Mises Wire

The True Costs (and Unseen Benefits) of Bitcoin Mining

Mainstream opinion writers have opined that Bitcoin mining is too energy intensive. They say it contributes to climate change, or that it simply takes more energy than a monetary system is justified in taking, and is a “potentially catastrophic energy guzzler.” Bitcoin and other cryptocurrencies are often admittedly energy-intensive in the computing involved. After all, cryptocurrencies, in part, have value to owners because they are scarce, and there is a cost involved in producing them. This cost, however, has been pointed out by critics of cryptos as evidence of a lack of true value for the currencies.

Similar arguments by critics of gold were made decades ago. They claimed a fiat/paper money standard was more economical than gold, which needed to be physically mined and stored. These changes, however, were confronted by Roger Garrison in The “Costs” of a Gold Standard. Garrison writes, “Comparing the resource costs of gold to the resource costs of paper does not settle the issue.” Garrison notes additional costs society incurs under a paper standard: (1) the costs imposed on society by different political factions attempting to gain control of the printing press, (2) costs imposed by special interest groups who persuade controllers of the printing press to misuse their authority (print more money) for the benefit of special interests, (3) inflation-induced misallocations of resources as a result of misused monetary authority, and (4) costs incurred by businessmen in their attempts to predict what the monetary authority will do in future.

Why is it necessary for Bitcoin to use such energy-intensive computing? Nick Szabo answers this question in Money, Blockchains, and Social Scalability , by pointing out that Bitcoin’s high resource consumption buys something even more valuable: social scalability. Bitcoin’s computationally costly design gives stronger resistance to forgery, inflation, and theft. This is due to the difficulty of production, and also to easy-to-verify dynamic of Proof of Work schemes.

Additional costs borne by society under government fiat money and the resulting inflation arguably must be taken into account when comparing monetary standards. For example, consider the dramatically cheaper debt market financing available to governments in a fiat monetary order. This debt financing in turn enables many extremely costly and destructive programs, such as the warfare & welfare state. These government programs would otherwise require increased explicit taxation of taxpayers, which is much more difficult for a politician to campaign for, relative to the hidden costs of inflation.

Could a similar argument be applied to gold, or to cryptocurrencies? Perhaps, but then society would have to contend with the risks of gold centralization, confiscation and/or co-opting by the government, which has historically been a bad bet. In terms of other cryptocurrencies, it should be recognized that (thanks to Carl Menger’s “ On the Origins of Money“) there is a tendency towards one highly liquid and saleable money. Thus a person wishing to speculate on gold or a cryptocurrency would have to believe that it could come to “win” in the marketplace for money.

The future is uncertain and we do not know if Bitcoin or other cryptos “win” in the global market for money. However, if a hypothetical Bitcoin (for example) standard should come to pass, a more holistic consideration of Bitcoin Mining’s costs and unseen benefits would include: dramatic restriction in the size of government, the end of the fractional reserve banking induced boom-and-bust cycle and consequent loss in economic output, and reduction in the welfare and warfare state. As Garrison writes, “Ultimately, the cost of any action, commodity, or institution is the alternative action, commodity, or institution forgone. The opportunity cost is the only cost that counts.”

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