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