Over the course of last week, bitcoin reached an
all-time high value of just under US$17,000, and currently hovers close to that
record high. The increase has generated many media articles and much commentary
from financial experts. Before we look at the reasons behind the increase,
let’s consider the infrastructure.
Society sorts its garbage for recycling and
attempts to save energy in many different ways: some speculators in bitcoin may
be shocked by the statistics on power consumption of the bitcoin network
published by Digiconomist.
To understand the power consumption issue it’s
important to have a conceptual overview of how bitcoin works. The system
comprises a blockchain, a ledger of records that contain all the transactions
and timestamps. A new block is created approximately every 10 minutes by
so-called miners. These are a distributed network calculating complex
algorithms to create blocks to extend the blockchain. Every miner attempts to
calculate the next block, the first to calculate a valid block distributes it
to the other miners.
The miners are paid for their services to the
network with additionally created bitcoins, diluting the value of existing
bitcoins. This is not an issue today, as the increasing value means the
dilution has no negative effect. Current revenues paid to Miners are $9.9bn and
their estimated mining costs are $1.58bn, making mining a lucrative business
and the reason people are keen to create miners.
Bitcoin’s estimated annual power consumption is
31.6 TW⋅h, that’s more power than Ireland uses on an annual
basis. The electricity consumed for a single transaction is 251 kW⋅h, which is sufficient to power 8.49 typical
households in the US for a day.
If you grab lunch from one of the many restaurants that accept
bitcoin, and lunch costs under $15, it will cost more to process the payment
than you paid for lunch. Using The average cost of a kW⋅h in
California, which according to Electric Choice, is $0.1816, so the cost of a single bitcoin
transaction would be approximately $45.
The energy costs are not the only charges in a
transaction: the bitcoin network itself levies a charge which, according to a
blog from Valve, the gaming provider behind the Steam network, has skyrocketed
from $0.20 in 2016 to $20 per transaction today. Based on this and the current
volatility in value Valve has decided to discontinue accepting payment using
bitcoin.
Logic indicates there is a serious flaw in this
business model when you look at the energy costs and the transaction fees.
However, as long as the price of bitcoin continues to rise then the flaw may be
acceptable to those spending their newly found wealth.
“If you grab lunch from one
of the many restaurants that accept bitcoin, and lunch costs under $15, it will
cost more to process the payment than you paid for lunch”
With the heightened interest around bitcoin, I have
been actively asking people I meet if they hold any of the digital currency.
Not surprisingly I have found a few… none of whom use the currency for daily
transactions, but are investors or speculators looking for capital gain. And
here lies the problem: the currency’s value appears to be inflated by the
demand from organizations and individuals looking to make a quick buck.
Sir John Cunliffe, the Deputy Governor of the Bank
of England, was quoted in a BBC article
as saying “investors should do their homework and think carefully”. He points
out that there is no government or central bank behind bitcoin, that it is not
an official currency, and that it should be viewed more as a commodity.
Speculation on the recent surge in value is varied:
Derek Thompson, a journalist for The Atlantic describes the recent rise as an ‘unsustainable
paroxysm’ and compares it to the 17th-century tulip bulb bubble. No one actually knows what is causing the
surge, other than demand, and an important factor in this could be that so far
16.5 million bitcoins have been issued, and since in its current format there
is a theoretical limit of 21 million, maybe people are just scared of missing
out?
One other important element to this is that bitcoin
is popular with criminals due to its lack of regulation and pseudo-anonymous
character. The UK Treasury recently stated that it believes
anti-money-laundering regulations should be updated to include bitcoin and
other virtual currencies. Detective Superintendent Nick Stevens from the
Serious and Organised Crime Command of the Metropolitan Police stated
that “Organised criminal groups have been early adopters of crypto-currencies
to evade traditional money laundering checks and statutory regulations”.
I am curious whether the speculators investing in
bitcoin have considered that as they push the price up, they are increasing the
value for criminals too?
What is apparent is that we are in unchartered
territory, a new era of digital currency. While there are problems, for example
with currency exchanges
being knocked offline by DDoS attacks, and potentially greed playing
its part in todays inflated valuation at present, there are likely to be real
uses for a digital currency in the future. When the bitcoin bubble inevitably
bursts, as all bubbles do, then it will only be a matter of time before another
currency appears and those behind, we hope, will have learned from the mistakes
of the first.
