Bitcoin is Based on the “Coal” Standard
The commonly accepted GOLD standard existed until the Nixon administration concluded that the US$ would no longer be based on the US gold reserves in the early seventies. The global monetary system as it stands today, is based on faith in economies. Exchange rates between different currencies are roughly based on the productivity of the country behind that currency. Although not easy to understand, the fluctuation in currencies could be modeled based on each country or region (in the case of the euro). Now we have Bitcoin where there is no sovereign entity behind the valuation. With no understanding of the valuation process, I would like to suggest that Bitcoin operates on the COAL standard.
There was a news item that stated Bitcoin was consuming electricity equivalent to the consumption of Argentina. The estimation of over 121 TWH (Terra Watt Hours) for Bitcoin mining has been steadily growing. A mid 2019 estimate was 62 TWH. For those who try to show this as insignificant, they suggest that its only .08% of the worlds power generation. The part that makes it significant is the WORLD generation capacity. When put in the context of Argentina (within months they will be ahead of Norway) we get a much better feel for how big this consumption really is. That places Bitcoin as the 29th largest consumer if it was ranked among countries. For reference, Canada’s total consumption is ~650 TWH annually.
The reason for suggesting Bitcoin is on the Coal standard is the conversion of power consumption into a carbon footprint. IF all the power came from coal fired plants, the carbon generated would be 133 million tons of carbon annually (equivalent to 32 Million vehicles on the road!). If most of the miners are in China, that would be true. In the US 62% of electricity generation is fossil fuel based, thus better than China, but not as good as Norway. There are Cryptophiles who suggest that most consumption comes from renewable sources but the measures are questionable as one cannot easily identify the actual source of your watt-hour of flowing electrons.
The obvious question, why does massive power consumption play a role in crypto-currencies? This may partly be explained by the blockchain technology behind Bitcoin or some of the other equivalents. The idea behind blockchain is maintaining a “Public Record” of every transaction of Bitcoin. If it is to remain open, there needs to be a method of protecting the record from be “edited”, thus the records need to be encrypted. To read this so-called public ledger, you need to employ decryption technology AND it must be very fast. Some may remember the shortage of GPU chips around 2015–16. This shortage was precipitated by new “miners” popping up as a miner gains a small fee for his decryption and interpretation of the transaction. The processing power for each miner is massive and the single largest cost for a Bitcoin miner is the electricity consumption.
All currencies in the world are subject to some kind of regulation, even if the regulation is the free market assessing good and poor monetary policy in any given country. Cryptocurrencies on the other hand are “democratized”, there is no single sovereign entity that can control it, “Yeah! People Power”. Cryptos talk about the “Openness” of transactions as being the major impediment to fraud. If that is true, why do hackers and Canadian Revenue Agency “collectors” demand payment in Bitcoin? I cannot claim in-depth knowledge of the technology or even how Bitcoin works but I am extremely skeptical of the long term viability of cryptocurrencies, at least in their current form. I will also accept an “OK boomer” response from any millennial reader.
The power consumption IS a real thing. The growth in power consumption is also a significant concern. In addition to the power requirement for the size of the current ledger, we know that a growing ledger requires more power. In addition, if the value continues to rise, more miners will be attracted to the industry, with a high cost of entry, unlike the old gold prospector with a small axe. Governments need to take note as all our transitions to greener energy sources may be eclipsed by Bitcoin’s unsatiable appetite for electric power. If Elon Musk is as “environmentally” conscious as he projects, he needs to divest Tesla’s estimated $1.5B Bitcoin war chest (estimate subject to change without notice!). The amount of carbon generated by that Bitcoin trading outstrips all the gains the Tesla models had over old time Hummers!