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The Global Arms Race Will Begin if Russia Invites Bitcoin Adoption

  • Recent pro-Bitcoin developments in Russia may put the Eastern power in the lead as inflation rises. What will the reactions of other powers be?
  • On February 15, the Russian Ministry of Economic Development signaled a bullish development in Bitcoin by lowering mining costs. But what are we to make of it?

First and foremost, yes, it is bullish. The Russian Ministry of Energy is reportedly considering “energy tariffs” for bitcoin (and other cryptocurrency) miners, as well as taxing cryptocurrency-to-ruble conversions — as long as said facilities are built in specific regions (you don’t want bitcoin miners popping up anywhere, not that they operate in this manner anyway).

One of the ministry’s justifications (as noted here) has been that bitcoin mining incentivizes large increases in energy generation while allowing for rapid demand pivoting by the grid. This means that if energy demand shifts quickly, such as in the aftermath of unusual weather, the grid has the capability of limiting or shutting down miners in order to supply energy demand where it is most needed.

Second, it applies pressure to Western powers. The United States, the United Kingdom, and the European Union have been slow to make concrete decisions on Bitcoin and the facilitation of Bitcoin mining. This is hardly surprising; not only do Bitcoin’s censorship resistance and decentralization jeopardies the SWIFT system’s viability, but they also make capital flight controls much more difficult to enforce.

Furthermore, there is concern about the persistence of inflation, particularly as it relates to the price of energy. Incentivizing bitcoin miners to bring business within their jurisdictions would not only provide economic stimulation in the form of infrastructure projects, but would also strengthen the grid’s resilience by providing an additional source of monetization that is demand-flexible.

As the price of natural gas rises, so do the incentives to invest in renewables (due largely to their risk of intermittent production). For these reasons, Russia would be compelled to seek to mitigate future energy cost inflation by incorporating bitcoin mining operations into energy projects.

These justifications, along with the following points, indicate that Russia is interested in incentivizing bitcoin mining within its borders:

Inflation has taken hold of the energy markets. What began as a move toward cleaner energy sources quickly turned into a massive liability during COVID-19 lockdowns. When economies pause, demand, including demand for energy, does not.

Since 2005, the world has been aggressively reducing nuclear energy generation. This is largely due to the fact that facilities capable of generating this energy have long outlived their usefulness. Unfortunately, officials could not have chosen a more inconvenient time to shut down this powerful and efficient source of energy. The grid’s resilience has now been dramatically reduced, leaving us with only fossil fuels and highly unreliable energy sources (aka “renewables”). These sources also necessitate massive amounts of fossil fuels not only to produce, but also to extract from the earth.

As energy markets experience inflation, the costs of goods and services rise as well. As previously stated, we must expend energy in order to generate energy. This implies that the costs of resource extraction, transportation, refinement, packaging, and storage will all rise as a result (regardless of what the CPI might say).

If goods and services are subject to the whims of inflation, it follows that food is also affected by inflation. Life, as the energy cycle dictates, requires energy to reproduce. As a result, agriculture and livestock require significant amounts of energy to produce the food that our children and communities rely on to grow healthy and strong. This energy manifests itself in the form of seed, feed, water, equipment, fertilisers, pesticides, and herbicides, among other things.

We’ve now returned full circle to recent developments in Russia and, more recently, China.

On February 2, Russia announced a ban on ammonium nitrate exports through April in order to better support domestic agricultural efforts. What’s the issue? Russia is the United States’ leading source of ammonium nitrate, a critical component in munitions production, lending credence to recent developments and activities along Russia’s western border. Continuing on the fertiliser theme, China banned fertiliser exports this summer.

The crumbs of this Hansel and Gretel story, however, do not stop there. With the aforementioned points, we have enough context to see how inflation affects all of us, but there is more. Consider Russia’s actions in Ukraine, and how they are fanning the flames and heightening fears of war. A normal economy is heavily reliant on energy, and war increases energy demand by a factor of ten (if not more). If Russia is determined to go to war, the European Union will require significant amounts of energy to facilitate resistance — in this case, energy in the form of oil and natural gas.

And who is the EU’s primary energy supplier? It’s the Russian Federation.

To make matters worse, Germany is the EU’s manufacturing leader. And on what country does Germany rely heavily for trade in order to keep manufacturing going? This is China.

To complicate matters further, China is putting military pressure on Taiwan, a key player in the global chip manufacturing space — on which technology relies heavily.

If war breaks out in this part of the world, I expect further price increases across the board, as technologies will become more expensive as a result of consistent/increasing demand meeting limited supply, if said chip manufacturing sites go offline.

Now for a really big question, “big” in the sense of historical, geopolitical, and even individual implications. What role does Bitcoin play?

Russia is signaling increasing support and appreciation for the nascent asset and technology stack that accompanies Bitcoin’s network operations and incentives by incentivizing mining operations. Furthermore, because Bitcoin operates outside the borders of any one nation or group, the risk of sanctions is virtually eliminated when trade is conducted through a neutral asset such as bitcoin.

Furthermore, a country that adopts such a neutral asset through trade (possibly even pricing energy in bitcoin would open up its coffers to trade with anyone, inviting an influx of demand for goods and services rendered.

The United States and its allies have effectively been backed into a series of corners. Can the United States try to outlaw Bitcoin and its transactions? It can attempt, but it will fail. China has already attempted this on numerous occasions, as has India. Not to mention that the United States now has a slew of politicians advocating for Bitcoin adoption, including U.S. Senator Cynthia Lummis and state governors who have expressed political support for the asset and network.

On top of that, there have been massive inflows of network hash rate to US shores following China’s infamous mining ban. Furthermore, the FDIC has been looking into providing support for American banks to hold bitcoin on their balance sheets.

“Bitcoin is for friends and enemies,” as the saying goes.

Are Russia and China pushing their agendas in order to not only get what they want, but also to force the United States and other Western powers into inflationary environments in order to weaken the petrodollar (US dollar) hegemony? And, in doing so, will bitcoin be able to demonstrate to the world that it truly is a future asset in which allies and foes transact equally?

In this environment, could we see both sides pushing for Bitcoin adoption and proliferation in order to keep up with their rivals.

Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.

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