Earlier this month, 39-year-old Salvadoran President Nayib Bukele made international headlines when he announced – and fast passed – A bill to make Bitcoin legal tender in El Salvador, making it the first country to do so. This is unlikely to have a massive immediate impact on the economy of El Salvador, where only about 30% of the people have a bank account and less than 51% to have Access to the internet that is necessary To use bitcoin. However, the precedent it sets is remarkable and deserves a debate over whether other countries should follow suit.
One of the most prominent arguments in favor of Bitcoin is that it is supposedly immune to inflation in a way that it is Fiat currencies like the US dollar does not. Jack Mallers, CEO of Strike, a payments platform that worked with the Salvadoran government to implement bitcoin in the country, said, “Owning bitcoin offers a way to protect developing countries from potential shocks from fiat currency inflation.” El Salvador itself has Not suffered immense inflation over the past few decades, mainly due to the fact that it Uses the US dollar (a choice that has its own) error). In other Latin American countries – like Venezuela or to a lesser extent Argentina – who have experienced inflation, a currency that is supposedly inflation-protected appear attractive.
The problem is that Bitcoin is nowhere near immune to wild fluctuations in value. Indeed, within the the last few months alone, Bitcoin rose from a high of $ 63,347 on April 15 to $ 32,404 on June 22. Most of this depreciation occurred in just two weeks. If this inflation rate were to persist for a year, it would correspond to an annual inflation rate of 5.569%, which is roughly the forecast inflation rate for Venezuela for 2021. Could Bitcoin bounce back from where it is now? Certainly. The current value of Bitcoin roughly corresponds to the level at the end of January 2021 and has obviously increased significantly from then on. But that is exactly the problem. Bitcoin is not a stable currency; it is prone to the same extreme fluctuations in value as some fiat currencies, and often more.
Worse, these discrepancies can – and have been – the result of policy changes in just one country. Bitcoin’s value fell almost 50% within a week in December 2017, just before South Korea, a country With 51 million people, forbidden new trading accounts. More recently, China’s crackdown on cryptocurrencies wiped off Taken $ 400 billion away from the global cryptocurrency market in the three days following June 18, including a 16 percent depreciation of Bitcoin. These incidents show how governments around the world can meddle in its value despite the fact that Bitcoin is a decentralized currency. If the Bitcoin-using countries of the world don’t get together to lay down rules for the legislation of countries – which I wouldn’t count on given the good cooperation of the world in combating COVID-19 – this international currency will forever be vulnerable to huge tremors due to national politics.
This is not meant to ignore the extreme amount of electricity required to mine Bitcoin, which is incredibly important as the threat of a climate apocalypse approaches. In 2020, the Bitcoin network, which includes mining and transactions, will used up to 58 terawatt hours of electricity, roughly equivalent to annual electricity use Switzerland. Bitcoin proponents usually have two rebuttals to this statistic: Fiat currency Likewise consumes a lot of electricity in its creation, and that is the bulk of Bitcoin mining running on renewable energies. While both are technically true, neither is an effective argument in favor of Bitcoin.
Paper money production and banking use about 100 terawatt hours of electricity each year, about 80% more than Bitcoin mining. However, this does not take into account the actual monetary value of what is produced with this electricity. In 2020, roughly 420,000 Bitcoin has been mined, valued at approximately $ 14 billion at its current value. In contrast, roughly 6.2 billion In 2020, US dollar notes worth $ 185.7 billion were minted. And only for the US dollar. So while the production and handling of fiat currency use twice as much electricity as Bitcoin, at least 13 times the monetary value is generated. The fact that a large portion – 74.1% – of Bitcoin production and handling is done with renewable energy just means that nearly 43 terawatt hours of electricity each year, roughly the annual electricity consumption of Qatar, is diverted from other manufacturing and activities how to deal with a highly volatile currency. And while the number of bitcoins produced annually is expected In the future, due to future restrictions on the total number of Bitcoin that can ever be produced, which were imposed when Bitcoin was invented, to decrease, these restrictions will be hotly debated and likely strained should Bitcoin become legal tender in countries around the world become.
Bitcoin is an extremely unstable currency that consumes a medium-sized country’s electricity diet every year to produce a fraction of the value that national mints afford. If Bitcoin were made a national legal tender, it would jeopardize the financial stability of any nation that adopts it as currency. Any country that makes it its reserve currency – as Bukele appears to be doing in El Salvador – risks the value of its reserves. And any wider use of Bitcoin risks wiping out even the modest gains we have made against climate change. I would be wary of any government trying to give it legal assistance, be it in El Salvador or New York City.
Brandon Cowit is an opinion columnist and can be reached at email@example.com.