Crypto Chronicles: A Lot of Carbon for A Lot Less Clarity
13. Currency or asset? Before pumping emissions, can someone figure out? (10 min read)
Dear reader, this post is the second of a two-part series on Cryptocurrency and The Climate.
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Writing this piece was initially challenging - not because I didn’t have stuff to say: there is a lot of analysis on the gory details of energy misuse and electronic waste generated. These are valuable to share, much like my last post - which resonated with a lot more of you than I expected! But there was a problem.
Somehow, it all felt shallow. I had this nagging feeling you get when you are missing the bigger narrative. And last night, I realized why.
I have been talking - and so has much of the loud and vocal investment community - about Bitcoin as a speculative commodity that is going through its own hype and bust cycle every few months, with YouTubers, tech CEOs, media personalities, all having their time in the sun to make a quick buck. The idea is still classic: exploit the inefficiencies in the market, buy low and sell high.
But consider where I left off in my last post… Is this an effective use of humanity’s limited resources? Based on solely what I wrote last week, the low-effort, knee-jerk answer is “Hell no”. And that is an entirely reasonable reaction.
But if we are, as a society, are to truly take action on the crypto mining frenzy and its associated emissions that nullifies our EV revolution, we need to ask the basic question:
Do we NEED Bitcoin, or any cryptocurrency, and is it worth the energy investment?
I couldn’t get this out of my head, and “data” is not a satisfactory answer. After all, everything in the world consumes a lot of energy when you calculate it at scale1. But we have generally agreed that we do it because of some value it provides.
Welcome to this week’s Climatonomics. As a society, our turmoil, uncertainty and insanity with Bitcoin and cryptocurrency is because, in my humble opinion, we have not yet decided on an answer that a majority agrees on. In this post, I will show you my answer, but what the society converges on as the answer, is something to watch.
The fundamental motivations for Crypto and Bitcoin run deep, and in many ways, beyond the familiar greed for power and wealth.. bordering on almost.. altruism? Heck, its inventor is anonymous, and is likely dead2, leaving behind only a noble ideal for the future. While this might sound ridiculous given the current state of affairs, this core motivation still drives the industry forward. It's best we understand it, if we are to answer the question.
A 1 minute history of Bitcoin and Cryptocurrency
Bitcoin had an interesting path to existence, and none of it from tech entrepreneurs or industry. It all started with the Blockchain concept, back in 1992, which many consider a breakthrough in modern computer science. (Nerds: you will love the sheer elegance of the algorithm and the entire structure). Unheralded, it came to life on Oct 31, 2008, when Bitcoin was proposed by Satoshi Nakamoto as a currency based on the Blockchain.
This is an important distinction. Blockchain is the core technology that makes Bitcoin possible, amongst other things completely unrelated to finance. Blockchain doesn’t need Bitcoin or cryptocurrency to be useful, but vice versa is not true. There is too much jargon here to explain in a single post, so here is an easy to understand video:
How does a blockchain work (Video from Simply Explained)
Nakamoto’s core ideal was concise. In his words:
“What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”
So if you give me a $100 bill, I accept it because I can take it to a store and buy goods for that money. The store accepts it and deposits it in a bank. The bank accepts it because the issuing authority - the third party - is the US government, as it guarantees its value. And just like that, fiat currency was born3. Similar guarantees exist for most countries, in their own currency.
But if I give you Pokemon cards as payment for buying your bike, this would not work. Even though I know these Pokemon cards have an actual value among a niche community of collectors, it means nothing to you. You can’t buy anything with it, and neither will a bank take it. What makes it any different from the US Dollar? The lack of a powerful, centralized authority that guarantees it has universal value.
Here is the key difference:
The Pokemon card is an asset. Can be exchanged for cash, but has no inherent value and is up to negotiation with the buyer, i.e. subjective.
The US Dollar is a currency. Accepted everywhere, and everyone agrees on what value a $100 bill has. i.e. objective.
This trivial example is important to introduce the conundrum…
… Is Bitcoin an asset, or a currency?
Bitcoin indeed has an authority that verifies that it has value, and this is extremely transparent: the blockchain. The crucial difference… is it’s decentralized. In fact, it is the only decentralized payment system in the world.
Translation: No government, bank, president, dictator, or any small group of malicious humans can change or deny its inherent value, because there is no central control (unlike the US federal reserve, EU central Bank, People’s Bank of China, Reserve Bank of India and so on).
The possibilities are enormous, because in theory two individuals over the internet can exchange payment anonymously, and without interference. To many, it’s the holy grail of decentralized finance. Absolute freedom to the people. With the events of the last few years about identity theft and large-scale data harvesting raising privacy fears en masse, this thinking has found a lot of converts.
And that is how Bitcoin got its initial wave of evangelists in the early 2010s. The early adopters were more philosophers, believing in a higher cause than scrupulous investors looking to make a return. By owning Bitcoin, they were voting with their wallets for a future devoid of what they perceived as tyranny from governments and a hedge against dictatorships.
Let’s see how that experiment has worked out…
Claim #1: Bitcoin is a currency
Even if there is an authority guaranteeing its inherent value, for anything to be used as a currency, it must have two properties:
Everyone else outside of the authority must have a relatively close agreement on its value. $1 in California is also $1 in Florida, regardless of sociopolitical differences in opinion.
Transacting that currency must be easy, reliable and cheap.
There is excellent empirical analysis performed by professional economists on these aspects. Here is one such chart from Baur and Dimpfl (2021).
We know that businesses globally struggle when the USD slightly appreciates or depreciates, because it makes a vast difference when sizeable sums of cash are involved.
The data is clear as day: If you are using Bitcoin as currency, prepare to have wild fluctuations in value which are over five times higher than fiat currencies. Hell, running a lemonade stand profitably will be outside your control, much less a corporation, even if you charge the same amount of Bitcoin for the same quality of lemonade. What about oil and agriculture? These are extremely sensitive to a few cents in fiat currency volatility, so Bitcoin in any serious transaction would be a laughable alternative. If you are not convinced how extreme currency volatility can wreck an economy, study the South American debt crisis starting in the 1970s.
But people exchange Bitcoin for actual fiat cash like USD or EUR. This brings us to the next raging mess: Transaction costs.
Let’s take VISA as a comparison, which is a fiat currency transaction behemoth. It is orders of magnitude cheaper, more energy efficient and faster to perform a single cash transaction on its network than on the Bitcoin network.
Despite VISA being a profit-making corporation, and Bitcoin an open source decentralized network, currently it costs between $2-$59 for an average Bitcoin transaction4.
Again, if you are a person or business, fiat currency is an easy decision. Ok, so why exactly is Bitcoin still a thing?
Claim #2: Bitcoin is an asset
If decentralization of finance and exchanging value without a third party sounded vaguely… medieval to you, you are on the right track. Welcome to the 1700s, where Gold and silver - the original decentralized currency - were so popular that empires went to great lengths to secure it despite massive abuses of human rights that would make today’s dictators blush.
Enter Bitcoin in the digital era. If it’s useless as a currency, can it be…. an asset? We might be on to something here.
Analysis shows that though Bitcoin is extremely volatile both in short and long term, it may be valuable over extremely long time periods. We can compare it to physical gold, except that it is easier to store, send and receive. And much like Gold, which has little industrial use, its value is perceived and agreed upon by society. No one questions if Gold mining should continue. Why? we as a global society, have long since answered that question (unlike Bitcoin).
Interestingly, Bitcoin mining is far more polluting and will only increase, since its supply is limited. Only 21 million of them are mathematically possible, and it gets more energy intensive with time. Much like Gold. We exploited the easily extractable mines long ago.
And this is the direction we are likely heading towards. In fact, the US tax system already taxes crypto ownership as capital gains, much like any other asset. Customers have accounts on multiple crypto exchanges like Coinbase, Kraken etc. where they can trade Bitcoin like they do with traditional stocks: buy low, sell high and hope you hit the volatility jackpot.
The Crisis Within, and Outlook
Remember the promise Bitcoin made to its early adopters? Decentralized finance, and a global currency truly out of reach of bad state actors and institutions. A currency accessible to everyone regardless of their place of birth, race, religion or gender. Freely exchanged without borders and middlemen profiting off you.
I must admit, it is a beautiful dream. Not a bad thing to have in the world.
The reality today? Just another speculative asset for influential people, financiers and media personalities to pump and dump with minimal regulations. With its volatility preventing any use as a currency, it has become de facto digital gold. Even that comparison is charitable, because gold as a metal has standards and is backed by various governments as a guaranteed exchange (Examples: South African Krugerrands, Canadian Gold Maple Leafs, American Gold Eagles). It is universally recognized because we answered “the question” long ago.
The Bitcoin network, though decentralized, still relies on basic internet infrastructure to be viable, and we know the internet is increasingly being regulated by the same entities that can regulate finance. Much to the chagrin of the Bitcoin purists, exchanges like FTX, Coinbase etc. need to verify your government issued ID and issue you tax documents for any Bitcoin you hold or trade (and thus anonymity is dead).
As they say: If it walks and talks like a duck, it is a duck. So if Bitcoin acts less like a currency and more like an asset, then it must be regulated as such.
That means…. centralized control and legal consequences for deviations. There are increasing calls from the public and politicians, for a variety of reasons: taxation, prevention of fraud, consumer protection - much like any other fiat currency.
But Crypto purists and thought leaders refuse any calls for regulation, as it goes against its fundamental ethos. Here is a really eloquent 6-minute “I have a dream”-type speech by one such purist, to the US Senate. Worth listening.
At face value, as a nerd, I find this dream exciting and truly world changing. But this was 4 years ago, and I realize the dumpster fire of a crypto industry today only exists to use the dream as an excuse to avoid regulations and profit without oversight.
So.. THE question: does the world need Bitcoin?
My answer: In its current form, I cannot see what tangible value it provides to the people, especially with its ridiculous carbon footprint. Its early adopters aren’t happy, the people investing in it are anxious, it’s unusable as a currency, and its lack of regulation may well bring down the entire banking sector, like real estate did in 2007. A lot of headaches for very little gain.
For me, that is a hard pass. We should rather invest that energy in something else. The Bitcoin dream, though well-intentioned, is dead. Let’s move on.
What is your answer? I am curious to know - Fire away in the comments below!
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Airline Frequent flyer benefits (how many of you have flown for free on points accumulated?). Ski resorts that make energy-intensive artificial snow. Theme parks. Tourism. Heck, the entire entertainment industry. We don’t need movies and Netflix to live, do we? You see where I am going here. Not all of these are entirely useful, if I were to take on the “energy efficiency” perspective. Yet, there is an inherent value we derive from it, and the society has largely settled the debate on these energy investments.
This is the rabbit hole of crypto conspiracies, because reality is stranger than fiction.
The US has never defaulted on this guarantee so far, and maintains a strong economy, thereby increasing confidence in this commitment.
Completely agree.
As far as I'm concerned, Bitcoin is a Very Bad Idea on the scale of transporting used tyres around the world and building the Nordstream 2 pipeline.