All of those people going to school, travelling to work, manufacturing and building things, enjoying their leisure time. And they use as much electricity as the world’s Bitcoin miners. Essentially processors processing transactions for a cryptocurrency that is not widely used. Or fulfilling a clearly defined purpose other than acting as an investment vehicle.
Bitcoin’s energy facts and figures
Digiconomist publish and update the Bitcoin Energy Consumption Matrix which estimates energy consumption in Bitcoin mining. It makes fascinating reading. It estimates nearly 30 US households could be powered for a day using the power used to process one bitcoin transaction. That transaction also produces 434 kg of CO2.
434 kg of CO2 is what a Boeing 737-400 jet will produce on a five hour flight. It’s clear what service a Boeing 737 is providing but what about Bitcoin?
The purpose of production
Any student of economics will tell you that a production function relates physical output of a production process to physical inputs. It is a mathematical function that relates the maximum amount of output that can be obtained from production inputs i.e. capital and labour.
The purpose of production is the creation of economic well-being. In other words, economic activities such as production aim directly or indirectly to satisfy human wants and needs. The degree to which the needs are satisfied is often accepted as a measure of economic well-being. That’s all fine and dandy when we’re making cars but what is the purpose of the mining and production of Bitcoin?
It is increasingly becoming more mainstream as a means of payment. Microsoft and Expedia accept it and the number of retailers willing to manage transactions using it is only going to increase. There is a cryptocurrency themed Japanese pop group Virtual Currency Girls – fans can only pay for tickets with virtual currency. Bjork accepts Bitcoin whilst Lily Allen famously turned down payment in this way to stream a concert on second life (the offer was in the early Bitcoin days and would now be worth millions).
However, it’s still not widely accepted as a regular day to day means of payment by a wide range of retailers. Many commentators will argue its value has more to do with its desirability as an investment vehicle.
But is there any intrinsic value in Bitcoin? If there’s none then is it simply being manufactured for no other purpose than supporting the Bitcoin investment market?
Alan Greenspan, former Chairman of the US Federal Reserve, isn’t sure “You have to really stretch your imagination to infer what the intrinsic value of Bitcoin is. I haven’t been able to do it. Maybe somebody else can.”
Let’s look at another commodity such as gold. Even though it is heavily traded and invested in it does have intrinsic value. It can be used for the manufacture of jewellery and electrical components. Even speculative bubbles generally have something with intrinsic value at the centre Tulips anyone?
It has little (or at least a difficult to define) intrinsic value and cannot be widely used. That doesn’t mean it won’t be. But for now no one would argue that its mainstream. If it’s not being widely used, how is it benefiting society? The answer is it probably isn’t. One of the major attractions with cryptocurrencies is a digital currency not controlled by a central bank or government. But if it can’t be used easily and widely then its benefit to society is greatly reduced.
This lack of societal benefit, production purpose (in the economic sense) and lack of intrinsic value makes Bitcoin a hard sell when trying to justify the amount of energy and associated CO2 production associated with its mining. Until that changes commentators will always argue that the astonishing amount of power being used to mine Bitcoin isn’t offering much in the way of payback other than to investors.