I came across a collection of articles telling me that the end is nigh for cryptocurrency, and that bitcoin had lost 30% of its value in the last month. I look here at the suggestion that all cryptocurrency must be bad.
I replaced the tempting Guardian graphic [1] with one from CoinGecko, so you can see how Bitcoin has developed in price since 2018, though it began in 2014. I looked at a few other cryptocurrencies and they generally move together. Commentators point to Elon Musk (making comment in turn), particularly by removing the option to pay for his cars in bitcoin, and to the Chinese, who have acted to prevent their nationals from acting in crypto. But the latest blow came from China, where the financial industry regulators said banks and payment firms were not allowed to offer clients any services involving cryptocurrencies, and warned of the risks linked to trading crypto assets. While the country already has crypto exchanges and initial coin offerings, consumers are still allowed to own crypto assets. I find this Chinese position odd, since the PRC is about to launch its own cryptocurrency closely tied to the Renminbi (RMB, yuan, the national currency). The fourth link [4] explains some of this, calling the product DC/EP. I think it is quite likely that the Chinese position is to force/encourage nationals to hold their crypto assets in the yuan bitcoin form.
We might well expect that traditional banking in general would work to counter the growth of crypto on the principle that this is not the business that they are in, that they are in gold-backed currency (fiat currency in every sense) and that therefore they will do anything to prevent the growth of cryptocurrency. This is a matter of trust and one of protecting one's own interests. I think it is in the interests of every individual for such as bitcoin to exist, so I do not think that, in the long run, cryptocurrency is a fad or a bubble. Look at South sea and tulip as previous bubbles. And do look at [4], which suggests that bitcoin and tulip are similar. Properly, virtual currencies fit the definition of commodities (see the Commodity Futures Trading Commission).
Hawala is the system of transferring money and property in a parallel arrangement, avoiding the traditional banking system. Suppose that from the country ‘Alpha’ a person named ‘A’ wants to send money to another person ‘B’ located in country ‘Beta’. Unlike hawala, which generally has no public (or even written) record of transactions, the details of each transaction report of Bitcoins are available in a secured ledger called ‘blockchain’. From this open source, anybody can tell how many Bitcoins are traded at some specified public key. But nobody knows who the owner of those Bitcoins is, or who is sending and receiving virtual money, with their location also being hidden.
India [the author is there] is very much unimpressed with such a decentralised digital money as it carries great risk of deception, fraud and terrorist financing. Ahead of the government’s plans to introduce a law to ban private cryptocurrencies, the RBI has expressed concern that cryptocurrencies would impact financial stability in the economy. Cryptocurrencies are already banned in some countries. The bubble of the new tulip-mania is, however, becoming bigger, and a part of the private sector is embracing it. Tesla for example, said it would start accepting Bitcoin as a payment method for its products. “It’s a totally speculative play on a bubble that is self-fulfilling,” Nouriel Roubini thinks. Its similarity to hawala, its very nature of anonymity and lack of control, however, might be the major reasons for officialdom’s scepticism towards it in many parts of the post-9/11 world. Maybe rightly so.
I don't understand how it is that India is very much unimpressed when it is Indians that practise hawala. Surely this is a matter of trust. To exercise hawala in India or in China you find an agent who connects the two parties that wish to exchange value. For example, If I have yuan in China and sterling in Britain I might usefully trade with someone Chinese in Britain (Wang, say) who has the same position and where both of us want value moved in the same direction, to or from home. So I, in China, move some yuan to Wang's Chinese account and she, in Britain, moves sterling to my account. If it works—and obviously trust is the issue—then all sorts of hassles are dodged. It seems to me that bitcoin is more trustworthy as a mechanism for this sort of transaction.
The big complaint is that this class of transaction is exactly what occurs with money laundering, with funding of terrorism and is just the sort of thing that a nation state wants to prevent, not least because they're missing their cut (tax, it's called) of all transactions. But is that not very similar to the issue that pertains with the huge international corporations such as Amazon, that money is transferred invisibly so that corporation tax is minimised? That suggests in turn that there is a general issue that needs to be clarified. One solution here is to change approach entirely and rethink the issue of charging tax on transactions. Another is to do the opposite and demand that tax be paid on all transactions, specifically including every trade in crypto. Which also then includes every transaction in the financial markets. That might be a good thing, but it also makes a load of very rich (and powerful) people become targets. So either we all pay all of the time or none of us pay all of the time. I do not see any reason why there should be an intermediate position.
Source [5] says: The causes for the selloff [of bitcoin specifically but other crypto sales have followed suit] are myriad. The first shot across the bow came last week when Tesla CEO Elon Musk declared that his company would no longer be accepting bitcoin for car purchases. The change happened less than two months after he said that Tesla would accept bitcoin, and the about-face came as Musk said he is concerned about the environmental damages being wrought by the energy-intensive cryptocurrency. (His thinking on the matter may have been influenced by an Ars article about a private equity firm that revived a zombie power plant just to mine bitcoin.) [...] The next jolt to crypto markets came this past Sunday when Musk suggested that Tesla either had sold or would be selling its bitcoin holdings, which amounted to $1.5 billion when they were disclosed back in early February. Musk's market-moving tweet was a cryptic “Indeed” posted in reply to @CryptoWhale, who had said, “Bitcoiners are going to slap themselves next quarter when they find out Tesla dumped the rest of their #Bitcoin holdings.” That single word sent bitcoin tumbling.
China has tried to tamp down speculation on cryptocurrencies before. In 2017, the country shuttered local cryptocurrency exchanges, and in 2019, the Chinese central bank said it would ban domestic and foreign exchanges and websites with initial coin offerings. At the time, some 90 percent of all transactions occurred in China. Earlier this year, the regional government in China’s Inner Mongolia province announced a ban on cryptocurrency mining by the end of April. Before the ban, 8 percent of all bitcoin mining was estimated to occur in the province, which has cheap power due to massive amounts of coal production.
Despite China’s frosty stance toward bitcoin, around three-quarters of all [bitcoin] mining occurs in China. The coin’s massive electricity use—estimated to be about as much as the entire country of Egypt—is not helping China meet its goals for reducing greenhouse gases. A recent study said that without intervention, bitcoin mining in the country would contribute 130.5 million tonnes of carbon dioxide at its expected peak in 2024. Cryptocurrencies have come under increasing scrutiny by regulators and law enforcement in the US, too. In the wake of the Colonial Pipeline malware attack, news leaked that crypto-exchange Binance was under investigation by the Department of Justice, the Internal Revenue Service, and the Commodity Futures Trading Commission.
The crypto bubble began inflating in early 2020 and took off late last year as the market for derivatives took hold and institutional investors began to devise bitcoin strategies. Large firms like Fidelity Investments began offering custodial services to select clients. At the peak, around $2.5 trillion were invested in cryptocurrencies of various flavours, with a significant portion in bitcoin.
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One of the current criticisms of cryptocurrency is that it is high in environmental impact and carbon footprint. One has to wonder how this can be, since cryptocurrency is only an idea held in a computer. In the case of bitcoin, the hidden cost comes from all the computation, not least in data mining. ¹
Taking selectively from [7] :-
Bitcoin alone accounts for 0.40% of the world’s total electricity consumption, and 0.34% of the world’s total electricity production [7]. The annual carbon footprint of Bitcoin, 34.76 megatonnes of CO2, is comparable to that of Denmark. A single Bitcoin transaction consumes more energy than 100 000 Visa transactions. The complex computing systems used by miners mean that they spend 60-80% of their revenue on electricity. A report published by Nature Climate Change made an alarming statement that Bitcoin could alone produce enough CO2 emissions to push global warming above 2°C in less than three decades. Of course, such dire reporting caused pledges to find digital green solutions.
Source [8] repeats much of this content. It explains more about the mining aspect, mostly done, it appears, in China. I found a bitcoin mining choropleth map, but this table (log scale, China ten times the US) may help more, and you may need to visit that link to understand what this tells us. --->
I don't think this is a justifiable complaint about cryptocurrency, but about the more general use of computing. Blaming just one aspect of the use of computers for its massive use of resource (mined elements, energy consumed, etc) is not sensible. Looking for information and comment on that more general statement I found useless information like [9 says] that the average PC (whatever that might be) uses 746kW (so precise) per year, while a 'fridge uses 500kW. ² says this is not true. Whole-cycle costs for all sorts of equipment we use needs evaluation and costing; bring on the environmental tax spread exactly across all products.
My conclusion is that statements that cryptocurrency is bad for the climate because it uses a lot of power are silly. The use of computers is a bigger issue; the use of technological equipment and the power they require to operate at all is bigger still. Crypto is but one very small part of a much bigger issue, to do with how we use resources. Effort is required into very much better recycling of scarce materials and in the same way we need to put a lot of effort into both reducing the energy demands ³ we make and providing that from renewable sources. Indeed it may be that the idea that (crypto)mining is bad for the world is one being pushed by the very people who want crypto (the idea much bigger than just mining) to fail; they want it to be a bubble. No doubt such people only like anything 'new' when it is somehow already in their possession. Dog-in-the-manger, to some extent, then.
I completely fail to understand why cryptocurrency has value, even after reading [13]. Once it has value—which I think equates to acceptance—I will be happy to trade in it as a monetary unit. I fail also to understand how it is that the value of cryptocurrency in general increases in value when there are undistributed units available (effectively coins not yet minted). But I don't understand non-fungible tokens⁴ either.
Those bothered by the volatility of cryptocurrency in general might be relieved to come across the concept of a stablecoin. These attach their value to something external such as gold or the US dollar, thus achieving stability. Users of a currency want it to be stable in the sense that they can rely on it holding value across time; they don't much care how that is achieved. That would move the cryptocurrency market from being a traded commodity to something more like gilt trades and this much closer to what one wants from a currency, reliably tradable value.
DJS 20210520
top pic from marketwatch.com
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1 https://www.theguardian.com/technology/2021/apr/18/bitcoin-records-biggest-one-day-drop-for-months
3 https://www.theguardian.com/technology/2021/may/19/bitcoin-falls-30-after-china-crackdown
4 https://www.investopedia.com/understanding-chinas-digital-yuan-5090699
6 https://www.investopedia.com/tech/how-does-bitcoin-mining-work/
7 https://earth.org/are-cryptocurrencies-harming-the-environment/
9 https://sciencing.com/how-do-computers-pollute-the-environment-13660586.html
10 https://www.forbes.com/sites/rogerhuang/2021/02/16/arguments-that-bitcoin-harms-the-environment-through-wasteful-emissions-miss-the-mark/?sh=1eaf169720a7 makes some points in counter argument. I thought it weak.
12 https://www.bbc.co.uk/news/technology-56371912
13 https://www.investopedia.com/ask/answers/100314/why-do-bitcoins-have-value.asp
1 Crypto mining occurs when new (bit)coins are added to the circulation. A crypto miner is someone who is checking that transactions made have been genuine. In so doing, they earn bitcoin. To earn bitcoins, you need to meet two conditions. One is a matter of effort; one is a matter of luck. 1) You have to verify ~1MB worth of transactions. This is the easy part. 2) You have to be the first miner to arrive at the right answer, or closest answer, to a numeric problem. This process is also known as proof of work. Specifically, a check is provided on a 64-character hexadecimal (a hash), which is so much like guesswork that basically guesses are thrown at each problem. Do read [6] on this.
Please notice that crypto mining is going to reduce, because the total number of tokens is fixed for bitcoin, at 21 million. I found this hard to understand and harder still to believe. The proof of transaction is required or the system is trusted; if the proof is necessary then the calculation must continue and all that cannot be provided is more bitcoin because the limit has been reached; so either there is a payment for proof from some banker equivalent, or proof itself disappears and with it, all of the mining. The minimum unit of bitcoin is a satoshi and a hundred million of them make one bitcoin, so the total number of bitcoin units is more than in most currencies.
Please notice also that bitcoin and crypto and mining are often conflated, when bitcoin mining itself is but a small part of cryptocurrency as a whole, and the biggest use of crypto mining is in the region of the Three Gorges dam, where there is often surplus power generated. So one could argue (and [10] does) that the crypto miners are doing a service, using up surplus power. I suspect that some commentators have confused crypto mining with physical mining. I also note that the likelihood of a generated mining guess being right and early enough to win bitcoin payment is similar to a lottery win, but for that presumably many, many more entries can be made at small cost. The point here is that there is money to be made and the bigger the computing power assembled, the more likely for a win and hence payment. Read [11].
2 Yeah right; or not right, at least here. My iMac is consuming 95 watts per hour. If the the total uptime for our several machines is as much as ten hours a day (and the laptops use less), and if our usage at that rate is 300 days a year, that's 285kW per year. Meanwhile we have two fridges on all the time in a cold kitchen, both rated A+; The fridge/freezer uses 299kW per year [source, higher than I expected], while our fridge-only is 117kWh/year, a total of 416kWh/year. 45% higher than the energy used by the computers, even if I added in all the television energy used. The statement that fridges use more than computers does not apply in this household, even if we extend that to all screens vs all fridges. The one larger less efficient fridge still exceeds the first estimate of computer usage, though not by much.
Incidentally, a computer used for gaming consumes around twice as much energy as other uses. This is equivalent to the mining concept in footnote 1, though that depends a little quite how the mining is approached; as distributed computing use, my comment stands scrutiny.
Compare this with an EV, where a Tesla 3 uses 240Wh per mile, so on 6000 miles a year, 1440kWh. More context; I found a super-duper water heating system rated at 624kWh/annum, where a gas boiler would equate to about 900kWh in the year. That's only looking at the water, though; it's a lot more to run the central heating and in our case more like 11-14Mwh, say 13000kWh. Our total electrical demand has risen steadily to about 4MWh/y. So all of the fuss about the cost of computing is rubbish at a domestic level, since a 5% reduction in heating energy would surpass it comfortably.
3 It is energy demand, not power demand. Power is energy per second, measured in watts, kW, MW. Energy units are power multiplied by time such as kWh and are relevant if you're looking at, say, your annual household consumption. Of energy, not power. No doubt people who disliked Physics really don't care that the words mean different things. Mass and weight belong in the same group of issues.
4 Non-fungible tokens, (no hyphen, according to Google search), and abbreviated to NFT. This is the tokenisation of things like artwork. While a digital file can be endlessly duplicated, the idea of tokenisation is that this is a digital proof of ownership. But nothing prevents the duplication; the artist will usually continue to have copyright and the holder of the NFT somehow 'owns' the work, the 'original'. I read that makes and NFT equivalent to an autographed print and I see no reason for there not to be multiple NFTs for one work in exactly the same way. [12] Having read wikipedia on the topic, I think instead that what this amounts to—in terms of art—is the proof of provenance that the blockchain provides. It is a curious situation that pertains, that the copies are as good as the original, which makes the copies indistinguishable from the original. So that makes the subtle difference difficult to understand, certainly to understand why that proof of provenance, the ownership, might be worth staggeringly large sums of money. This applied to music throughout 2021, so I imagine the equivalent is holding the original manuscript or the golden disk of a recording. Maybe the point is that there are some intangibles that people will buy; I really don't see the value except as proof of something.
The property of fungibility is that tokens might be interchangeable, in the way that all bitcoins are equal and equivalent, as are units of any currency. NFTs are unique and therefore non-fungible. I'm surprised that there isn't very much more fuss about copyright not being held with the token. Does that mean one could have an NFT for something widely copied and shared, like a Trump twitter?
You might also consider matters like link rot, the easy loss of digital material and wider issues of tokenisation. For example, there could be the odd million tokens for a piece of music or a film clip, so that you might be one of (very) many owning, for example, a film scene or a single song. Let It Be; Imagine.
Link rot study reveals a half-life of 138 weeks for any weblink. How you save your bitcoin (cryptocurrency) wallet and where you keep that is a real issue. How do you keep it safe? I imagine having at least one data stick so that the (encrypted of course) information is somehow physical, or sending it as an email attachment to yourself. This could very easily get scarily complicated considering the large value that crypto can amount to. Maybe future 'mining' will amount to the many attempts to produce a code that gives access to unclaimed funds - but then it is only the unclaimed funds that wouldn't be screaming from the rooftops that theft had occurred, so this would only be attempted theft, the very thing that bitcoin says it is proof against.
Addendum:
Coin burning. see here, https://www.investopedia.com/tech/cryptocurrency-burning-can-it-manage-inflation/, is the removal of coinage from circulation. No big deal; equivalent to a company buying back its own shares.or, even, putting money aside. Benefit, that it avoids, reduces or prevents inflation – or that is the perception. The distinction here is that the coins are not just put beyond circulation, they are removed permanently by being put in an account which is 'unspendable'. I fail to see the point, as with so much of behaviour attached to cryptocurrency.
Meanwhile, my own investment continues to decline in value from a peak earlier this year but still a long way ahead of what I spent originally.
As to why it is that cryptocurrency in general has fallen in value, here says it follows the Chinese Banking Association's website said financial institutions should "resolutely refrain" from providing services using digital currencies because of their volatility. This was followed by restrictive changes in the Middle East and the US. Quite a bit of 'blame' is given to Elon Musk. Here (paywall) says the price falls at weekends – I've noticed that, too. Here says several things but actually explains nothing. On the other hand, the related articles look really interesting Too many sites talk of crypto but then only detail bitcoin; they are not interchangeable. All of which echoes what I wrote near the top of the page.