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The unsavoury truth about bitcoin mining – Newspaper

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Bitcoin is the talk of the town. Some call it the next technological revolution, while others refer to it as a potential Ponzi scheme.

Whatever your stance may be, one issue is exceedingly difficult to ignore. The energy consumption required to ‘mine’ bitcoins is unsustainable. Significant computer power is needed to create each digital bitcoin.

Generating just one bitcoin consumes as much electricity as an average Pakistani household does in three years. The process starts when computers try to mine via a computational race, which needs to crack a math algorithm.

Generating just one bitcoin consumes as much electricity as an average Pakistani household does in three years

The algorithm is extremely complex and the only way to find the desired answer is to make lots of different permutations and combinations. The more combinations a computer makes the better the chances of winning — and therefore the need for immense computational power and electricity.

Recently, the energy consumption of these systems has risen enormously as the prices of virtual currencies have skyrocketed, leading to even more complex algorithms and even greater electricity consumption requirements.

On average, one bitcoin is trading in the range of Rs110,000, or around $10,000 these days. With a steep incentive to mine a new bitcoin, people have begun to invest astronomical sums to participate in the computational race, which in turn makes the race harder to participate in.

This is one reason why there are now giant server farms around the world dedicated to mining bitcoins. In Pakistan it is no different. Proposals are going round to utilise cheap electricity — most likely through micro-hydro and run-of-the-river plants in Khyber Pakhtunkhwa — to power nearby server farms.

Electricity consumption increases more as the system is completely decentralised. Whilst mining, all the computers are also serving as accountants of the network. Furthermore, after unlocking an algorithm, the computers are required to monitor new transactions coming to the network, thus upping the required electricity consumption.

Comparing bitcoin’s electricity consumption to that of its centralised alternatives- MasterCard and Visa card, Digiconomist, a blog site, estimates that each bitcoin transaction requires approximately 80,000 times more electricity than each Visa credit card transaction.

This staggering figure outlines the cost of a decentralised financial system. However, there is a counter-narrative to this by bitcoin devotees. First, they argue that bitcoin has allowed for the creation of the first financial network that is trusted, governed, operated, and regulated by the participants themselves.

They believe this more trustworthy financial system allows the flow of money without central bank prejudices and does not concentrate power in the hands of a few big corporations.

Secondly, in countries where the financial system lacks stability- such as Zimbabwe and parts of Africa- bitcoin has sometimes provided a more stable place to put money in a democratised manner, free from one-off governmental mal-actions.

And in countries with more stable economies, bitcoin has led to new start-up activities, investments and jobs. For instance, a company in India recently announced it would create a decentralised blockchain ledger, termed the Rupee blockchain, to create the first decentralised currency system for India and South-Asia.

Such activities are bound to attract investments and create greater employment opportunities. This boils down to one question: if one really distrusts the financial system, is that really worth the additional electricity cost of bitcoin mining?

For a climate enthusiast, the simple answer is no. It is not worth putting so much electricity in recreating a financial order that is simply not broken. With climate change on the horizon, there are individuals making conscious efforts to adopt energy conservation technology. Bitcoin mining makes a mockery of such efforts.

Also, in perspective, the fiat money (government issued money), costs nothing — no mining is necessary — it is easy to transport and store, and is a perfectly functional means of exchange with most people in a country trusting it.

Old-fashioned money also provides for a government-backed guarantee. Major central banks have played important roles in stabilising economies when financial crises have hit. They have not depicted the volatility of bitcoin, which surges to 100 per cent in one week, only to come crashing down the next.

To make an educated guess, cryptocurrencies might be a major part of the problem when the next financial bubble bursts, not a part of the solution. Nonetheless, we live in times when every new technological development is labelled as disruption.

The tech world’s frenzy about the inherent labelling of disruption is becoming more of a self-styled sales pitch. It is easier to justify bitcoin when it comes to disrupting an existing financial system in need of innovation, but more challenging to justify it at the expense of staggering electricity consumption and environmental damage. After all, what good is a new financial order that only accumulates poisoned air and water?

Published in Dawn, The Business and Finance Weekly, February 26th, 2018



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