Based in Singapore, I have been involved and invested in Bitcoin and Cryptocurrencies since 2011. I launched and ran a Bitcoin point-of-sale payment service in 2013 and became one of the representatives of the space in the region, having spoken with various global media and at international conferences.

I focus on projects with real value proposition, proper incentive analysis, and with investors' returns in mind. For consulting or speaking requests, reach out via contact form. To subscribe to posts and updates, fill in the form below.

Bitcoin Is Not Killing Polar Bears

Bitcoin Is Not Killing Polar Bears

 Photo by  Marko Ahtisaari

Countless articles have already been published about the amount of resources "wasted" on Bitcoin mining. They calculate cost per transaction by dividing overall costs of mining operations by number of transactions. Many of course don't forget to mention allegedly huge burden on the environment. These claims are however based on wrong assumptions and completely miss the point of cryptocurrencies in the context of our monetary system. 

One problem with those claims is on the costs side, as different estimates vary by as much as an order of magnitude. Not many critics bother to use the most conservative figures or at least indicate the full range.

However the main misunderstanding is with regards to value of mining, the dynamics between mining costs and Bitcoin price and what it all says about our (mis)trust in central banking.

Purpose of mining

The role that mining (or Proof of Work) provides for Bitcoin and other crypto currencies is in competition it drives. In short, the algorithm distributed on many competing mining nodes makes sure, that any transaction confirmed by a consensus of those nodes is guaranteed to remain valid and unchanged forever because anyone who would want to change history would need to replicate the vast mining power, which went into confirming these transactions. And since issuance of new coins is merely a special transaction predetermined by the protocol, the same consensus is upholding the transparent inflation rules.

In other words, mining provides censorship resistance and guarantees, that no one can manipulate money supply (well, technically monetary base). To understand why users might appreciate such utility, one just needs to recall funds freeze and seizure in Greece and Cyprus, capital controls in China or hyperinflation in Venezuela or Zimbabwe. Even in the US, the law enforcement runs massive racketeering operation, which steals billions of people's money without ever charging them, let alone finding them guilty of any wrongdoing.

Immutability and scarcity are valuable

Next thing to understand is, that miners always follow the money. Their calculation is simple: if they think bitcoins they mine over a lifetime of their hardware will be more valuable than their investment in the hardware and cost of energy, they validate the procurement. They get their returns on investments by selling newly minted bitcoins to users who through the market exchange mechanism indicate how much value they have in the currency and the protocol's ability to protect them from all forms of theft.

In that sense, Bitcoin mining is no more wasteful than mining of gold for the sole purpose of exchange and store of value. Where Bitcoin deploys distributed protocol, gold has empirically earned a reputation of scarcity (and other properties) by curbing investments in mining operations through market demand. 

All of that is not to disregard the fact, that with the minuscule number of transactions on Bitcoin network (as compared to the overall economic activity), the resource costs per transaction are arguably huge. But it is foolish to dismiss or criticize Bitcoin based on that because the number of transactions and mining costs are unrelated. The mining difficulty adjusting algorithms, which are designed to incentivize competition look solely at the size of mining network, not transactions it processes. The resources go primarily to upholding rules of the network itself, but marginal costs of each transaction are virtually zero. Thus cryptocurrencies, which will successfully scale (which will be subject of a separate post hopefully soon) will drop costs per transaction dramatically over time while providing ever increasing security and trust of its network.

Central banking is wasteful 

Often the same people who find Bitcoin and perhaps gold mining wasteful ignore or don't understand waste caused by fiat money and its effect on the business cycle. One merely needs to visit sites of post-bubble periods to see how much material and energy has been wasted on projects, which should have been less ambitious or should have never existed. Those projects were started because central banks kept interest rates artificially low, rendering investments realistic when they really were not.

The white elephants reaching for the sky in Bangkok unfinished and abandoned 20 years after Asian crisis, the massive unoccupied housing projects in Spain, or new cars financed by cheap loans which replaced perfectly usable cars in the US - all of that is dwarfed by mother of all credit bubbles in China, which manifests itself with ghost megacities all around the country. And not to mention the senseless destruction of wars financed by fiat moneys.

Bitcoin mining compared to that, is a service to humanity and when it succeeds in replacing government printing press, it will save, rather than waste a huge amount of scarce resources. And fortunately for everyone, there's nothing those who hate the mining can do to stop it.

Photo by Marko Ahtisaari @ Flickr

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