The crypto space is getting cold when the hype disappears

The crypto market has been quite dormant over the summer, driven by the global inflation fears as well as geopolitical tensions. These have been the main drivers of the decrease in risk appetite for investors both in the equity and crypto markets, and to a large degree these markets have been moving in sync in 2022. What will be driving the crypto space from here? Will the energy crisis be a limiting factor for a comeback in crypto, or will other parts of the crypto space be able to fuel a new rally?

Energy limitations are raising concerns

Bitcoin and several other big cryptocurrencies are relying on huge amounts of computational power to run their network and make sure that transactions are verified properly. Estimates from early September predict Bitcoin to have the same daily energy consumption as Sweden. A key feature for Bitcoin is that the network is run in a decentralised way, where multiple independent agents around the globe validate the transactions to ensure that no single entity is controlling the network. These so-called miners are rewarded in newly issued Bitcoins, but with the decreasing value of the crypto market and the rising energy cost, miners are facing challenges when it comes to profitability, as shown in figure 1. The decline in Bitcoin prices in 2022 is forcing miners to either relocate to countries with cheaper power or close down their operations. With fewer miners running the network, it will be less secure and may become less decentralised. However, with the current amount of Bitcoin miners, we do not see increased centralisation as a major risk within the next couple of years.

Neither centralisation or energy consumption appear to be a major concern for the classical crypto trader. However, larger governmental institutions are becoming increasingly concerned with the computationally heavy “proof-of-work” validation scheme which Bitcoin is using. At the beginning of September, the US White House Office of Science and Technology Policy found in a report that cryptocurrencies have a significant impact on energy usage as well as on the emission of greenhouse gases, and they recommended increased monitoring and potential regulation. This happens half a year after the EU Parliament was discussing a ban of the energy-intensive “proof-of-work” validation which Bitcoin is using, which in the end was rejected. We see a major risk to cryptos if governmental institutions start regulating the use of cryptocurrencies due to their energy consumption. If strict regulation is imposed, it may limit the number of use cases for cryptocurrencies and thus make it less attractive to employ crypto technology.