Gentle Decline 2/7: Crypto and Cash
In which the writer attempts to understand energy use of super-made-up currencies, as opposed to ordinary made-up currencies.
Hello. A few people have asked me to write about cryptocurrencies, NFTs, and similar things, particularly since they have environmental impacts. I’ve been interested in historical economies for a long time, so you’d think I’d have some grasp on this stuff. It turns out I really don’t, so I’ve turned to my economics consultant, Gav Cassells - last appearing in Gentle Decline in Issue 1, Volume 26 - to get some more salient thinking on the matter, and then use that as a stepping stone to make it look like I know what I’m talking about. Pretend with me.
[Gentle Decline is an occasional newsletter about climate crisis, and - more to the point - how to cope with it. You can support the newsletter via Patreon, Ko-fi, or by buying some of the seriously classy merchandise. The spotlighted product for this issue is the Chicken Thing Zip-up Hoodie, allowing you to be as stern or seductive as you like via the zipper position and still have an element of Cthulhuoid doom about you.]
Let me illustrate how alien this stuff is. Here is a tweet that says something about NFTs:
PieDAO @PieDAO_DeFi👾 It's time to $PLAY 👾 Get complete exposure to the🌍#metaverse, 🎮#gaming ,🎨#NFTs, all through one token. Mint your $PLAY NOW gas-free, only for the next 48h ⏳ https://t.co/auxdBgwoAz https://t.co/lAsyL3Mps4
(There’s an embedded video if you follow the link. It is no more edifying.)
Before I bring Gav in on this, I do want to address one point: “cryptocurrencies are made up”. Sure, they are. So is interest on savings or bank loans, so are mortgages, all financial instruments, and currencies themselves (and hell, all Montagues, and thee, says Tybalt in the back of my head). Money has been fictional since 1933 or thereabouts, and it was of dubious reality before that. Cryptocurrencies et al are not backed by states, though, and therefore not backed by the one thing on which states, in theory, hold a monopoly: violence (I’d like to thank Anna for pointing me at this datum a few years back). If you act for long enough as though fiat currencies are not real, sooner or later your local police force will arrive to take you into custody, and they are allowed to be quite violent in the process. As long as you don’t push on that particular backing, though, there’s no real difference between an invented currency and a “real” one, the more so if there’s any kind of exchange rate. Yes, this does make World of Warcraft gold a real currency.
Gav reckons the energy issues are real, and are a long term issue; I’ll come back to those shortly. He also says:
[I]n the near term buying bitcoin can be seen as a hedge against inflation precisely because it's so hard now to create new bitcoin (which is much of the point of it). One of the things the designers of the currency wanted was a currency that didn't get less valuable over time. Fiat currencies have an inflationary risk that comes about from government printing more of the currency (increasing the supply of it like they have done in the recent year). We are heading into a potentially very inflationary period. The pandemic was, for many people, a supply side issue, their spending being curtailed by a lack of opportunities to spend their money.
All of that is true, and indeed, money printer go brrrrr is one of the ways in which Western governments have dealt with the (largely imaginary) labour that creates the imaginary money not happening for the last year.
This has led to a huge amount of saving and potentially enormous excess consumer demand when things get going again. In the short to medium term this could lead to high inflation. Inflation often begets inflation, as people adjust upwards their general expectations of the rate of price increases. Bitcoin will potentially surge in value if this proves true.
It always takes me a little while to get my head around the concept of value of currency in terms of inflation; the phrases used seem to go backwards. Once I have, though, there’s certainly plenty of evidence to support the notion of inflation in the near future, such as the ESRI’s expectations that house prices will go up. That’s a particularly Irish situation, but the same thinking probably applies in a lot of places. Inflation makes accumulation of money - both debt and savings - less significant. So an inflation-proof financial thing like Bitcoin is inevitably going to be popular.
One largely unstated issue, though, is that turning Bitcoin into “real” money again may be problematic. The climbing values mostly represent people handing over fiat currencies to get the cryptocurrency, and that only works for as long as it goes up. If - as with any not-actual-money value-holding-concept (and some nominally actual-money value-holding-concepts) - people start to cash out, the value will fall rapidly. Unlike material goods and land, you can’t do anything with Bitcoin while you’re holding it, either, so a drop will beget some more drop, even as the available supply of the stuff changes only very slowly (or even decreases, as people lose passwords and hard drives).
My initial description of my understanding of Bitcoin, etc, to Gav included “there's something profoundly stupid going on here, where bitcoin mining has a huge externalisation of cost in electricity and heat-generation, and the thing itself is a bubble with not even the backing of tulip bulbs.”
Carbon taxes are important is the real key take away here. Externalities need to be captured and priced into human activity. The best idea I've heard is to implement a swingeing Carbon Tax, but to ringfence that tax revenue and redistribute it as a pseudo UBI. The idea being to redistribute income from high carbon users to low carbon users. This would address some of the potential effects taxing basic needs would have on the very poor (but there will still be problems related to undocumented individuals etc). At the end of the day taxes that attempt to capture externalities are super important for making markets behave properly. (But they are also possibly inflationary!)
(“swingeing” means large, extreme, or otherwise superlative, and is partly Hiberno-English and part financial industry jargon; I don’t know how these things happen)
So in the context of Gentle Decline, the aspect of cryptocurrencies and NFTs and such I’m interested in is energy use. All fiat currencies use energy, at present; they exist in large part as electronic records, and it costs to keep the servers running, the backups and other infrastructure, and so on. So a euro that is “just resting” in your bank account is using energy. That is (technically, mostly) not true of a euro coin; it exists as a token that represents a digit in a database (or, when fiat currencies were first invented, an entry in a ledger). Obviously, there’s a bit of interdependence going on here; if you walk into a bank (assuming you can), and withdraw 10 euros (assuming your bank does withdrawals, which some don’t anymore), does the fact that your balance is now 10 euros lower make it any cheaper to keep a record of it? And the answer is that it does not, and that by adding the record of the withdrawal, you might be very marginally increasing the cost. And coins and banknotes consume some energy and materials to make. The point, though, is that any currency use costs some amount of energy, and the important question is whether cryptocurrencies use more.
It turns out it’s not easy to determine how much energy cryptocurrencies or fiat currencies are using. Or, to be blunt, anything, anywhere. Current estimates for cryptocurrencies go from 40 to 445 “annualised Terawatt hours”. Ireland, for comparison, probably uses about 35 TWh. A pro-Bitcoin article from 2017 estimates the use of banks worldwide to be around 100 TWh, and includes such things as the use of aircon and lightbulbs in branches, running ATMS, and so on. Most other coverage that I can find uses the same set of estimates (and indeed, the same text). To be honest, I find these numbers to be pretty dodgy; they assume that bank branches are the major users of power, and take no account of datacentres, non-branch bank offices, central banks, etc - but still manage to arrive at what I suspect is an overestimate. Another estimate (which lays out some of the issues in calculating this) puts global datacentre energy use in 2018 at about 205 TWh. Given the enormous amount of non-currency use of datacentres, I’m willing to hazard a guess that running the world’s actual currencies is somewhere in the 50 TWh region. Your piece of string probably varies.
I’m going to ignore the upper reaches of cryptocurrency energy use, in part because 445 TWh is mad shit, and in part because a decade of experience in marketing has told me that reality usually lies in the third quarter of the percentile range of any estimate, so somewhere between 50% and 75% of the 40-445 TWh range, giving us about 300 TWh, which now that I look at it is also mad shit.
So by the numbers I have there, and acknowledging that they are only loosely rooted in reality, cryptocurrencies currently use about 6 times as much energy as the global currency systems. Further, as cryptocurrency mining deliberately increases in difficulty over time, its energy use will increase pretty fast. Fiat currencies depend mostly on storage and data transmission costs, both of which are in real terms decreasing. So whatever the current multiplier actually is, it’s going steadily upward.
But comparative costs are not an indication of usefulness. Global use of fiat currencies allows trade, industry, food production, shipping, etc.; essentially all business and exchange. Cryptocurrencies allow rich people to move wealth into inflation-proof holding. A very few extremely online businesses will allow you to pay in Bitcoin, and sometimes other leading cryptocurrencies. But mostly you can’t actually buy anything with it unless you convert it back to a fiat currency first. I know which I think has more usefulness.
In summary: Cryptocurrencies suck; moving your money into them actively wrecks the planet, and does so more every day. Don’t use them, divest from them if you have them, and do something marginally less destructive with your money.
But Drew, you haven’t covered NFTs, apart from calling them alien!
I haven’t, and I was kind of hoping to put it off until someone explained them to me. Usefully, The Verge had my back, and you’re better off reading their explanation than having me relay it. The tightest summary I can give is that an NFT is a unique digital token which represents ownership of some distinct chunk of data. I wanted to put scare quotes on nearly every phrase in that sentence. Most of the chunks of data represented by NFTs at this stage are “art” (sorry). Overall, someone looked at the world of art trading and went “hey, this isn’t nearly scammy enough, let’s make it more so!”. NFTs don’t really add directly to energy use, but their interaction with (some of) the same technology as runs cryptocurrencies makes them occasionally impact on it. And to be honest, that’s about where my interest in them ends.
I think, to be honest, that’s quite enough about currencies, crypto or otherwise. Have a soothing picture of spring blossoms to calm your nerves.
I noted last time out that I needed to put the 7 Assumptions and 3 Rules on a web page. That now exists as gentledecline.org, and you can link to it from anywhere that pleases you. It’s handcoded, hosted with an Irish company, and so forth, which means that even if I need to move the newsletter, the merch shop, or other aspects of GD’s presence around, that can remain as a central point.
This issue brought to you by spring rolls, a particularly excellent bake thing mostly made of chips, and the arrival of the Old Famer’s Almanac for 2021, which I can only describe as a trip. I've given up on trying to say what the next issue will be in advance, but I'm taking requests and questions. If you hit reply, you can send stuff straight to me!
Gentle Decline is on Twitter as @gentledecline, which I’m using more these days.
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