Bitcoin, touted as the ‘King of Cryptocurrencies,’ is gaining traction once again. Financial analysts and asset managers are calling it a ‘superior asset.’ They have started singing its praises in mainstream newspapers; their ‘op-eds’ are uncritical and promotional.
Regardless of all the hype, Bitcoin is not an ‘asset.’ It has no inherent value. It is, at best, a speculative gambling tool, a technically sophisticated ponzi scheme. Those who ‘trade’ or ‘invest’ in it could make or lose a fortune, just as one does in gambling.
In 2009, Bitcoin was valued at zero. By 2021, Bitcoin was valued at $60,000. Indeed, this phenomenal increase in value is incomparable to any other financial instrument. But what was that valuation based on? Was it based on the products and services it created? No. Was it based on the number of people willing to buy and sell it? The truth is, no one can answer with certainty as to why or how the value of Bitcoin changes.
In 2021, after a phenomenal run, the value of Bitcoin tanked. It was a financial scam unlike any other in modern day. Sam Altman’s high-profile crypto scam had wiped off billions of dollars and bankrupted many crypto ‘investors.’ Now, after a two-year cooling period, Bitcoin seems to be making a ‘recovery.’ Analysts, asset managers and pundits are willing to gamble money on Bitcoin once again.
‘My new year resolution is bitcoin; Yes, I know the dangers, but I’m having some anyway,’ wrote Stuart Kirk, a former portfolio manager, in an article published in the Financial Times on January 6, 2024. Keen to ‘begin the year with a bang,’ Kirk had ‘decided to allocate some money to spot bitcoin exchange-traded fund (ETF) while running along the picturesque Exmoor coast. What were his reasons for doing so?
First, because his mate told him ‘there was a 98 per cent chance of bitcoin prices doubling this year.’
Second, he felt it was ‘time to take more risk.’ He thought there was ‘no bigger investment story’ than the ‘Bitcoin ETF’ because he speculated that the Securities and Exchange Commission (SEC) was ‘about to give the green light to multiple spot applications.’
His gamble worked. By February 13, 2024, it shot up to $50,000. Within one month, i.e., by March, Bitcoin touched $69,000. Kirk must be laughing his way to the bank. But does this mean Bitcoin makes for a good ‘investment asset class’? Is Bitcoin all that it is made out to be? Does it stand the test of time?
If one were to go by the hype, Bitcoin may seem like the currency of the future. Some ‘analysts’ have even compared Bitcoin ‘mining’ to gold mining. However, put bluntly, Bitcoin is a volatile gamble meant for those who can afford to lose money. More importantly, it is not sustainable. Let us consider some examples.
In 2021, when Tesla CEO Elon Musk revoked his support for Bitcoin for its environmental impact, its value crashed by 20 per cent. The values of other currencies, like Ethereum, had also crashed. Musk’s tweet encouraged a global conversation regarding the effects of cryptocurrency on the environment. But unfortunately, public memory is short, and greed overtakes concerns over climate change.
What is Cryptocurrency mining, and how does it affect the environment?
In 2021, there were over 5000 cryptocurrencies (according to CoinLore, an online database that tracks and reports changes in the cryptocurrency market); Bitcoin and Ethereum were at the top.
Cryptocurrency is ‘mined’ through computational processes; ‘miners’ produce the currencies as they record and confirm the transactions within the blockchain. The currencies are then put into circulation, and miners are rewarded with earnings.
This process provides security to the blockchain system as it is based on Cryptography, which translates information into codes or ‘puzzles’ that cannot be broken. However, the computation processes that miners use to mine blocks and verify transactions use specialised computers that consume massive amounts of energy.
When Bitcoin first came out, mining was easier. However, mining becomes increasingly difficult as the puzzles become harder to solve when cryptocurrencies gain more ‘investors’ (read Gamblers), resulting in a larger user base. This results in the demand for upgraded machines solely dedicated to mining cryptocurrencies.
The use of exclusive machines for crypto mining generates electrical waste as the hardware cannot be used for any other purpose and quickly becomes obsolete. The increasing difficulty in puzzles also means more computing power, making the networks consume more energy over time.
The increasing use of electricity demands cost efficiency in the production of electricity. Mint reported that 75 per cent of Bitcoin mining occurs in China due to the low cost. Most of the electricity in China is produced by burning coal or other fossil fuels, a major contributor to climate change.
Bitcoin mining alone consumes more energy than Argentina, Malaysia, or Sweden and produces the same carbon dioxide emissions as New Zealand each year. In 30 years, Bitcoin mining is estimated to raise the global temperature by 2 degrees Celsius and worsen the air quality in areas it is mined. The growth of the cryptocurrency will directly negate the goals of the UN’s Paris Agreement on climate change.
So what will happen next?
The increasing popularity of cryptocurrencies will keep elevating electrical energy consumption exponentially over the years, but it may also become their downfall. If the electrical consumption of cryptocurrencies keeps rising at the same rate, Bitcoin alone will require energy comparable to global energy consumption.
Massive effects on the environment could lead to a stricter regulatory framework vis-a-vis cryptocurrency mining. Moreover, the current algorithm will continue to complicate the computing process, making it more difficult and less profitable.
A Citigroup research claims that rising electrical consumption will result in the collapse of the Bitcoin system, which can be assumed for any network growing with the same impact. In this case, cryptocurrencies may need to change their algorithms to become less energy-consuming and more environmentally sustainable while promising the current security.
Furthermore, Bitcoin transactions are opaque, making it difficult to counter ‘issues around money laundering, Bank Secrecy Act, use of digital currencies for illicit payments, consumer protection and the like.’ Much has been written about it, and governments worldwide have been trying to stop, with limited success, the proceeds of crime from turning into Bitcoin.
Given the volatility, environmental impact and criminality, will cryptocurrencies like Bitcoin gain traction again? Yes. For sure.
Why? There’s a more powerful factor at play: Greed.
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