Is Bitcoin Really Throwing Energy Away?

Today I saw yet another article about how Bitcoin is bad for the world. The authors focus on Bitcoin’s energy consumption, and find it completely pointless. Bitcoin (and by association all cryptocurrency) is the root of all evil, the Destroyer of the Environment, ManBearPig. Well, wait a minute Mr. Economist. Let’s first focus on what Bitcoin is doing with all that energy and why. Why does a financial system need energy at all?

Imagine that you tweeted “Check out these cardboard boxes containing twenty million dollars in cash [picture of your basement room].” That does not sound like a good idea. Someone might be tempted to find out where you live and break into your house. If you have that kind of cash, you will spend energy to protect it. This is because you know that others are ready to spend energy taking it from you. This happens everywhere, all the time. Stores are robbed, people get mugged, financial fraud happens. Banks have huge security budgets, move bundles of bills in armored trucks, employ armed guards.

When it comes to money we generally have to make a tradeoff between security and convenience. We all use cash or credit cards for small amounts that we could afford to lose. We do not keep large sums around. We find ways to park our money that involve losing liquidity in order to gain safety. The most common one is real estate. I recently read Factfulness by Hans Rosling. At some point he talks about how if a typical American were to visit Tunisia, she might see half-built houses and think that the locals must be lazy. Instead, they save money in bricks. Because they do not have easy access to banks, they buy bricks and add them to the construction as they go so that they will not get stolen!

I suspect the main reason Bitcoin’s electricity bill gets so much attention is that it is so easy to calculate. I would like to be able to compare Bitcoin’s security cost against the traditional mechanisms: vaults, armored trucks, security guards, police, lawyers, etc. Unfortunately this is not trivial to do. I have not yet seen a fair comparison of relative efficiencies. It is very possible that right now Bitcoin is ten, twenty or a hundred times less energy-efficient than the traditional financial system. We simply do not know.

The question that matters to me is, could cryptocurrency (not necessarily Bitcoin) make securing and transferring money more efficient in the long run? There is obviously a minimum threshold of energy that must be spent to defend from the “bad guys.” How low can we go? If we use the history of computers as a guide, I would imagine there is more room for improvement than most people think. Saying that cryptocurrencies have no future because they use too much energy would be like saying (in 1950) that “computers will never be popular because they take up too much real estate.”

Construction begins on ENIAC, May 31, 1943 - EDN

I suspect in the long run Bitcoin will be remembered like ENIAC, a pioneer of cryptocurrencies. I do not imagine that Bitcoin can easily move away from its current securing mechanism (Proof of Work). Instead, newer cryptoassets will take advantage of greener mechanisms. Perhaps proof of stake, perhaps something else (proof of space, time, who knows). It is a solvable problem, and the only reason it has not been solved yet is the extremely fast explosion in popularity that crypto is experiencing. If you believe in the concept of digital and decentralized money with arbitrary features that go beyond what cash can provide, it’s time to place your bets and wait.