London

📚️ PDF⏳️ 7 min 📖 6

ETF Flows 

A little heartbeat on the ETF flows here from Coinglass. Suffice to say until this week, recent outflows have been negative, but not overwhelming so. The net decline in ETF bitcoin holdings is tiny overall from its peak and does little to explain the price movement. The main factor is older holders selling. We did preface this at $100k that it was likely to be a very significant hurdle because of the ‘OG’ selling that it might (and did) precipitate. 

Surely though, that is bad? 

No. What we want is maximum distributed exposure. As many people as possible with some exposure to bitcoin. Directly, through ETFs or funds like ours or through some other means. Bitcoin’s success is directly attributable to early adopters distributing their coins. 

Like the now famous “Laszlo Pizza” of 2010, where he paid 10,000 bitcoin for two pizzas. It looks ridiculous in retrospect but he was actually making it real by distributing his stack to others in return for something.

Let the bitcoin flow, I say. Here they are flowing as I write, 27 blocks deep of transactions in the queue. 

The user of last resort

I read a thesis last week that AI’s hunger for power would ‘kill bitcoin mining’. Specifically, the idea is that it is far more profitable to sell power to cashed-up AI providers than it is to do so to bitcoin miners. A case in point would be Bitcoin miner Iris, whose premium power contracts have indeed been pivoted to AI data centres with great success. 

The idea fundamentally misunderstands mining though. Since the beginning bitcoin mining could only ever occur in places where nobody else wanted to be. 

1. So we began with home miners. You used a simple desktop PC in 2009 to mine bitcoin. Nobody wanted the excess capacity on your computer and that was that. At that time there was no competition for that space, people mined bitcoin. 

2. Later, ASIC miners specific to bitcoin were invented. They needed power and so the big miners went to places like Kazakhstan and Mongolia where power was plentiful and cheap. At that time there was no competition for that space or that power, people mined bitcoin. 

3. Bitcoin expanded to geographically stranded energy, parking miners on gas flares. No competition for that stranded energy. 

4. The space evolved. Miners started to sign up very cheap power contracts wherever they could. There is excess capacity all over the world for large periods of the day because the renewable build out often produces more than is required. Again, there is no competition for that particular space and….people mine bitcoin. 

Now we are here. Demand for power 24/7 is soaring because of AI and so power grids particularly across the US and China are being built out heavily to accommodate it. Nuclear reactors are coming back from mothballing. It will take 3-5 years but power availability (at least globally) is going to soar. The thing is you have to build power to peak capacity so your grid needs to produce for the very hottest (air con) or coldest (heating) day; which will also be days when everyone is indoors asking ChatGPT why they are fat and depressed. 

There will be so much excess energy for large parts of the day that the demand for an intermittent user; specifically the one who can just turn off whatever they are doing at a moment's notice is going to soar. This has been put to the test in Texas, a hub for bitcoin miners, who sign up to intermittent agreements and turn off their equipment on very hot days when electricity demand soars. It’s still rare, their uptime remains in excess of 97.5% annually. The key feature is that turning it off doesn’t matter, there is no time dependency to bitcoin mining. Mining at 1am is the same as mining at 6pm on a very hot day. For the vast majority of other grid users there is no choice. Supermarket freezers must stay on, the kids are hungry, the oven must go on etc.

Bitcoin has never used power that other people wanted. It can only afford power that nobody wants. It was true on day one and it is true today. 

The thing is, the availability of power that nobody wants is about to go through the roof. You will not want to be running a massive AI data centre without also hosting a bitcoin miner to make sure that you always use 100% of your allocated power contract. 

Bitcoin mining has always been the user of last resort. 

Hard things

I’m impressed by this. It is extraordinarily difficult to get a Federal Reserve master account. Much in the same way as getting a banking licence in Australia is incredibly hard (keeping it is even harder). The same hurdles are true in the USA. Kraken went through five years of pain:

“The approval follows more than five years of sustained regulatory engagement, extensive examination, and operational scrutiny. As a Wyoming-chartered Special Purpose Depository Institution (SPDI), Kraken Financial is a state-regulated bank operating on a full-reserve basis, holding liquid assets equal to or exceeding 100% of client fiat deposits.”

A master account is essentially a bank account with the person that prints the money. Your money in the CBA is just a line on a spreadsheet. If CBA collapses the money goes with it save for the guaranteed amount ($250,000 per account). That cannot happen in a master account, it is the money. That is why they are hard to get and the Fed and the RBA are extremely protective of who joins the club.

The least popular member of this club is going to be Kraken because their business model threatens everything in banking. 

“Over time, this architecture could enable atomic settlement between fiat and crypto, institutional-grade cash management integrated with digital asset custody, and programmable financial products built within a fully regulated framework. This is what it looks like when crypto infrastructure matures into core financial infrastructure.” 

So we are talking stable coins paying yield to holders. We are talking about bitcoin backed loans at a fiat based institution.

Most impressive is the depth of the lobbying effort that went into stopping this from happening. You will recall Operation Choke Point II under the Biden Administration where crypto providers were de-banked at the behest of the incumbent providers. That is to say banned from having any bank account at all, never mind a Fed Master Account. 

It took five years to get this far and it might take five years more for interesting things to happen. The climb is unstoppable though. I note also that Kraken Bank is in excess of 100% reserved. Considering the levels held by their competitors it is just about the most robust bank in the world financially. 

Huge effort. Not trivial for the industry and congratulations to Kraken. 

Bricking it

Two things strike me about house prices in London. First, they have had a terrible time. Second, nobody that actually lives in London believes prices are down.

Progress has been ‘slow’ but they have risen every year. Nominally true. Real prices of course are down about 25% from their peak. Several things happened, a severe bout of post covid inflation and then a collapse in the really high end market because the new government chased away all the rich people in London. That high end collapse drags the average down but it also trickles down generally because less money is sloshing around.

No millionaire in their right mind now would shell out £15m or more for a house in London right now. 

The reason is one simply of taxation, not just generally but even on the house itself. If you buy a second home in London now for £2.5m, it costs £340k in stamp duty. If you did buy one for £15m, the stamp duty cost is £2.46m because you pay the additional 5% on the whole thing because it is a second home. 

I’m certain nobody is actually doing this, you’d have to be mad but that is the nature of the change in the rules. The basic stamp duty rates are here, and the additional property rates are here. There are now lots of beautiful houses in London that nobody wants, even more homeless people and even less tax raised for the government.

Yet, the prospect of this creeping into Australia is high. The problem is when so much wealth gets trapped in one source the government has no choice. It happened in the UK. There was nothing surer than London property, just like there is nothing surer than Australian property today. It’s a sitting duck though. We will find out how much of one on 12th May this year. 

Euro-Trash

It was Saturday morning in Europe when war broke out in the Middle East. By late afternoon that day the major airports across the region had closed causing massive disruption to the 500,000 people that pass through them every day. A lot of Europeans were ‘trapped’ in the UAE in particular. 

Enter Ursula von der Leyen. 

On Monday! It was all and everything that could be said about the European Union in one message. 

When Monday came not much happened but by Tuesday Ursula had been on the phone. 

To Bahrain:

To Qatar:

To Jordan:

The EU is a piece of paper. It literally has nothing. No army, no money, no tax raising power. Nothing makes it more obvious than the last seven days. There is nothing wrong with trade blocs, but there is something odd when they pretend to be something else.

Further Information

Our February 2025 report to investors can be found here.