The Future of Bitcoin Supply is in Exclusive Mining Agreements
The writing is on the wall, we are headed for a liquidity crunch in Bitcoin. Daily, weekly, and monthly demand for Bitcoins is outstripping the current supply from mining. This means we’re likely to see volatility to the upside continue over the next year. But what does this mean for the broader landscape of Bitcoin supply as demand continues to grow from ever larger traditional financial players?
Over the past year, especially now following the halving in May 2020, we have seen a steadily growing narrative that Bitcoin is digital gold and an inflation hedge. This is apparently resonating quite well with traditional juggernauts in finance and investing. Every day we have new comments, stories, and even press releases indicating that some of the biggest entities on wall street are preparing to either assist their clients in taking Bitcoin positions or will be taking positions themselves. It’s an exciting time.
But, the problem therefore is how on earth are we going to get enough Bitcoins into the hands of these players fast enough to satiate the growing demand? There are a few ways. One that we are seeing play out right now is the price is climbing. Everyone has “their number” at which they are willing to divest their sats for green paper and apparently for a few older entities in the space, their number is somewhere around $18,650 USD at time of writing. Eventually, given the enormous institutional demand for coins, the coffers of these 2010–2014 era Bitcoin hodlers will run dry (or the remaining ones will hold their coins tightly as their “number” hasn’t been met). Retail will unlikely be able to supply enough coins to keep the price under $100,000.00 a coin.
This leaves the miners, the only source of new Bitcoins. My theory is that the large players on wall street and the banks are going to very quickly understand (assuming they don’t already know) these dynamics. Right now, the price is at $18,650.00 a coin, which if PlanB’s model is to be found accurate, means that coins are still priced at a bargain.
Imagine, if you will then, that you are a savvy trader/banker at JP Morgan (or really any bank or hedge fund) with experience in arbitrage plays. If you know, deep in your gut and with your quant models, that Bitcoin is undervalued and that your business will absolutely need some in the coming months and years in order to service your clients and attract new ones, you would do everything you could to secure coins now and in the future. I posit that futures contracts alone are not enough to secure the coins they will need.
Here’s what I think we might see develop — exclusive supply agreements. Or even, an investment in mining itself as division of these companies.
Let’s be honest here, Bitcoin’s fundamentals are actually not that difficult to understand once you have the “lightbulb” moment. These mammoth banks do not rule the world because they are dumb or slow. They have an enormous amount of capital to work with, and thanks to the Fed’s spigot of fiat, they are looking to deploy it wherever they can. If Bitcoin is truly about to enter this “Phase 5” where multinationals, NGOs, and nation states start dabbling in Bitcoin, there is going to be a capital race to secure supply lines. It is not crazy to envision that they will attempt to cut out the middle players as much as possible and rely as little as possible on retail (who now controls most of the circulating Bitcoin supply).
Deployment of capital may look like JP Morgan entering a 5 year agreement to exclusively purchase all coins that “Mining Company XYZ” produces over the term of the contract. Perhaps you have guaranteed prices at different production levels delivered since hash power will likely change a lot over the term, or if the company is “unlucky” in generating coins relative to the hash power they deploy. JP Morgan could guarantee prices well above market price today that would be below the target prices for “Phase 5.” Because mining is a cashflow business that requires selling coins, I could see many miners being tempted by this guaranteed, predictable cashflow. If I were in this business, this is the avenue I would be pursuing as you would have guaranteed supply and price pegged out into the future, which will be absolutely crucial over the next few years.
As well, we may see the big players start their own mining operations or subsidiaries. The same effect would be played out. These entities have access to enormous capital and could deploy it in mining itself, raising hashrate, securing supply, and choking out the smaller competition.
What does this mean for retail? If my thesis is correct, it means many of today’s on-ramps to Bitcoin for the little guy will come to a close unless the exchanges we have today start making the kinds of deals I described above. If retail is unwilling to sell their coins (or we exhaust the number of people who are willing to sell, rather), and if the miners are locked up entirely in directly supplying the banks and hedgefunds only, then you get a situation where Bitcoins are only available through illiquid exchanges where only retail supplies liquidity or you have to go through traditional finance, and all that that entails.
What I propose is that if exchanges have not already done so, they should look to start ensuring their future liquidity by contracting directly with a few mining entities. If I’m correct, this will be a cutthroat and quick race to lock up new issuance.
Now, I will say up front, this is merely an idea I’ve been playing with in my head for the last few months. I will openly admit that I do not have any knowledge about how exchanges currently interface with miners directly. I also do not know enough about the regulation and laws that might prevent the kinds of contracts I have mentioned in this article, but I suspect there aren’t any legal barriers to this sort of activity. I welcome people’s informed comments and criticism of my ideas laid out here, we are after all all here to learn. You can find me on Twitter or in the comments here. Cheers!
