February 7, 2021 #Cryptocurrency #Technology #Blockchain #Externalities
On a hike a few years ago, Michi and I started talking about Bitcoin. Admittedly, we were late to the party—the cryptocurrency was already hitting an early peak—but we figured that it might nevertheless make sense to invest a small sum.
Our logic went something like this: When something seems utterly passé in our bubble of people with startup jobs, the real hype might only just be getting started. We got some cryptocurrency, watched it bumble along for months, but it only ever went down. I ended up selling it early last year, at a loss.
Turns out we simply misjudged the timing: This winter, Bitcoin has climbed to an unprecedented high, and suddenly everyone around me is talking about it again.
“What the hell”, I thought to myself at the end of January, “I could throw another €150 at it and see where it goes.” As before, the process was innocuous enough: Fire up Coinbase, select a currency to buy, confirm credit card details, and voilà—my digital wallet populated with numbers ready to go up, down, or every which way.
Browsing Twitter just a day later, I came upon a nicely-written threat by Stephen Diehl about the environmental impact of Bitcoin, something I had been entirely unaware of:
The bitcoin network annually wastes 78 TWh (terrawatt hours) annually or the energy consumption of several million US households.
The mere act of acquiring some Bitcoin, it turns out, was quite costly: To constrain the supply of Bitcoin (not unlike that of any commodity of value), creating new Bitcoin requires computers to solve elaborate and power-hungry calculation exercises.1
An of-quoted tweet from 2018 explaining Bitcoin reads “imagine if keeping your car idling 24/7 produced solved Sudokus you could trade for heroin”. The analogy works so well because Bitcoin is effectively created by converting an ever-greater amount of electricity into a string of numbers. The genius is that it constrains supply, the trouble is that there are mind-bogglingly large amounts of electricity being spent.
The Digiconomist Bitcoin Energy Consumption Index tracks the “costs” of a transaction, which I find helpful to break down the issue into an understandable chunk. According to their calculations, a transaction produces the same amount of CO2 as a 54,260 hours of watching Youtube,2 all at current “mining” costs. Meanwhile, the yearly energy consumption of Bitcoin is somewhere between that of Bangladesh and Chile.3
To me, one of the most fascinating and dangerous aspects of the internet—and modern life in general—is that its high level of complexity has all sorts of externalities that we’re likely unaware of. I often joke about online calls to my neighbors likely being routed through deep-sea cables to the US and back, but the reality isn’t too far from it: Ease of use and convenience (and, especially, easy-to-use convenient products boosted by investor money) have become so prioritized that we’re willing to accept the inefficiencies powering them—or fail to notice the outcomes they’ll bring in their wake. Environmental concerns are usually the first to be tossed aside, a classic Tragedy of the Commons.
Just because something is possible doesn’t mean it’s a great idea—particularly if it has the potential of taking on its own dynamic, which Bitcoin certainly did. My conundrum is that I didn’t consider any of this before deciding to invest—and rush it all along.
This is something other people have described much better than I ever could: “The continuous block mining cycle incentivizes people all over the world to mine Bitcoin. As mining can provide a solid stream of revenue, people are very willing to run power-hungry machines to get a piece of it. Over the years this has caused the total energy consumption of the Bitcoin network to grow to epic proportions, as the price of the currency reached new highs.“↩︎
There are a number of such vivid comparisons on the web. My favorite comes from earth.org, which has calculated that “the annual electricity consumption of Bitcoin is greater than the total energy required to power all the tea kettles in the UK for 19 years”.↩︎
People have argued that the banking sector or paper money causes power consumption far beyond that, but I don’t see Bitcoin replacing the banking sector anytime soon, so for the time being, it adds to the problem.↩︎