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I own a small amount of bitcoin, the value of which has been increasing a great deal in the past few months. As the price has increased, I’ve become increasingly uneasy with this arrangement. This is an attempt to understand why.
Bitcoin as a system is a transaction ledger which operates in a decentralized manner. Blocks containing transactions (changes in ownership of bitcoin) are created every 10 minutes. Computational resources called miners compete to be the one publishing the block by being the first to complete a computation, the difficulty of which will increase or decrease over time to approximate the 10 minute goal. The winner is rewarded with new bitcoin created as part of every transaction.
Currently the amount of electricity consumed by these computations (in aggregate) exceed the consumption of Argentina. I imagine that the exact relationship between the market price of bitcoin and electrical consumption is complex, however by laws of supply and demand if the price increases then it becomes more desirable as a reward, incentivizing additional power consumption. This appears to be a positive feedback loop, driving up prices and consumption over time.
My thesis then is that bitcoin is effectively monetizing waste of electricity. And for prices to remain at current levels (or increase), the ongoing consumption of electricity must continue or increase. Over the years, I’ve heard of alternative algorithms to proposed to address this, but thus far it seems this consumption is inherent to the system. And unless the system continues to chug away, bitcoin effectively ceases to exist.
One phrase of my dad’s was that ‘we do not live in a perfect world’. We live in an industrialized society and are all complicit in some degree to the impacts this society has on the planet. Even the basic necessities of life come with an impact, multiplied by a population in the billions. But at what point do we draw the line? At what point do we say ‘not this’ to a system that consumes massive amounts of resources to secure a small number of transactions? I can put off the question, rationalizing that my holdings of bitcoin are tiny, but eventually the question needs to be answered...
Bitcoin as a system is a transaction ledger which operates in a decentralized manner. Blocks containing transactions (changes in ownership of bitcoin) are created every 10 minutes. Computational resources called miners compete to be the one publishing the block by being the first to complete a computation, the difficulty of which will increase or decrease over time to approximate the 10 minute goal. The winner is rewarded with new bitcoin created as part of every transaction.
Currently the amount of electricity consumed by these computations (in aggregate) exceed the consumption of Argentina. I imagine that the exact relationship between the market price of bitcoin and electrical consumption is complex, however by laws of supply and demand if the price increases then it becomes more desirable as a reward, incentivizing additional power consumption. This appears to be a positive feedback loop, driving up prices and consumption over time.
My thesis then is that bitcoin is effectively monetizing waste of electricity. And for prices to remain at current levels (or increase), the ongoing consumption of electricity must continue or increase. Over the years, I’ve heard of alternative algorithms to proposed to address this, but thus far it seems this consumption is inherent to the system. And unless the system continues to chug away, bitcoin effectively ceases to exist.
One phrase of my dad’s was that ‘we do not live in a perfect world’. We live in an industrialized society and are all complicit in some degree to the impacts this society has on the planet. Even the basic necessities of life come with an impact, multiplied by a population in the billions. But at what point do we draw the line? At what point do we say ‘not this’ to a system that consumes massive amounts of resources to secure a small number of transactions? I can put off the question, rationalizing that my holdings of bitcoin are tiny, but eventually the question needs to be answered...
