When I was introduced to the concept of block chain and cryptocurrencies, it was the year 2016. I was actually wowed by the concept of a decentralized currency. I started reading about it in many sources. It had two aspects the financial one and the technical one. I read about both. As a monetary unit it looked very promising. But more I learned about how it is being perceived and used by people, my interest in the area dwindled. I thought to myself, I am never going to mine or invest in cryptocurrencies. The reason being, it not resonating with my personal values.
1. Deviating from the Original Cause
You either die a hero, or you live long enough to see yourself become the villain…
— Harvey Dent
The bitcoin white paper outlines bitcoin as a distributed (crowd operated) monetary unit that is designed to eliminate the need of mediating third party (financial institutions) in transactions. Actually why do we want a currency that is not controlled by the financial institutions?. The first reason is, these institutions add an operational overhead to all the transactions. But I can live that. But the more important reason is, these institutions can control the inflation of the currency. The general public do not have a say in this. Bitcoin was a currency that democratized this. It put the responsibility and power in the hand of each and every user of the currency. That was the factor that made me go “wow” at first. I really liked it.
But today cryptocurrencies are not currencies anymore. Don’t get me wrong here — They are currencies nominally. But people are not perceiving it as a currency anymore. It has gone from a currency to become a digital asset. Since it is perceived as an asset, people hold on to it, expecting it to increase in value. This reduces its widespread rotation and flow in the market, which makes it less of a currency.
You may ask, is it that bad for a currency to be perceived as an asset? Well actually it is not that bad. In fact, In developing country like ours, people tend to invest in Forex as well, expecting the value of USD, Euro etc. to grow relative to Rupee. But by becoming just an asset cryptocurrencies have lost the wow factor (hero’s appeal) it had.
2. Crypto’s Value = What?
“Okay, it may have lost it’s appeal as a hero but that doesn’t make it a villain right? it can still be treated as any other asset bought and sold… what is the harm in it?”
Well IMO it has an inherent harm - one day it will loose its value.
Let’s say you invest in a firm by buying some shares. To most part, the asset you bought with your investment is tied to the performance of the firm. If the firm performs well, your ROI and share value increases. If the firm performs bad value decreases. Of course the demand for the share and prospective growth of the firm in the long run too influence the value of the shares. But again the demand can be tracked back to the performance of the firm. ( I am ignoring scenarios like Gamestop here). Even in case of Forex investments, the relative value of the foreign currency is tied to the comparative performance of the two countries.
But the value of cryptocurrencies increases only based on the demand metric. The demand for cryptocurrencies is driven by the expectation that value of the cryptocurrencies will increase further in the future. This is like an uncontrolled chain reaction (that might go boom one day). Also this heavy dependency on crowd anticipation as the only value metric has caused the cryptocurrencies to be very volatile and chaotic. In the past few weeks value of cryptocurrencies fluctuated by a lot based on few tweets!
Another resource I can think of with similar traits is gold. The value of gold is purely driven by the demand for it. But there is a significant difference — gold is a limited resource, whereas cryptocurrencies are not.
3. Environment — Do we care?
“May be. But cryptocurrencies have a market cap north of 2 Trillion USD. That mean a lot of people value cryptocurrencies as an asset. If I buy and sell at the right time it will be a lucrative investment, right?”
Yes it will be. But what is the actual price ‘We’ all would have to pay for it?
This is where I see an inherent design flaw in cryptocurrencies. One factor was not paid enough attention at design stage — the ENVIRONMENT. According to Cambridge Bitcoin Electricity Consumption Index, Bitcoin mining is estimated to consume 120+ tera watt-hours per year for mining. According to this list (of course it is Wikipedia), this is greater than the annual electricity consumption of 189 countries/regions. Only 30 countries in the whole world has electricity consumption above this number. I hope you can imagine the carbon footprint of cryptocurrencies.
Of course every asset we own, service we consume, product we use has a carbon footprint. But they are not as big as crypto’s. The mining process of cryptocurrencies is responsible for the massive carbon footprint. Mining is not only the process of minting new coins, it is the process through which the transaction is validated and accounted for. Every time a transaction is made using cryptocurrency a computationally intensive algorithm is run (I am not going into the technical details of the process). According to Digiconomist, a single bitcoin transaction uses the same amount of power that an average American household consumes in 41 days and creates a carbon footprint equivalent to watching Youtube for 95 000 hours (10 years 10 months straight). A crypto-coin will have this amount of impact on the environment again and again and again till eternity each time it is used. If we stop the mining process of a cryptocurrency then all the credibility of that cryptocurrency will be gone. Hence, the value will be gone.
Usually we (mass public) question the big corpos whether they are using energy ethically and whether they are caring for the planet. At least in the tech industry, few big players have vowed to go carbon neutral in the coming years. Some companies have even pledged to erase their historic carbon footprint by being carbon negative. But I think it is time to ask that question to ourselves. When given the opportunity to own an asset that can be lucrative (in the short run), but impacts the environment in an adverse manner, what will I do?
I have answered…
This is not a research article and I am not a person with a strong background in finance. These are my thoughts based on my personal ethics. I could be wrong — “to err is human”. I could have miss interpreted something or I could have totally not seen another side of the story. So if you disagree with me, kindly point it out. I am open for constructive criticism. I believe through objective healthy arguments we can shape the collective knowledge of humanity.
