High-Tech Speculation at the Expense of the Environment and the Rule of Law – The dirty greed for bitcoins
„A spectre is haunting the world – the spectre of false promises „, this is perhaps how Karl Marx and Friedrich Engels would have their „Communist Manifesto“ begin today, referring to a phenomenon of global financial capitalism that is as absurd as it is frightening: the cryptocurrency bitcoin (and others of its kind).
Intermediary institutions such as banks, exchanges, notaries, as well as various government institutions (e.g., central banks, tax authorities, and regulators) control a large part of our economic life. Associated with them is a key condition for smooth economic activity: trust. Banks guarantee money paid in, a notary the legal security of a contractual agreement, central banks that the paper bills in our hands continue to have value, i.e. with a „banknote“ you have a store of value that is (most often) reliable; government authorities ensure that the rules are followed. They are all „agents of trust.“ That these agents can themselves fall into crisis is shown by the massive banking, financial, economic, and government crises of recent years and decades, which have led to hyperinflations, bank failures, credit crises and dysfunctional states (so-called „failed states“).
Digital technologies promise new solution here, most prominently through a new self-declared transparent and decentralized way of defining the central unit of economic exchange, money. Instead of a government-regulated currency, economic exchange can also take place in decentrally managed networks. This is the core idea behind the so-called „blockchain“ technology. It can be used to process payments without the need for a central bank or currency. Whereas with ordinary (cashless) payments, participants must trust a bank or a similar intermediary (e.g. a credit card company) to guarantee the security of the transaction, with blockchains this is the responsibility of the community of all participants. A payment is approved by the majority of participants upon presentation of the correct digital keys. Corrections to the system are only possible, if the majority of participants agree to them, which is hardly possible after a while due to the growing number of participants. Blockchain technology thus replaces intermediaries such as money, banks, and authorities with the community of many users. The promises associated with this are nothing less than the overthrow of the traditionally non-transparent, corruption-prone, and overpriced business model of banks, more democracy in companies and the government, fairness in global trade, the enforcement of social justice, all the way to a prosperity turbo-booster for the poorest people in the world.
Unfortunately, the reality is quite different. Let us take a closer look at the four criteria bitcoin claims to meet in its quest to replace conventional currencies with blockchain technology:
- Acceptability and scalability as a payment system: Bitcoins and other cryptocurrencies are hardly used as a means of payment for goods and services by reputable companies. Ironically, even some crypto conference organizers refuse to accept bitcoins for their participation fees. Besides the enormous volatility in price movements, which can wipe out traders‘ profit margins within a few hours, this is also due to the still technically very limited transaction volume. bitcoin today allows for less than five transactions per second. By comparison, the Visa network alone can process more than 400 times as many (about 2,000 per second, Visa itself even speaks of 65,000 per second!).
- Security: bitcoin’s price volatility exceeds that of all other investments. This is also because cryptocurrency is far more exposed to fraudulent and illegal activities. Reports of price manipulation such as front-running on exchanges are widespread. And cryptocurrencies create paradise conditions for crimes of all kinds: Money laundering, ransomware by hackers, embezzlement, arms trafficking on the so-called darknet, terrorist financing, etc. Organized crime rejoices. But even for private individuals, there is little security: If a credit card or bank account is hacked or stolen, you are covered by trusted institutions. On the other hand, if the private key of a cryptocurrency deposit is stolen or lost, the assets are gone forever. In addition, 99 percent of bitcoin trading takes place on centralized exchanges, which are relatively easy to hack, as demostrated in the past.
- Decentralization: Meanwhile, a small number of „whales“ control much of the value of bitcoin in trading. This is also true for other cryptocurrencies, where on top the original cryptocurrency programmers often retain outsized control over their creations. Time and again, it happens that they reverse transactions that were supposed to be immutable. Most bitcoin mining today is controlled by oligopolistic miners. Many of these are located beyond the reach of Western law enforcement in autocratic and corrupt countries such as China, Russia, and Belarus.
- Store of value: Most assets (such as stocks, bonds, real estate) come with an income stream or have a tangible usability (e.g. housing) or some other use, such as liquidity and flexible means of payment in the case of normal (so called “fiat”) currencies, from which they obtain their value. An exception is gold, which has no income (but does have an industrial use, albeit a rather small one), but has an established use as a means of storing value over millennia. bitcoin’s fundamental value, on the other hand, is zero. Considering the immense amounts of energy it takes to maintain this „currency,“ its value is negative, because for the sake of economic consistency, we would have to (and probably will soon) apply a proper carbon tax to its massively energy-guzzling production.
It is not political idealism nor the prospect of a more just society that is driving the current hype around bitcoin and bringing its value to ever more absurd heights. Rather, it is the same cry that rang out from San Francisco in the same year that Marx and Engels announced the coming of communism: „Gold! Gold! Gold from the American River!“. Who can ignore the fact that millions can be raked in quickly? The only difference is that today you no longer have to travel arduous thousands of miles to „dig“ the new gold; all you have to do is go on the Internet.
Unfortunately, this new gold rush comes with immense environmental costs. Mining bitcoins, which is necessary to maintain its underlying blockchain infrastructure, requires an enormous amount of computing power, and thus electrical power. From October 2020 to February 2021, the amount of electricity required for cryptocurrencies to exist nearly doubled. The high-tech computers of bitcoin miners will very soon consume more electricity than the whole of Holland, and the trend is rising sharply. 65% of mining activities now take place in China, because the price of electricity is particularly low there – and comes mainly from coal-fired power plants. The renowned computer security expert Felix von Leitner therefore calls bitcoin „organized environmental pollution“. It’s time to put an end to this absurdity.