The recent news that the leader of El Salvador has made bitcoin the national currency is yet more evidence the pandemic has forced human brains off the rails. That and the other news Bajans as well as Cubans and others in the Caribbean have now been tempted to jump into the crypto currency craze. Making us wonder if they have any faint conception of the downside risks of holding an unstable ersatz currency prized by all manner of criminals. (Bitcoin was created in 2009 as a novel way to pay for things without central bank or government oversight. It's the go to exchange medium for those inhabiting the 'dark web'.)
In truth, the very existence of a "coin" that- in order to be created - requires vast fossil fuel energy to be consumed (by using immensely powerful computers to solve ever more complex puzzles) shows we have gone through the looking glass as it were. It also confirms again there is no stopping hubristic citizens from walking off existential cliffs. Last year in a column in The Financial Times Brendan Greely went so far as to assert:
Both the code and the culture of bit-coin are designed, over the long term, to drive it out of circulation. This leaves hodlers stuck with a collective action problem. Sell, or change the code, and your asset drops in value, becoming more useful as money. Hodl, and keep the code, and your asset appreciates. Monetary culture is monetary policy. Diamond hands are Gresham hands.
Can this be true? Yes, it can and doubters are invited to do their own research. Oh, and to remind readers "Gresham's law" - to which he refers - is that bad money drives out good. Still, many bitcoin obsessives, hodlers and simple admirers, or ordinary investors (like too many Bajans) may not even care. 'Hell', they will argue, 'you take your risks going into a casino anytime and who knows when the next stock crash may be.' True, but casino gaming and stock investing is not quite the same as holding a stash of Benjamins in government -backed 3-month Treasury bills, whose yield just went up 0.46% (cf. 'Start Getting Fatter Gains On Your Cash' Jason Zweig, WSJ, April 23-24, p. B5).
But the less noticed side is the grievous fossil fuel energy consumption just to create one bitcoin. To refresh memories, bitcoin mining is currently consuming billions of gigawatts each year in its endless number-crunching. (Since each bitcoin created requires gigantic computing power in solving arcane puzzles or problems.) Specifically the amount of power consumed by the number-crunching is equal to about 5.1 gW a year or equal to all of the total consumed by Sweden.
Since my last posts in May last year, on Bitcoin's energy consumption and pollution aspects, a company in rural Montana has been working hard to make it less energy intensive. This follows the cryptocurrency industry being under increased pressure to rein in the environmental impacts - from its massive electricity consumption. To that end the Montana company (Marathon Digital Holdings) made the decision to pack up its computers (the actual "miners") and relocate them to a wind farm in Texas. In the words of company CEO Fred Thiel, quoted in a Denver Post piece Sunday:
"For us it came down to the fact we don't want to be operating on fossil fuels."
Fair enough. But is wind energy intense enough to enable the relocated computers to crack the draconian math problems needed to create multiple bitcoins? See e.g.
💰💰 What is BITCOIN, The maths behind bockchain and cryptocurrencies 🤑 - YouTube
Marathon Digital may aspire to less intensive use of fossil fuel energy but many economists (and environmentalists) have warned that as the digital currency grows in price - and with it more speculative frenzy- the process of mining will become increasingly energy-intensive and potentially unsustainable. The bitcoin investors at the end of it all may just have to admit this currency isn't worth it in terms of the damage inflicted on the planet.
The way bitcoin mining by computer works now, all the computers connected to the bitcoin network are in a race to solve complex mathematical calculations that basically verify the transactions. The winner in any given race earns newly minted bitcoins as a reward. Currently, when a machine solves the given puzzle, the owner gets 6.25 bitcoins, worth about $260,000 total. (The system is calibrated to release 6.25 bitcoins every ten minutes). The process now may not be perfect but it does achieve the primary goal of verifying and recording the successful solutions, transactions. For comparison, when invented it was possible to solve the bitcoin puzzles using a home computer. That is no longer the case and often supercomputers are needed and these consume a lot more energy. (The amount of energy used to solve the puzzles grows as more computers join the effort to solve them, and that translated into more difficult puzzles - which need even more energy to solve to get bitcoin.)
Marathon Digital currently has about 37,000 mining computers and hopes to have 199,000 online by early next year. Can wind power alone provide what's needed to get the job done? This is hard to believe given the Cambridge Bitcoin Electricity Consumption Index estimated about 109 terawatt hours were used by bitcoin mining last year. All of this energy went to what is called "proof of work" verification. Meanwhile, the current usage rate works out to about 143 terawatt hours a full year. (Cambridge's estimate doesn't include the energy consumed to generate other crypto currencies.)
Elon Musk, who recently bought out Twitter- with cockeyed perceptions of "free speech"- is at least using some of his own speech to call out the industry's exorbitant energy use to create bitcoin - and no longer taking it as payment. That's a good sign and one suggesting he believes FT's Brendan Greely's take. Then there are others like NY governor Kathy Hochul who want the government to step in with regulation. (Hochul is being pressured to declare a moratorium on the proof of work/ mining method, and to deny an air quality permit for a project at a retrofitted coal fired plant I'd posted on last year, near Seneca Lake. (Yet another activist judge entered with a ruling that the project would not impact the air or water. Well, one wonders exactly what chemical engineering degrees the guy has to justify that take.)
But I tend to stand with Yvonne Taylor, Vice president of Seneca Lake Guardians who recently declared to the local press: "Repowering or expanding coal and gas plants to make fake money in the middle of a climate crisis is literally insane."
Ann Hedges, of the Montana Environmental Information Center, is on the same page, saying: "The crypto currency industry needs to find a way to reduce its energy demand and needs to be regulated. That's all there is to it. This is unsustainable."
Which is really a no brainer given any given energy industry - from coal to oil and natural gas- is also regulated in this country. Given the bitcoin miners also impact the environment they also need regulation, even if it means a drop in the price of bitcoin. So is the solution to go to wind energy, like Marathon Digital has, or is it to change to proof of stake verification which is implicitly less demanding than proof of work?
In the case of the latter, digital currency transfers are assigned to computers as opposed to having them each compete with the others to solve recondite math puzzles. The upside is the groups that employ proof of stake methods are more likely to get the work and rewards in more bitcoin. The other major advantage is that far less electricity is consumed since there is no longer computer competition to solve bitcoin problems - each computer burning up megajoules of energy in number crunching. However, critics argue proof of stake blockchains are less secure.
On the other positive side, some companies retaining proof of work procedures acknowledge the problem of their excess energy use and are committed to achieving net zero emissions by 2030. That implies no greenhouse gases added to the atmosphere from bitcoin mining and to that end they have signed a Crypto Climate Accord modeled after the Paris Climate Agreement.
Will it work? We can't say for sure at this point, but Marathon Digital is one of those companies pinning its hopes for bitcoin creation on tapping into renewable excess energy from solar and wind farms in Texas. Indeed, two companies - Blockstream Mining and Block - have already broken ground in Texas on a small, off the grid operation using Tesla solar panels and batteries.
It will be interesting to see if this "green-based" operation can work, especially given Marathon Digital's goal of 199,000 miners online by next year. In the words of Adam Back, CEO of Blockstream:
"This is a step to proving our thesis that bitcoin mining can fund zero emission power infrastructure."
Maybe, but the proof is in the actual achievement and only time will tell.
See Also:
Cryptocurrency Firms Push Back Against Proposal to Police Treasury Markets
Excerpt:
A Securities and Exchange Commission proposal intended to make Treasury markets more resilient has sparked a backlash from cryptocurrency companies, which say it could increase legal risks for so-called decentralized finance, or DeFi, platforms.
The rule, proposed by the SEC in January, would expand the agency’s definition of an exchange to include a broader array of communication systems that enable prospective buyers and sellers of securities to find each other. Such entities would have to register with the SEC either as exchanges akin to the New York Stock Exchange, or as a category of broker-dealers called alternative trading systems, or ATSs, which perform exchange-like functions but face lighter regulations.
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