Notes 3/5: FOMC and Bitcoin Price, Taxes for Bitcoin miners

Will the FOMC's rate hike today make a significant difference to the price of bitcoin. Also, what economic benefits does bitcoin provide justify its high energy use.

The Federal Reserve will have many things to consider when it concludes deliberations at the latest Federal Open Markets Committee (FOMC) meeting. That list includes the latest round of bank failures, inflation and unemployment data, and the economy’s overall health. Suffice to say, bitcoin price will not be a part of that list.

While the cryptocurrency’s price has rallied by seventy percent this year, its overall footprint has diminished. Crypto valuations and markets are down. Bitcoin liquidity is at a one-year low, according to research firm Kaiko.

Fed Guidance

A further increase of 25 basis points by the agency, as expected by most traders, will further hasten the departure of investors from its ecosystem. Their flight has already catapulted volatility in bitcoin price and made it susceptible to outsized moves from few parties. Even that development, however, is not enough to sustain the cryptocurrency’s forays past the $30,000 mark – a key price resistance level, according to some analysts.

A delay in hiking rates by the Fed might provide relief to bitcoin price. But it will be temporary. This is because bitcoin’s ecosystem has already been battered by regulatory action against exchanges and mining services. It will take time to build it back up and attract investors to it again.

To that extent, the thing to look forward to, at least in the context of the Fed’s actions today, is future guidance. Bitcoin’s performance for the rest of this year depends not on its internal metrics but on how the agency decides to tackle the US economy going forward.

Renewing the Bitcoin Mining Debate

The debate about bitcoin mining’s energy use is back in the spotlight.

The Biden administration wants to impose a progressive excise tax – 10% in the first year, 20% in the second, and 30% in the third year – on bitcoin mining providers. Their argument is that crypto mining consumes massive amounts of energy and spikes greenhouse gas emissions. It also distorts demand in the energy grid without providing much economic benefit to residents in local communities. According to the White House press release yesterday, the primary goal of the Digital Asset Mining Energy (DAME) tax is to start having “crypto miners pay their fair share of the costs imposed on local communities and the environment.”  

The crypto community is pushing back and point to the use of clean energy sources at bitcoin mining centers. Imposing taxes on bitcoin mining facilities will drive them to countries with dirty fuels, they say. Another one of their claims is that bitcoin is used by the unbanked and underbanked in developing countries to transfer value and, therefore, provides economic benefits.

The Question of Economic Benefits

An important, and consequential, strand about bitcoin mining’s energy use relates to the cryptocurrency’s economic benefits. After all, what is the point of expending so much energy on an asset that might, in the end, turn out to be worthless?

The cryptocurrency’s proponents claim that it is a tool for economic empowerment. But there is no verifiable proof for that claim apart from reporting by crypto-affiliated publications or bogus blockchain statistics that can easily be manipulated using anonymous wallets.

Its use as a tool for payments and remittances is also far from being realized.

An example is El Salvador, a Central American country that introduced bitcoin for remittances with much fanfare some years ago. The experiment has turned out to be a dud even after the government rolled out incentives for citizens to begin using its crypto wallets.  

Who Benefits from Mining?

About the only economic benefit of bitcoin lies in price speculation. That is an admissible use case, if it distributes wealth amongst many stakeholders like the stock market. But it doesn’t.

Based on the current distribution of wallets on bitcoin’s blockchain, the biggest economic benefits accrue to those holding more than 500 bitcoin (worth roughly $14.1 million at current prices) in their wallets. Their numbers are limited to thousands. In other words, the operations of bitcoin miners currently benefit only the rich.    

Miners also derive economic benefits from bitcoin. The cryptocurrency’s algorithmic supply adjustments have ensured that their revenues have largely kept pace with changes in its price. Even the recent price drawdown has not inhibited their profits from mining the cryptocurrency. In the future, that figure will multiply because bitcoin mining is increasingly about scaling operations. Thus, more mining rigs and bigger budgets equals more profits. Again, those profits are mopped by very few players.

What all of this means is that the cryptocurrency’s electricity use is disproportionate with the profits it distributes amongst very few organizations and people.