Bitcoin and the Energy Illogic of Cryptocurrency

Bitcoin is in the news (for a change) owing to the inexplicable collapse this morning of the cryptocurrency’s price. This is a good opportunity to talk about the completely nonexistent logic of cryptocurrency mining around the environmental implications of the technology. And, oddly, how Mr. Market might actually come to the rescue, given the recent collapse!

Growth of the Bubble– and of the Blockchain

Cryptocurrencies like Bitcoin and Ethereum are popular because 1) they are, for the most part, a secure way to store and move capital, 2) they exist exclusively on the interweb and therefore can easily evade regulatory intervention, 3) much-beloved idiots like Elon Musk love manipulating their price, and, valuable in the context of the current bubblicious state of the market, 4) they can be easily traded using a number of financial intermediaries that operate basically like stock brokers. Great, right?

It’s not exactly news that many environmentalists, climate change activists, and philanthropists alike have raised eyebrows at the astounding carbon footprint of cryptocurrency mining and processing. Bitcoin, for example, uses over 700 kilowatt-hours to process each transaction, which is equivalent to nearly a month of electricity for the average US household. Why so much? Isn’t every Bitcoin transaction just an exchange, like cash, kola nuts, or what have you?

As a mutual Twitter follow graciously explained, the energy intensivity per transaction theoretically increases as the blockchain becomes larger. This, he continued, doesn’t mean that every transaction in the market translates to adding to the blockchain. The aforementioned financial intermediaries allow randos like you and I to buy and sell what is effectively a right to that asset, which is actually held by someone else– this is why I say “theoretically,” because not all transactions will involve amending the ledger of the blockchain.

Will Low Prices Disincentivize Mining and Usage?

The intermediary approach allows a lot more capital to easily access cryptocurrencies the same way it can access marketable securities, but it sort of defeats the purpose of crypto to begin with. The capital access issue, though, is key in facilitating the bubble we see currently popping (whether or not it’ll keep deflating is anyone’s guess). As the market inflates and concerns grow over the environmental impact of crypto mining, a few states are even discussing legislation to restrict mining.

But this may not even be necessary if the price of Bitcoin continues to collapse: If we look at the 700-kilowatt-hour figure, that works out to $94.50 per-transaction in Michigan retail rate pricing, or about $100 for an average US utility market. Electricity is cheaper in China, but it’s not free– Chinese residential customers mining bitcoin would still have to pay about $59.50 per transaction at this rate. In other words, Bitcoin remains astronomically expensive per transaction compared to cash (obviously), so the conclusion might be that Bitcoin is best used to move a lot of money in a way that can avoid regulatory scrutiny. Like, illegal, potentially (remember Silk Road?). Or just really large transactions.

Remember, um, using cash as a currency?

We are already increasingly moving toward zero-fee transactions using electronic cash. There’s a lot more electronic cash than physical cash because of how much business is done, say, online, with debit cards, and with newer platforms like Zelle, Cash App, PayPal, and Venmo (owned by PayPal), so companies that can drive down the transaction cost can cop more market share.

But given this growth, one wonders how much runway the crypto bros even have to talk about the innovative nature of using cryptocurrency as a payment method. Certainly, the carbon intensivity of the technology is as good a reason as any for why we shouldn’t be using it. But the volatility just makes it feel ever more unattractive to me as an investor. And as a consumer who is pretty fed up with the proliferation of cashless establishments (like, why the hell would you WANT to drive up your marginal cost per transaction by 3% every single time?), I’m not terribly inclined to switch to some hokey technology like cryptocurrency to do business. For now, I certainly view it as a bubble, and one that can’t deflate soon enough.

 

 

Nat M. Zorach

Nat M. Zorach, AICP, MBA, is a city planner and energy professional based in Detroit, where he writes about infrastructure, sustainability, tech, and more. A native of Lancaster, Pennsylvania, he attended Grinnell College in Iowa, the Kogod School of Business at American University, the POCACITO transatlantic program, the SISE program at the University of Illinois Chicago, and he is also a StartingBloc Social Innovation Fellow. He enjoys long walks through historic, disinvested Rust Belt neighborhoods at sunset. (Nat's views and opinions are his own and do not represent those of his employer).

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