The cryptocurrency crash is great news for the rest of the world. here’s why
Cryptocurrencies like Bitcoin were meant to be used as digital currency. Instead, they have become popular as speculative investments.
In addition to being resource-intensive and inherently wasteful, cryptocurrencies are also incredibly volatile. The prices of the biggest cryptocurrencies, Bitcoin and Ethereum, have both fallen more than 55% in six months, leading some to suggest regulation is needed to contain the turmoil.
Some blame the price drop on a specific contagion, a collapsing “stablecoin” called TerraUSD which is believed to be pegged to the US dollar. But the current cryptocurrency market crash is more likely a combination of many factors.
For years, interest rates have hovered near zero, making bank bonds and treasury bills boring as investments, while cryptocurrencies and non-fungible (or NFT) digital tokens to works of art look attractive.
However, the US Federal Reserve and Bank of England recently raised interest rates by the highest amount since 2000. Continued COVID controls and Russia’s invasion of Ukraine have also sobered markets.
Bitcoin was designed to be indifferent to governments and banks, but investors generally are not. They remove sources of risk from their portfolios and abandon crypto.
The loss of the crypto, the gain of the climate?
The most polluting “proof-of-work” cryptocurrencies, such as Bitcoin, Ethereum and Dogecoin, together use around 300 terawatt hours (TW/h) of mostly fossil electricity each year.
Bitcoin has an annual carbon footprint of around 114 million tons. That’s roughly comparable to 380,000 space rocket launches, or the Czech Republic’s annual carbon footprint.
Proof of work mining can be seen as a controlled way to waste energy. The process involves specialized computers repeatedly taking random shots to guess a long string of numbers. The amount of computing power dedicated to this effort is called the network hash rate.
If the hash rate drops for any reason, due to power cuts or price drops, for example, the difficulty of the guessing game is automatically adjusted to ensure that the network can find a new winner every ten minutes. Each winner then tries to verify transactions made on the network and receives 6.25 newly minted bitcoins.
Whether or not the guessing game pays off depends on how much the mining company paid to set up its computers and how much energy it takes to run them.
Most proof-of-work mining machines in the world use electricity generated by coal-fired power plants. The higher the price of cryptocurrency, the more mining companies are willing to waste that electricity, until the costs of winning outweigh the rewards.
With the Bitcoin price falling, the financial incentive to waste energy on Bitcoin mining should be lower. In theory, it’s good for the climate.
But surprisingly, the hash rate (and carbon footprint) of the network remains very close to its all-time high, averaging around 200 quintillion hashes per second.
The magnitude of this continued interest means that mining Bitcoin at current prices is likely still profitable. But for how long ?
Tipping points and death spirals
Bitcoin’s value temporarily fell below the estimated cost of production several times before without significant long-term damage to the hash rate. But if the market stagnates long enough, proof-of-work cryptocurrencies will start to see an increasing number of miners capitulate.
Miners with the highest costs are likely to sell their bitcoin holdings as profitability declines, creating even more selling pressure in the market. Short-term capitulation among high-cost junior mining companies (often using intermittent renewables) is normal.
But a domino effect with one major mining company after another shutting down could quickly send crypto prices and network carbon emissions crashing towards zero. This event is called a Bitcoin death spiral in crypto parlance.
Besides the price challenges of Bitcoin mining, there are other potential tipping points to consider. Many large investors, especially those who bought at higher prices, are currently underwater – weighed down by large bags of Bitcoin.
Salvadoran President Nayib Bukele has just increased his country’s total Bitcoin reserve to around 2,300, or around $72 million at current prices. His country’s crypto losses add to fears of an impending default that would cause significant pain to those who had no say in their leader’s bet.
Bitcoin ban or boycott
Prominent investors can find Bitcoin bear trades a bore. But research shows that the environmental losses of high-priced cryptocurrencies are far more worrisome.
The damage caused by Bitcoin mining disproportionately affects poor and vulnerable communities, as mining companies and crypto developers take advantage of economic instability, weak regulations and access to good energy. market.
Locals wishing to use these resources for productive purposes can be priced by Bitcoin miners. These communities also tend to face the abrupt end of the climate crisis, which crypto mining is fueling.
Governments around the world want to appear enthusiastic about cryptocurrencies as tools for economic growth. But the crash shows that Bitcoin is both useless as a common medium of exchange and as a reliable store of value, bringing most users far more pain than profit.
In the aftermath of the 2008-2010 global financial crisis, governments promised a crackdown on toxic financial instruments with fictitious valuations. For the global climate and a stable economy, cracking down on crypto now will be a boon for everyone.
But if environmental regulatory efforts aren’t globally coordinated or far-reaching, crypto’s climate contagion will continue to grow..
Peter Howson, Lecturer in International Development, Northumbria University, Newcastle.
This article is republished from The Conversation under a Creative Commons license. Read the original article.