Bitcoin Miners Are on a Path to Self-Destruction

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Many of the complaints about Bitcoin over the years have been overhyped. But the cryptocurrency’s increasing use of real physical resources— energy and computer chips — can no longer be ignored. If Bitcoin wants to avoid government crackdowns, it needs to shift to technologies that don’t require constant massive resource consumption just to maintain the currency’s price.

A real problem with addressing criticism of Bitcoin is that so many people have cried wolf about it in the past. Its initial enthusiasts believed — and many still do — that cryptocurrency is going to undermine central banks and take over from fiat currencies like the U.S. dollar. That has led some to decry Bitcoin as a plot to bring down governments. That’s a red herring. Bitcoin is not going to become the dominant currency as long as it remains highly volatile. And for it to become less volatile will probably require it to become inflationary — that is, for its price to go down over time.

But the price, though it bounces around and has plenty of bubbles, has kept on going up. That’s great for the people who bought in early and for people in the crypto software industry. But Bitcoin’s high price may now be leading to new problems for the cryptocurrency, because unlike other financial assets, Bitcoin uses more resources as its price goes up. (Disclosure: I own Bitcoin and other cryptocurrencies.)

For normal currencies such as dollars, transactions are logged and verified by a trusted entity like a bank. For Bitcoin, however, transactions are logged and verified by a decentralized network of people called “miners.” Miners compete to be the one to verify each block of transactions by using computers to guess a number. The lucky miner who guesses the number first gets rewarded with a certain amount of new bitcoins.

The higher the price of Bitcoin, the more valuable winning each little lottery becomes. And like an increased jackpot in Powerball, that bigger reward draws more miners into the game, who spend more resources making guesses. Those resources include computer chips and electricity to run the computers. 

The whole system creates decentralized trust. No evildoer can come in and change all the transactions so that they get all the Bitcoins — that would require spending enough on computer chips and electricity to outcompete all the other miners. In other words, it’s the cost of the real resources that go into logging and verifying Bitcoin transactions that keeps the network honest and reliable.

So the more Bitcoin’s price goes up, the more resources it consumes. In early 2017, when the price was only about $1,000, the website Digiconomist estimates that Bitcoin mining used about 10 Terawatt-hours per year in electricity. Four years later, the price has gone up by about a factor of 50, and the electricity consumption has risen by a factor of 8 or 9.

Power Hog

Electricity consumption by Bitcoin miners has risen along with the price of the cryptocurrency

Source: Digiconomist

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