Is bitcoin mining a waste of energy and resources?

Spending energy to secure and operate a payment system is hardly a waste” is the anwer on

Fine, but traditional currencies don’t need proof-of-work.

I totally agree that Proof-of-work (i.e. doing a lot of computation to validate transactions) is necessary for a non-centralized cryptocurrency, I don’t question this. However, I think that one of the goals of technology innovation is reducing the resources required to perform the same task. Now, are bitcoins really more efficient than traditional currencies?

Mining reward can be considered a cost to make the bitcoin network working properly. During 2013, 12% of Bitcoins have been generated for covering those costs. That’s a lot! It’s like if the Federal Reserve printed 12 cents per year for every dollar you have in your pocket or your bank account, just to process the transactions. The Fed does print money, but mainly for financing the US government, that is a total different thing.

This inflation (intended ad increase of money supply, obviously not as price increase) will decrease, but it will be anyway 3.7% in 2020. So if the Bitcoin capitalisation will be 1000 G$ in 2020, at least 37G$ will be spent to process the transactions, without taking the fees into account. These costs can’t be avoided, as they need to be a good incentive for everybody to mine and to find new blocks. If those costs were very low, a 51% attack could be possible, so we will ever have medium-high costs associated to the bitcoin network. And a very high energy bill.

It looks to me that this argumentation has been rapidly confuted saying that with traditional currency you have banks, armored vehicles, security costs, cash management, etc…

But very different things are mixed together:

  1. Cash management
  2. Financial services
  3. IT security

Cash management. Any form of electronic payment (in any currency) can help to reduce the costs associated to cash management. So with bitcoin you won’t have any armored vehicle, neither with other traditional electronic payment. This is an advantage of bitcoins over cash, but not over credit/debit cards and any other existing electronic payment method.

Financial services. Banks, financial institutions will continue to work with any currency. They basically borrow and lend money. If everybody will use bitcoins, we will have anyway banks that offer bitcoin credit cards, bitcoin mortgages, bitcoin investment products. Bitcoins won’t get rid of the financial industry. Not at all. People will continue to lend and to borrow money, no matter the currency is.

IT security: this is a critical issue with both bitcoins and traditional currencies. We saw several bitcoin heists, probably due to badly designed IT solutions. I could say for bitcoins IT security is even more critical since bitcoins are unrecoverable if they are stolen/lost.

So, I am not convinced about the sustainability of a system that, if massively adopted, will require probably tens of GW worldwide and hundreds/thousands of server farms around the world that calculate hashes, nothing really useful.

This entry was posted in Economics and tagged , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s