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Inside Bitcoins unsustainable matters

When they first came out, digital currencies (DCs) have represented the element of novelty in the worldwide trend of digitalisation. The high potential to turn payments from physical to digital that they represented at the beginning was incredible. The most recent developments, upon whom the deregulation trend of the market was surely the riskiest, jeopardised such high potential, turning cryptocurrencies into a speculative asset. Reasons to this can be traced from DCs market volatility towards their energy-intensity. We are exploring the main drawbacks [1] of Bitcoins because they show meaningfulness with regards to the overall Digital Currencies ecosystem.



A. Rudakov —Bloomberg/Getty Images

Factor number one is volatility. Data provided by Statista [2] show how instability tampers with every possibility investors have to face Bitcoins’ fluctuations. Few comments could be made except from the fact that, in a time span of only four months (October 2020 – February 2021) , BTC price in USD has been roughly sextuplicating. Nonetheless, BTC tipping point has been already overpassed and a sustained decrease is already on its way. If we look further at the pricing [3], this factor cannot be denied. Nor could risk be underestimated [4] since bookmakers convene that average market risk in Bitcoin [5] is “9.5 times higher than that of USD/EUR and 2.9 times the SP-500 risk”. Overall, volatility is the most unravelling factor characterising the world of unregulated Digital Currencies – economists [6] say.



Bitcoin (BTC) price per day from October 2013 to January 18, 2022(in U.S. dollars). Source: Statista

The second, factual reason, of DCs scepticism stands in their scarcity. On the one hand, in an institutional exit, Christine Lagarde (the former International Monetary Fund Chief and current European Central Bank President) considered data as the new gold [7] - and Digital currencies as the new Gold standard [8] by extension. On the other hand, Digital Currencies face a problem Fiat Money does not have: a limited offering [9]. BTCs are supplied by a digital technology which sparks much more controversies than the benefits it could have entailed. In other words, Bitcoins are not sustainable [10]. Their issuance process is energy-intensive [11] and shifts the matter from volatility to carbon footprinting.



Average years of household-equivalent electricity to mine one Bitcoin. Source: Newyorktimes.com

Putting the pieces of the puzzle together, BTC supply scarcity relies on the mining capacity that could concoct other BTCs. Such capacity is proved to be extremely limited by the huge amount of energy that a single BTC needs to be “mined” [12] (see the figure above). This second factor is endorsed by academics [13] and observers [14] alltogether. This explains why the curve representing the number of circulating BTCs is lowering and precisely, its position is resting in a sort of plateau [15] (read below).



Number of Bitcoins in circulation worldwide from October 2009 to January 9, 2022(in millions). Source: Statista

Conclusions take us to say that Bitcoins future is jeopardised by their own volatility, their in-made scarcity and the energy costs their usage and mining entails. As long as one of these will not be properly addressed, sceptical observers will continue to move their own critiques [16] to Digital Currencies in general and Bitcoins in particular.



By Manfredi Morello



Sources:


[1] EFG International: “The PROs and CONs of Cryptocurrencies”. URL: https://www.efginternational.com/Insights/2021/Pros-and-cons-of-cryptocurrency.html.

[2] Statista.com “Bitcoin (BTC) price per day from October 2013 to January 18, 2022 (in U.S. dollars)”. URL: https://www.statista.com/statistics/326707/bitcoin-price-index/

[3] Youtube “Top Crypto 2013-2021 | Historical price of bitcoin”. URL: https://www.youtube.com/watch?v=1BBtb3dUaiU

[4] Danielson J. (2018) “Cryptocurrencies don't make sense”. Vox.EU, URL: https://voxeu.org/article/cryptocurrencies-dont-make-sense.

[5] Extremerisk.org (2022) Risk forecasts made 17 January 2022 URL: http://extremerisk.org/

[6] Aizenmann J. (2019) “On the built-in instability of cryptocurrencies”, Vox.EU URL: https://voxeu.org/article/built-instability-cryptocurrencies

[7] Lagarde, C (2018), "Winds of Change: The Case for New Digital Currency," speech at Singapore Fintech Festival, November 14.

[8] Ferguson N. (2021) Opinion - 50 Years After Going Off Gold, the Dollar Must Go for Crypto” Bloomberg.com, URL: https://www.bloomberg.com/opinion/articles/2021-08-15/niall-ferguson-nixon-the-gold-standard-and-a-bitcoin-bonanza

[9] Pathrap M. (2021) “Nearly 90% of all Bitcoin has already been mined — here's how its limited supply has driven up its value”. Business Insider India, URL: https://www.businessinsider.in/investment/news/bitcoin-limited-supply-has-driven-up-its-value-nearly-90-percent-has-be/articleshow/85349471.cms#:~:text=The%20hard%20limit%20of%20Bitcoin's,12%20years%20of%20its%20creation.

[10] Signorelli Andrea D. (2021) “The (un)sustainable bitcoin. The significant environmental impact of the cryptocurrency world is causing concern among new generations of investors”. Eni.com, URL: https://www.eni.com/en-IT/digital-transformation/sustainability-bitcoin-cryptocurrencies.html

[11] Digiconomist.com “Bitcoin Electronic Waste Monitor”. URL: https://digiconomist.net/bitcoin-electronic-waste-monitor/

[12] Newyorktimes.com (2021): “Bitcoin uses more electricity than many countries. How is that possible?”. URL: https://www.nytimes.com/interactive/2021/09/03/climate/bitcoin-carbon-footprint-electricity.html

[13] Carter N. (2021): “How Much Energy Does Bitcoin Actually Consume?”. Harvard Business Review, URL: https://hbr.org/2021/05/how-much-energy-does-bitcoin-actually-consume

[14] Tully S. (2021): “Offsetting Bitcoin’s carbon footprint would require planting 300 million new trees”. Fortune.com, URL: https://fortune.com/2021/11/06/offsetting-bitcoins-carbon-footprint-would-require-planting-300-million-new-trees/#:~:text=The%20result%3A%20Bitcoin%20deploys%20an,you%20on%20a%20golf%20bet.

[15] Statista.com “Number of Bitcoins in circulation worldwide from October 2009 to January 9, 2022(in millions)”. URL:https://www.statista.com/statistics/247280/number-of-bitcoins-in-circulation/De Vries

[16] A. (2018): “Bitcoin's Growing Energy Problem”. Joule, Volume 2, Issue 5, pp.801-805. DOI: https://doi.org/10.1016/j.joule.2018.04.016