From Coal Mining to Crypto Mining— Crypto Investing, AI Adoption, and Chip Production in light of Risks to American Energy Independence
By Ryan Scott, Executive Director & Steven Arevalo Chief Technologist at DuLac Capital Advisory L.L.C.
Bitcoin Market Capitalization has reached $1 Trillion again, which is 1/3rd that of the total market cap of the Global MSCI ACWI (Oil/Gas) Energy Index (source: ETF. com, MSCI).
Since the pandemic, investors generally have "swiped right" on tech-enabled companies that are increasingly using solar/wind energy, at the expense of strong balance sheet Large Cap Oil and Nat Gas-- despite 5x-10X turns of lower PE multiple.
There are three key investment considerations that have emerged since the Covid19 pandemic that emerged just as the US vs PRC/EU Trade Wars began to thaw—yet DuLac Capital Advisory L.L.C. believes will heat back up again:
AI Infrastructure companies increase use of solar/wind based power thanks to policy & PRC renewable supply chain scale that has enabled an 80%+ reduction in lithium battery Megawatt/Hour costs (Bloomberg Oddlots, 02/18/2024).
Convergence between renewable raw materials pricing and the stagnant multiple expansion observed with large cap Oil & Nat Gas companies in the advent of UN COP26.
Many institutional clients will increasingly wonder whether the largest North American centered Oil & Nat Gas companies may end up benefiting from decreased market assigned equity risk premium—just as the market eventually placed with Bitcoin as investors sought an alternative to only gold as a fiscal tail-risk hedge.
These MetaTrends have occurred despite the recent grass roots backlash against global public market ESG mandates within many American States via their state pensions fiduciary mandates. The Western world, especially in America, is facing a bit of a Shakespearean “War of the Roses” debate on the nexus between energy policy and tech policy—especially relating to the AI ecosystem which includes semiconductor chip production and crypto currency mining.
AI Adoption & Crypto Allocation—> Greater Chip Production = Greater Need for Fossil Fuel 2.0 Energy Strategy
The National Security implications are foreboding: can America, which is likely to ban TikTok due to People’s Republic of China (PRC) fears, able to achieve AI dominance and act as a platform for crypto mining and institutional investing, while also relying on a Solar/Wind energy supply chain mainly controlled by the PRC? This is a doubtful proposition from both an American energy independence imperative, crypto mining and Chip production electric usage requirements, and from an American fiscal health perspective:
America will have to ramp back up Fossil Fuel energy use to meet its AI/Crypto/Chip ecosystem energy needs— and to reduce fiscal constraints.
For example, Congress is likely going to soon pass a ban on consumer use of TikTok (as of this publishing, the bill is being considered in the Senate), citing People’s Republic of China backdoor intelligence gathering concerns. However, will the American Congress be ready to also then ban the Solar/Wind supply chain that originates or is controlled in some form by the PRC? Doubt thee not!
In fact, retired CIA Operations Officer Bryan Dean Wright highlighted the troubling trend of the PRC domination in the Solar/Wind (i.e., “Renewable” or “Green Energy”) supply chain and its foreign policy implications for America during his August 2023 report, “Dirty Green Energy”—citing evidence that approximately 70-80% of the Solar/Wind Supply Chain stems from the PRC: a nuclear nation that both parties deem a “strategic competitor,” “strategic rival,” or even outright “enemy”, in colloquial settings. Mr. Wright’s analysis was echoed by a Wall Street Journal expose on the “renewable energy arms race” gap between the PRC and America in a February 2024 expose.
Thus, it is likely America’s push to Net Zero Transition—especially with its attempt to dominate the AI Ecosystem—will likely stumble without re-considering up-weighting the use of Fossil Fuels within the nation’s mixed energy portfolio. DuLac Capital Advisory L.L.C. thinks most institutional investors are currently not positioned then for the investment portfolio allocation implications for this scenario as well.
Therefore, DuLac Capital Advisory L.L.C. thinks IG Rated “Fossil Fuel” companies that are increasingly deploying Carbon Capture technology, will be a viewed by contrarian investors as a beneficiary as well:
The DM world’s irresponsible fiscal expansion that is becoming dangerously close to the “tipping point” before debt-inflationary spiral takes hold per Rogoff and Reinhart study popularized during the Euro sovereign crisis.
Increased collectivist economic planning that is proven to be a counter-indicator to productivity and innovation—against all warnings based on proven history analyzed by Dr. F.A. Hayek and Dr. Milton Friedman.
“Global Green Inflation” driven by Paris Accord Alignment may end up being tail-winds to companies with higher than average fossil fuel based commodity risk factor—let alone higher electric bills for consumers and small businesses that end up acting, ironically, as a consumption deflator.
Additionally, based on the market multiples of IG rated Oil, Nat Gas, and energy MLPs, DuLac Capital Advisory L.L.C. does not believe the market is appreciating the continued role that fossil fuel companies will play in the Net Zero Transition—especially as they continue to leverage the Inflation Reduction Act tax credits to build out Carbon Capture & Storage technologies. Essentially, the Fossil Fuel production generates positive cash flow, albeit increasingly being called “impaired due to stranded assets,” while the Carbon Capture and Storage Technology could receive CO2 and Greenhouse Gas Reducing Tax Credits—effectively servicing as a net positive Cash from Financing business line that can offset the Carbon Cost Liability that even now the SEC is asserting Large cap companies must now disclose.
American Fossil Fuel Companies will increasingly pursue various types of M&A and Joint Ventures— while also deploying Carbon Capture & Storage Technologies to offset the alleged CO2 risks that the SEC will soon require estimated disclosure on their financial statements.
Crypto Mining and Chip Production May Resurrect Coal/Oil Multiples
American States such as Texas and Indiana, whose policy leadership tends to be aligned against UN’s Paris Accord Mandates are facilitating Carbon Capture & Storage Technology Adoption—it’s viewed as a job creator, a bridge for allegedly “stranded” fossil fuel assets native to those states, and a mechanism to offset liability claims they view as unfair, yet are very really being priced via the public and private markets: for example, despite JP Morgan and BlackRock unsubscribing from the UN sponsored Climate 100 Action+ Committee in February, no major Wall Street or City of London Financial Firm has announced they plan to ramp up Coal investing.
Also, DuLac Capital Advisory L.L.C. believes Tree REITs are currently an under-appreciated part of the engineering solution for meeting the needs of both Net Zero Transition, and for potentially staving off complete shutter of the coal industry. How? Combining the Tree REIT CO2 credit (via photosynthesis measurement) model with the stranded deep underground assets of Coal: effectively converting them to CO2/GHG storage industrial REITs, if environmental engineers approve.
The rise of crypto mining, and its institutional use cases for investors as expressed through ETFs, will increasingly call for greater use of tried and true cheap energy sources in order to continue to mine this pro-cyclical, inflationary amplifying asset: coal is certainly the cheapest once they can tap into Inflation Reduction Act Tax Credits to offset their CO2/GHG outputs.
Yet, given even the best rated coal companies tend to only be B rated, and thus capital constrained, DuLac Capital Advisory L.L.C. expects the coal companies to find a more cash rich partner within the traditional fossil fuel space that has the capital and technology, yet needs the “Real Estate” that ‘Stranded Coal’ may offer. Essentially, picture A rated Oil companies trading around 8xs EV/EBITDA acquiring stranded, yet usable spun-out coal assets trading at 4X EV/EBITDA, less legal claim.
Many American policymakers and voters say Coal is important for them— yet few are putting their money where their mouth is as regulatory headwinds seem to have no end in sight. The market may not be fully weighing the odds that Coal Companies may end up adopting Carbon Storage Tech, especially via Joint Ventures with better capitalized adjacent fossil fuel industries.
How does this relate to AI & bitcoin/crypto?
DuLac Capital Advisory believes that the continued breakneck speed of crypto mining and correlated (American-sphere) AI expansion is in jeopardy if the federal push to completely eliminate all fossil fuels from the electric utility infrastructure continues unchecked. Such anti-fossil fuel mandates have not caught up with the times: even mega CO2 generators such as Exxon are now using Carbon Capture and Storage technologies to offset millions of metric tons of GHGs—yet, State Pension managers such as New York Commons have not gotten the memo of this new normal, as they recently announced many Oil companies are now excluded assets.
Such institutions perhaps may find the reality that their AI expansion, crypto mining, and semiconductor chip expansion is simply not feasible “sola solaris”. Hence, the climate debate in America is spilling over at a public policy and investment policy level nearly akin to Europe’s religious wars in the 17th century. Nonetheless, as investing from a fiduciary duty perspective requires more than faith, it requires evidence. The evidence of AI/Crypto/Chip ecosystem’s energy intensity is increasingly manifesting the reality that fossil fuel companies will be a required component of the future American energy independence portfolio—especially given the rising use of Carbon Capture and Storage technology and Forest REITs CO2/photosynthesis credit/debit offsets.
For example, a Microsoft BING generated AI image takes as much electricity to produce as charging an entire iPhone for example (source: Bryan Dean Wright, The Wright Report January 2024). Additionally, consider how the PRC recognizes this fact and thus to fund its AI Industry (chip production included), it is ramping up its Coal production. Do American public policy and investment policy professionals really think wind turbines in the Midwest, California, and Texas will meet this demand without massive brown-outs due to intermittency?
Or, what happens, when American consumers and small businesses realize that their electric bills are actually a major driver of their personal inflation costs? Midwest American energy independence policy advocacy firm, Reliable Energy Inc. has underscored surveys that American lower middle class consumers are increasingly becoming frustrated at the rising electric energy costs: BlackRock calls this the “Global Green Inflation.” Just as Americans voted in the Reagan-Bush-Volker trio in the 1980s to stamp out the LBJ-Nixon-Carter era inflationary policies, the same could happen on a regional basis in America. There are already signs of the energy public policy bleeding to actual electoral political shifts in the United Kingdom—a country that has instituted “carbon dioxide” taxes directly to consumers since 2008 (source: Wall Street Journal, February 2024).
Nonetheless, they are offsetting the alleged net CO2 generation by buying CO2 credits and outright forest rights in photosynthesis rich places such as Central Africa. This spells the need for American energy, financial, and tech communities to forge a future pathway to arrange a marriage of necessity between Fossil Fuel and Material Sector companies. For example, between Large Cap Oil & “Stranded Coal”-- will enable the continued institutional use and adoption of Bitcoin by professional investors via expansion of scaled mining, outright investing in the underlying asset, and expansion in portfolio allocation through ETFs/Futures.
The pro-cyclical correlation between crypto mining, institutional crypto asset trading, AI adoption, and AI Chip Production is becoming increasingly evident. What is not realized yet though, is that stranded and slandered Fossil Fuels will soon be invited to come (back) to dinner as American policy makers face the reality of PRC renewable supply chain, consumer inability to meet the “Global Green Inflation” price tag, and the increasing reality that the CO2/GHG left-tail risk is largely solvable through engineering mechanisms. Climate-Malthusians will once again be holding the short-end of the stick.
Ryan Scott
Executive Director and Founder
DuLac Capital Advisory
(+1) 516-939-6833
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The information, investment news, and policy insights provided by DuLac Capital Advisory L.L.C. ("the Firm") through its publications, reports, newsletters, and communications, including but not limited to Investment News, Market Insight, and Investment Insight, are intended for informational and educational purposes only. These materials are not to be construed as specific investment recommendations or advice. DuLac Capital Advisory L.L.C. is a technical services management consultant for companies and institutional investors. DuLac Capital Advisory L.L.C. does not receive any revenue from any company or service mentioned in this insight piece.
**Not Investment Advice:**
The materials provided by the Firm do not constitute investment advice or recommendations to buy, sell, or hold any securities or investment products. The insights offered are general in nature and do not take into account the individual circumstances, investment objectives, risk tolerance, or financial situation of any particular institutional investor or recipient.
**No Reliance:**
Institutional investors should not rely solely on the information provided by the Firm for making investment decisions. It is recommended that investors conduct their own due diligence, seek advice from qualified financial professionals, and carefully consider their investment objectives and risk appetite before making any investment decisions.
**No Guarantee:**
While the Firm strives to provide accurate and up-to-date information, there is no guarantee of the accuracy, completeness, or reliability of the information provided. The financial markets and economic conditions are subject to change, and the information provided may become outdated or irrelevant over time.
**Risk Disclosure:**
Investing in financial markets involves inherent risks, and the value of investments may go up or down. Past performance is not indicative of future results. Institutional investors should be aware of the potential risks associated with investment decisions and should consult with professionals who are qualified to provide personalized investment advice.
**No Endorsement:**
Any mention of specific securities, investment products, or companies does not constitute an endorsement, recommendation, or promotion of those securities, products, or companies by the Firm. The inclusion of any such information is for informational purposes only. No compensation was received from including any investment product or technology into the White Paper.
**Legal and Regulatory Considerations:**
Institutional investors are responsible for understanding and complying with all applicable laws, regulations, and guidelines related to their investment activities. The Firm's materials are not intended to replace or substitute for legal or regulatory advice.
The Firm disclaims any liability for the use or interpretation of the information provided in its materials. Institutional investors should use their judgment and exercise caution when relying on any information provided by the Firm.
For personalized investment advice tailored to your individual circumstances, we strongly recommend consulting with licensed financial advisor at a major Wealth Manager.
All content published by DuLac Capital Advisory L.L.C. is Copyright Protected per U.S. law. Insight is protected speech and right to commerce per U.S. Constitution and Civil Rights Act of 1866, Civil Rights Act of 1871, and Civil Rights Act of 1964.