Bitcoin, a waste of energy

more substantively (and this is just a lazy question because I cant be bothered to read much about bitcoin)–I’ve seen a lot of people mention there’s a hard cap on the number of bitcoins & thus a definite end of the mining. Is that not correct? Wouldn’t that drastically reduce the long-term concern?

“That’s right, BitCoin is built to be deflationary. The amazing thing is that not even otherwise sensible proponents can be brought to see how that’s a problem..”
This seems like a clever bit of design from the inventor, especially if he put some bit coins aside at the start.

Another way to calculate the importance might be to take Stern’s $80 a tonne social cost of emissions. Meaning that bitcoin would have a cost of some $5 billion over two centuries to pay for mining. $25 million a year for a new form of currency (no, I agree, it won’t become that but pretend) doesn’t sound excessive.

the verification of transactions against existing cryptographic records becomes the major new source of income for farmers

… although there is no guarantee at all that the transaction fee mechanism in the reference client will actually provide anything like the necessary amount of income …

The system is called proof of “work”, but it’s “work” in the physicists’ sense and not the economists’. It should really be called proof of waste. People are effectively buying the right to add an update to the bitcoin ledger by burning money.

The mining system is not the only form of waste. Bitcoins are intrinsically very fragile. They can be lost irretrievably in all the normal ways of data loss through hardware or software failure. They can be accidentally or deliberately sent to invalid addresses. And the recent transaction malleability attack may not be properly fixable.

There’s also the fraud issue; a common practice in bitcoin space is to set up an exchange or market with escrow service, operate for enough time to gain trust, and then abscond with all the working capital.

How should we catergorize trolling one’s own blog.

Is DougJ now giving self-trolling lessons?

It also seems like a clever bit of marketing from the inventor, especially if ve correctly anticipated who would be most enamored of a computerized “currency” with no evil gubmint involved. For the tech world’s version of goldbugs, it was like meat snacks for hungry weasels.

Oh yes, that’s exactly why I started mining bitcoin about 10 minutes after I first read about it back in 2010. I’m no libertarian but I can spot an opportunity to get money from them. The early participants were clearly going to get huge windfalls if it became at all popular, and the downside risk was trivial as I was using already-owned hardware and nearly the cheapest residential electricity in the USA. I mined 450 BTC with hardware I already owned, at the cost of maybe $2. :smug:

Then I sold almost all of them during the first big bubble up to $20 per coin. I thought that was going to be the last and greatest price rally for Pretend Internet Dollars. It’s a good reminder why I don’t try investing with real money. :notsosmug:

In the end, Bitcoins will attain their true economic value of zero.

Any guesses at the time frame? I thought it was going to crash permanently after the first bubble-and-pop around the $20 price point. There have been multiple rallies and crashes since then. It has stayed in a $200-$300 band for some time. A sufficiently widespread regulatory crackdown could end it, as its utility critically depends on real-money exchanges, but that crackdown has not materialized the way that I thought it would.

I also expected that technical flaws might end Bitcoin. Either there would turn out to be a flaw in the protocol itself to enable double-spending or the reference implementation would turn out to have bugs that let protocol violations slip through. But it’s been surprisingly technically robust. Clearly “Satoshi” was no dilettante when it comes to cryptographic protocols.

Umm, 3 tonnes CO2 per bitcoin. There will be a maximum of 21 million (ish) ever mined. In 2140 that is, when mining ends.

No. The cost of mining one block goes up (rapidly!) with available computing power, keeping the rate near a constant 6 blocks/hour. The cost of mining one coin, in blocks, doubles every four years, so that blocks keep being mined at constant rate as the coins run out. The only way the energy cost per hour goes down is if the worldwide desire to contribute computing cycles goes down . . . in other words, if the grownups get bored and leave.

It’s interesting and instructive to graph the operational costs per GWh-t, neglecting capital investment, of course, of three strategies for turning Icelandic surplus geothermal energy into foreign exchange: smelt aluminum, run Fischer-Tropsch and hope Europe will pay you carbon credits and China will buy your atmodiesel . . . or mine bitcoin. (The shortcut of running a global financial empire backed by none of the above seems to have been a mistake.)

@Bloix – means of exchange is itself the use of currency. Whether a currency still has use as a means of exchange depends on where, when and with whom it can be exchanged.

What’s more interesting to me is at what point the physical (or at least uniquely possessable ) units start or stop being a functional currency. You can sell or trade Confederate dollars with collectors, but good luck using it at the grocery store.

I’d actually argue that Bitcoin never passed into the realm of currency, and has actually been more of a commodity.

Any guesses at the time frame?

Well, it’s a truism, but not necessarily true, that the endpoint of BC is either “zero, or a lot of zeroes.” A constant rate of hash investment yields a permanent 16% annual deflation (in BC/US$); a constant rate of energy investment with a two-year Moore’s law doubling time yields a permanent 41% annual deflation. For deflation to fall off this curve (that is, for BC to stop rising exponentially in purchasing power at the reciprocal rate), miners with sunk capital costs have to decide their marginal coin will never be worth its marginal energy cost, pull the plug, walk away, and not be replaced by more hopeful miners who can scavenge the hardware.

Baseball cards are not liquid as a medium of exchange, but they haven’t “failed” exactly in over a century. It’s easy to imagine a scenario in which the total value of the BC supply remains nonzero, or even rises at less than the reciprocal built-in deflation index, while existing solely for the vanity of collectors. Some would say that this happened in autumn 2011.

What’s more interesting to me is at what point the physical (or at least uniquely possessable ) units start or stop being a functional currency.

The one statistic that isn’t easy to find online (though it’s implicit in the public blockchain) is the velocity of BC. (Technically, not every logged transaction is an exchange of value between parties, so what’s discernable but not spoken of is the very low observable upper bound on actual velocity.) If people with nontrivial hoards were actually using their BC, rather than holding and folding (Matt’s cash-out @14 would also be counted as a transaction, but is also part of the overestimate if you’re looking for BC use as currency), it would be a remarkable data point about human revealed preference. I mean, just think about it — to spend BC as money, you have to believe that the imputed 16% hash deflation (or still higher energy deflation) is almost precisely balanced by the greater-fool risk of collapse. Smirk just a bit harder, and you have to get out while you can. Frown just a bit more judiciously, and you’d be mad to ever part with a true widow’s cruse. Zero, or a lot of zeroes . . . and you’re going to weigh the swing against groceries? As a spendable currency, it’s nuts either way, and the nutcracker is very sharp.

Give up on the “functional currency” part, and treat it as an alternative collectible, and a lot of these problems go away. BC could be “baseball cards” for a long, long time without bothering the rest of us; at that point, of course, it should be Pigovian-taxed as should all baseline power consumption.

Bloix, I have often seen cowry shells used as jewellery. Low cost jewellery nowadays. I can imagine (but do not know for sure) that they were prestigious jewellery in places where such shells were rare.

I do think that there is some circularity in the ‘use’ argument, especially when the use is decoration. People do indeed use gold for decoration. But a big part of that is the prestige of expensive, prestigious decoration. And gold is expensive and prestigious because of its quasi-monetary status.

If gold were to lose its monetary image. No one would hoard gold bars in vaults. Would it still have much attraction for jewellery? Does gold really make much nicer jewellery than titanium, or anodized aluminum?

IMHO it is important to note those same potential risks apply to the electronic transaction management system we call “US currency”

No, because the USD has an existence independent of the transaction infrastructure, which means we can swap transaction infrastructures or even use different infrastructures at the same time. As in fact we do do; in my pocket right now as I type, I have AUD coins, AUD notes, and not one but two electronic key-cards that are hooked up to two fairly different and largely-independent electronic payment infrastructures, an eftpos card and a debit mastercard.

Bitcoin can’t do this: it’s tied to the implementation details of the blockchain. Is a direct manifestation of the blockchain maths, rather than an abstraction layer on top: this means that if vulnerabilities are detected we’d have to replace bitcoin entirely and in short order, which is a somewhat bigger disruption than gradually replacing vulnerable bits of the transaction ledger framework.

Not to mention that the US currency has people defending it against such attacks and has a governing body that can and will change the rules in the face of some changes in circumstances. Different bank capital requirements, statutory limits on consumer liability for fraudulent credit card charges, etc.

Bitcoin depends solely on the strength of the protocol for defense.

Colin Street @ 3:08 and Jake @ 3:51,
Not necessarily disagreeing, but I think you are missing my overall point. US paper currency and coin are a tiny fraction of the value of the US dollar in circulation, the overwhelming percentage of which is electronic transactions. Smaller countries may have a higher percentage of cash in circulation but all major currencies are primarily electronic. So conceptually I argue that we already have major national currencies fully dependent on electronic infrastructure to operate.

Now Bitcoin indeed depends on one algorithm and its reference implementation, and as you noted (also in my 2:03) that there is some diversity in the major dollar transaction systems. But my experience with interconnected systems tells me that there are probably key points and technology in common (e.g. the AT&T switching center across the street from the WTC; the core Federal Reserve transaction systems) and that common mode failures – including attacks – are possible.

Are there mitigating factors, plans for active defense and counterattack, “full faith and credit” statements as the Fed issued on 9/11? Yes, and I hope those are sufficient. Performing a risk analysis and openly acknowledging risks observed isn’t the same as thinking the probability is high. I do argue however that those risks exist with the USD system as well.

The designer of Bitcoin may have planned to use it for his own purposes but as noted upthread it was brilliantly designed to check off all the boxes for the people with that set of economic beliefs.

Hence, “Dunning-Krugerrands.” I think Jeff Atwood in late 2013 gets the seigniorage for this happy coin.