Is Bitcoin More Wasteful Than Bank Bailouts Were?

A popular topic of conversation among international anti-bitcoin finance associations, banks, and the political class forming an extension of their trust work is the “Waste of energy” that Bitcoin creates. Is that a fair review?

As a proof-of-work chain that requires state replication on many devices around the world in order to reach consensus, Bitcoin is computationally intensive. This is because a primary goal of the system is to instill trust without the need for an explicit intermediary to verify it.

Instead of going through digital ledgers of banks that are guaranteed to work for the respective nation-states by the tax status (and shifts of employees and political donations), the value can be passed on to people who have no reason to trust each other and do not need a third party to mark confidence in one way or another.

In a sense, the mediator’s role can be seen as “wasteful” here. Again, it depends on how you define waste and from whose perspective. People who trade Bitcoin or use the Lightning Network to charge their phones or share tips with people they value might define working through middlemen as a waste. Likewise, states that generate some tax revenue from the transactions but cannot rely on the network operators could view all of the value transferred in cryptocurrencies as a waste, despite the value nodes, miners and users placed in them.

This argument can be as nuanced as the reference to various consensus algorithms: for example, distributed versions of proof-of-work or proof-of-stake. But everyone has their compromises: Proof-of-stake, for example, must rely on external validators because economies of scale tend to centralize uptime and equity ownership – and theoretically reward larger owners with better holding costs than smaller players – leading to centralization risks that are not seen in proof-of-work chains.

And it doesn’t eliminate the cost, but it can improve it: while the energy cost of mining versus the energy cost of holding can be arguable, there will always be some amount of energy cost associated with holding or maintaining computing power.

However, the subject of the term “waste” is seldom so detailed. In fact, waste is a more primitive word and name, similar to classifying certain forms of violence as “terrorism” or not.

So far we’ve looked at hypotheses – let’s anchor us at one point: TARP, called a “great success” by some who denigrate Bitcoin as a waste – the fiscal program that amounted to a massive bailout of troubled banks. What were the end results of TARP?

1- Rampant wealth inequality

Wealth inequality increased in the post-TARP period. Some would say this was deliberate: after all, the strategy was based on creating an asset bubble and rewarding those who caused the 2008 financial crisis in the first place. The wealth at the top almost doubled from 2009 to 2016 when it comes to global wealth while the wealth of the global poor has declined.

That same formula with quantitative easing beyond zero was reactivated, in part because monetary policy never returned to pre-2009 equilibrium – for the benefit of those who owned assets, or in other words, those who were already rich and lived in rich states who could benefit from it. Despite the equality rhetoric, the truth is that monetary policy is trickle-down, causing extreme inequality within states and around the world, which benefits those who primarily manipulated the system – and fiscal policy in the form of TARP just added frosting to the cake.

2- Consolidation of the same key players

The same actors not only caused the Great Financial Crisis, but thanks to the takeover of fallen competitors, they are larger and better connected politically than before. The concentration ratios (the measure of the assets of the banking system held by the five largest players in a country) are in the USA and Europe.

Consolidation continued, with post-crisis banks focusing heavily on smaller players who could not survive or did not have the broad political ties implied in ‘too big to fail’.

The bailouts ultimately added moral hazard to great gamblers who had never suffered the consequences of their actions. The system has never evolved beyond the conditions that created financial fragility in the first place. “Too big to fail” has become “bigger”.

3- Increased CO2 emissions

The reality is that as GDP increases under current conditions, so will CO2 emissions. That correlation is evident in China’s recovery from COVID-19, with China marking its peak CO2 targets through at least 2030. Even more alarming, despite the rhetoric, China continues to build coal-fired power plants at a rapid pacewhich alludes to the compromise of another more fundamental goal: 6 percent GDP growth rate per year.

While the United States has seen a significant drop in CO2 intensity since 2009, much of that has been attributable to natural gas use, some government incentives for renewable energy, and a strong shift from production to commercial activities, a long-haul trend since the intertwining of Chinese production with American consumption. A A global look at the statistics brings this into focus: Global CO2 emissions are accelerating and growing, driven by non-OECD countries, most notably China – the CO2 intensity and activity profile of the United States has in part shifted to developing countries that are now producing.

All of this is not a waste because it has helped consolidate the tax base of the United States or China or any other nation-state. Increased GDP per capita does bring benefits, but it must also be taken into account in terms of costs. A GDP per capita reading with a full focus on carbon emissions in the same way that critics consider Bitcoin would consider this to be a pure cost.

Bitcoin is wrongly compared to a financial system that produces a lot of consumption in order to “provide liquidity”, but which cannot seem to avoid large, stormy financial crises and is only rewarded for always being the biggest player. Dent this system sensibly, something that Satoshi had originally envisioned in the Coinbase of the Genesis block, can hardly be viewed as a waste in this context.

Any system can benefit from the reduction in costs. It would be good for Bitcoin and other proof-of-work chains to gradually move to cleaner energy sources, including some of these changes as they are big enough or as nation states adjust them.

Here we should specify cleaner in terms of lower CO2 emissions so that we don’t forget that many of the measures are intended to close the hole in the Ozone layers are some of the worst sources of carbon now (The switch from chlorofluorocarbons (CFC) to partially halogenated chlorofluorocarbons (HFC) and partially halogenated chlorofluorocarbons (H-CFC) for cooling).

This shift is not only due to the fact that renewable energy sources are likely to be more economical in the long run (see this Long-form cost curve of solar energy as an example) – but also because long-term consumption and saving thinking should promote a better future in a deflationary asset. Hence thinkers like Hal Finney Very early on, people thought about how to reduce CO2 emissions for Bitcoin, even if it was only a fraction of what it is today.

The problem lies in the inherent argument that cryptocurrencies should only be viewed in terms of cost, not benefit – an imperial stance of “The current financial system works for us, so why can’t it work for you forever?”

Of course, nation states want to reduce their CO2 emissions, but here, too, there is a compromise. Their economy creates “value” for them – the level of taxes and the number of people they control. Nation states are designed to view people in a binary way: as “citizens” or “tax evaders”. Emigration is seen as a “brain drain”.

Carbon emissions are seen as a cost within the system rather than an absolute indicator of waste. Many who denounce Bitcoin’s carbon emissions seem to focus only on the issue of “waste” – once categorized in this way, improvements like shifting to more carbon-neutral energy sources will not work for the most extreme critics.

After all, worth is when a bunch of Wall Street banks pay you to fuel the economy and nothing changes.

The value, as it is defined from a state perspective, does not depend on the level of benefit that is due to the various persons, but on the level of control that the state retains.

We are so used to being shaped from birth and tying virtue to belonging to one state or another – that many of us quickly forget the fundamental lie that lies in this idea, and this sensitivity is most exposed, when it comes to money, a monopoly on numbers has been half conjured up by state authorities.

Bitcoin can reduce its energy consumption – but its greatest strength in this debate is taking the hands of “value” outside the exclusive domain of government planners and putting it in the hands of people around the world – who make themselves known by running software instead of being forced to play a game with losing stakes for them and the planet.

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