In March last year the cryptocurrency Bitcoin stood at $5000. A year later it had risen to $60,000. At the time of writing, it has increased a further 5% to $63,000. This extraordinary rise has been fuelled by increasing support from major corporations. Online payments giant PayPal said it would allow account holders to use cryptocurrency. Wall Street banker BNY Mellon, investment fund giant BlackRock and one of the two major credit card companies, MasterCard have all given their support. Even companies like JP Morgan and Goldman Sachs are starting to treat it as a separate asset class. U.S. Treasury Secretary Janet Yellen, President Joe Biden’s top economic adviser, described Bitcoin as ‘an extremely inefficient way to conduct transactions. The amount of energy consumed in processing those transactions is staggering.’ Bill Gates just last month said ‘Bitcoin uses more electricity per transaction than any other method.’ At that time Bitcoin’s estimated energy consumption had reached its highest ever rate of 130 terawatt hours (TWh) annualised. The cryptocurrency is ‘mined’ by high-powered computers to continuously solve computational puzzles. The electricity generated to mine and process cryptocurrency is equivalent to that emitted by whole countries such as New Zealand and Argentina. It even uses more than all the tech giants combined, that is Netflix, Apple, Facebook, Microsoft and Google, all of which require vast amounts of energy to run their services.
Bitcoin was invented in 2009 by a mysterious computer coder who has never been found or identified themselves. Some people believe that it is actually a complex scam cooked up by some fraudsters with the aim of parting users from their hard-earned money. While there is no proof of this, given that nobody does know who founded it, it is difficult to rule it out completely. Probably the most famous investor in the world, Warren Buffett the CEO of Berkshire Hathaway, views all cryptocurrencies (Bitcoin included) as worthless. But since it is being used as a cryptocurrency that is not true either.
Government currencies also have no innate value, but they work on the basis that governments are behind them. The US dollar is undoubtedly backed by debt as it is the leading reserve currency in the world. But as Bitcoin gains in popularity its value is its utility. Metcalfe’s law states that the value of a network is proportional to the square of the number of connected users. And with the number of Bitcoin wallets growing exponentially, Bitcoin’s utility is therefore growing even faster.
In 2018, two Yale University economists published a report titled ‘Risks and Returns of Cryptocurrency’, in which they examined the risk of Bitcoin collapsing to zero in the span of a day. By using Bitcoin historic returns to calculate its risk-neutral disaster probability, the authors found that the likelihood of an unspecified disaster crashing Bitcoin to zero ranged from between 0% to 1.3%, and was around 0.4% at the time of publication. At the same time the Euro had a 0.009% chance of the same, thus the chance of Bitcoin collapsing to zero in a day was 44 times greater than that of the Euro.
It is clear that the range of views about utility or the value of Bitcoin is enormous. To me this is not the point. The point is that the world cannot afford Bitcoin. Its carbon footprint is simply too big and will only get bigger as more people jump on the bandwagon. At a time when major countries are planning to send representatives to a conference in Glasgow in November this year to review their commitments to reducing their carbon emissions to net zero by dates not that far in the future, it is simply absurd to leave Bitcoin to work exactly in the opposite direction. Most major polluting industries are making serious efforts to reduce their carbon footprint. Even Google, the largest energy consumer of the tech giants which used 10 TWh in 2019, is nevertheless seeking to get to a point where that all comes from renewable sources.
Bitcoin as of March 13 this year was using 130.9 TWh (annualised). The U.K.’s total electric consumption is slightly more than 300 TWh a year. Thus, Bitcoin is heading towards the point where it will use roughly half of the electricity consumption of a major country like the UK. Indeed, the assessment of Bitcoin’s energy consumption through mining covers a range of possibilities. Estimates of its lower bounds assume that all of its miners use more efficient sources of energy. Its upper bounds assumes that all of its miners use the least efficient form of energy while central estimates, the one published, assumes there is a mixture of both. The upper bound estimate is already higher than that of even the UK.
I have seen one report that seemed to claim that 74% of Bitcoin’s energy consumption did in fact come from renewable sources. I think that this is extremely unlikely. First of all, the largest miner of Bitcoin is China. While China is indeed developing renewable sources of energy it also continues to build many coal powered power stations and at this stage these are likely to be cheaper to use. The miners are most likely to go for the cheapest source of energy. Another country that is producing large volumes of Bitcoin is Venezuela where, of course, the government-backed currency has collapsed and so it is understandable that people are seeking an alternative. That is indeed one of the arguments that many people use in favour of Bitcoin. They say that governments cannot be trusted, and they need an independent currency particularly to run trade on the Internet. This is just another example of how the Internet has become ungovernable. Another reason Bitcoin supporters like to use is that Bitcoin can be used to buy things anonymously. This simply means that it is widely used by terrorists and criminals to traffic drugs and guns. This calls for tighter regulation. Governments cannot simply stand by and let this disaster continue out of control. I think that if we are going to reduce our carbon emissions substantially, almost certainly we are going to have to use a carbon tax as one of the methods to change behaviour. This would be my solution to Bitcoin. Its miners need to pay a considerable tax for the use of such a dangerous technology.