An (Institutional) Investor’s Take on Cryptoassets
John Pfeffer

John, thanks for the excellent article. You’ve done a great job disambiguating between the store-of-value and the payment-rail use cases. The fact that BTC is valued for both use-cases has muddied the analysis, and you’ve made a strong argument for being able to value BTC as a store-of-value independently of its merits as a payment rail.

I have two questions that continue to vex me with respect to BTC’s “steady-state” as a replacement for gold and USD as a store-of-value.

  1. The hash power of the network follows the price because rising prices create economic opportunity for miners. At a 1M USD per BTC (which is your order-of-magnitude estimate for the steady-state value of BTC once it reaches its potential as a robust store-of-value), the power expenditure across the network rises from roughly 5 gigawatts (already a sizable number) to 0.5 terawatts (roughly equivalent to US power generation and about a quarter of the world’s). That doesn’t seem likely/sustainable. And yet a core change in the mining algorithm to reduce power consumption is by definition a hard fork. How does BTC price get to these levels without the commensurate power consumption increase?
  2. Over time as the block incentives decline, transaction fees are supposed to supplant them as the chief source of income for miners. But if BTC isn’t used in payments, and instead is held rather like gold or USD foreign reserves are today, the transaction flow may not sustain anywhere close to the mining capacity we have today. Transaction fees would either become gargantuan (which isn’t true for gold today, and therefore provide significant headwinds for BTC to replace gold), or total hash rate for the BTC network would decline dramatically, potentially reducing the network security and increasing vulnerability to attacks on its blockchain.

What follows from the second question in particular is that BTC needs transaction volume to maintain its blockchain. Can this volume be exclusively sustained from exchanges between private / institutional investors that move into and out of BTC positions as a store-of-value? Or does it require BTC to also develop as a payment rail to maintain sufficient transaction volumes? The USD is good for both — its use for payments strengthens it as a value store. Will the same happen in cryptocurrencies?

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