Bitcoin Is a Bad Way to Do Something Necessary

I don’t write about crypto-currency often because its proponents are fanatical. (You’d be fanatical too if you combined rabid self interest that might make you a multi-millionaire with a social engineering project you thought was utopian.)

But more and more, I am inclined to agree with a judgement my friend made years ago: While Bitcoin does something important (creates a peer-to-peer payment network) it does it in a terrible way.

This averages out to a shocking 215 kilowatt-hours (KWh) of juice used by miners for each Bitcoin transaction (there are currently about 300,000 transactions per day). As the average American household consumes 901 KWh per month, each Bitcoin transfer represents enough energy to run a comfortable house, and everything in it, for nearly a week. On a larger scale, De Vries’ index shows that bitcoin miners worldwide could be using enough electricity to at any given time to power about 2.26 million American homes.

This is crazy. Looked at from this point of view, Bitcoin is terrible: Its actual transaction costs are far higher than those for any other form of money of which I am aware.

Bitcoin was also a libertarian project. Libertarians hate inflationary money, so Bitcoin was made deliberately deflationary. There are a limited amount of bitcoins which can be created. There is a strong first mover advantage even without the fact that bitcoin is acting more like stock in a company than money.

Deflationary money is reactionary. It rewards people for being first, not for being productive. It encourages people not to spend and not to invest in something other than money, which is bad for economies. Moderate inflation, contra-gold bugs and Austrians, is a good thing, as it devalues effort from the past. It’s great that you did something wonderful 40 years ago, but what you do today should matter more.

It shouldn’t matter completely more, I’m not saying that retired people shouldn’t be able to eat and pay rent, but it should discount and discount more and more over time.

People who won the past shouldn’t control the future for all that long. People who are winning the present should, if anyone should.

This piece will likely have people screaming in the comments, but just because Bitcoin is not government money does not mean it gets a pass from general economic principles.

And none of this is to say that blockchains are not an important innovation, or that Bitcoin isn’t important, won’t make its early movers lots of money, and so on. Just that its embedded economic assumptions and power requirements won’t produce maximum welfare.

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