Chia (XCH) is a new cryptocurrency released this year. Rather than using raw computing power to add blocks via proof of work like Bitcoin, a process which is very energy intensive, Chia seeks a green(er) approach by utilizing hard drive space in what they call proof of space and time.
XCH started off with great price strength peaking at over $1,685 per coin on May 14th. This is somewhat arbitrary without the market cap information, which is difficult to independently verify. However, the Chia farming reward of 2 XCH meant the possibility to farm $3,370 per block added. The network difficulty accelerated upwards as people bought hard drives and created plots to farm.
Enter the summer slump in which Bitcoin fell from $63,000 on April 13 down under $30,000. Other cryptocurrencies fell as well, including Chia.
With the drop in the price of XCH down below $200, network difficulty growth has slowed noticeably. Which you can see in the chart above. Difficulty has actually fallen over the past couple of days although I do anticipate the difficulty growth will resume albeit slowly unless and until the price of XCH rises. This slowing in difficulty growth combined with pools, presents an opportunity to acquire some Chia. Another important factor is the reduction in the price of hard drives–the cost per Terabyte (TB) has dipped below $15.
Of course one has to have plots in order to farm Chia. Once a plot is created it can be used to farm for an extended period of time, possibly indefinitely. Plotting on a hard disk drive (HDD) is slow. An SSD or NVME drive is important, combined with a fast processor and memory. This is the side of Chia that isn’t as green, as a lot of energy is required to produce plots.
Another option is to buy plots. I’ve seen plots for sale at a cost of $200 for 110 plots or $1.80 per plot. You also have to pay to ship the drives to and from the company doing the plotting, which we’ll say is $40 total with insurance. Let’s also assume you already have a computer to farm on (an old computer with a quad core 1.5 Ghz processor with 2GB memory would meet the minimum requirements. I’m not adding in the cost of an internet connection, electricity or the cost of the farming computer. I assume most people considering this already have a basic computer with an internet connection. Let’s say we have a 12 TB HDD for $250, we buy 110 plots at a cost of $240. So all in, we have a cost of $490.
If network difficulty were to remain static (which it won’t) at current prices this setup would result in $16 per month. So you’d break even in about 2.3 years. I do expect network difficulty to continue to grow, and as difficulty grows the amount of Chia earned will be reduced. This means that in reality it will take more than 2.5 years to recoup that initial $490 invested. So Chia farming probably isn’t worth it if you’re starting from scratch. If you do “believe” that Chia will take off as a greener alternative to Bitcoin, simply buying Chia directly on an exchange is probably the best bet.
Now, if you already have some HDDs and a fast computer you can plot on, and if it is something you’re interested in learning and spending some time on, it might be worth it to try to farm Chia. This would pay off in particular if the price of Chia rebounds to it’s May highs.
But, starting with little to no hardware, I don’t think it makes sense to farm Chia, you’re better off just buying XCH.
Of course the above takes into account the monetary gain. If you’re just in it for the money. Personally I think the Chia Network is an interesting project and one I find enjoyable to observe and be a part of through farming.
I subscribe to various financial newsletters. I still have a lot to learn. One such newsletter I subscribe to is written by person who has a lot more money and an exponentially bigger following than I do. So obviously he is doing some things right.
But I’m amazed by what I read recently. He posted the following image and wrote: “In other words, if there had been no pandemic, aggregate net worth for each wealth percentile would likely be around where the blue lines are today. But due to the pandemic, we’ve unexpectedly made a whole lot more.”
That is very “unexpected” for someone like me that believes hard work, innovation, capital investment and fiscal discipline are what produce wealth.
What has happened since March of 2020? Many businesses have closed, some permanently, the government has “printed” money and spent it, people have been paid to stay home and not work, and countless people have passed away. I would never have expected shutting down large portions of the economy, printing and spending money would result in wealth creation.
Now I don’t doubt that the upper income brackets have increased their wealth in real terms. However, I can’t believe that in real terms wealth in the United States has increased. Why? Because the dollar buys much less than it did pre-pandemic. Commodity prices have gone up, housing prices have gone up, and food prices have gone up. The wealthy, even accounting for multi-million dollar mansions, private jets, and the finest organic vegan food cooked by a private chef, still don’t pay as much on food, housing as transportation as the poor when viewed as a percentage of their whole net worth.
At best this wealth effect is pulling forward future returns. But I suspect, that given the rising prices, most people are worse off as a result of the pandemic. But it is amazing the attitude it shows. At no point in that newsletter did the author question why closing large portions of the economy, printing and spending money was a recipe for wealth building.
After all, staying home and collecting a check is a lot easier than going to work to produce goods and services. So why bother encouraging businesses or workers.
The tax and spend philosophy, the universal basic income philosophy, the rejection of the basic principle of economic scarcity are consistent with the belief that a government can pay people not to work, run deficients and print in order to create prosperity. It’s all part and parcel with the United States rapidly shifting away from free market enterprise and towards collectivism and state control. This hasn’t worked in the past but maybe this time is different?
I’ve punched a lot of keys on the ‘ole qwerty debating the merits of cryptocurrency versus gold and precious metals. But when all is said and done, gold has gone up very little while cryptocurrencies have gone to the moon. I was reminiscing on some old articles and I came across “No, Even with ETH at $2 Gazzillion, Ethereum Cloud Mining Isn’t Profitable” and I’m reminded that at one point I could have bought 62 Ether (ETH) for $561. ETH was trading at $9 per coin back then. As of writing ETH is trading at $2,455.48, so those 62 ETH would be up 27,183.1% to over $152,000 in about 4 years or so. Not bad.
I remember reading about the Ethereum network before it even launched. Based on my philosophical musings of money I thought it would important for a cryptocurrency to have non-monetary use in order to be valued over the long term and not just be a speculative fad. The ability for Ethereum to support DApps in addition to “just” being a currency checked boxes and so I chose to buy some ETH. At one point I probably owned 50-60 ETH.
EOS Is Superior to Ethereum based on Several Metrics
Of course the Ethereum network was at that time, like it is now, relatively slow as highlighted by “Cryptokitties” one of the distributed apps built on Ethereum that caused the network to grind to a proverbial halt. To date the most transactions per second processed by the Ethereum network is 19. I decided to sell ETH and instead placed my cap at EOS. EOS was labeled an Ethereum killer at one point and some people said that EOS stands for “Ethereum on Steroids.” Of course this was all before Ethereum went to “the moon.”
EOS uses proof of stake (instead of Ethereum and Bitcoin’s energy intensive and slow proof of work) and has handled up 9,565 transactions per second. In my view, assessing the EOS network and Ethereum network, EOS is superior.
However the market disagrees.
The market capitalization of EOS is $5.9 billion, the market cap of ETH is $285 billion. So clearly the market favors Ethereum.
For a long time I didn’t think this market cap was in any way justified. However, because of Ethereum 2.0 and with Ethereum down 36% from the highs, I’ve decided to buy some ETH.
The “Best” Technology Doesn’t Always Win
It is hard for me not to think that the better technology won’t win out in the medium term. However, this often isn’t the case. Good technology is important, but there is name recognition, brand, leadership and the network effect, which I’ve realized I tend to discount too much.
Apple in the 90s is a great example. Macs at that time were considered to be higher quality, more innovative and easy to use. However, a lot of people used Windows based PCs at work and wanted to use what they were familiar with at home, PCs were less expensive, and more people used Windows in general. So people chose Windows and Microsoft had a larger market share as a result. There were certainly rational reasons for choosing Microsoft Windows/PCs over Apple/Macs even though a strong case could be made for superior Apple technology.
Apple was able to overcome this in the early 2000s and onward but that is a topic for another article.
EOS Has a Likability Problem
A lot of developers are interested in and devote time to Ethereum, a lot of the cryptocurrency community was and is pro Bitcoin and pro Ethereum. Ethereum was sometimes thought of as “Silver to Bitcoin being Gold.” Ethereum entered the scene in a much more diplomatic way.
The technological founder of EOS, Dan Larimer, referred to proof of work as a technological dead end, was more abrasive and alienated more people. There were also issues, perceived and otherwise, that EOS is not in fact very decentralized. EOS had a market cap in excess of $16 billion in April of 2018 but has never recovered these highs.
That is was makes the excitement about Ethereum 2.0 so interesting. EOS can already do a lot of what Ethereum 2.0 is promising to be able to do in the future. But Ethereum has people like Mark Cuban talking about it, it has more name recognition and more development interest. The cryptocurrency community, and people outside the space know about and accept Ethereum in a way other cryptocurrencies can’t match.
Ethereum Has More DAapps
According to State of the DApps, there are 2,782DApps on Ethereum and only 328 on EOS. However, EOS has handled 353.18k in the last 24 hours (as of writing this article) compared to 201.92k for Ethereum. So despite the technological limitations in transaction count and less energy efficient consensus model, developers choose Ethereum on which to build their DApps.
Ethereum Has More Name Recognition
Most people have heard of Bitcoin by now. I doubt many people on the street will have heard of EOS or associate it with the cryptocurrency. Ethereum is much closer to Bitcoin in terms of name recognition. I decided to test my theory using google search trends as a proxy and found that searches for “ETH price” far outstrip searches for “EOS price”. This is an admittedly flawed approach as EOS could also refer to the Canon Cameras, the “Entrepreneurial Operating System” and there is even an EOS fitness. I don’t think Ethereum shares it’s name the way EOS does. But if anything this inflates the number of searches for EOS price beyond those searching for the cryptocurrency.
Ethereum 2.0 Should Address Many of the Performance Issues
Ethereum 2.0 should address many of the performance issues that caused me to favor EOS over ETH in the first place. Add that to the tailwinds it already has and it could be a great speculation. I’ve decided to buy some ETH and plan to continue to average in on pullbacks. You probably shouldn’t listen to me, this isn’t investment advice and I’ve had a bad trading track record when it comes to crypto, particularly on the sell side.
Cryptocurrencies like Bitcoin have taken quite a hit over the past few days. Bitcoin is down under $40,000 from its all time high of $63,000. A variety of factors contributed to this but one of them is recent negative statements about BTC’s poor environmental impact. Bitcoin miner’s use a lot of electricity to process transactions securely in a proof of work consensus model and some people aren’t super happy about it. Elon Musk is one such person and he recently said Tesla would no longer accept Bitcoin as payment because of its environmental impact.
Well one new cryptocurrency called Chia (XCH) is trying to put a more environmentally friendly foot forward while maintaining security. Their green paper details a new consensus algorithm called Proofs of Space and Time, “PoST”. PoST “replaces the Proof of Work which wastes massive amounts of energy and is less secure against mining centralization.”
An admittedly oversimplified explanation is that instead of using energy intensive processing power to add blocks Chia uses hard drive space. In an age where many people are concerned about energy usage, Chia could be a powerful alternative to Bitcoin and other proof of work cryptocurrencies. For that reason alone, it could easily go up to $50,000 per Chia if it were to replace Bitcoin.
Instead of “mining” Chia has “farmers,” farming requires lots of hard drive space. If you’ve tried purchasing a new hard drive recently you might have noticed the prices have increased dramatically and many are out of stock. The reason for this is because the more hard drive space one has, the more “plots” one can put on them, and the more likely one is to successfully farm chia. Chia farmers have been buying hard drives in bulk and the result has been rising prices and shortages. The number of Chia farmers continues to grow, and hard drive prices have gone up as well, so you might want to buy a hard drive now.
George Orwell’s dystopian book “1984” introduced the world to the concept of Newspeak. Newspeak is the process of redefining words for political purposes. Examples in the book include, “War is peace. Freedom is slavery. Ignorance is strength.” There are plenty of examples of Newspeak today in the United States and doubtless throughout the world. The United States Federal Reserve is a terrible offender when it comes to the use of Newspeak. Below are several examples.
Federal Reserve Newspeak: Price Stability
Part two of the Federal Reserve’s “Dual Mandate” is “Price Stability.” However, the Federal Reserve actively undermines price stability. Here is a quote from the St. Louis Federal Reserve website:
Price stability: If prices for goods and services are stable, that preserves the purchasing power of money. The Federal Open Market Committee, or FOMC, has equated price stability with a low, measured rate of inflation. (Inflation is a general, sustained upward movement of prices for goods and services in an economy.) To achieve this part of the mandate, the FOMC targets an inflation rate of 2 percent over the longer run.
Why is this newspeak? Two percent inflation is not stable. If a ship is losing 2% of its buoyancy every year it will eventually sink. Take a worker who makes $15 an hour. After 20 years, at a 2% inflation rate, that money is now worth $10.09. That “stable” price stability cut a workers wage by a third.
Price stability actually means prices neither rising nor falling.
Of course the real rate of price increases is well above 2%–more on that later.
So when the Federal Reserve use the term “Price Stability” what they really mean is rising prices and a steady erosion of the purchasing power of the dollar.
Federal Reserve Newspeak: Balance Sheet Normalization
The US Federal Reserve makes available their “recent balance sheet trends.” The Federal Reserve narrative of their balance sheet trends is as follows:
The Federal Reserve’s balance sheet has expanded and contracted over time. During the 2007-08 financial crisis and subsequent recession, total assets increased significantly from $870 billion in August 2007 to $4.5 trillion in early 2015. Then, reflecting the FOMC’s balance sheet normalization program that took place between October 2017 and August 2019, total assets declined to under $3.8 trillion. Beginning in September 2019, total assets started to increase.
There is lots of Newspeak in that paragraph. I will give the Federal Reserve some credit, as one sentence doesn’t need too much translation “During the 2007-08 financial crisis and subsequent recession, total assets increased significantly from $870 billion in August 2007 to $4.5 trillion in early 2015.” Here is the translation:
The Federal Reserve’s balance sheet has significantly expanded over time. During the 2007-08 financial crisis and subsequent recession, total assets more than quadrupled from $870 billion in August 2007 to $4.5 trillion in early 2015. Then, the FOMC’s balance sheet normalization program that took place between October 2017 and August 2019 failed and the balance sheet was only able to be reduced back to about $3.8 trillion which is still 3.3 times higher than it was prior to the 2007-2008 financial crisis. Starting in September of 2019 the balance sheet started to grow again. In the year long period between March 2020 to March 2021 the balance sheet increase by over 80% and is currently almost 8x higher than it was back in July of 2007
Balance Sheet normalization in actual english would mean reducing the balance sheet from $4.5 trillion back to under $1 trillion. But in Federal Reserve Newspeak it means reducing the balance sheet 17% from the highest it had been up to that point, going from $4.5 trillion down to $3.8 trillion and then proceeding to more than double it up to $7.7 trillion.
Federal Reserve Newspeak: Tools to Fight Inflation
Fed Chair Jerome Powell has talked about how he has the tools to fight inflation. This is arguably just a lie and not Newspeak, but since Newspeak is a way of lying this distinction doesn’t matter. The translation of this statement is that the tools the Federal Reserve will use to fight inflation will be to ignore and downplay that inflation exists and claim it is transitory.
The Federal Reserve was previously targeting a 2% reduction in the value of the dollar per year. Now that the CPI is officially over 2%, the Federal Reserve is saying this is transitory and that because there were periods of time in which inflation was under 2%, it is okay to be above 2% now.
So the Federal Reserve starts by using a number that is already too low (2.6% instead of 6%) then redefines price stability to mean 2%. So we’re really only seeing a 0.6% increase in prices and that is transitory.
Meanwhile, the only real tools the Federal Reserve has to fight inflation would be to shrink its balance sheet and raise rates. But this would tank the stock market and make it too expensive for the US government to borrow money.
In US Federal Reserve Newspeak, “Price Stability” is rising prices. “Balance Sheet Normalization” is doubling. “Fighting inflation” is ignoring it.
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