Bitcoin’s Real Weakness? Energy.
Considering all the technobabble and steep learning curves regarding blockchain tech in general, and Bitcoin in particular, it shouldn't be a surprise that it remains unpopular, seldom used and overall a specialized, speculate asset. That is, Bitcoin is decidedly NOT money for everyday use.
But that's okay.
You can't go to a café and offer pieces of silver or gold to pay for your coffee. And the lack of ability for those two rare metals to function as universal means of exchange does not negate their function has hedges against fiat inflation.
So to with Bitcoin.
But all this aside, a fundamental part of Bitcoin that, in my opinion, represents the fatal flaw of it, is how Bitcoin derives its value.
Value comes from the way a commodity is produced. When we discuss use-value (how something is used), this is a different discussion than exchange value. People generally get these two concepts confused, mixed up or just fail to understand this. Marginal Utility theory, for example, claims that the ‘value’ of something is solely derived by its ‘utility’. That is, its use-value.
But how something is used, or the fact that it has a use, is not the same thing at all with its exchange value, or, the value of that thing as expressed against a quantity of other things.
Whereas use-value describes the quality of a commodity, exchange-value describes the quantity of that commodity, as expressed in a universal means of exchange.
Money is the abstract form of value. It is value, solely in the form of exchange value, and not use-value.
The only use of money is to exchange it for other things.
I say all this as a preamble for emphasizing the labor theory of value, which is the only real way of explaining value. From the Austrian school to classical liberal economists like Smith, their fundamental failure is not understanding the LTV.
Coming back to Bitcoin, it is a commodity whose use-value, at times, is a universal means of exchange (like money), and other times it is a gambling device (a hedge against inflation, a speculative asset to be used as part of Greater Fool Theory).
But it is a commodity with exchangeable value imbued in it. And that value is derived from its production process.
The accumulated costs of purchasing infrastructure, a building, cooling systems, servers, computer parts, LAN/WAN, all these elements go into the process of ‘mining’ a bitcoin. And they all go into the cost of Bitcoin and thus, its value.
If we say that, from purchasing the equipment necessary to mine a single bitcoin, for arguments sake, amounted to $10,000, then it would be absurd for the miner to sell for less than that amount.
I understand it is more complex than that, as blocks aren’t a single bitcoin, etc. But, for simplicity sake, we assume that one block is mined for one bitcoin.
If that process costs $10,000, then it would be absurd for the miner to sell any less than that amount.
This is the basis for socially accepted labor time, and how, as these miners form a social force, there comes an agreement in buy and sell pressure regarding a price.
But inside that $10,000 is represented not just costs of the operation’s infrastructure, but also energy.
And all that infrastructure is not used completely to get one bitcoin. The computers still run afterwards, the building still stands, etc. Overtime these machines degrade, yes, but the entirety of their value does not go into that mined bitcoin.
The most significant amount of value that is imbued in the ‘labor’ process of bitcoin is the energy required to run the machines.
That energy is egregious.
A single Bitcoin transaction has an electricity consumption of 549kWh. The total electricity to mine Bitcoin rivals that of the entire country of Israel. It creates more e-waste per year than Luxembourg. It has a comparable annual carbon footprint to Syria. A single transaction can power one U.S. household for 18 days.
Put away all the concerns of techno-babble and learning curves, the fact that Bitcoin gets its real cost of production, and therefore price, from an absurdly wasteful process of energy consumption is the single worst thing about it.
Should the cost of energy be reduced, Bitcoin would lower in price. This was evident at least in the great dampening after the Bitcoin hype mania of ’17-’18.
It is, altogether, an exceptionally wasteful speculative process that offers very little to society, aside from acting as a source of speculation for the world’s middle-class, a digital fantasy for libertarians and drug dealers, and this will only get worse.
As bitcoin’s excessive costs continue to accumulate, it will reach a point where it is simply no longer profitable to mine. Already, there is a falling rate of profit to its production.
According to the digiconomist,
Annualized global mining revenues
Annualized estimated global mining costs
Current cost percentage
99% of the costs of mining are eaten up by the process of mining itself. There is a profit margin of only 0.45%! Anything above that is earned from mania and speculation. Once that mining cost crosses the point of profit, mining will be useless as there will not be enough value for the trouble. And that is when we should be worried.
Name a more wasteful asset!