Cryptocurrencies took the world by a storm at the end of 2017 when Bitcoin hit its all-time high price of $20,000. From hitting $5,000 a Bitcoin point in September 2017, the cryptocurrency made news across the world. But all has not been well since then. There have been speculations regarding Bitcoin mining being Hazardous.
But first, let’s back up a little bit.
A cryptocurrency is a form of digital currency designed to act as a medium of exchange. It uses the Blockchain (distributed ledger) technology to verify the transactions between two users. Using this technology helps it to be decentralised – there is no single point where the entire system is controlled. And, anyone can be a contributor to the ledger.
Bitcoin, which is one of the biggest (according to market capitalisation) cryptocurrencies, works on a system called mining in order to update the blockchain and confirm transactions.
Mining is a process by which any person with sufficient computing power can become a contributor to the public ledger to verify transactions. As a reward, they get bitcoins. Each computer has mining power measured in Gigahash/second. As more and more people join to mine bitcoins, the overall mining power of the systems grows. Bitcoin has a system to automatically adjust the difficulty so that the number of bitcoins mined grows at a constant pace. When more people mine, it becomes difficult and people receive lesser bitcoins and vice versa.
But there is a problem with this – the computing power doesn’t come free. A lot of electricity, as well as cooling, is required to run this operation. This has become a huge cost. Bitcoin mining is consuming approximately about 0.21% of the entire world electricity supply, going well above the electricity consumption of many countries. Thus, bitcoin mining is increasingly being called as hazardous.
Generally, due to the high demand for electricity, Bitcoin mining centers are set up where there is cheaper electricity. One such center has been in China, where multiple companies have set up shop to mine bitcoin.
Not only this but when a lot of computers are running simultaneously round the clock, they tend to generate a lot of heat. This is actually where the main demand for more electricity arises from – to provide cooling by the fans.
People have come up with unique solutions to keep the machines running efficiently. One method is to use a cooling solution. A second approach is to build centers in places where the temperature is generally lower, in order to prevent overheating. In this case, countries like Norway are being preferred by the miners.
One caveat of the mining methodology that must be mentioned is that if any player controls over 50% of the hashing (mining) power share, they could practically crash the entire system. Although this hasn’t happened so far, there is no guarantee it could not happen in the future.
Operation Costs for Other Systems
So, we have talked about the costs of running the mining operations of Bitcoin and have called the Bitcoin Mining Hazardous. This has fetched a lot of negative comments for, it being not economical to mine bitcoin, too much electricity consumption, not being sustainable, so on and so forth.
If we go back in history, each and every monetary system that has been put to use carries some cost with it. Whether it be the cost of storage and transportation for the barter system, the mining costs of gold or the cost of printing and transportation for circulation in the fiat system, each system includes its own share of expenditures.
A lot of people blame Bitcoin mining to be hazardous and unsustainable, yet how many resources are employed to mine the gold that is currently in circulation (or would be mined this year and the time to come), or even the banking system. The costs are even incurred to construct buildings, run air conditioners, printing currency notes and in transporting them.
In “An order of magnitude”, a dated study of 2014, Hass McCook compares the relative costs of using the different monetary systems in the world. According to the study, Gold mining used about 475 Million GJ of electricity, the banking system used about 2.3 Billion GJ while the Bitcoin network used about 3.6 Million GJ.
This comparison, though dated, brings to light a lot of misconceptions about the technology. Now agreed, that it is still nascent and has ways to go in order to improve itself before it gets mass adoption. Still, the Bitcoin network has time and again survived multiple price crashes and has improved to become more efficient over time. Compared to the functions it performs, Bitcoin appears to be more efficient than the traditional banking system.
Also, let us not forget that fiat money has lost value over time. This has happened due to the ability of governments to print money out of literally thin air. All of that has led to the mighty US Dollar falling over 90% in terms of purchasing power due to inflation.
Gold does get a pass here due to comparatively lesser supply (even though it does increase by a small percentage every year). Bitcoin specifically having a hard cap of 21 million, saves it from the effects of inflation.
One would here argue that the price of bitcoin has fluctuated so wildly, so how can one expect it to have a stable value. That has majorly happened because we value bitcoin in terms of the dollar. Thus, we need to look at it as a currency and not as an asset and that can eventually reduce the fluctuations. Adding to this bigger institution participation, and we have a formula for reduced volatility.
We also have to consider that bitcoin and other cryptocurrencies have been adopted by people. No one has ever been forced to use them as legal tender. Adding to this fact that the system is decentralised, there is no central authority which governs it. This is both a boon and bane. The drawback is that since no one is responsible, the system is open to exploitations. The benefit being you can practically start a bank at your home!
So when we complain that Bitcoin and other cryptocurrencies are consuming a lot of energy, it is not justifiable. For the functions they perform, the entire Bitcoin system is very efficient and comparing it to the banking system, it is not an apple to apple comparison.
Hence, Bitcoin and other cryptocurrencies need to be looked at from a fresh perspective and need not be subjected to the ways of the past trend. It is something new and naturally, humans resist change. But over time, as the technology develops and adapts to the changing requirements, this could actually pave the path where we have a highly efficient monetary system or probably the most efficient in all of mankind.