(Bloomberg) — Are you a cranky skeptic of crypto-currencies and tired of adherents promising that Bitcoin can do everything from protecting your privacy to curing the common cold? Are you dubious that it’s as scalable as its prophets claim? Perhaps in this case, the Luddites are correct. A look at the resources required to power the blockchain suggests that crypto-currencies — at least in the guise of Bitcoin — can only ever be a tangential part of the financial system.
- While the volatility of Bitcoin makes it a somewhat dubious proposition as a store of value, its supporters claim a raft of revolutionary benefits for the crypto-currency, often resorting to the type of sweeping rhetoric found at the height of financial market bubbles
- While the blockchain is undoubtedly a revolutionary piece of architecture, it doesn’t come without a cost — namely the resources required to mine coins and build out the ledger. While hardware is perhaps the most obvious expense, electricity consumption is the most stunning. The recently released Bitcoin Energy Index from Digiconomist estimates that Bitcoin mining currently consumes some 16.65 terawatt hours per year — roughly identical to the country of Jordan
- If Bitcoin were to become an integral part of the global financial system, those numbers would go up in a hurry. If we assume a broad correlation between the level of money supply and number of transactions, we can derive an estimate of Bitcoin power requirements in a best-case (or is that worst-case?) scenario. The combined U.S. dollar value of U.S. MZM, Eurozone M1 and Chinese M1 is currently about $31 trillion. That’s 450 times greater than the current $70 billion capitalization of Bitcoin. For Bitcoin to replicate that money supply implies an annual power usage of some 7500 TWh — that’s nearly a third of global annual production, per the IEA.
- In fairness, that analysis depends on the spot price of Bitcoin, which is a bit of an ephemeral beast. What ultimately matters is the volume of transactions — and if anything, Bitcoin fares even worse on this metric. There are currently something like 300,000 transactions per day on the blockchain. Visa claims to process 150 million transactions per day; even if we dispense with all other forms of monetary transaction, that is 500 times more than currently go through the blockchain. Clearly, the power required to replicate card transactions (let alone cash purchases) with Bitcoin render the enterprise uneconomic on a macro scale
- Part of this is because of the computationally intensive proofs required to build out the blockchain; a more elegant algorithm would require less power. Still, any analysis of crypto-currencies that ignores the resource consumption requirements only provides half the story
- In some ways, the blockchain is just a 21st century version of commercial aviation — an amazing technology with lousy economics. Whether the world needs crypto-currencies as much as it needs air travel is a question left for the reader to decide
- NOTE: Cameron Crise is a macro strategist who writes for Bloomberg. The observations made are his own and are not intended as investment advice.
To contact the reporter on this story: Cameron Crise in New York at firstname.lastname@example.org