Quiggin bitcoin news

Photo: Quiggin bitcoin news chain of block erupters used for bitcoin mining. Vast amounts of electricity go into feeding the Bitcoin delusion.

Fortunately, it’s unlikely that the digital currency will survive long enough to generate the environmental disaster that would arise if it became a major part of the financial system, writes John Quiggin. While these threats have raised concerns, it appears that all can be managed with appropriate regulatory and law enforcement strategies. Bitcoin system: that of ever-increasing environmental damage from the electricity used in the ‘mining’ of Bitcoins. Even more striking, this same design feature ensures that Bitcoin cannot, in the end, provide a stable store of value. In essence, the creation of a new Bitcoin requires the performance of a complex calculation that has no value except to show that it has been done.

The crucial feature, as is common in cryptography, is that the calculation in question is very difficult to perform, but, once done, is easy to verify. In the early days of Bitcoin, the computations in question could be performed on ordinary personal computers. Nowadays, however, ‘miners’ use special purpose machines optimised for the particular algorithms used by Bitcoin. With these machines, the primary cost of the system is the electricity used to run it. That means, of course, that the only way to be profitable as a miner is to have access to the cheapest possible sources of electricity.

Most of the time that means electricity generated by burning cheap coal in old plants, where the capital costs have long been written off. Even in a large grid, with multiple sources of electricity, Bitcoin mining effectively adds to the demand for coal-fired power. That corresponds, in turn, to about three tons of carbon dioxide for coal-fired electricity. Switching even a small part of a typical household’s financial transactions to Bitcoins must therefore entail a massive increase in electricity use. Fortunately, it’s unlikely that Bitcoin will survive long enough to generate the environmental disaster that would arise if it became a major part of the financial system. The same design feature that requires the use of so much electricity is the fatal flaw in Bitcoin as a currency.

The creation of a Bitcoin requires costly calculations. But these calculations are of no use to anyone. If they were valuable, then they would be performed for their own sake, with Bitcoins as a free by-product. That would undermine the whole system. By contrast, all viable currencies are underpinned by the fact that the currency has a use outside its role as a medium of exchange.

This is obvious in the case of metallic currencies such as gold and silver coins, and of paper currencies that are convertible into gold. The external value of fiat money is more subtle than that of a metal coin. It is inherent in the fact that the government issuing the currency is willing to accept it in payment of taxes and other obligations. If the US government ceased to exist, people might choose to go on using US dollars as a medium of exchange for a while. In the end, Bitcoins will attain their true economic value of zero. But as long as Bitcoin, and similar ‘crypto-currencies’ persist, the mining process will continue to damage the environment by wasting energy to no purpose. The sooner this collective delusion comes to an end, the better.

Professor John Quiggin is an ARC Laureate Fellow in economics at the University of Queensland. Please read the House Rules, FAQ and ABC Online Terms of Use before submitting your comment. That’s obviously not what he was saying. He was being sincere while Mark is being facetious.

How many resources are consumed around the world to mine gold – an essentially useless metal. I’m not exactly sure how much of a science background you have, Gary, but gold is far from useless. Its nominal value is inflated by its use in jewellery, but its material properties have significant industrial uses. There’s gold in almost every modern electronic device, for starters! Gold is used in jewellery, investment and industry. Its use in jewellery is well-known, of course, both as the pure metal and as alloys.

As an investment, it’s widely recognised as one of the most secure. In industry, they’re all over the place. They’re also widely used in expensive or mission-critical computer components, or for use in corrosive-atmospheres. Gold is also a good reflector of electro-magnetic radiation, making it useful as a protective coating for artificial satellites, astronaut’s helmets and electronic-warfare aircraft. This property also makes it useful in the preparation of specimens for scanning electron microscopy. Just “almost useless”, because people continue to insist that it is not useless. When I see comments such as Rob’s, I’m reminded of the statement by an eminent economist many decades ago.