It Is Not A Myth, Cryptocurrencies Require Far Too Much Energy And Resources

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It Is Not A Myth, Cryptocurrencies Require Far Too Much Energy And Resources
dry2 / Pixabay

Dear ValueWalk,

I have just read your article “Myths (about bitcoin) that must die” and have some concerns about your claims that bitcoin, or any other crypto-currency, should be considered as money in the true sense of the term. Crypto-currencies have some major drawbacks that prevent their being considered as true forms of money.

Cryptocurrency Market forms of money
dry2 / Pixabay

The primary drawback to bitcoin and ethereum is that, due to their blockchain nature, everyone has to download and maintain the entire blockchain file on their computer/server.  This requires and increasingly large amount of electrical output as the number of users grow.

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How much?  According to this article it is currently 14.54 TWh with every bitcoin transaction taking 163kWh/transaction and ethereum requiring 49kWh.

https://hothardware.com/news/ethereum-and-bitcoin-energy-consumption-surpass-entire-countries-power-budgets

If these power consumption claims are true, one has to understand that 14.54 TWh of electricity requires an installed capacity of electricity generation of 1.65GW.  The cost of the capital equipment to generate that power is something on the order of $2b using conventional generation sources.  The annual retail cost of that electricity produced, at 10cents/kWh, is $1.65b.

With expanded use of crypto-currencies there will be increasingly costly parasitic loads on an already strained infrastructure. Due to such power supply costs some of the fundamental characteristics of money are not met by crypto-currencies:

Uniformity – since electricity rates differ considerably depending on location the cost/unit is not uniform.

Durability – not only is there a power requirement to create crypto-currencies there is also a power requirement to maintain the blockchain database. Hence, there is no static durability since there is a shelf life cost – it is not free.

Infrastructure risk – We have to consider infrastructure risk, if the grid goes down there is simply no crypto-currency to be had. This risk does not exist with conventional money. Consider the current situation in Puerto Rico. Where would those people be if they depended on crypto-currencies?

Power surges over an unstable power grid could also damage stored data. As more traditional base load power generation is shut down the grid becomes more unstable, harder to balance and such surges could become commonplace. And should there be a naturally occurring electromagnetic pulse from a solar flare the entire system could go down causing significant loss of one’s “money”.

And what happens if the internet itself should “go down”. We would no longer have any “money”. We take the flawless performance of this digital infrastructure completely for granted – should we?

Additionally, there are some other concerns regarding security, reliability and store of value – I know of a case where someone lost their laptop holding bitcoin data and there is no way for them to retrieve the value of the lost bitcoin – total loss. We don’t usually travel with our entire savings of conventional money so less risk there.

There is a lack of long-term security and reliability since computers can be hacked and regulatory changes can fundamentally change underlying values of these financial instruments. Just look at the price volatility of these crypto-currencies. How do you reasonably value something over time using a medium that has such enormous volatility? Is this truly a store of value?

Most of these risks are non-existent when it comes to longer-term stores of value such as precious metals or other more tangible goods. Even fiat currencies, though they do fluctuate these variations are somewhat transparent and reasonable to understand. Sure, all of these forms of money can be stolen but they don’t have the risk of degradation in any of the forms mentioned above.

Thus, using these arguments, it appears that, once a more encompassing perspective is taken, your refutation of myths about bitcoin ring a bit hollow.

I would be very interested in learning if you can refute the claims described above that preclude crypto-currencies (bitcoin and  ethereum) being legitimate forms of money.

I look forward to your response.

Best regards,

Anonymous

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2 COMMENTS

  1. Great points. I respect them very much. However, I do have minor counterarguments to some of the proposed risks.

    1) Infrastructure Risk: If a power grid were to experience power surges. One’s data would not be at risk because of the decentralized nature of data storage cryptos are characterized by (e.g. if 1000 computers go down, 5000 other computers will still be running).
    2) If the entire system were to go down due to some ultra solar flare, I’m pretty sure that only those that have cash buried in their backyard would be safe… so cryptos wouldn’t be the only victims. Think of all the ATM’s, exchanges, and digitized holdings that would be affected.
    3) Losing one’s laptop does not equate to losing one’s crypto holdings. The only time this would be true is if the person does not have a paper, hardware or brain wallet. This kind of situation can be easily avoided.

  2. Seriously, if you are to take the time yo write an article like this, at least know what you’re talking about.

    Yes crypto currency consume energy. they are also in their infancy and there is no clear dynamic of value to it, which brings a lot of speculation and volatility. This is short term effect in the initial phase as with any new type of valuable.

    The fact they use energy is not negative in itself (apart the pollution aspect of it, but still mining gold and precious metal or petrol is more polluting.). Actually, we can forecast that crypto currency baseline value would be the cost of energy. Basically, an economy of electricity based energy. Good news, it will drive effort for sustainable energy source which are cheaper and cleaner. It will also bring more investment in better infrastructure with more load as we transit toward electric car and self electricity production (solar roof…). So surge won’t be a problem. it happens only on s##ty infrastructure that need more investment.

    Your point about financial risk losing everything if you lose your laptop. In this specific example, the user is responsible at 100% because he didn’t do a BACKUP!!!! If you are stupid enough to not backup your data, then you desserve to suffer. (still, i wouldn’t be that hard on a senior person who wasn’t born with Internet). still this can be mitigated with new technology. Google has a patent to use a dna sequence as a crypto private key (like the one we use in the blockchain). if you lose your wallet, no problem as long as you still carry your dna and doesn’t become a mutant.

    As per the resilience of Internet… I hope you realise that there isn’t anything more resilient than the Internet… it was designed to be extremely robust…

    As per losing your blockchain data, i hope you realise that million of copy exist distributed around the world as you falsely claimed that everyone must have a copy of it. (the reality, you dont have to keep a full copy of it, you can use a client that connect to a full node instead). still very resilient.

    If an electromagnetic storm were to happen capable to destroy data on conventional hard drive, most human would lose consciousness, all satellite would be fried, all grid would short, all your electronic device would fry and the global economy would completely crash including all our technology. basically even if you owned a gold bar, you would only become a target or you would end up with something useless as it is not comestible (back to stone age). But I reassure you, even if you data could be erased that easily, most node use SSD drive which don’t use magnetic system and would be impervious to such issue. *I hope you realize that bank actually use digital technology like databases, computers, servers, and so on which would be just as vulnerable but with a lot less resilience.*

    For your Puerto Rico example using fiat currency, unless if you are a careless individual stashing money under your mattress, most people had less than a 100$ in cash. And pretty sure ATM didn’t work without electricity. Bank probably don’t have computer to process transaction… so the cash system is paralyzed as well. Now, Internet is more resilient than bank infrastructure. So Google or Facebook could just fly their flying internet node and provide people with a money system. Of course we can expect people in the future to own portable solar panel or to have it listed in an emergency supply plan of the future.

    It’s false to think that crypto currency has to be 100% digital, there is no problem into creating physical version of it. So far there is no demand for it and it would add cost to do it. Since the technology is very resilient and secure, owning a physical version of it would only make you more vulnerable.

    feel free to reply and discuss further.

    I do a master degree about the application of blockchain

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