A recent article published in the journal Joule, noted that it is likely that the Bitcoin network could be using as much as 7.7 gigawatt (GW) of electricity by the end of the year. How much is 7.7 GW? It is approximately equal to 0.5% of the world’s electricity; the same level of energy used by the whole of Austria. Currently, Bitcoin consumes 2.6GW – as much as the whole of Ireland!
You’ll recall that Bitcoin verifies transactions on the blockchain, a decentralised ledger of all transactions. Bitcoin miners set up expensive computers (called Bitcoin mining rigs) to compete in the verification of transactions contained on the blockchain. Verification involves the solving of a computational algorithm. The longer these miners compete, the more difficult it becomes to verify a transaction, the more expensive mining rigs they have to use and the more energy intensive it becomes to verify each transaction. Due to this energy intensity, there is even talk of placing a carbon tax on cryptocurrencies!
In the past, for some miners, this has been an extremely valuable enterprise, especially when Bitcoin was trading at USD20 000 per unit. The number of cryptocurrencies increased exponentially to capitalise on the cryptocurrency mania. We now even have Banana Coin – which is tied to the price of 1kg of bananas! Google “Bitcoin Lamborghinis” and you’ll be amazed at how many early Bitcoin speculators could afford to purchase the sportscar at USD20 000 per Bitcoin.
Currently, with Bitcoin trading at USD8 000 per unit and electricity prices making up in excess of 60% per new unit of Bitcoin, it has become far more difficult to earn decent returns. We are, therefore, seeing fewer Bitcoin Lamborghinis roaming the streets.
It is notable that in spite of Bitcoin being labelled as the future of payments, it has fallen to the same principles as outlined in classical capital cycle theory, namely that excess returns earned above the cost of capital, attracts competitors, increasing competition which reduces those excess returns back to the cost of capital. Inherently, with Bitcoin having no defensible competitive advantage, investing in it does not bode well for long-term returns. It is estimated that four investors currently control 25% of the Bitcoin market. This then also means that the primary rationale for the existence cryptocurrencies, namely decentralisation, has largely become redundant, further weakening the investment case.