Bitcoin has few fans among western politicians, particularly those of the progressive left. In response to its increasing popularity, and increasing gravitas as a financial asset, this group has advanced the narrative that Bitcoin, because of Bitcoin mining, is bad for the environment and ought to be regulated, if not banned, to combat climate change.
Bitcoin requires so much computing activity that it eats up more energy than entire countries. One of the easiest and least disruptive things we can do to fight the #ClimateCrisis is to crack down on environmentally wasteful cryptocurrencies. pic.twitter.com/derGr1bjuq— Elizabeth Warren (@SenWarren) June 9, 2021
This contra-Bitcoin narrative comes at a time when progressives are also promoting plans to replace consumer banking via Federal Reserve bank accounts, considering the implementation of a central bank digital currency, and discussing changes to the mandates of the Federal Reserve in order to promote progressive causes. The existence of a viable, non-state money could threaten this agenda if Americans moved to Bitcoin in significant numbers. This also raises the question as to whether the attacks on Bitcoin’s energy use are really just about its purported climate effects.
Putting that question aside, progressives who claim Bitcoin is environmentally wasteful imply it is of little value relative to its energy usage. This is incorrect. From a humanitarian perspective alone, Bitcoin provides significant value to those in the developing world. It does so by alleviating problems associated with high inflation, weak property rights, and limited banking services.
As Nic Carter and Ross Stevens state in their report Bitcoin Net Zero, “Hyperinflation events generally result from the mismanagement of financial systems and the economy by central governments. Bitcoin offers the world an alternative – a sound monetary system outside the control of governments and central banks.”
For millions, maybe even billions of people living in developing countries with high inflation, weak property rights, and poor governance, Bitcoin is a means for them to protect their savings and grow their wealth. As Carter and Stevens put it, “People in these countries value Bitcoin’s institutional qualities, which compare favorably with their local settings.”
By ignoring the economic reality of so many in the third world, progressives fail to properly contextualize the energy costs of Bitcoin.
Bitcoin’s Humanitarian Value Proposal
The current discretionary central banking utilized by most western nations is in need of reform. That said, central banks in the developed world remain preferable to the disastrous financial systems that typify the third world.
In the United States, the President has not yet taken de facto control of the central bank and directly set interest rates, such as President Erdoğan is currently attempting to do in Turkey. And while the IRS would like to snoop on all individual banking transactions over $600, the Treasury has not frozen consumer bank accounts like in Argentina in 2002, nor have American banks imposed arbitrary withdrawal limits on personal accounts, a more recent occurrence in Lebanon.
Americans and others in developed countries currently live under a monetary and financial system characterized by financial repression. They face artificially low interest rates and a devaluing currency as the preferred means of coping with a high debt-to-GDP ratio. Despite this, they have not experienced the degree of capital control or hyperinflation which can destroy entire societies in a matter of months.
Hyperinflation, using the definition provided by Philip Cagan in Milton Friedman’s Studies in the Quantity Theory of Money, is a price-level increase of 50% or greater per month. In their Hyperinflation Table, Steve Hanke and Charles Bushnell find that, since World War I and the rise of central banks, 57 hyperinflationary events have occurred worldwide.
What does hyperinflation look and feel like to those experiencing it? Saifedean Ammous provides an overview of its societal effects in his book, The Bitcoin Standard:
Hyperinflation is a far more pernicious phenomenon than just the loss of a lot of economic value by a lot of people; it constitutes a complete breakdown of the structure of economic production of a society built up over centuries and millennia. With the collapse of money, it becomes impossible to trade, produce, or engage in anything other than scraping for the bare essentials of life…First go the luxury goods, but soon follow the basic essentials of survival, until humans are brought back to a barbaric state wherein they need to fend for themselves and struggle to secure the most basic needs of survival.
The bottom line is this: hyperinflation kills. And while citizens of developed nations have not yet experienced its effects in the central banking era, this has left progressive politicians in the west with the notion that their tightly regulated central banking system is superior to the alternatives. Because westerners have not experienced hyperinflation, they do not understand why those in the third world would be afraid of government money and currency overissuance. The widespread adoption of Bitcoin in countries that are most affected by high inflation suggests that it is preferred to the local currency, even with its characteristic price volatility.
In addition to providing protection against inflationary currency overissuance, Bitcoin also alleviates the related issues of weak individual property rights and limited banking services. With respect to both of these, Bitcoin allows individuals to access a safe store of value on a decentralized, global ledger. This allows them to build wealth in a “property” over which the individual is sovereign, because Bitcoin isn’t subject to government theft or confiscation, either physically or via currency debasement.
In addition to the store of value function, Bitcoin also allows individuals to lend peer-to-peer and to access credit. These basic functions of banking facilitate entrepreneurial activity and boost economic growth. We are already seeing this in Nigeria, where individuals exchanged more than $40 million worth of Bitcoin via peer-to-peer loans this past August alone. As Bitcoin becomes increasingly adopted throughout the third world, it will continue to allow individuals to lift themselves out of poverty by strengthening their property rights and giving them access to banking services.
Finally, Bitcoin lessens the costs associated with migration. Imagine fleeing a desperate, starving, and war-torn country, or from persecution based on your ethnicity, belief system, sexuality, or anything else. Before Bitcoin, your savings, if you were fortunate to have savings, would likely be tied up in physical commodities (livestock or other business inventory, real estate, gold), and would be extremely difficult to transport across physical space. And any money you had would be subject to confiscation at any number of points along your way.
With Bitcoin, you can safely store at least some of your wealth on something the size of a USB drive, or you can memorize your seed phrase, in effect keeping access to your wealth in your head. This is a powerful application. It lowers the opportunity cost of choosing freedom, and allows migrants to leave crisis situations with some of their savings intact.
In technical terms, Coindesk defines Bitcoin as a “digital currency that uses an open-source, peer-to-peer protocol to conduct, verify, and record transactions. It is a decentralized form of currency not backed by any government or financial institution, or pegged to the value of any hard commodity such as gold.” The supply of Bitcoin is capped at 21 million by an algorithm that cannot be changed. It can be used as a store of value, a global unit of account, for international and online settlement, and for the purpose of individual sovereignty. It can also be easily transported across time and space. It is transferred peer-to-peer, which means it does not require a third party such as the central bank or the state.
Bitcoin is considered by many to be a “sound money.” Sound money, defined by Brian Curran, “retains its value over time, functions as a medium of exchange, and is highly divisible to function at scale.” Historically, gold is the most common example of a sound money, but Bitcoin, because it is digital, improves upon gold in terms of portability.
Due to its decentralized nature, Bitcoin is nearly impossible to shut down. When Bitcoin mining was recently banned in China, it just popped up elsewhere. To successfully ban Bitcoin, global governments would need to act in a synchronized game of “whack-a-mole” to continuously eliminate the servers that host it. As Ralph Merkle describes Bitcoin in DAOs, Democracy and Governance,
The only way to shut it down is to kill every server that hosts it. Which is hard, because a lot of servers host it, in a lot of countries, and a lot of people want to use it.
What is the value of this technology, in terawatt hours (TWh)? This is an important question. Lacking any consideration for these issues, however, western progressives place little-to-no value on the technology, labeling it as no more than an “environmentally wasteful cryptocurrency.”
Tackling the Energy Critics
Mining Bitcoin is accomplished via a “proof of work” system. Miners, competing with each other, use large amounts of energy to crack a unique cryptographic problem so they can add blocks to the Bitcoin ledger. When successful, they are rewarded with Bitcoin.
Currently, Bitcoin mining represents 0.04 percent of global energy consumption and 0.1 percent of global carbon emissions. Nic Carter and and Ross Stevens contextualize this with respect to other modern innovations: “We estimate that Bitcoin consumed 62 TWh of electricity in 2020, which resulted in 33 million tonnes of carbon dioxide emissions, insignificant in global terms.”
They make this claim because they compare Bitcoin’s energy consumption to that of other modern innovations, such as U.S. domestic refrigeration (using 630 TWh) and U.S. domestic clothes dryers (using 108 TWh), compared to Bitcoin’s 62 TWh.
Considering Bitcoin mining consumes slightly more than half of the energy used by dryers in the United States, is it fair to say that the energy costs of an innovation that can provide so much to those in the third world are ”wasteful?”
In addition to what are low energy costs relative to value provided, Bitcoin mining is becoming increasingly energy efficient. Because Bitcoin can be mined from anywhere with enough energy to support the mining operation and is not “mission critical,” Bitcoin miners move to the cheapest and most energy efficient source, and can route wasted energy from energy grids to “even out” supply and demand. For example, most utilities, particularly renewables such as solar and wind, are overbuilt in terms of energy supply, since they must be able to meet fluctuating levels of demand.
Given this, there are many days when these utilities waste energy because supply is greater than demand. Bitcoin presents a solution to this problem because it is an interruptible, or controllable, load resource that can consume excess energy (profitably for the utility provider) when demand is low, but be interrupted/controlled when demand is high relative to supply.
In this manner, Bitcoin mining can help support the buildout of renewable energy sources without the use of fossil fuels to backstop periods of high demand.
We are seeing an example of this now in Texas, where Bitcoin miners use flared natural gas as a source of mining energy. Senator Ted Cruz took notice of this, speaking at the Texas Blockchain Summit:
Fifty percent of the natural gas in this country that is flared, is being flared in the Permian right now in West Texas. I think that is an enormous opportunity for bitcoin, because that’s right now energy that is just being wasted. It’s being wasted because there is no transmission equipment to get that natural gas where it could be used the way natural gas would ordinarily be employed; it’s just being burned.
As Friedrich Hayek presciently predicted 37 years ago:
I don’t believe we shall ever have a good money again before we take the thing out of the hands of government. That is, we can’t take it violently out of the hands of government. All we can do is by some sly roundabout way introduce something that they can’t stop.
Arguably Bitcoin is Hayek’s “sly roundabout way,” and many western politicians, particularly progressives, are becoming uneasy with Bitcoin as its adoption and use as a viable non-state money grows. Their unease likely stems from the threat this presents to much of their developed world fiscal and monetary agenda. But it has been publicly expressed as an attack on Bitcoin’s energy cost, one that has been devoid of any context by ignoring Bitcoin’s significant humanitarian value.
If progressives such as Elizabeth Warren extended their publicly held values of “fearless consumer advocacy” to also apply to those outside the western world, they would see the value of Bitcoin. And if they looked honestly at Bitcoin’s energy use relative to its humanitarian applications and ability to drive innovation in energy markets, perhaps they would reconsider their critique of it as nothing more than a “wasteful cryptocurrency.”