The business of cryptocurrency turns out to be one of the more power-hungry forms of market speculation. An article in the April 2024 issue of Physics Today says that between 0.6% and 2.3% of the total electricity production in the U. S. goes to cryptocurrency mining farms. Is this a bad thing, and if so, what can be done about it?
A helpful review of the history of cryptocurrency is found in the surprisingly entertaining 2020 book Money: The True Story of a Made-Up Thing by National Public Radio reporter Jacob Goldstein, who points out that one of the main attractions of physical currency (paper bills and coins) is its anonymity. No one can tell where a $100 bill has been, and so that's why illegal transactions around the world favor briefcases full of large-denomination bills.
Goldstein describes how after the rise of the Internet, "techno-libertarians" tried to develop a digital equivalent of cash, free of the need for banks and creditors and debtors to keep track of who has transferred what amount of money. After several "cypherpunks" came up with pieces of what was needed, an anonymous person (or group of persons—no one knows exactly) calling himself Satoshi Nakamoto put it all together in a paper sent to other cypherpunks on Halloween, October 31, 2008.
Goldstein calls the entity which eventually became known as bitcoin "an anonymous(ish), money(ish) thing that buyers and sellers could exchange over the internet without any bank or tech company in the middle." After a very slow start, including the first-ever purchase paid for with bitcoin in 2010 (someone sent a tech nerd a pizza in exchange for 10,000 bitcoins, which were then worth about a third of a cent each), the criminal element discovered that bitcoin was ideal for international illegal transactions involving illicit drugs. Bitcoin started to rise in value, and as the code for bitcoin was openly published, imitators started to create their own versions.
But as with many network-based phenomena, the first to get in with a usable product tends to dominate, and today bitcoin is responsible for about half the total market in cryptocurrency. Lately it has been trading at around $72,000 per bitcoin, which would make that 2010 pizza worth $720 million at today's prices.
As Goldstein points out, most items used over the centuries for money have been either relatively difficult to obtain, or else governments have strictly enforced laws to prevent counterfeiting. Nakamoto chose to make bitcoin intrinsically hard to create by embodying digital puzzles that must be solved before new bitcoins can come into being. The custody of the master code has now been taken over by a 57-member Bitcoin Mining Council, which has adjusted the difficulty of the puzzles to keep up with advances in computer technology so that nobody has been able to flood the market with bitcoins, at least so far. And the code is set up so that no more than 21 million bitcoins will ever exist.
The price of all these restrictions is that to make a new bitcoin requires huge computer installations, such as the 700-MW-rated-consumption unit in Rockdale, a small community in Central Texas. In 2023 that much power produced almost 7,000 bitcoins. The mining analogy is apt, because as the Physics Today article points out, the estimated global energy consumed in cryptocurrency mining is 163 TWh (163 with 12 zeroes behind it), comparable to the estimated 132 TWh consumed worldwide in gold mining. Both enterprises require a great deal of work to produce a commodity whose price is unstable, and a sudden dip in price can render either a gold mine or a bitcoin mine useless. But risk-averse people generally don't fool with mining investments in the first place.
Cryptocurrency doesn't have to consume huge amounts of power. One alternative version, Ethereum, changed its algorithm in 2022 to something called "proof of stake," which exchanges puzzle-solving for putting up one's own stock of cryptocurrency as collateral in order to do the necessary digital work to maintain the blockchain process, which by itself is not that burdensome. Ethereum thus reduced its energy consumption by 99.9%.
As an attempt to replace physical cash, bitcoin and its allied cryptocurrency creatures are a failure. One of the prime features of the U. S. dollar is its relative stability in value as measured by what it will purchase. Even minor upticks of 5 or 10 percent annually, as we saw in the last few years, lead to fierce political blowback and can endanger whole administrations. So no one without a very good (and probably illegal) reason to do so is going to use a commodity for routine transactions like bitcoin, whose value bounces around like a kangaroo.
Instead, cryptocurrency has found its niche in the spectrum of other commodities traded primarily for speculative purposes. Most economists consider speculation a basically unproductive activity, because it tends to be a zero-sum game. If A makes a killing on the stock market, you'll surely find that B, C, and a lot of other letters lost at least that much, unless a lot of leveraging is going on, in which case we get into fractional-reserve banking theory, and that's a whole other column. A society can tolerate a certain amount of financial speculation, but at least gold mining leaves you with something physical that you can wear or plate electrical contacts with. When your bitcoin investment turns sour, it's gone into the bit void, never to return.
People do all sorts of things with their money, and as long as what they are doing with it is not intrinsically illegal, I don't see a large problem with bitcoin mining compared to all the other nasty things that we have to put up with these days. Other things being equal, I wish they'd redesign their algorithm to use less power, but it might rock the boat too much and leave every investor with little or nothing. But hey—it's only bits anyway.
Sources: Jacob Goldstein's Money: The True Story of a Made-Up Thing by Jacob Goldstein (New York: Hachette, 2020) is a treasury (so to speak) of little-known facts about money and a pretty good guide to how it works, including the Federal Reserve System. Physics Today carried the article "Code changes could drastically reduce bitcoin's enormous energy requirements" by David Kramer on pp. 26-29 of the April 2024 issue.
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