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by John Quiggin on December 8, 2018

The market price of Bitcoin and other cryptocurrencies is plummeting, having dropped by 10 per cent over the last couple of days, and 50 per cent over the past month. The bubble that reached maximum expansion a year ago is gradually deflating.

The good news is that a lower Bitcoin price makes the energy-wasting process of Bitcoin mining unprofitable for many, so lots of miners are turning off their servers. Most estimates of the marginal cost of mining are around $4500 per coin, but the market price has just fallen to $3500.

That situation won’t last long. Every couple of weeks (more precisely, every 2016 blocks) Bitcoin adjusts the difficulty of the pointless algorithm used to mine coins, so as to ensure a steady flow of around one every 10 minutes. As mining effort has declined, the difficulty is reduced, which means less electricity wasted per Bitcoin.

The rapidity with which Bitcoin prices are falling give some hope that the entire disastrous episode will soon be over. If the current rate of decline (50 per cent per month) is maintained, Bitcoins will be worth less than dollar coins in a year’s time, and their impact on electricity demand will be negligible. That’s equivalent to taking a small country like New Zealand off-grid.

In this context, it doesn’t matter whether Bitcoin miners are using renewable energy or coal. The opportunity cost of the electricity they use is the coal-fired electricity that would otherwise be displaced by renewables.

{ 11 comments }

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Scott P. 12.08.18 at 7:06 pm

My understanding is that the total number of Bitcoins is finite, so that the number mined will automatically decrease and that will cause the rate to slow (though never entirely stop) over time as well.

2

Chetan Murthy 12.08.18 at 9:58 pm

Scott P @1: Three thoughts:
(1) this is true of Bitcoin, but not so for Ethereum (which has a hard-coded rate of increase).
(2) you’re right, and to the extent that miners fund their operations by cashing in “miner reward coins”, this will be a problem for the BTC ecosystem
(3) but already we’re seeing the rise of “transaction fees” required to get your tran to be accepted by a miner (and included into a block someday before next century). It was always expected that these fees would be the eventual source of funding for miners.

The problem really boils down to the “insanely, brutally wasteful consensus algorithm” that BTC (and all its descendants) chose. Proof-of-work is intrinsically wasteful: it spends resources at each miner, as they try to compete to produce the next valid block. If we reduce the cost of that activity (to each miner, who is working independently, mind you), we attract more miners. John Q. noted above that as the number of miners drops, the global BTC “algorithm” changes a parameter to make mining “easier”. Conversely, if more miners join, the algorithm will adapt to make mining harder. All to keep the rate of block-production as constant (10min/block) as possible.

So if you decrease the “intrinsic cost” of operating a miner, you won’t change the resources expended on mining — you’ll just attract more miners. Assuming that the value of BTC doesn’t crater. John’s right, that the only real way this can end “sanely”, is for BTC to crash in value: that’s the only way that miners will exit.

3

Gregory J. McKenzie 12.08.18 at 10:12 pm

The downfall of all speculative assets, not backed by governments, is short selling. Whether it is naked or covered, short selling can devastate assets prices. This makes crypto currencies problematical as a replacement for legal tender.

4

b9n10nt 12.09.18 at 3:42 am

if you squint hard enough, you can squeeze the light into a silver lining.

Bitcoin’s potential demise has no effect upon the institutions that ensure that speculative boondoggles will continue to drive a significant degree of current economic combustion.

Only a radical social democratic capture of Finance could do that. Bitcoin’s potential demise does not hasten this change.

But it is good to note the absurdities, I’ll grant you that. Just no squinting, please.

5

bad Jim 12.09.18 at 6:14 am

There are many spectacles more gratifying than libertarian wet dreams being shattered like icicles in Iceland, where geothermal electricity is cheap and the cooling of densely packed clusters of high-speed circuitry merely a matter of opening the windows, but it would be heartless not to laugh.

6

TM 12.09.18 at 11:20 am

Since the other thread is closed, maybe I am permitted a remark here. FN mentioned Austudy and asked whether similar programs existed elsewhere. The German BAf?G was mentioned and it is an interesting case study. BAf?G (federal education support, https://de.wikipedia.org/wiki/Bundesausbildungsf%C3%B6rderungsgesetz) was introduced in 1971 as a typical socialdemocratic reform to promote lower class students’ access to higher education. It was initially a non-repayable, no strings attached transfer payment to students from low income families. It is what allowed two siblings and myself to attend and complete university. It’s not a scholarship for specially gifted students (in Germany “merit-based” scholarships play almost no role and tuition is still free). It’s also a right that eligible students can sue for if they are denied it.

Although BAf?G was introduced in 1971, a predecessor was introduced in 1957 by the Adenauer CDU government. The SPD government expanded it and established a *right* to education support that eligible students could sue for. In 1982, the SPD government was replaced by the soft-Thatcherite, “neoliberal” CDU under Kohl. Kohl together with the small liberal party FDP went on to win four elections (the last only barely but the others convincingly) and was only displaced in 1998 by the “neoliberal”-turned SPD under Schr?der (together with the Greens). Note to leftist delusionists: the SPD ran and lost against Kohlian neoliberalism four times, then they moved right and started winning again. Not the other way round.

The Kohl turn had dramatic consequences for poor students: from 1983 to 1990, BAf?G was reduced to a grant that had to be repaid (albeit at zero interest). It was not voter revolt but the unification that in 1990 forced a correction. In the GDR, a basic income for students independent of background had existed since 1953. Now the government turned BAf?G into a mix of 50% transfer payment, 50% grant. My older brother had the bad luck of studying in the worst of times and had to repay everything. I was luckier. I repaid far less than half, at zero interest. By the end of the Kohl era, the proportion of poor students eligible for BAf?G at universities had reached a low point (13%).

Schr?der didn’t return BAf?G to its former glory but enacted many improvements. The repayable portion of BAf?G was capped at 10’000 Euros and eligibility was extended. The proportion of low income students went up to 25% by 2003 but declined to 20% by 2016. The Merkel grand coalition government also enacted improvements. Relatedly, there was a short-lived attempt to introduce tuition fees. The Kohl government never dared go in that direction but hardline state governments tried, around 2006. Even though the fees were low by US standards, the resistance prevailed. Since 2014, no public university charges tuition.

The BAf?G (and tuition) saga is an interesting lens through which to look at the political changes of the last 30 years. There clearly was an anti-welfare-state turn in the 1980s, which perhaps the term “neoliberalism” helps describe, and which, sadly, was popular with voters. The welfare state hasn’t quite recovered from this turn but it is not true that the pendulum has moved only in one direction. Social democratic policy has changed, compared to the 1970s, but comparing “third way” social democrats like Blair and Schr?der to Thatcher and Kohl is absurd. Btw “third way” was the official policy of the SPD at least since 1959 (Godesberger Programm) – what new is there under the sun?

Otoh it is impossible to overlook that even the Kohl-era BAf?G (together with free tuition) was more generous than anything that for example would be possible in the US. And yet, and yet, despite decades of relatively generous funding, Germany still falls short of providing equal access to higher education because educational “capital” is still concentrated in the middle and upper classes. Perhaps this proves that reformism really doesn’t work. Real equality cannot be established in a class society. Of course not, by definition.

But for millions of people, yours truly included, reformism has worked and has provided opportunities that they otherwise wouldn’t have had, and I don’t see a better alternative on the horizon.

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Dan White 12.09.18 at 1:08 pm

Lead into gold. Thorium into Bitcoins ?

8

James Wimberley 12.09.18 at 6:15 pm

Dan White: Luca Pacioli didn’t think big enough. Onward to thousandfold-entry accounting!

9

James Sutherland 12.10.18 at 1:14 pm

Commentators: when something seems to us “insanely, brutally wasteful” or “absurd” but has been weathering these same criticisms for a decade and chugging on regardless, might it be possible (maybe even more likely?) that we just don’t understand it?

10

boconnor 12.11.18 at 1:45 am

@ James Sutherland

Of course you must know that people can continue to believe things that are not true long after the rational analysis has shown them to be false (flat earth, etc etc ). Longevity does not imply that “we” don’t understand it. On the contrary the evidence from the dot-com boom/bust and other bubbles is that we understand them all too well.

Its a pity that gullible retail investors are being scammed again, and that there is no strong regulation to stop these schemes.

11

Chetan Murthy 12.11.18 at 4:48 am

James Sutherland @9: I don’t want to be cruel, so I’ll just ask it as blandly as possible:

Do you understand cryptocurrency and blockchain? In detail? Can you explain the economic arguments, and the technical and legal underpinnings of the various systems? Again, in detail ??

I designed IBM’s HyperLedger Fabric blockchain transaction design. I consulted with Cisco on their blockchain platform. I’ve written very, very nontrivial Ethereum smart contracts. And I have a history of working with mission-critical transaction-processing systems, including at major financial institutions. You think maybe I don’t understand it? Maybe you need to demonstrate that you -do-, eh? How about giving us a dissertation on Ethereum Plasma? Prove that you understand this world, in detail, eh? [yes, it’s a d**k-measuring contest; yes, you asked for it.]

And I can say, with 100% certainty of not being disproven, that the *technology* behind blockchain is 100% BULLSHIT. It’s not just terrible, but not scalable in either transaction-rate (throughput), data-set-size (# of accounts), or complexity (and if you think that all financial transactions are simple, (a) maybe you should rethink your life choices, and (b) maybe read Nacamuli’s book[1]).

Furthermore, the economists and legal scholars who have weighed in, both here and elsewhere about blockchain, are even *more* well-qualified to talk about the enormous insanity that is cryptocurrency. Show us where you preditected that the introduction of futures markets in BTC & ETH would naturally result in popping of speculative bubbles, yes? B/c real economists pointed out that that was a *natural* consequence. You know, people with actual expertise.

And last: sure, it’s been weathering criticisms for a decade. In that time, it has yet to expand past its initial user-base (which is criminals). In that time, the “business-case” has moved from “private trans for real people” to “settlement for big trans between financial institutions”[3] to “a store of value”[4].

I mean, It. Is. To. Laugh.

[1] and if you don’t know Nacamuli’s book, maybe you don’t know what you’re talking about[2]
[2] _Payment Systems_ by David Nacamuli.
[3] As if big financial institutions could benefit from these “censorship-resistant” payment systems! It’s ridiculous! they’re all regulated and required to keep records of *everything* for N years.
[4] This … well, what’s the point? Anybody who believes this horseshit obviously hasn’t even read _The Wealth of Nations_ — why bother to educate them?

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