The lure of easy money has driven the price of Bitcoin to lofty heights and continues to inflate its current value. Trading under $20 six years ago, a single coin is now worth $6,228 — at least it was on Thursday at 11 a.m.
This is unlikely to last as Bitcoin and other cryptocurrencies are destined to claim their rightful place in the museum of failed financial innovations alongside subprime mortgages, junk bonds, stock holding companies, Florida real estate and Dutch tulips circa 1636.
However, in the meantime, they are racking up a truly astounding record of squandering electrical energy. In terms of annual electricity consumption, the entire Bitcoin network exceeded New Zealand in 2017, then Singapore and at this moment is now a larger consumer than Austria with a remarkable 70 terawatt hours a year.
After capturing cheap energy around the globe, Bitcoin and its copycat cryptocurrencies have their sights on Central Washington. So-called Bitcoin miners are demanding electricity service to feed their warehouses packed with computers in places like Wenatchee, Quincy, Entiat and Moses Lake.
Why is this important? Because decades of smart investments in hydropower, wind power and energy efficiency have provided Washington state with some of the cheapest and cleanest power in the nation. Washington along with Oregon, Idaho and Montana saved enough energy over the past 35 years to power five cities the size of Seattle, successfully avoiding the construction of many fossil-fuel plants which in turn helped lower power rates and carbon emissions.
What does Bitcoin offer in return? Surprisingly little. Like many of the failed financial innovations that preceded it, Bitcoin sells a vision more than a service. It claims to have invented a new kind of money based on an esoteric piece of software that allows it to remain independent of national governments. But remaining independent and unregulated may not be a good thing. In February 2014, the largest Bitcoin trading exchange, Mt. Gox, based out of Tokyo, declared bankruptcy after it was hacked and “lost” 850,000 bitcoin worth $473 million at the time. The hackers took advantage of poor cybersecurity and now because of a history of spotty record keeping and mismanagement at the company, investors are still looking for their money.
Insatiable demand for electricity from these cryptocurrency mining operations compete with more legitimate needs for power by true high-tech businesses, server farms and the nascent electric car industry. Because of the increase in demand associated with the Bitcoin boom, it may be harder to close high polluting coal-fired power plants. It was easier to schedule the closure of these plants when demand was flat or falling. Any upward pressure on demand from cryptocurrencies may make closure more difficult.
Bitcoin’s success as an actual currency isn’t good. First, the U.S. dollar holds its value better than Bitcoins whose value fluctuates like a subprime mortgage. What the dollar doesn’t do is waste electricity. A fundamental rule of any currency is that it must have a limited supply. Nature assured the scarcity for gold and silver when it was currency, and the Federal Reserve provides that function today for dollars. Bitcoin scarcity is assured by requiring a costly waste of energy to produce new coins. This is the new “innovation” which paved the way for cryptocurrencies.
Some forward-thinking utilities in Washington state have anticipated this invasion by establishing rules to protect their customers from these fly-by-night operations. Under these rules, bitcoin miners must pay upfront and assure that they will not leave other customers holding the bill when the speculative euphoria collapses. But this is only the start. Higher level help is needed.
Federal regulators need to stop debating whether Bitcoin is a commodity or a currency and ensure that it cannot be used for international drug deals, money laundering, human trafficking or fraud. And corporations that value their investments in sustainability and green power shouldn’t even consider accepting payment in Bitcoin. The conspicuous consumption of energy required by cryptocurrencies is the opposite of what is meant by green power.
Bitcoin is assured to run its course as a get-rich-quick financial innovation, but until the bubble bursts, it threatens to burn a lot of precious energy, including some in Washington state. In the meantime, any effort by utilities, regulators, corporations and public citizens to reassert some financial common sense to this market should also be considered a contribution to energy efficiency and sustainability.