Home > Economics - General > Bitcoin now a much bigger waste of energy

Bitcoin now a much bigger waste of energy

December 2nd, 2017

I’m giving a talk tomorrow at a Colloquium organized by a group called Sort, on The Wasteful Economics in Resource Recovery, and I’ve been asked to talk a bit about blockchain technology. That reminded me that I needed to take another look at the issue, and what has changed since 2015 when I wrote that

at most of the market value of a Bitcoin reflects the electricity wasted in the calculations needed to “mine” it, with the obvious disastrous implications for the global climate.

and concluded that the sooner this collective delusion comes to an end, the better.

As far as I can determine, the only thing that has changed is that the Bitcoin bubble has got massively bigger and that the associated waste of energy is now much more widely recognised than when I first wrote about it.

Despite the huge increase in the market value of bitcoins, they seem further than ever from becoming an actual currency. Unsurprisingly, there’s no sign that governments are willing to accept bitcoins as legal tender. Nor is there any sign that they are displacing standard forms of money. On the contrary, bitcoins now seem to be seen as a financial asset, with no real suggestion that they will ever be a general medium of exchange.

As a check on this, here’s a list of firms that accept bitcoin as payment, which fits easily on to a single page. Sydney readers who would like to buy a beer with bitcoin are in luck, or were back in 2014 when the Old Fitzroy got a bit of coverage for saying it would accept bitcoins. There’s another pub listed in London, and that’s about it as far as drinks are concerned. After nearly a decade, Bitcoin acceptance remains the stuff of publicity stunts, not a serious commercial option.

At least by repute, bitcoins are used more extensively in covert transactions such as those involving drug trading, tax evasion and money laundering. But that’s scarcely a good reason to bet on them beintg around for a long while. If the scale of the problem gets large enough to cause real problems, governments will act to shut the whole system down or regulate it to the point where the compliance costs make the whole idea unattractive.

At any rate, the durability and magnitude of the Bitcoin phenomenon, running for nearly 10 years and with a putative value of nearly $US 100 billion, provides us with a very sharp test of the Efficient (financial) Markets Hypothesis. If Bitcoin eventually becomes a currency, the EMH and its supportsr will be vindicated, and I (along with quite a few other economists) will have a lot of egg on my face. If the bubble bursts, the roles will be reversed.

Finally, I should give a plug to Gridcoin. This is a project that aims to avoid the massive waste involved in Bitcoin by making calculations that are actually useful to science. This is a worthwhile idea. But with a current market capitalization of $21 million, it’s obviously got a long way to go.

There are also alternatives to the “proof of work” method of validating changes to the blockchain, such as “proof of importance”, which is analogous to Google’s page ranking systems. I’m still trying to find out more about these.

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  1. December 2nd, 2017 at 17:10 | #1

    Pr Q said:

    Despite the huge increase in the market value of bitcoins, they seem further than ever from becoming an actual currency. Unsurprisingly, there’s no sign that governments are willing to accept bitcoins as legal tender. Nor is there any sign that they are displacing standard forms of money. On the contrary, bitcoins now seem to be seen as a financial asset, with no real suggestion that they will ever be a medium of exchange.

    For sure Bitcoin is a bubble if you are only looking, like the proverbial drunk searching for his keys under a lamp post, at the at the “white” economy. But Bitcoins rise seems to be associated with the “black” economy, specifically contraband traders, tax-evaders and sanction-busters, for whom standard cost-benefit calculus does not apply. Bloomberg reports:

    North Korea appears to be stepping up efforts to secure bitcoin and other cryptocurrencies, which could be used to avoid trade restrictions including new sanctions approved by the United Nations Security Council.Hackers from Kim Jong Un’s regime are increasing their attacks on cryptocurrency exchanges in South Korea and [Japan], according to a new reportfrom security researcher FireEye Inc. ..The same factors that have driven their success — lack of state control and secretiveness — would make them useful fund raising and money laundering tools for a man threatening to use nuclear weapons against the U.S.

    There is also evidence that tax-evaders are benefitting from tax-free remuneration and the capital gain. Win-win. NYT reports:

    “The risk/reward ratio for a taxpayer in the virtual currency environment is extremely low, and the likelihood of underreporting is significant,” Mr. Utzke wrote. “The characteristics of virtual currencies could enable them to replace traditional abusive tax arrangements as the preferred method for tax evaders.”

    Naturally hedge-fund traders want a piece of this action. NYT reports:

    Now market watchers say a significant amount of the new money is coming from large institutional investors, many of them hedge funds looking to capitalize on the skyrocketing price.

    Many of the hedge funds were set up over the last year to invest exclusively in virtual currencies. The research firm Autonomous Next has said the number of such hedge funds has risen from around 30 to nearly 130 this year alone. More general-purpose hedge funds have also been buying up Bitcoin, like one run by Bill Miller, a well known mutual fund manager who spent most of his career with Legg Mason.

    It just looks like human beings are not well adapted to global financial markets. As Monty Brogan said, apropos similar developments in globalism:

    Let an earthquake crumble it, let the fires rage, let it burn to f***ing ash and then let the waters rise and submerge this whole rat-infested place.

  2. bjb
    December 2nd, 2017 at 17:17 | #2

    Bitcoin seems now largely the province of speculators. I can’t see how it can ever become a currency given the “proof of work” algorithm, and the diminishing incentive to mine as the maximum number of bitcoins is reached, and the problems already on block size.

    Blockchain though, as a concept has merit. I can see Ripple, for example, having wide usage.

    Bram Cohen, (Bittorrent creator) has an alternative (https://chia.network/) based on “proof of space” – he has co-authored a paper about the “proof of space” algorithm (which is largely indecipherable to me) explaining it.

  3. December 2nd, 2017 at 21:00 | #3

    bjb said:

    Bram Cohen, (Bittorrent creator) has an alternative (https://chia.network/) based on “proof of space”algorithm (which is largely indecipherable to me) explaining it.

    Hash mining currently accounts for 0.14% of global energy usage. I daresay that Bitcoin currently finances a much smaller fraction of the global payments system. If one converted all the world’s fiat currencies into Bitcoin-style cryptocurrencies using the “proof of work” algorithim it would presumably double global energy costs.

    In.sane.

    Vitalik Buterin (Etherium) has developed a “proof of stake” algorithim that is less energy costly than Bitcoin’s “proof of work”.

    I am not a computer scientist so not competent to judge between the two. But Etherium seem by and large a more pro-social company, in that their development of block chain integrates “smart contracts” into the Distributed Ledger Technology. As a deontological contractualist, I can only applaud.

  4. Ikonoclast
    December 3rd, 2017 at 06:41 | #4

    Bitcoin is an annoying bubble and an annoying waste of energy. Is it the biggest offender? War is a waste of energy. Having myriads of personal vehicles when mass transit would do the job is a waste of energy. I could go on.

    An economy (late stage capitalism) which encourages speculation with large rewards for said unproductive speculation is always going to throw up examples like Bitcoin. Treat the cause in the system rather than just focusing on its symptoms.

  5. Greg McKenzie
    December 3rd, 2017 at 07:50 | #5

    The dark web loves bitcoins and must be behind the speculative surges. Short selling would explain its somewhat bumpy ride at times of extreme speculative activity. But it is the massive hoarding of financial assets and actual currency that explains the Bitcoin bubble. The rich are hoarding money at ridiculously high levels. The hoarding of other financial assets is equally aberrant. Hoarding is the enemy of income equalisation. Until this is overcome, stagnation will continue in the global economy.

  6. Simon Fowler
    December 3rd, 2017 at 09:02 | #6

    I don’t see any future for things like bitcoin/etherium/etc until they’re explicitly designed as a mechanism for exchange rather than an attempt to create value from scratch – digital cash rather than digital currency. There’s just no way that fiat currency will go away unless our current political and socioeconomic systems go away, and in that scenario it’s hard to see the infrastructure that current cryptocurrencies rely on being stable enough to build an economic system around them.

    Blockchain algorithms may well have plenty of value in the area of contract laws and similar, but currency just doesn’t work the way that the cryptocurrency boosters seem to think it does . . .

  7. Ernestine Gross
    December 3rd, 2017 at 12:13 | #7

    I am surprised how many commercial enterprises do accept Bitcoin as a means of exchange already. Importantly, the list includes international payment facilitators, international real estate agency, international travel and a lot of the more recent IT companies. Furthermore, in the US a political party accepts contributions in this electronic currency.

    True, at present Bitcoins are not legal tender for the purpose of tax payments. However, I note, physical money in the form of notes and coins issued by the RBA is also not accepted as legal tender by the toll road companies in Sydney and not all Opal card machines at train stations accept notes and coins, preferring plastic.

    Bitcoins are a privately issued form of money, just like IOYs, except that the total supply is fixed, in contrast to IOYs and fiat money, denominated in various national currency units. So it is a competitor as a store of value for the fine arts and antique markets, including vintage cars.

    I can’t see how a widespread adoption of Bitcoins or its collapse of would affect the conclusions about the Efficient Market Hypothesis.

  8. Ronald
    December 3rd, 2017 at 12:30 | #8

    Blockchains, which is what bitcoins and other cryptocurrencies use, have the following disadvantages over a central register:

    Slower
    More expensive
    Less scalable
    Less user friendly
    Impossible to manage effectively due to their decentralized nature

    These problems are part of the nature of the beast and can’t be gotten rid of with improved programming.

    There one advantage is they are immune to censorship. This can be terribly useful if you don’t want Malcolm Turnbull reading your love letters or your detailed terrorism plans which are apparently often sent by email.

    There are no doubt some practical uses for blockchains where it is useful to prove that a collection of ones and zeros you have are different from an identical collection of ones and zeros. Of course, this ability can be used for evil. So in the future when some patents corners or some other ridiculous thing, every use of corners may need to be registered on a blockchain to prevent theft of imaginary property. This of course will have a chilling effect on the economy, so between that and bitcoin contributing to global warming…

    Some say the world will end in fire,
    Some say in ice.
    From what I’ve tasted of desire
    I hold with those who favor fire.
    But if it had to perish twice,
    I think I know enough of hate
    To say that for destruction ice
    Is also great
    And would suffice.

  9. Ronald
    December 3rd, 2017 at 12:31 | #9

    That was, of course, Fire and Ice by the appropriately named Robert Frost.

  10. John Quiggin
    December 3rd, 2017 at 17:30 | #10

    I’ve updated the post slightly in response to comments.

  11. Collin Street
    December 3rd, 2017 at 17:31 | #11

    Ernestine Gross :
    Bitcoins are a privately issued form of money, just like IOYs, except that the total supply is fixed, in contrast to IOYs and fiat money, denominated in various national currency units

    … IOUs aren’t negotiable, Ernestine. An IOU records the existence of a debt, it doesn’t contain a repayment obligation, so transferring an IOU to a third party doesn’t transfer a repayment obligation and the third party can’t claim payment of the debt in replacement of you.

    If you want it to be negotiable you have to make a promissory note, which includes repayment details like “on demand” or “on or after the seventeenth of march” or what-have-you.

  12. Ikonoclast
    December 3rd, 2017 at 19:36 | #12

    “If the scale of the problem gets large enough to cause real problems, governments will act to shut the whole system down or regulate it to the point where the compliance costs make the whole idea unattractive.” J.Q.

    Yep, just like they did with tax evasion and tax havens… not! 😉

  13. Ernestine Gross
    December 3rd, 2017 at 19:41 | #13

    @Collin Street

    True, IOYs (IOU) aren’t negotiable (sold to a third party) but they are a form of private money (means of payment for something). A ‘negotiation’ of one IOY would require another IOY. It is news to me that IOYs cannot contain a repayment obligation, whereby the repayment may be in currency units (including Bitcoins) or shares or some physical object.

    National currency units (fiat money) will persist as long as governments demand tax payments in this unit. But banks and other financial institutions might wonder how long they will exist in the advent of digicash payment and financial record systems and Bitcoin type financial securities.

  14. Tom Davies
    December 3rd, 2017 at 21:56 | #14

    John Cochrane has an interesting article on bitcoin: https://johnhcochrane.blogspot.com.au/2017/11/bitcoin-and-bubbles.html

    He basically agrees with John — using bitcoin to get your money out of China is rational, and explains the current value, but Bitcoin is a terrible long term investment.

    I opened a *demo* account to trade bitcoin CFDs 20 minutes ago, went short, and have already lost USD400 😛

  15. Ikonoclast
    December 4th, 2017 at 06:08 | #15

    “But banks and other financial institutions might wonder how long they will exist in the advent of digicash payment and financial record systems and Bitcoin type financial securities.” – E.G.

    You have hit the nail on the head there. There are aspects to digicash etc. which might break the banks’ method of doing business… unless they opt in. This is not to say I am a fan of digicash as private payment systems. It’s a new kind of privatised money. I am also not a fan of banks and toll road operators.

    Is there any reason a fiat currency cannot be block chain, I wonder? Is the energy cost really so much greater than the energy cost of current transactions in an electronic system, including current encryption, checks and cross-checks?

    Postcript: My son has made many tens of thousands of dollars speculating on Bitcoin and Ethereum and electronically trading it for arbitrage gains (not bit-mining). So, it is, or was, possible. He understands that it is pure speculation and has already converted enough for profits and diversified his portfolio into standard share investments. Being a socialist, this is technically a problem for me. At a personal level, I am pleased he is clearly going to be able to look after himself in the dog-eat-dog world of late stage capitalism. The system can stay unjust and irrational for longer than a generation can live, longer than several generations can live. Many have fought for a better world and just ruined their own lives. That’s still an optional fight for people in the first world… so far.

  16. Troy Prideaux
    December 4th, 2017 at 07:41 | #16

    @Tom Davies
    Thanks for the link Tom, very interesting. I didn’t realise there was a limit to bitcoin (21 million) mentioned in the comments below.

  17. Troy Prideaux
    December 4th, 2017 at 07:57 | #17

    I was really interested in one of the bottom comments from “Paul”:
    “Imagine if there were only at most 21 million USD in the world. what do you think the EUR/USD rate might be?”

  18. Ikonoclast
    December 4th, 2017 at 08:41 | #18

    @Tom Davies

    John Cochran gets it right about bitcoin. The following comment is of interest too;

    “Some of the convenience yield of cash is that it facilitates tax evasion, and allows for illegal voluntary transactions such as drugs and bribes. We can debate if that’s good or bad. Lots of economists want to ban cash (and bitcoin) to allow the government more leverage. I’m less enthusiastic about suddenly putting out of work 11 million undocumented immigrants and about half of small businesses.” – John Cochran.

    The implication is that cash mainly and bitcoin in a minor way support illegal voluntary transactions and in so doing help keep 11 million undocumented immigrants and about 50% of small businesses going (in the U.S. presumably). It’s an indictment of the current system that it needs systemic illegalities and systemic corruption to keep it going. It’s an indictment of the current system that can’t find work for 11 million undocumented immigrants and 50% of small businesses in legal and constructive ways.

    Below all the detail of symptomatic faults in our economy there is the basic set of systemic problems intrinsic to capitalism itself and which give rise to a great many of these outcomes.

    If r greater than g then inequality increases – Piketty. Indisputably correct and given entrenched the secular (long run) stagnation this is likely to be our new future sans fundamental changes to the system.

  19. Ernestine Gross
    December 4th, 2017 at 10:37 | #19

    @Tom Davies

    “I opened a *demo* account to trade bitcoin CFDs 20 minutes ago, went short, and have already lost USD400”

    You lost USD400 not because of Bitcoins per se but because you entered a derivative market (contract for difference). This loss could have happened on any financial security on which CFDs are written.

  20. Moz of Yarramulla
    December 4th, 2017 at 11:28 | #20

    Charles Stross posted earlier with a slightly different take on the deficiencies of bitcoin, but the same underlying point: insofar as it works, it works by burning massive amounts of electricity.

    http://www.antipope.org/charlie/blog-static/2017/11/unforseen-consequences-and-tha.html

    It’s up to 0.12% of global energy consumption and rising rapidly: the implication is that it has the potential to outstrip more useful and productive computational uses of energy (like, oh, kitten jpegs) and to rival other major power-hogging industries without providing anything we actually need.

  21. Moz of Yarramulla
    December 4th, 2017 at 11:42 | #21

    Ikonoclast :
    It’s an indictment of the current system that it needs systemic illegalities and systemic corruption to keep it going.

    Yes, but 🙂

    There are much greater financial leaks in our tax systems that would be far more lucrative to fix, and could be fixed with less administrative overhead. The ongoing enthusiasm for punishing the poor in order to fund the rich isn’t affected by the loss of cash, and quite probably would be enhanced by it.

    Sure, making Uber drivers register for GST and yadda yadda might raise a few net dollars, but the real benefit would be to take that information and say to Uber “we see you made a profit of $XXXXX last year, where’s our cut?”. Taking 30% off the top instead of 10% … one number is bigger than the other.

    (also , the actual limit on bitcoin is significantly lower because of the number of coins that aren’t/can’t be traded. IIRC Nakamoto has a million coins, but trading those would be fraught. Then there’s various estimates of lost coins which is complicated by the likelihood that some of those are simply being held in anticipation of sale (although really, if you have a few thousand coins you mined when they were 10c each, $10,000 each would seem like the ideal time to dump them).

  22. Troy Prideaux
    December 4th, 2017 at 12:15 | #22

    Moz of Yarramulla :
    Sure, making Uber drivers register for GST and yadda yadda might raise a few net dollars, but the real benefit would be to take that information and say to Uber “we see you made a profit of $XXXXX last year, where’s our cut?”. Taking 30% off the top instead of 10% … one number is bigger than the other.

    The problem with that (as is evidenced right now) is that many of these companies are claiming losses/costs against gross profits here in Australia – losses often attributed to costs claimed in tax havens where the real profits are made. The advantage with many consumption taxes is that you can’t claim losses against it like you can with company taxes or income tax (from my understanding).
    It would be nice if there was rule brought in that only allows a company to claim losses/costs if such was claimed from a tax jurisdiction with a tax rate equal or higher than the 30% company tax here in oz.

  23. Moz of Yarramulla
    December 4th, 2017 at 13:05 | #23

    Troy Prideaux :

    The problem with that (as is evidenced right now) is that many of these companies are claiming losses/costs against gross profits here in Australia – losses often attributed to costs claimed in tax havens where the real profits are made.

    Oh, absolutely. But the first step is working out exactly who gets each dollar spent so that you can then start arguing about real costs vs imaginary ones and so on. I think the US still has a tax system that says “our tax rate is X, you can claim up to that as tax paid but if there’s a shortfall… it’s ours” which is why a lot of nominally US companies are sitting on huge piles of “cash” that they don’t want to repatriate because of the US tax. That’s where the Republican “tax holiday” stuff comes in, they buy enough votes to get get a “bring it home for a nominal fee”. Allegedly the extra capital benefits the US economy just like those tax cuts trickling down the side of the overflowing toilet bowl of oligarch wealth benefit the poor who are paid to clean up the mess.

    Anyway, Australia should at the very least have a Tobin Tax, but then bulk it up with the reverse of the US system, where money leaving has to be shown to be taxed. Your suggestion seems similar and not incompatible.

  24. Tom Davies
    December 5th, 2017 at 06:26 | #24

    @Ikonoclast
    Is it really arbitrage, i.e. riskless? I’ve wondered if there’s any way to arbitrage one bitcoin fork against another, but I don’t understand it well enough…

  25. Ronald
    December 5th, 2017 at 16:21 | #25

    Tom, I find substituting the word tulip every time someone says bitcoin helps.

    https://en.wikipedia.org/wiki/Tulip_mania

  26. Nicholas
    December 12th, 2017 at 12:51 | #26

    Do we even need retail banks to operate the payments system? Why can’t every individual and every business have a fee-free account with the Reserve Bank of Australia, and make electronic payments to each other directly? What value is added by having retail banks act as intermediaries in this process?

  27. Ikonoclast
    December 12th, 2017 at 17:13 | #27

    @Tom Davies

    “Arbitrage” might be the wrong term. If so, that’s my mistake. His trading wasn’t riskless. As I understand it, his trading program automatically sought sellers’ offers and buyers’ offers. Where there was a difference and his program could make trades fast enough, he could make margins on it I guess. When another trading program became faster than his, it could out-trade him and cause him to make losses not gains. He got tired of the program-optimising “arms race” and packed it in after a time.

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