If it works, Cosmos’ founder Manning, chairman Martin, and their investors – including former Challenger chairman Mike Tilley and KTM Investments’ Martin Rogers – could make a fortune. But plenty of people have lost big money on bitcoin in the past. In the 2017-2018 rally, bitcoin surged from $US1000 to more than $US19,000 only to topple by 80 per cent over the next year. So why should this time be any different?
People are starting to really understand bitcoin, its digital properties, and how valuable it will be in the Web 3.0 world.
— James Manning, Cosmos Capital
Manning is optimistic after a wave of buying support from the traditional financial establishment. He says bitcoin has similar investment properties to gold – scarcity, store of value, transactional.
“People are starting to really understand bitcoin, its digital properties, and how valuable it will be in the Web 3.0 world,” he says. “As Australians, we can be world leaders in digital mining, like we are world leaders in traditional mining. Our revenue just comes from bitcoin, rather than metals.”
Mining operation
Unlike US dollars, both gold and bitcoin can’t be created with abandon. The complexities of mining gold mean demand often outstrips supply, and a rigid set of software rules ensure there can only ever be 21 million bitcoin in circulation.
To validate and secure transactions on the network, “miners” run purpose-built computers. These machines compete to solve complex maths puzzles, and are rewarded with bitcoin at completion.
As it stands, around 18.6 million bitcoin have already been mined, and miners are rewarded with 6.2 bitcoin every time they complete an algorithmic puzzle.
Hedge funds like Ray Dalio’s Bridgewater Associates, institutional investors like JPMorgan, and insurance firms like MassMutual have all talked up bitcoin in recent months, pointing to its hedge against inflation, or even a bet on broader anarchy.
“I think that bitcoin (and some other digital currencies) have over the last 10 years established themselves as interesting gold-like asset alternatives, with similarities and differences to gold and other limited-supply, mobile (unlike real estate) storeholds of wealth,” wrote Dalio in a Reddit post in December.
However, for every new convert like Dalio, Musk and BlackRock’s Larry Fink, there is a high-profile sceptic questioning whether you can just create a currency that has real value. These doubts are not helped by the focus on cryptocurrencies that followed bitcoin such as dogecoin, which started as a joke and now has a market value of more than $US10 billion.
Economist and outspoken critic Nouriel Roubini claims, “The fundamental value of bitcoin is zero and would be negative if a proper carbon tax was applied to its massive polluting energy-hogging production.”
He says bitcoin is volatile, virtually nothing is priced in it and it is not a stable store of value.
A boon for other business
Supporters insist the tide is turning. US banks are receiving the green light to custody – or hold – crypto assets on behalf of customers. In September, the US Office of the Comptroller of the Currency (OCC) announced banks could officially provide services to stablecoin issuers, as well as custody crypto assets – leading BlackRock to say it may invest in bitcoin futures in some of its funds, and Mastercard to begin planning cryptocurrency support on its network.
Large crypto exchanges are now becoming more like banks. Kraken, founded in San Francisco, now has a banking licence in the US and feeds live prices into Bloomberg terminals, and Coinbase, another exchange and news services, has a $US22 billion valuation and is looking to IPO.
Closer to home, banks are lagging behind, though Westpac has no hesitation profiting off bitcoin’s growth. It stands to make $300 million from Coinbase’s IPO through its venture capital fund, Reinventure Group.
Meanwhile, large corporates, such as Tesla, PayPal and Square, are putting real cash behind their bitcoin support. In addition to its $US1.5 billion bitcoin purchase this week, Tesla will now accept payment for cars in bitcoin (at the time of writing, a Model 3 in Australia would go for just over 1 bitcoin).
Square, a payment company, allocated 1 per cent of its assets into bitcoin and continues to purchase, while PayPal, another payments company, will facilitate bitcoin transactions on its platform.
To actually facilitate transactions, these companies need to buy bitcoin, and their large purchase programs are all contributing to bitcoin’s meteoric price rise and spilling over into the broader cryptocurrency market.
The entire market – which includes the likes of smart contract cryptocurrency ether, remittance token ripple and US-pegged stablecoin USDTether – has now surpassed Alphabet’s Google in terms of market capitalisation.
While there are different characteristics of these cryptocurrencies, the flood into bitcoin is proving a boon for other technologies and networks, irrespective of their own fundamentals.
“If you’re looking for crypto use cases, these are it,” says Adrian Przelozny, founder of Independent Reserve, Australia’s largest cryptocurrency exchange, which has seen $400 million in new inflows since the start of the year.
“Hedge funds and very big banks are all catching onto the idea this bitcoin thing can’t be inflated, there’s no centralised body deciding how much to issue, and there’s this post-COVID-19 fear of where we’re all going to end up after this crisis.”
As such, people from main street to Wall Street are choosing to buy one of the newest stores of wealth over the oldest.
As US-investor and George Soros protege Stanley Druckenmiller said before Christmas; “If the gold bet works, the bitcoin bet will probably work better, because it’s thinner, more illiquid and has a lot more beta to it.”
Unleash the stimulus
After more than a decade of central bank interest rates near or below zero, and enormous doses of quantitative easing pouring liquidity into the financial systems, investors are wary of roaring markets pushing stock prices to record highs, despite poor underlying economic data.
Continuous money printing means investors have found no clear way of putting new capital to work, and have sought out alternative assets as bond yields remain at rock bottom.
As US President Joe Biden prepares to unleash his $US1.9 trillion coronavirus package into the system, analysts expect a further boost to equity prices, and an increase for gold, generally considered a safe haven in tough times given its scarcity.
Larry Summers, former US Treasury Secretary, warned this kind of stimulus could unleash a set of inflationary pressures of a kind ‘not seen in a generation’, with consequences for the US dollar and financial stability.
Gold is currently trading just under its all-time high of around $US2000 an ounce, which was reached last year, adding around 30 per cent over the last 12 months and benefiting from many of the same trends that have lifted bitcoin through 2020—worries about the COVID-19 pandemic, lower-for-longer interest rates, and inflation fears.
“The method of bitcoin mining keeps the lid on supply,” says Cosmos’ Manning, who adds the sophistication of the bitcoin mining industry has evolved at warp-speed, thanks to the rapid development of faster computer chips.
This entire confluence of global finance, politics and bitcoin is why Cosmos is poised to take advantage of Australia’s fragmented electricity system and cheap power, and its own technological edge in its mining equipment.
The onslaught of renewable energy, both from utility scale plants and microgenerators on rooftops, means the grid struggles to meet power demands when the population is at home, and then suffers excessive generation at noon and midnight.
As such, thousands of kilowatts of energy are wasted, or “grounded”, as the latent supply cannot find demand.
“We can be that demand, and use it to produce a highly valuable asset at the same time,” says Manning.
As the price of bitcoin nudges $60,000 this week, many are dumbfounded a piece of code could attract so much interest, but for those embedded in the crypto ecosystem, building the shovels that help find this digital gold, it’s only just the beginning.
“If you wanted to shut it down, there’s no chance now,” says Manning. “The bitcoin horse has bolted.”