A barbarous relic

That’s what Keynes called the gold standard nearly a century ago, and he was right. I was reminded of this by the commentary on my latest piece on Bitcoin, published in the Conversation and also the ABC. I restated the points I made in my 2015 article on the massive and wasteful use of electricity in Bitcoin mining. The key points are that the cost of mining Bitcoins will inevitably rise until it is equal to the price for which Bitcoins can be sold, and that the great bulk of this cost is the electricity used to run specialised computer systems.

The responses included a great deal of huffing and puffing to the effect that I know nothing about cryptocurrency and shouldn’t comment, but showed no understanding of the central point, let alone any attempt to refute it. The scale of Bitcoin’s electricity use (which was hard to observe directly when I wrote in 2015 is now so massive as to be undeniable.

The other response, standard in cases like this, is whataboutery, that is, attempts to point out other wasteful uses of electricity compared to which Bitcoin is allegedly insignificant. I addressed one of these in the article, responding so someone who claimed that the electricity used by Bitcoin (serving at most a few million people) is “only” one-third of that of the rest of the global financial system.

Some other whatabouts led me to some interesting thoughts. One, which I plan to look at further is the use of electricity in electronic equipment on standby. The other, pushed with some vigour by commenters is gold. So, is gold worse than Bitcoin

The first point to observe is that the fans of gold as an alternative to government-backed fiat money overlap pretty closely, in political terms, with the fans of digital cryptocurrencies. Both are typified by a mixture of libertarianism, anti-politics and conspiratorial thinking. The main difference is that gold bugs tend to be older and less technologically sophisticated than digital crypto fans.

Coming to the numbers, Wikipedia suggests that gold mining uses about 25 kW·h of electricity per gram of gold produced. If I get the order of magnitude right, that corresponds to 25 GWh per tonne. Current annual production is about 3000 tonnes, so that gold mining uses about 75 TWh per year, compared to a widely cited estimate of 30Twh/year for Bitcoin. But the majority of gold is used for jewellery and industrial purposes, with only around 40 per cent being used for private investment (governments hold gold in reserves, but they have been net sellers for many years). Entirely coincidentally, 40 per cent of 75 is 30.

So, the barbarous relic and its high-tech replacement use about the same amount of electricity every year. Gold is probably more widely used as a pseudo-currency than Bitcoin. On the other hand, gold mining has a lot of destructive effects in addition to the electricity used.

So, at least arguably, gold and Bitcoin, considered as alternatives to the standard financial system, are about equally destructive in environmental terms.

29 thoughts on “A barbarous relic

  1. The embedded energy in the computers, and the loss of natural capital in their materials and production could also be a factor?

  2. This article is nice to see and I hope you explore this issue of what ‘value’ means a lot more John as it goes to the heart of our growth economics madness.

    It also touches on where progressive but still conventional economists like yourself differ somewhat from more ecological economics oriented people in regard to managing chunky commodities like gold. Thus future offerings would be very interesting.

    The gold production energy figure you quote is not interesting so much of itself but as to whether it will rise or fall in the future and how much total gold might be ‘mine’ given the right price/value. It also provides a good case study of the interplay between energy, environmental impact, resource related utilitarian value (gold for high tech conductors) v. non productive speculation (financial fiddling) comparable to that for bitcoins. Some other examples (at the risk of being boring as I’ve posted this stuff before):

    – oil, otherwise known as black gold, suffers from similar but different issues as do all fossil fuels as they can be turned into energy whose value does not seem to be declining leading to crazy projects like Qatar’s gas to diesel https://en.wikipedia.org/wiki/Pearl_GTL .
    – (even) renewable energy – apparently the Germans have a process where you can create black gold from air plus energy https://en.wikipedia.org/wiki/E-diesel – pretty close to alchemy until you remember the old Calcium Carbide trick teachers used to show us in high school.
    – in 2009 in the wake of the GFC, Goldman invested in increasingly scarce (phosphorus) and high energy containing (Aluminium bars) natural resource commodities as much for speculation and market control https://www.theguardian.com/business/2015/mar/19/london-metals-exchange-urged-to-act-swiftly-over-broken-aluminum-market .
    – more generally, the cheaper the energy the more we can turn base rock/cheaper minerals into gold or other refined natural resource – STEEN, B. & BORG, G. 2002. An estimation of the cost of sustainable production of metal concentrates from the earth’s crust. Ecological Economics, 42, 401-413.

    This latter illustrates how Herman Kahn was right conceptually when he said we would never run out of natural resources because the absolute quantities in the earth’s crust are enormous. But what Kahn missed (or more likely was economic in narrative truthwise) was the EROEI and the environmental impact implied. The Steen and Borg paper provides useful order of magnitude estimates of this in the form of:
    – the amount of physical rock to be mined,
    – the amount of energy involved: and
    – the wastes such as solvents in the form for example of HCl.

    Combining these numbers with – U.S. GEOLOGICAL SURVEY 2011. Mineral commodity summaries 2011. – which describes current use rates, and ppm estimates of bedrock element content (https://en.wikipedia.org/wiki/Abundance_of_elements_in_Earth%27s_crust )makes for interesting contemplation. For example to supply current Chromium demand you would need to roughly:
    – mine and crush and leach 1 trillion tonnes of rock (total gravel and sand for the whole of the USA is around ‘only’ 800 MT per year by comparison) per year
    – from 436 000 km2 per year
    – using 100 billion tonnes of NaCl to produce (and dispose of ?) 75 gigatonnes of HCl
    – and consume 60 TW of energy (about 3 time current global total primary energy demand)

    Now while these figures are necessary first cut they look reasonable and so indicative at an order of magnitude of this interplay between energy, decreasing resource quality, value, environmental impact, and economics which lies at the heart of the limits to growth problem and which we still arent tackling in our question for continuous growth and wealth.

    As to what is at stake the best metaphor I have still ever encountered is a classic SF short story for 1940 called ‘The Dwindling Sphere’ which can be found here
    http://doctord.dyndns.org/Stories/Hawkins.htm .

    Happy reading and Merry Xmas

  3. Re this subject, you might want to have a look at this just up on YouTube:

    Andreas Antonopoulos has written a good technical book on BitCoin, so while he obviously has a horse in the race, he knows a bit about the subject.

  4. Question: do you only need the vast amounts of computational energy to create the “coins” or do you also need it to process the transactions once the coins have been created?

  5. @Troy Prideaux
    Coins are created as a by product of confirming the transactions and adding to the block chain. i.e. they are the reward for updating the block chain. Not quite sure what happens when the finite number of bitcoins is reached down the track – I think there will be some sort of transaction fee for each transaction in the block.

  6. @Garry Claridge
    Yeah, but you can do the same thing for the gold mining equipment. Which is higher I couldn’t say but they’ll cancel each other out to a large extent.

    @Troy Prideaux
    My (vague) understanding is that processing the transactions and mining are the same thing – when you mine, you create a “block”, which is a lump of transactions, and then get the reward, and also whatever transaction fees are attached to those transactions. So as the system reward drops the transaction fees increase and gradually replace it. It’s the same process and the same waste of energy either way.

  7. Here is my attempt at explaining the issue with BitCoins.

    View at Medium.com

    Once upon a time, it was efficient to give money tokens a value for reasons of trade and security. Today our technology is such that money tokens need only be a measure of value. When we get rid of the notion of money tokens having value then our financial system becomes a low-cost operation. BitCoin and most cryptocurrencies can be useful but only if they are used to measure value. We have a perfectly good currency called Australian Dollars that is good at measuring value and we do not need crypto-currencies to make Australian dollars secure and private.

    The problem is much wider than economics and money. We create inefficient information systems when we make symbols that measure or give meaning to something take on the properties of the thing being measured. An example is identity where we allow identity tokens to take on the meaning of identity in contrast to just being a symbol for identity. It does lead humankind down some strange paths and most of the time it does not matter but with money, it does matter because it costs a lot effort to make money tokens have a value.

  8. JQ says: “So, at least arguably, gold and Bitcoin, considered as alternatives to the standard financial system, are about equally destructive in environmental terms.”

    This conclusion depends on how well the governments controlling the mining sites (for any commodity, including gold or bitcoins) ensure that costs paid for by the miners reflect the global economic impacts of that mining.

    I imagine gold production will be more than optimum where environmental and work safety issues are not well managed; and bitcoin production will be more than optimum where electricity is cheaper than it should be; other things being equal.

    “… about equally destructive” sums it up only if governments around the world are “about equally incompetent” at looking after the environment.

  9. @Troy Prideaux

    Yes – there’s a choice between a substantial lag, or paying quite a substantial amount in fees. This actually leads to a lot of “transactions” happening off the blockchain (and later added to it in an aggregate form). Which, yes, does mean that that to actually use Bitcoin in a vaguely practical way you have to abandon one of the biggest claimed advantages of it.

  10. @bjb

    The finite number of bitcoin is never reached: every time you’ve burned through half the remaining number of bitcoin, the rate that bitcoin are awarded falls by half.

  11. Sorry, that puzzle didn’t make the point I was trying to make, which is that the fly makes an infinite number of trips. I can’t find a version of it on-line that puts it the way I originally saw it framed.

  12. numerobis :
    The finite number of bitcoin is never reached: every time you’ve burned through half the remaining number of bitcoin, the rate that bitcoin are awarded falls by half.

    Wouldn’t that only be true if the processing rate is constant? What if (hypothetically) the rate at which you could process doubles each time you mine half the remaining coins?

  13. I’m guessing that John Q will come up dry on standby. This used to be a real issue, but for several years now consumer appliances like TVs have had good standby chips, which cost pennies. There may be holdouts – my modem seems to run suspiciously warm.

  14. @numerobis
    According to Andreas Antonopoulos’ “Mastering Bitcoin” (p 214) there is a finite number of bitcoins:

    “The maximum amount of newly created bitcoin a miner can add
    to a block decreases approximately every four years (or precisely every 210,000
    blocks). It started at 50 bitcoin per block in January of 2009 and halved to 25 bitcoin
    per block in November of 2012. It halved again to 12.5 bitcoin in July 2016. Based on
    this formula, bitcoin mining rewards decrease exponentially until approximately the
    year 2140, when all bitcoin (20.99999998 million) will have been issued. After 2140,
    no new bitcoin will be issued.”

  15. @Troy Prideaux “Wouldn’t there be a prolonged (and unacceptable) lag in processing transaction times?”

    Yep, apparently so. Reportedly the average transaction confirmation time is about an hour, but it can vary upwards if there are many transactions to be processed.

    More remarkably still, you pay a fee to get ahead in the transaction processing queue. According to this Wired article (bit.ly/2AECYtM) posted a couple of days ago:

    “Tuesday afternoon, Eastern time, it cost around $19 to have a transaction processed in 10 minutes. By one estimate, paying a smaller fee of $3 would leave your transaction taking an estimated 24 hours.”

    Reportedly transactions can simply expire unconfirmed if no fee is paid. I have also read suggestions that this problem either grows or maintains with scale.

    If so, Bitcoin’s not a transaction system’s bootlace. It does seem to be an excellent demonstration of how technological elegance can divert rational minds away from all other practical considerations.

    Something may yet come of the underlying ideas, especially the blockchain, or from a fork – Stellar, Ripple, Ethereum, Litecoin, [insert new virtual currency here] – that solves all these problems well.

    Note for readers: I’m thoroughly not an expert on this.

    Note for John: Thanks for confirming my worst suspicions on this stuff. It seems to be the 21st-century equivalent of Charles Mackay’s famous “company for carrying on an undertaking of great advantage, but nobody to know what it is”.

  16. @David Walker

    “company for carrying on an undertaking of great advantage, but nobody to know what it is”.

    I was quoting this just last night. I wonder if Mackay cites contemporary sources for it.

  17. Many people – and most especially libertarians – mistake the role of gold in monetary systems. All these systems are interconnected chains of tradable debt. Gold (or silver) set the benchmark for estimating the value of the rest, while never constituting more than a small fraction of the whole. It had this role as the most widely accepted marker of debt, least connected to any particular person or institution (coins arrive with mercenary soldiers, who don’t want to hang around and can’t read a letter of credit).

    This benchmark role has now been taken over by governments, as the largest, most credit-worthy institutions around, with the US setting the benchmark for the rest. So does the rise of bitcoin and other electronic currencies signal an underlying growing distrust of governments?

  18. @John Quiggin

    The company was one of a list of “bubble companies” declared illegal and abolished by the Lords Justices in Council (the equivalent of our Executive Council, I think) in 1720. The list is a wonderful insight into the industrial London of the time. Read the relevant chapter at http://www.econlib.org/library/Mackay/macEx2.html (Lord, I love the Web.) If you’ve read Kindleberger much of this will be familiar, but Mackay is actually a great writer – not only is the language remarkably modern, but fresh and vivid:

    “It seemed at that time as if the whole nation had turned stock-jobbers. Exchange Alley was every day blocked up by crowds, and Cornhill was impassable for the number of carriages. Every body came to purchase stock. “

  19. @bjb: The infinite sum of 1/2^i is finite (namely, 2). That’s exactly what’s happening here (and in Zeno’s paradox). The finite distance or number of bitcoin is covered in an infinite number of periods.

    In Zeno’s paradox, the length of each period falls by half so the total time it takes for the arrow to cover the distance is also finite even if it’s an infinite number of periods. Bitcoin sets the length of each period to a constant (about 4 years) so the total time is infinite.

    If the protocol is currently set up to stop in 2140 that implies the bitcoin community only wants to halve the award size about 32 times rather than an infinite number of times. It’s a long way away, plenty of time to change their mind.

    @Troy Prideaux: the processing rate in terms of time is roughly constant by design. The more miners, the more hashes you need to solve per block. (I haven’t fully understood the mechanism of how that rate-throttling happens in a distributed network.)

  20. Seems to me that the only question not perused about all crypto currencies is the ethical one: What is this unit of money being used for and by whom?
    I strongly suspect that the untraceable nature of crypto currencies, well as far as the cyber crime expertise of police forces goes, leads it to be used for criminal activities by drug lords and mafia types. Ethical investments are all the go but I doubt that any investment in bitcoins can be seen as ethical. Still like John Maynard Keynes and the gold standard I could be proven wrong by history.

  21. This article along with the subsequent reporting in the MSM is now one of the questions in the ABC weekly news quiz.

    Professor Quiggin has “made it”

  22. @Greg Pius
    I remember (few year ago now probably) when Christine Lagarde from the IMF was invited on Q&A for one of those frank discussions covering a broad range of topics. IIRC the final topic raised was that of bitcoins and the various financial innovations springing up that circumnavigated the established financial institutions (eg “greedy banks” etc) to which there was audible excitement from the audience who were obviously (post GFC fallout) ready for a change in the way money and financial transactions are handled. Lagarde could obviously sense the mood and enthusiasm in the room for change.
    Her response was quite striking as she acknowledged the excitement for fundamental change, but also went on to highlight many of the concerns involved – some of which you mention.


  23. This comment thread is a good one, which is a surprise. In the past as soon as anyone mentions “gold” and “money” in the same post the comments thread rapidly degenerates into vicious (and amazingly ignorant) arguments about fractional reserve banking.

    Whatever the other faults of Bitcoin it seems to have at least diverted the attention of “libertarians” away from that.

  24. numerobis, computer bits can’t be halved, therefore a satoshi can’t be halved. There’s no smaller unit, so the series can’t be asymptotic. Difficulty is calculated from the difference in timestamps of previous entries in the blockchain. Everyone knows the algorithm, so can calculate it themselves at any time.

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