After eight years of denying a Bitcoin exchange-traded fund (ETF) in the U.S., the U.S. Securities and Exchange Commission (SEC) has changed its tune. Last month, the government agency approved the ProShares Bitcoin Strategy ETF (BITO), which tracks Bitcoin futures contracts pegged to the future price of the cryptocurrency rather than tracking Bitcoin’s spot price. Enabling institutional and retail investors the opportunity to dip their toes in the cryptocurrency market, traders can get involved without actually owning any tokens.
Considered a watershed moment for the crypto industry, the regulatory approval of ProShares ETF comes after the Winklevoss brothers first attempted to secure their own crypto ETF eight years ago. For much of this time, the SEC has argued that crypto volatility and fraud made the case for ETFs too risky. However, SEC chair Gary Gensler indicated earlier this year that he would be open to Bitcoin funds coming to the market.
With the first Bitcoin futures ETF rising in trading debut, warm reception from investors will lead to a demand in Bitcoin. The ETF launch already caused Bitcoin to hit an earlier all-time high, jumping to above $66,000, with some predicting that BTC prices could go higher. And with a large number of miners from China moving to the U.S. due to China’s crypto crackdown, what impact, if any, will the Bitcoin futures ETF have on the mining industry?
Correlation of Bitcoin futures ETF and mining
Trading activities in the ETF do not directly link with mining activities. However, the acceptance and adoption of financial institutions will definitely contribute to the Bitcoin bull cycle, increasing the profitability of ASICs (application-specific integrated circuits), a hashing machine used to mine Bitcoin.
A number of factors are contributing to stronger global demand for mining, increasing the prices for mining rigs: global chip shortages, the issue of China’s crackdown on crypto miners, and further interest in Bitcoin given its legal acceptance as a form of payment in El Salvador. And as the price of ASICs rises, so too does the scarcity of them. According to Bitmain’s website, its Antminer S19j Pro is listed at $11,400, with all other products sold out. New orders submitted in September won’t be available until Q2 and Q3 2022. For those lucky enough to get a mining machine, the price increase means new miners are taking a much higher risk because the cost of them is higher. Any prolonged bear market will greatly reduce the return of the new miner.
Added to this is the issue of China intensifying its crackdown on crypto, declaring all crypto transactions illegal in September. Notably, China’s mining industry saw a sharp decline even before the government made its move. China accounted for 75.5% of the world’s Bitcoin energy use in 2019 and only 46% in April 2021. Bitcoin’s total hash rate currently stands at approximately 165 TH/s, up from 84 TH/s back in July.
Where, though, are these miners going? Large-scale miners will go to the location that has the cheapest electricity costs, favorable tax terms and good infrastructure. Today, that leader is the United States.
Bitcoin mining community
The continual adoption of Bitcoin, and crypto in general, meant that it was inevitable that the SEC would greenlight a BTC-related ETF. While some have misgivings about the product, given that it is futures-based and doesn’t track Bitcoin’s price directly, the Bitcoin community has shown strong positivity on this milestone, with a 10%-15% increase of machine prices over the past week due to Bitcoin achieving a new all-time high.
With the state of play in China right now, the U.S. has overtaken China in Bitcoin mining, making the U.S. the top market for mining. According to data from the Cambridge Centre for Alternative Finance (CCAF), America accounted for 35.4% at the end of August, more than double what was seen in April. In mainland China, a 0% hashrate was recorded, a significant drop from 34.3% rating in May and 67% in September 2020.
For now, however, mining prices and demand are following the price of Bitcoin, with distributors updating their prices on a weekly basis. If there is a sharp correction, most small-scale owners will want to sell their machines at a substantial loss.
Regulations on Bitcoin mining
Since 2009, Bitcoin, and others that have followed, have proved controversial. Widely criticized for its volatility and the exorbitant amount of electricity to mine it, these issues have resulted in various governments restricting or banning crypto. This includes Algeria, Bolivia, Iran, Nepal and Vietnam.
More regulations on Bitcoin mining are expected in the future, focusing on the environmental, social and governance-related regulations (ESG). Due to much higher electricity costs, there needs to be more energy-saving solutions first, otherwise miners will focus on hosting in cheap electricity jurisdictions.
Whatever regulations are put in place for crypto, miners should not impact the Bitcoin Futures ETF, which is for institutions that believe in Bitcoin’s macro outlook.
At the moment, crypto mining companies are producing at maximum capacity, but new companies may invest additional capacity to build new facilities, creating more supply of mining machines. As climate change continues to be a problem, many people will want to blame Bitcoin. In turn, more ESG regulations to make Bitcoin more sustainable will be required. In fact, the Bitcoin Mining Council is already preparing information on a quarterly basis to update the mining situation and the source of electricity. Accounting regulation will also need to be updated to better accommodate digital assets in general.