I am fascinated, blinded, amazed and intimidated by Bitcoin, the oldest (2009) and largest cryptocurrency. I first wrote about it five years ago before it became a “thing” that everyone now seems to have an opinion about. At that time I compared Bitcoin to paper money and imagined what the Doges of Venice might have thought when Marco Polo raved about the “paper money” he had used there after his return from China. He later wrote: “All of these slips of paper are given out with as much solemnity and authority as if they were made of pure gold or silver …[a person can] handle all purchases and sales of goods with them as well as if they were coins of pure gold. “
Paper money is fiat money. Fiat, Latin for “it should be”, is a currency created and legitimized by governments. It works well as long as you can trust the government. When people lose confidence in the government – like in 1922 during the German Weimar Republic or in 2013 when the almost bankrupt government of Cyprus imposed a 47.5% “tax” on deposits from the Bank of Cyprus overnight – the system fails. Suddenly a piece of paper that you would have used to buy a full bag of groceries yesterday is worthless. (Remember, the U.S. Treasury Department didn’t stop minting silver coins until 1964 when the silver content exceeded face value. A quarter of 1964 now has a silver bullion value of nearly $ 5.)
It is for this reason that Bitcoin and other cryptocurrencies have drawn so much attention because their value does not depend on governments. Bitcoin itself is inflation-proof, i.e. no chance of the hyperinflation that was afflicted in Germany in the 1920s, for example. As soon as 21 million bitcoins have been mined, which will happen around the year 2040, that was it. This is the genius of Bitcoin: It was set up from the beginning, unlike, for example, the number of US dollars in circulation, which is changes at the discretion of the government.
The key to Bitcoin’s success is the blockchain, a single, public ledger that is stored in multiple copies on approximately 100,000 “nodes” around the world and is occupied by an estimated one million people. Most of these nodes are operated by “miners”. New bitcoins are mined at a computer-set rate (around 900 per day), and a miner is paid in bitcoins – both for success in mining and for maintaining their node. I’ve explained it here and here.
Will Bitcoin, or cryptocurrencies in general, one day replace fiat currency? Judging by how quickly it was accepted, that’s a real possibility. It took only 12 years for Bitcoin’s market cap to hit $ 1 trillion. Compare that to Microsoft (44 years old), Apple (42) and Google (21).
I can’t write about Bitcoin without discussing its environmental impact because it takes enormous amounts of energy to run a Bitcoin mine. You can imagine it this way: The global banking sector consumes around 250 terawatt hours per year, around 1% of the global energy consumption of 23,000 TWH / year. (Production = 77% of it, mining = 12%, construction = 7%, agriculture = 4%.) Bitcoin miners meanwhile use between 32 and 110 TWH / year – difficult to estimate. Much of this – at least half – comes from renewable energies or from excess “stranded” gas that would otherwise be flared. (Norway offers miners subsidies to use local hydropower sources.) Here is a positive aspect of Bitcoin’s energy usage.
Bitcoin mining farm in Iceland, where cheaper hydro and geothermal electricity is available. Photo: Marco Krohn, via Wikimedia. Creative Commons License.
I wrote, “Publications like Fortune, Business Insider, and The Street have published over 100 stories of Bitcoin’s death in the past five years, which hasn’t stopped Bitcoin startups from raising more than a billion dollars in that time.” That was in May 2016 when Bitcoin was trading at around $ 450. It has since redefined the word “volatility”: last March it traded above $ 60,000, while it fell to $ 32,000 in the summer. Now it’s a yo-yo between $ 42,000 and $ 69,000. (In case it’s not obvious, I’ll be the last person to ask about investing, so don’t use any of the above as a guide.)
Ponzi or currency of the future? No idea. Ask me in five years.
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