Bitcoin's true cost should hamper the euphoria of mining wealth from thin air

The cryptocurrency is showing the warning signs of a weaponised asset

FILE PHOTO: Representations of virtual currency Bitcoin and U.S. dollar banknotes are seen in this picture illustration taken January 27, 2020. REUTERS/Dado Ruvic/Illustration/File Photo/File Photo

Miles of ink have already flown in commentary and analysis about the cryptocurrency bitcoin.
But recently, something has changed – and it may be ominous. As trading volumes have shot up, the digital currency is being weaponised to support all different kinds of interests. Where will this lead?

Consider bitcoin's beginnings. It is digital money, similar to any other currency, though more transferable and outside of the control of banking systems and governments. For this reason, in the early days, it was used extensively for illicit trade and transactions. Then some uber-cool coffee shops and retailers also accepted BTC, when this elusive currency could be had for less than $2,000.

From there, the fascination spread, and cryptocurrencies were flogged in places from low-cost airline in-flight magazines to personal finance blogs. More money piled in causing a massive rally and valuing the currency at close to $20,000 in December 2017 before registering big losses. And onto the rollercoaster we climbed. But what will the future history read?

Economists such as Nouriel Roubini caution individuals strongly against investing because there is no underlying commodity, business or asset that provides BTC its value. Warren Buffet, veteran investor, shares this view and concern that the price increase is pure speculation.

But it may be risky in another much larger way, too.

Since this currency is entirely digital and is transacted in complex ways, it is extremely energy intensive – thousands of times more so than credit card transactions.

Iran has blamed the energy demand of hundreds of cryptocurrency transaction centres in the country for recent power outages in Tehran. The clever folks at the Bitcoin Electricity Consumption Index, an effort of Cambridge University, have put a number to it: bitcoin's annual energy consumption is 129 Terawatt hours, which is more energy than the Ukraine consumes in one year – a population of 44 million with a GDP of $153 billion. The current total value of BTC is now well over $1.5 trillion – without having produced anything at all – not one toaster, not one graduate, not one beach towel on a Black Sea resort, nothing that even remotely resembles an output of a country.

Yet, the energy consumption and carbon emissions of this phenomenon are symptomatic of our aversion to include the true cost of carbon while apparently creating wealth out of thin air.

Still, plenty of people and companies point to BTC continuing to grow in value and the need to invest further. Somewhat ironically, electric car company Tesla is one of them. Another is Dambisa Moyo, a development economist, who recently advocated for bitcoin to be a store of value. She argues that companies must invest in this currency as a measure of self-protection, a kind of insurance. Companies that invest successfully will be able to take over poorer companies that have not invested.

(FILES) In this file photo taken on December 01, 2020 SpaceX owner and Tesla CEO Elon Musk (R) gestures as he arrives on the red carpet for the Axel Springer Awards ceremony, in Berlin.   Tesla boss Elon Musk strongly denied March 20, 2021 that his cars, which gather large amounts of data, could ever be used to spy on China despite fears raised by Beijing, the Wall Street Journal reported. / AFP / POOL / Britta Pedersen

With this argument Ms Moyo has “weaponised” bitcoin and created a cryptocurrency arms race. This is akin to a cold war: nobody wants it but, equally, nobody can afford not to participate. It is a stratospheric war at that, fought at high altitude at such high stakes that the effects will splash down over the population. Savings, pensions and debt are rolled into the exposure to bitcoin as institutional investors join in.

This means massive volatility – on March 14 it was worth $61,600 and down to $54,000 two days later. In November 2017 its value was $327. But what if institutional investors held on for several years? What if the value collapsed? What if everyone was invested in the currency – even schoolchildren could invest their lunch money in this global de-centralised digital honeypot. Could bitcoin become too big to fail? Will governments need to bail out those who sustain losses?

Industrial cooling fans operate to thermally regulate illuminated mining rigs at the CryptoUniverse cryptocurrency mining farm in Nadvoitsy, Russia, on Thursday, March 18, 2021. The rise of Bitcoin and other cryptocurrencies has prompted the greatest push yet among central banks to develop their own digital currencies. Photographer: Andrey Rudakov/Bloomberg

The digital experiment is of epic and real-life proportions: over $1.5tn are locked into this code. Much of that money could have gone to re-kindling Covid-19-ravaged economies (just watch those stimulus cheques going to bitcoin). Everyone is hoping to strike it rich, everyone else fears missing out. Few worry about the planetary climate implications and more trading means more carbon emissions. Others egg on investors by weaponising BTC. Energy allocation is prioritised to carry out transactions over essential services.

How might it unfurl as wealth is created and destroyed so easily and ethereally? This sounds like a dystopian future and addictive game rolled into one. But, of course, this is just one possible scenario. I’m sure there is another one somewhere, in which everyone gets rich, someone somewhere resolves the climate and energy issues, and we all live happily ever after.

Dr Patrick Noack is the executive director of future, foresight and imagination at the Dubai Future Foundation

Patrick Noack

Patrick Noack

Dr Patrick Noack is the executive director of future, foresight and imagination at the Dubai Future Foundation