Bitcoin’s social cost can’t be ignored

As Bitcoin attempts its latest price rebound after a 40% slump in three days, its long-term potential as an investable asset is becoming linked inextricably to its cost for the rest of society.
This is increasing the pressure on policy makers to do more. The US Federal Reserve’s Lael Brainard nodded to this, when she warned that a proliferation of alternative payments systems might lead to fragmentation and increased costs for households and businesses, suggesting there was a need to expand crypto’s regulatory “perimeter.”
Bitcoin’s “dirtiness” is still the chief concern, however. The carbon footprint of power-hungry miners, which raised red flags during the pandemic melt-up in prices at the start of 2021, is now inseparable from the way politicians, investors and even the laser-eyed faithful view crypto.
There was some good news for the crypto bulls overnight, with yet another tweet from Elon Musk, the Tesla billionaire who’s gone back and forth on Bitcoin’s environmental impact. He said North American crypto mining companies had promised him greater transparency on their energy mix — a “potentially promising” hint of greener days ahead.
This debate is essential. Citizens need to know the broader societal impact of the computing resources used up by mining new Bitcoins and running transactions. The cryptocurrency’s power demands have outpaced entire countries.
An estimated $5 billion of costs had been sunk into mining by the start of 2018, according to a report from Germany’s Institute for Economic Research, but this didn’t include all of the costs paid by society — not least the more than 80% of Americans who don’t own crypto. One 2020 study, based on energy required per coin, estimated that each $1 of Bitcoin value created was responsible for $0.49 in health and climate damages in the US and $0.37 in China.
Another paper, cowritten by Southampton University’s Larisa Yarovaya, found a strong connection between Bitcoin’s price volatility and that of electricity company shares in highly active mining areas. More transparency on mining may encourage a bigger shift to renewables, but it will also bring greater scrutiny of what one lawmaker called “almost infinitely increasing energy demand” from the crypto industry.
These effects feed into the real economy, and not in a good way that might get policy makers excited about job or wealth creation. The virtuous narrative of a decentralised currency promises future utopia while delivering present dystopia.

—Bloomberg