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.