Bitcoin Intersects With Today’s Most Pivotal Macro Investment Trends

On its’s own, bitcoin is having a stellar year, gaining broader adoption and greater influence. Bitcoin the asset (BTC) is up over 125% in the last 12-months and over 33% year-to-date. BTC spot ETFs, introduced in January 2024, have far exceeded the industry’s performance expectations to become the most successful ETF launch in US history. The group’s Day 1 net flow totalled $655 million on $4.66 billion of trading volume and over $50 billion in AUM has been accumulated across issuers to date. The most technologically sophisticated issuers have already adopted a proof of reserve standard – a capability native to bitcoin – to automatically, in real time, provide public verification of BTC holdings.

Further, bitcoin’s payment network, Lightning Network, has seen strong, organic growth driven by the software’s utility, rather than the token incentives and cryptocurrency speculation that underly most of the engagement in non-bitcoin and non-stablecoin crypto ecosystems. Instead, Lightning Network transactions increased 1,212% over a 24-month period ending in late 2023 as use of the network increased including for cross-border and micropayments, both which Lightning makes more efficient.

From a 10,000 foot view, bitcoin has advanced as a store of value, matured and gained market share as a means of exchange, and increased dominance vs. the crypto market as classic crypto and stablecoin functions and activities have begun moving to bitcoin as they mature. This may be most evident with the flourishment of ZK rollups on bitcoin beginning in 2023.

But bitcoin doesn’t exist in a silo, it emerged in the late 2010s from a two+ prior decades of research and development and today bears significance to other nationally critical industries and large macro investment trends. In July, at the Bitcoin Conference 2024, I joined Cathie Wood, founder CEO and CIO of ARK Invest, to discuss bitcoin’s convergence with the macro investment trends of importance to large asset managers, specifically (I) generative AI and LLM technologies and infrastructure and (II) the energy transition to renewable generation.

First, to reach and capture the full potential in generative AI technologies, investors must consider the payments infrastructure that is fit to serve a field of new capabilities that will likely come to include, for example, per-API call monetization, reliance on multiple models to achieve a solution, AI models that reference (and need to make payment to) other models or external data pools, AI-supported agents that interact and/or transact with an audience (e.g. to issue rewards or incentives) or on behalf of an individual or enterprise (e.g. to filter spam), or more simply, paywalled content and data materials. A mature AI and LLM ecosystem will require cost efficient micropayments on a highly scalable payments architecture, which falls outside of the strengths of traditional financial systems and beyond the system constraints of non-bitcoin cryptocurrencies and their payment focused L2s (“layer twos”).

Uniquely, with bitcoin’s Lightning Network, real time payments are able to match the flow of value in a system. Lightning payments settle instantly and nearly for free, unlocking the potential for efficient microtransactions and opening global access to software and data, including AI models, data pools, and agents or bots.

Within the bitcoin and crypto industries, only bitcoin’s Lightning Network can reach the scale of payments that AI, LLMs, and the agents and bots that will leverage them are expected to achieve. This is because the Lightning Network is a payments channel network and, as such, Lightning payments do not require a global state of network transactions to assure honest transactions. Consequently, Lightning payments do not require the scarce and costly block space of the underlying blockchain outside of specific, anomalous, circumstances. Other blockchain scaling solutions, including ZK rollups, which may have great value for more complex financial contracting on bitcoin, require compute and block space that ultimately caps the number of transactions that may be processed per second. Lightning exists outside of this constraint, enabling it to be a favorable payments partner to the AI field, itself projected to reach $1.3 trillion over the next 10 years according to reporting by Bloomberg Intelligence.

Further, the friction in establishing a payment channel network (a tradeoff to its potential for AI-level scale) is a competitive moat that advantages bitcoin’s Lightning Network against crypto latecomers. Establishing a payment channel network of sufficient scale to offer utility to early adopters requires a bootstrapping period in which a growing number of individuals run nodes (i.e., channel hubs) and contribute capital for network liquidity without receiving much reward in return. Such a network is difficult to establish and to maintain. For example, ethereum’s attempt at a payment channel network, Raiden Network, failed- discontinuing development.

In addition to bitcoin’s intersection with AI, bitcoin may drive investor returns and project productivity in the energy transition, where global investment hit $1.8 trillion in 2023, according to BloombergNEF reporting. This figure includes investment in the construction of renewable energy production facilities, such as wind, solar and geothermal power plants, biofuels production plants, and the power grid. Key renewable energy sources, however, suffer from intermittency. Energy supply and demand are frequently mismatched, resulting in significantly more power than is needed during certain recurring periods as well as not enough when demand spikes, and grid congestion exacerbates this. But bitcoin data centers’ large, flexible loads can support power generation assets managing congestion, curtailment, and negative pricing.

Both bitcoin and AI data centers will consume surplus energy, but bitcoin data centers (also known as bitcoin mining facilities) can be significantly more responsive to energy price, which itself reflects the dynamic relationship between supply and demand. Thus, bitcoin data centers don’t contribute to demand peaks as AI data centers do. Because bitcoin miners can fill demand troughs without adding to the peaks, bitcoin mining can improve the return productivity of new renewable energy development. For energy producers with existing, surplus production, bitcoin mining can absorb and monetizes this energy.

Additionally, within the energy field, bitcoin payments technology can reduce credit exposure between energy market stakeholders. Supply and demand on the power grid must match in real time, but payments don’t flow for days or weeks. This leads market operators and energy suppliers to require collateral from buyers to mitigate default risk. Because bitcoin’s Lightning Network enables real time payment, it can reduce credit exposure between such counterparties, freeing billions of dollars of working capital to be used for further development of energy infrastructure.

Energy innovators and generative AI pioneers are blazing the trail for the electric grid to become more sustainable and AI to contribute to greater economic productivity. Both may leverage bitcoin to further the potential of these visions, accelerate their achievement, and support investment productivity.

Source: FORBES