Bitcoin is consuming outrageous amounts of energy. This is important since the world is currently combating global warming and putting pressure on places like Houston to reduce carbon emissions. Bitcoin is an internet currency. However, since the internet market place can be used for theft, many protections are in place to protect transactions carried out in cyberspace using bitcoin. This new currency is sure to fail and here is why.
For something to be money, economists agree it must satisfy 3 basic functions: be a medium of exchange, be a store of value, and be a unit of account. I think bitcoin satisfies this definition. The function of particular interest is “store of value”. The question is “what value”? To answer this question, one must take a closer look at bitcoin.
Bitcoin is part of something described as an open source movement. In the field of software, this includes projects like Open Office, Linux, and Apache server. The source code is “open”, everyone can see it; however, it does have a particular “guardian”, for instance, Red Hat Linux, or Ubuntu Linux, or Mint Linux. The guardian releases the software but the code used to build the package is transparent. The guardian also incorporates changes made by users worldwide who have constant access to the open source code. You can even change the code and run a custom version on your computer. Steve Jobs created a new operating system for the MacIntosh computer using open source software.
The central idea behind open source is that no one person has control; thus, easing fears that companies like Microsoft are spying on you with embedded malware that you do not know is there because you cannot see the code. The same concept applies to bitcoin. Bitcoin essentially makes you the bank.
These days are full of economic uncertainty. Each economic boom and bust gets higher and deeper. The debt is soaring. The population struggles to save and inflation is eating at everyones retirement account. Bitcoin is a way of moving the Federal Reserve and the entire banking system out of the way. Bitcoin gives the ordinary buyer and seller the illusion that they are in control of their money.
At the heart of Bitcoin is an open ledger that everyone can see. The ledger keeps track of every bitcoin in existence, every owner of bitcoin, and every bitcoin transaction ever done. A network of computers around the world are constantly receiving an updated ledge. This network is also competing to facilitate bitcoin transactions around the world. The computers compete to solve a cryptic puzzle and when the puzzle is solved, then the transaction is facilitated. The person whose computer solved the puzzle is rewarded some nominal amount of bitcoins.
Therein is the “store of value”. The individual is payed a transaction fee in the form of bitcoins. The bitcoin program that runs the system is coded to create only 21 million bitcoins, ever. This all sounds reasonable since bitcoin is a fiat currency and cannot in itself be used for anything useful, just like all other fiat currencies. However, there are two major reasons that bitcoin, in its present form, cannot survive.
Firstly, since no legitimate government is controlling the currency, bitcoin is fluctuating wildly on the stock exchange and speculation is running rampant. Over the past year, the value of one bit coin has gone from about $900 up to nearly $20,000, and currently is in the neighborhood of $14,000. December 2017 has been very volatile. One axiom of economics is that markets perform well under stable conditions. With no government modulating the currency, how can bitcoin survive if no one has confidence in its value? At this point, it is pure speculation. The great economist Thornstein Veblen would say that people are in it to “get something for nothing”.
Secondly, the amount of energy required to process transactions for bitcoin are unsustainable, both economically and environmentally. Since processing transactions requires a worldwide network of computers solving complicated puzzles (tough puzzles for security purposes), its stands to reason that the energy requirements are staggering. At one time it could be done with a single desktop, but now specialized machines are required. Here are a few items that have been reported in the month of December, 2017:
- Bitcoin network consumes as much energy as Denmark or Ireland
- By July 2019, energy consumption will surpass USA consumption
- By February 2020, energy consumption will surpass current worldwide consumption
- Current energy consumption is 4 to 35 terrawatt – hours per year
- Google consumed 5.7 terrawatt – hours in 2015
- The “mining” of one bitcoin creates a 118 kilogram CO2 footprint, equal to driving a car 300 miles
Granted, for people in Houston, bitcoin sounds like a gift from Heaven. It would be like having $200/barrel oil. With such demand for electricity, a boom in drilling, processing, and engineering is bound to follow next. But, considering that the entire world (except the USA) agrees that mankind is burning up the earth with fossil fuels; the only conclusion to make is that bitcoin, in its current business model, is unsustainable.
A trader posted a video on YouTube saying that bitcoin is the greatest Ponzi scheme ever constructed. He states that a very small few own the vast majority of the bitcoins and that all the hype is simply an effort by these few to create a “pump and dump” scenario. Does this sound familiar? I think its true.