Bitcoin Miners Need Ethereum Too — CoinDesk

Maximalist dogma does no one any good.

While much has been written about Bitcoin maximalism’s impact as a cultural force (and its inevitable decline), less has been said about how the ideology drives financial markets—including its influence on institutional capital deployment decisions. This is worth investigating because digital asset allocations may now be poised for a revolutionary shift towards the Ethereum blockchain.

Bitcoin (BTC) miners in particular may face a new opportunity as Ethereum’s potential value is unlocked. This opportunity could help offset and reverse the pressured margins that have dominated the sector as of 2022, and may continue for some time.

Sam Tabar is the chief strategist for Bit Digital, a bitcoin mining company listed on the Nasdaq (BTBT).

Next year, the number of bitcoins that can be mined per block will drop from 6.25 bitcoins to 3.125, making it harder for miners to make money – unless, of course, the BTC price rises and/or network competition slows down enough to compensate. Some believe this is exactly what will happen, and much has been written about the Bitcoin blockchain’s supply/demand mechanism and its impact on mining economics. But from a simplistic, point-in-time perspective, at the exact moment of halving, miner earnings will immediately be halved (assuming everything else remains equal, admittedly a big assumption).

At first glance, Ethereum may seem like an unlikely contender to add value to bitcoin miners. The network’s recent transition to a proof-of-stake (PoS) model eliminates the role of mining altogether. However, a consensus PoS model allows Ethereum validators to receive passive ether (ETH) rewards, which is not currently possible with Bitcoin. The mining sector is sitting on massive bitcoin reserves that have limited use as a financial instrument, other than converting to cash to cover operations, and holding for the long term as bitcoin’s value recovers.

However, Ethereum’s network and its capabilities are always changing. Ethereum developers have driven a proliferation of use cases, including the rise of decentralized exchanges (DEX), stablecoins, and non-fungible tokens (NFT). Ethereum’s successful transition to PoS (aka the September 2022 “merger”) marked an important milestone in blockchain history. Looking ahead, the network will undergo several new upgrades, including the Shanghai upgrade in March and sharding thereafter (both expected to ease network congestion and set the stage for greater usage). The future of Ethereum is more exciting than ever, and the growth of layer 2 systems (ie Polygon, ZK rollups, Optimism, and Arbitrum, to name a few) will further enhance Ethereum’s scalability.

Despite criticism of blockchain from certain environmental groups, Ethereum has become increasingly environmentally friendly. After merging, Ethereum’s energy consumption dropped by an estimated 99.95%, and worldwide power consumption will be reduced by 0.2%, according to co-founder Vitalik Buterin. Along with an earlier upgrade, EIP-1559, the merger dramatically reduced the net issuance of ETH, and many believe the ETH supply will be deflationary in the long term. A total of 2.8 million ETH representing $8.8 billion have been burned since the implementation of EIP-1599 in August 2021, increasing the scarcity of ETH, which also suggests its long-term value.

A PoS blockchain like Ethereum could serve as a welcome addition to bitcoin mining. Bitcoin rewards can be converted to ETH, and then bet for rewards. Deposited ETH can act as an interest-bearing asset, with balances that deteriorate over time. This creates a flywheel-like effect between the two largest digital assets. From there, miners can figure out more creative ways to gain value. What can initially serve as a financial management tool can, through innovation and development, become an additional industry.

Ethereum and Bitcoin both have unique advantages and limitations. Bitcoin is the original proof-of-concept for decentralization, and has proven resilient even under extreme market conditions that have tested it as a store of value. On the other hand, Ethereum is relatively versatile and encourages innovation. Iterations are made to Ethereum continuously to expand its functionality and fix its imperfections for its vision of “a digital future on a global scale.” In the future, we expect that both Bitcoin and Ethereum will have an integral role in the global financial system and society at large.

Both concepts, proof-of-work (PoW) and PoS, can work together. Bitcoin miners are in a unique position to realize how the two can complement each other to drive revenue, monetize stranded energy, and realize the future of decentralization.

The author’s views are his own and do not necessarily reflect the views of his company.