This article was written by Edward Hsiang
Ethereum, Bitcoin, Tether, while these may sound like video game items, they are actually all part of the growing cryptocurrency movement. Caught somewhere in-between investment stocks and electronic currencies, crypto has been slowly appearing in mainstream media ever since Bitcoin’s boom in the early 2010s. Nowadays, it seems like a new cryptocurrency is popping up every other week, but there is still very little general understanding around how they work and why they have value.
Let’s start with a basic understanding of how real-world money like the Canadian Dollar has value. A common misconception these days is that all currency is commodity based, namely that the currency has value because it’s backed by federal gold reserves or some other resource. In reality, most countries function off of “fiat” currency, ever since President Nixon chose to decouple the USD from gold in 1971. Fiat currency, unlike commodity currency, has no intrinsic value and functions only because the people who use it agree on its value. Of course, the value is also influenced by the governing body (in our case the Canadian government), as well as supply and demand (US currency is sought after due to the amount of trade that occurs using USD).
Cryptocurrencies, much like fiat currencies, have no intrinsic value or government backing and derive their worth entirely from supply and demand. This is why many regard them as a stock rather than an actual form of payment. So how do cryptocurrencies generate demand? To understand that, we need to delve a little deeper into the inner workings behind them.
Most current cryptos run off of blockchain technology, more precisely, an encrypted electronic ledger that details transactions (i.e. A sent 5 bitcoins to B, B sent 8 bitcoins to C), hence the origin of the name “crypto.” The main merit to this is that no governing body regulates this electronic ledger, and instead, a decentralized network of computers all over the world record and authenticate transactions. The process of recording and authenticating transactions is artificially slowed down by the encryption, or complex math problem the currency runs off of, requiring computers to run lengthy calculations before the next “block” in the ledger can be established. This prevents people from making fraudulent transactions as each block must be verified before the next block can begin. Anyone can contribute to the recording and authenticating of cryptocurrencies by donating their computer’s processing power and are rewarded freshly minted crypto-assets for their efforts, leading to the crypto-mining industry. Additionally, buyers and sellers don’t hold their assets in bank accounts but instead are given a digital “address” and access keys to make transactions with. All in all, the main appeal to investors is the security of their transactions and the fact that no banks or government institutions are involved.
However, the system is not without its flaws and criticisms due to the stock-like element in its value, and the ugly nature of the crypto-mining industry. While government-regulated currencies are protected from large swings in value, the same is not true of cryptocurrencies. In fact, wealthy investors with enough capital can swing the market in a dramatic fashion. At the time of writing, Bitcoin recently reached its highest ever value of around $74,426 CAD on October 20th, followed by an immediate drop of 7% to $71,740 CAD in the span of minutes due to investors cashing out (Express 2021).
Another demerit for cryptocurrencies is the mining circuit. While anyone can spend computational resources on the blockchain, only the first computer to find the solution to the complex math problem used in the encryption is rewarded with newly minted cryptocurrency. This has led to investors starting large-scale operations, running hundreds, if not thousands of computers simultaneously to compete for these crypto rewards. While this might not sound that bad, the environmental and economic impacts are larger than you think. The most tangible repercussion you might see is the marked increase in high-end computer prices over the past few years. Computer processing components i.e. CPUs and GPUs rely on the slow and expensive semiconductor manufacturing process, which also requires expensive metals. Due to the crypto-mining boom, popular chip suppliers such as Nvidia, AMD, and Intel have all reported supply shortages making graphics cards difficult to find for the mainstream consumer (BBC, 2021). From an environmental standpoint, the amount of energy being consumed in crypto-mining is staggering. A “rig” composed of a computer with multiple graphics cards plugged in consumes around 1,000 Watts of power or more, around the power consumption of a medium-sized window AC unit (CNet, 2021). Mining centers will generally be composed of hundreds to thousands of rigs running 24/7, necessitating even more energy to be spent on the cooling of these systems. On just Bitcoin alone, mining generates an estimated 87.02 Mt of CO2 per year, comparable to the carbon footprint of a small country like Bangladesh, and uses 183.2 Terawatt hours of electrical energy; comparable to the energy consumption of Thailand (Digiconomist, 2021). According to the same source, the energy required to perform a single Bitcoin transaction (1833.42kWh) could power a typical US family for 53 days.
Other popular cryptocurrencies like Ethereum and Tether generate lower yet comparable amounts of waste in their management. As the number of blocks in a cryptocurrency increases, the payout for miners also decreases to account for inflation, requiring more and more resources to farm as the currency grows. Given the fact that cryptocurrencies have no intrinsic value and in no way benefit the overall well-being of our society, it is hard to justify the amount of environmental resources being used to keep them running.
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