Anthony "Pomp" Pompliano was helpful, pointing out that the Fed's balance sheet has expanded ten-fold since the Global Financial Crisis of 2008. His one-word summation: "wild."

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Relevant Reads

Yuga-Lava

If the Fed is the most important institution in the fiat economy, the Bored Ape Yacht Club and its backer Yuga Labs constitute the most important institution in the NFT economy. That was made clear this week when a couple of bombshell announcements offered an insight into the kind branding juggernaut that the BAYC, the most valuable NFT collection, is becoming. CoinDesk's Will Gottsegen and Eli Tan were all over the story.

On Friday last week, Yuga Labs, which sponsored the creation of the ubiquitous Ape NFTs, announced it was purchasing the brands and intellectual property rights associated with the Crypto Punks and Meebits NFT collections from their founder Lava Labs. Gottsegen reported that it would assign commercial rights to all owners of individual Punk and Meebit images, extending a policy it applied to the Apes.

Gottsegen followed up with a think piece entitled "The First NFT Monopoly," which unpacked what just happened. It is yet more sign of centralization at the marketplace level for NFTs, he wrote.

The Yuga-Lava deal wasn't the end of it. On Wednesday, a new entity called the Apecoin DAO was formed and an airdrop of Apecoin tokens was announced for BAYC members, marking the beginning of collective organization with tokenized governance rights. As Tan and Gottsegen wrote in a joint bylined piece, the press release announcing the token went to great pains to distance BAYC and Yuga Labs from any control over the token, presumably to avoid triggering securities laws.

But if BAYC members thought it was another chance to get fabulously rich, the token market wasn't having any of it. As Tan reported on Thursday, Apecoin dropped 80% in the opening hours of trading.