Investors diving into bitcoin – that is, hedge funds – are eager to highlight unpredictable price fluctuations as a sign of a new asset class in the works.
The cryptocurrency has traded between $ 5,000 and $ 40,000 over the past year, and arguing about its true value is like a dispute that doesn’t make much sense. Can its value reach six figures? Seven? Is it really worth nothing at all? The mystery only increases its appeal.
The speculative digital gold rush is understandable in this widespread ‘fear of missing out’ and easy money pandemic environment of day trading, but it is notable that the non-virtual side of buying bitcoin, meaning the energy consumption required to mine and maintain it, receives much less attention. Instead, cryptocurrencies are promoted with operations like Tesla, another of the main options of retail investors, regardless of the fact that buying bitcoin clearly makes an investment portfolio “less green”, as Gerald Moser of Barclays Private Bank put it last week.
The bitcoin algorithm demands increasing amounts of computational power to validate transactions. If it were a country, its estimated annualized carbon footprint would be comparable to New Zealand in approximately 37 million tons of carbon dioxide. A Bitcoin transaction generates the CO2 equivalent of 706,765 passes from a Visa credit card, according to the Digiconomist index, though without the convenience of plastic.
Energy estimates are not an exact science, but the trend has been clear. The annual consumption of bitcoin is estimated at about 77.8 terawatt hours, up from 9.6 terawatt hours in 2017, according to Digiconomist. Another index, compiled by the Cambridge Center for Alternative Finance, estimates a higher figure of around 108.4 terawatt hours. The economics of mining outpaced the average laptop long ago, and companies like the Marathon Patent Group now buy tens of thousands of specialty chips at a time. to feed their crypto farms.
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It would be one thing if this took place in, say, Sweden, which has a carbon tax of more than 100 euros per metric ton of CO2 (with exemptions), or within the carbon emissions trading system of the European Union, with prices around 34 euros per metric ton. But one document suggests that nearly half of the world’s bitcoin mining capacity is located in southwest China, where energy is cheap, less taxed and supplied by coal and hydroelectric plants. The Cambridge Center for Alternative Finance estimates that coal accounts for 38 percent of miners’ energy.
The ‘bitcoiners’ defense is that this is still ‘good’ overall – this is energy that would otherwise go to waste, and the share of renewables will grow. The Siberian city of Norilsk, for example, now houses the arctic’s first crypto farm. It is made from scrap metal, stays cool in subzero temperatures, and runs on cheap gas and hydroelectric power from the (traditional) mining company MMC Norilsk Nickel PJSC.
But these arguments sound insufficient. Cheap energy generally has other costs. Consider the recent power outages in Iran that were attributed to bitcoin. Even Ray Dillinger, part of the first digital cash movement to generate cryptocurrencies, recently claimed that bitcoin had wasted “huge resources of energy” on the taxpayer-subsidized portion of electricity with encouragement from exactly the kind of authoritarian governments against which claimed to fight.
A 2020 article by academics from Dublin City University, Trinity College Dublin, and the University of Southampton found that cryptocurrency trading appeared to be influencing prices in the large electricity and utility markets.
Not all cryptocurrencies need algorithms ‘starved’ for energy, but bitcoin won’t go back to its fundamental rules without a fight. That stiffness is promoted as a characteristic and not as a bug. Fidelity Digital Assets’ defense of bitcoin’s energy inefficiency, for example, is that you get bitcoin in return.
Doing so would also mean filing the usual false equivalences that bitcoiners draw with supposedly worse wastes of energy, like central governments. Unlike governments, the closest bitcoin is to wealth redistribution are the gifts sponsored by celebrities, which are at worst hoaxes and at best promotional corporate gimmicks offering $ 11 worth of cryptocurrency to people clearly desperate for much more.
Researchers have suggested that alternatives to a carbon tax could include more direct taxes on mining, albeit with a high likelihood of deterring such activities.
What would bitcoin really be worth if, to take care of the world that it set out to revolutionize, it changed its algorithm, or if miners were disconnected from cheap energy? That is a real pricing mystery.
* This column does not necessarily reflect the opinion of the editorial board, Bloomberg LP and its owners. Not from El Financiero.
* The author is an opinion columnist for Bloomberg and covers the European Union and France. He previously worked at Reuters and Forbes.
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