It’s hard to watch the debate over Bitcoin’s energy use without imploring the moderator to rephrase the question. Who decides on behalf of global society what’s an appropriate, just, or ‘right’ amount of energy to employ to build infrastructure for future generations? We should be challenging ourselves to examine how we have normalized big bets on energy use and develop a pragmatic standard for initiatives with the greatest potential impact. Not only does cryptocurrency promote a greener planet, but it will bring the underbanked and underrepresented online to a transparent, fair and open financial system for the first time in history. Meanwhile, cryptocurrency-based infrastructure will further reduce redundancies and inefficiencies in plain sight that waste energy across everyday financial activity. Bitcoin isn’t a threat to the environment – it is one of the most important uses of energy in the next 20 years.
The Earth is home to 7 billion people and our global population is estimated to hit 9 billion by 2040 that when coupled with accelerating urbanization could double power use. The efficiency of everyday electricity usage has greatly improved as we continue eliminating waste and unnecessary carbon intensity. However, you can’t redesign the laws of physics–per the Jevons paradox, it’s a mathematical certainty that more energy will be required to make more energy to meet our booming population’s basic needs and foster economic growth. We must consider energetic investments which may yield generational gains in productivity, financial inclusion and equitable resource distribution. Enter Bitcoin.
First, Some Context (Money is Energy)
It’s tough to condense the history and relationship between money and energy, but I recommend this excellent primer which covers the history and science of energy and its intrinsic tie to Bitcoin. Our civilization’s economy is a useful work machine evaluated on its competence (productivity) in energy transformation as a thermodynamic system in our ecological biosphere. Our economy takes energy and through (hopefully!) useful work, transforms it into productive assets plus waste. The primary purpose of the monetary and financial system is to efficiently aggregate and allocate capital across time horizons for productive societal purposes.
Everything is energy, including money, which is just a fungible form of energy. If energy is the ability to do work, money is the fungible ability to make like-for-like decisions about whether to consume energy today or defer consumption by investing that energy. This is an enormously important function enabling efficient intertemporal energetic trade-offs. This includes everyday decisions: an addition to your house, purchasing groceries, investing in gold or adding to a savings account. This also includes deciding between taking a vacation or investing in a degree. The more direct the link between money and energy, the better it is at helping us make equivalent decisions about how to invest that energy.
That connection is partly what historically made gold such an effective form of money. Gold is the original ‘proof of work’ currency – the value of energy is visible in a mine’s operational costs, the direct conversion of quantifiable manpower (energy) and complexity to unearth a tangible item of limited supply. There’s a reason cryptocurrency uses the metaphor of digital mining today; the blockchain acts as a transparent ledger of energy across a new generation of virtual miners and sophisticated computer systems via a finite number of digital tokens. What we spend to gain has never been clearer. This straightforward elegance only highlights the inherent murkiness of fiat money and its inherent contradiction: the ease of issuing fiat without consideration of its energy costs has always resulted in devaluation and inflation, because of its lack of unforgeable connection to energy.
The financial system is simply an overlay on the real economy. It cannot avoid its intrinsic tie to energy and thus cannot afford to ignore innovation that transparently enables this value exchange. Unfortunately, our current system is unnecessarily inefficient because of the creaking operational infrastructure at its core, even with incorporation of Artificial Intelligence, machine learning and streamlined UI’s. It remains a centralized system of manual and batch processes that wastes tremendous energy daily.
And it’s hardly ready for that population boom. The UN Broadband Commission has set several digital inclusion goals to bring more of the world online by 2025, including reaching 75% broadband penetration among the global population. For many of the newly connected, this will be the first time they have the possibility of reliable, digital banking – but how accessible will that luxury really be? Today there are 63 million unbanked and underbanked Americans and 1.7 billion unbanked people worldwide (55% of whom are women). They are without the security of a formal financial institution or necessary documentation to hold a bank account, get a loan or send cash wages to family abroad. This exclusion from the financial system results in an unnecessarily hard life today, generational wealth gaps and entire nations of people who will suffer poverty traps.
We have to ask why we’re preserving last century’s financial energy system. If we could use modern technology to better represent money and energy, what would that look like?
1) A monetary system that supports, rather than distorts, our global ecological economy
The purpose of a financial system is to help society efficiently make the best economic allocation decisions over time, which is inherently tied to the money system. At the same time, the internet has removed significant barriers for international and local economies, and is merging civilian life toward one global economic community. We need money that can move anywhere, instantaneously, in a way current localized forms do not.
A fiat money system is generally tied to a political system in a specific geography. It is not tied explicitly to energy, unlike gold or other commodities, but rather to the ability of an issuer to tax an economic system. Since fiat money has no real marginal energetic cost to produce, it is political will that maintains its constant purchasing power. There are precisely zero historical examples of fiat money maintaining purchasing power—it is politically easier to dilute someone else’s energy through monetary inflation rather than balancing the energetic costs with less spending, more taxes or higher interest rates on borrowings. Fiat money continues to drift unmoored from the underlying economy; regardless of its regionality, the pain it yields as excess debt is universal. Debt represents the unrealized but obligated commitments of future energy resources. When we overextend the system, we’re really witnessing an intertemporal disequilibrium that massively misallocates energy. Our enormous global debt load is now at 355% to GDP. There is no historical precedent for an economy to have this much indebtedness. It is both unsustainable and unstoppable—debt has grown faster than the economy in the US and globally virtually every year since the explicit fiat system started in 1971. We are moving further and further away from sustainable growth by creating Ponzi-like dynamics that are bankrupting our children.
The economic distortions are everywhere: interest rates are zero or negative for the first time. Asset prices are at record valuations. Central banks continue to expand balance sheets at unprecedented rates. Meanwhile, productivity, the most important element for sustainable long term growth, is at generational lows. This paradox creates enormous wealth inequality; real median wages have barely grown in 40 years For rich countries this has led to societal tensions and increasing political polarization. For less well-off countries, the opportunity cost of sub-optimal growth and inefficient energy allocation is unnecessary hardship and excess poverty. Whenever this trend has briefly slowed or stopped, it has led to a recession and/or financial crisis.
It might be easy to sound the alarm, but it’s nearly impossible that the financial ecosystem can reorient its relationship as intermediary between citizens and their ability to access energy within the current framework. Evolution is crucial to the success of organized systems, especially those that serve billions of people. A democratic and open financial system brings us closer to a structure of checks and balances facilitated by third-party innovation. Valuing Bitcoin as a fundamental innovation—an asset backed by energy— makes its adoption a priority.
2) A greener future is a currency that reflects the marginal cost of energy in the economy
The amount of energy used by the overall Bitcoin process is relatively small, just 6bps of global energy (half of the gold industry.) The majority is spent in mining and securing the ledger, not from incremental transactions. We’ve already made the initial investment in energy to mine more than 85% of the finite supply of tokens and bring them into circulation. So how do we move forward in the most responsible manner, driving use of renewables while minimizing carbon emissions?
Bitcoin mining incorporates a system of constraints and growth controls over time. For example, mining rewards tied to issuance halve every four years. With less coins to mine for less reward and so much infrastructure yet to build, the Bitcoin ecosystem is incentivized to shift focus to developing solutions required to scale transaction efficiency and leverage lower-cost energy. The consortium sponsoring the Crypto Climate Accord has already challenged private sector blockchain leaders to commit to transition to renewable energy by 2030 and reach carbon neutrality by 2040. More than 45 organizations have joined the pledge.
It is very worthy to invest in the future of borderless financial infrastructure that can complete transactions anywhere and which relies on mining cryptocurrency. Unlike most applications which require close proximity of the power source and end user, Bitcoin encourages participants to seek the cheapest energy anywhere in the world regardless of the user’s geography. If the industry frames this opportunity correctly for policymakers and community leaders, it will effectively develop hyperlocal economies that push forward the adoption of renewables. In fact, the Cambridge Centre of Alternative Finance (CCAF) calculates Bitcoin already uses at least double (39%) and as much as four times (78%) the renewables of the general economy.
Presently, 1.3 billion people suffer from energy poverty, lacking access to electricity due to limited financial resources or geographic isolation. It’s exciting to see the tentative beginnings of the halo effect, untrapping energy in emerging markets such as El Salvador where the president has committed to a cryptocurrency hub powered by geothermal volcanic energy, tax credits for crypto entrepreneurs and renewed satellite infrastructure to help rural users access the internet (how often do American companies leverage Salvadoran energy today?) The country is also the first in the world to classify Bitcoin as legal tender.
It couldn’t be better timing to encourage this powerful utility, a currency that enables the economy to utilize trapped energy that is otherwise stuck or wasted. We haven’t exactly mastered energy efficiency in our own backyard! The United States is estimated to spend more than $300b per year on energy drained by drafty doors & windows, inefficient appliances and other home issues that are easily repaired.
The fact is, we’ve normalized deep commitments to long term energy expenses; big bets like continued military innovation, space exploration and daily diversions like Christmas lights and checking your favorite apps. Internet giant Google uses enough energy continuously as an organization to power more than 1,000,000 homes; 100 searches on its homepage equal one standard light bulb burning for 28 minutes. Global gas flaring represents almost 10x the energy consumed by the Bitcoin network. The energy revolution demands a wider perspective and analysis of our energy consumption and investments.
3) Open and transparent access for everyone in the world
Lastly, the ideal money for our civilization is open to anyone. Open systems are the most efficient energy allocation mechanisms. They leverage Metcalfe’s Law to drive innovation and adoption that will use all available energy in the economy—equaling greater opportunity and financial literacy for consumers regardless of where they live or how much money they have. Open systems are built atop values of inclusion, freedom, decentralization and independence— distinctly American values.
We take for granted that the financial system in America has general protections and safeguards for middle class, law-abiding citizens. But to a family fleeing their country’s authoritative rule or a laborer without a bank account, a decentralized financial system means safety, stability and the ability to retain and grow the assets they own.
The need for an open financial system, even for Americans, is much more pressing than we think. The current closed financial system generates very high cost solutions for the most vulnerable that are unbanked and underbanked. They disproportionately pay higher service fees and interest compared to those that are financially healthy with readily available access. Today, 84% of fees are paid for by the 64% of households that are the least well-off. This is particularly acute for the financially vulnerable, who are paying 13% of their income in fees.
Crypto won’t “hypothetically help” the marginalized; the impact is happening now. Recent studies by Harris and University of Chicago show how crypto is embraced by the underserved. Awareness of crypto is much higher among people of color. Half of Black Americans, half of Asian Americans and half of Hispanic Americans say they are familiar with cryptocurrency, versus 37% of White Americans. One-quarter of LGTBQ Americans own crypto compared with only 13% of the general public. ”There has been a long history of discrimination in investments,” says John Gerzema, CEO of the Harris Poll. “And that could be why we have seen a wide demography of interest and inclusivity in crypto.”
Marginalized groups are adopting blockchain technologies even faster than category leaders and system builders because they need a new system that works for them. We need to transcend outdated and inefficient habits and systems while investing in a future that can move society to a more productive and equitable equilibrium over the next 30 years.
The economy is a thermodynamic system. In a society that has normalized enormous energetic bets from media to entertainment to space, we should also leverage new technologies to promote a more fair, efficient and safe monetary and financial system. Bitcoin is a part of the solution to today’s energy constraints that meets our banking and investment needs for a digitally native global society.