Elon Musk slams Bitcoin – finally – but he still ain’t selling

Profile picture for user cmiddleton By Chris Middleton May 13, 2021 Audio mode
Summary:
What is Space-Doge up to this week? A man who literally has money to burn.


cryptocurrency
(PIxabay)

Tesla and SpaceX supremo Elon Musk, the world's second richest man after Amazon's Jeff Bezos, has announced that Tesla will no longer accept payments in Bitcoin. And not a moment too soon.

A 12 May tweet from the space-doge cited the electric car company's environmental fears about the cryptocurrency, after a slew of reports slamming the impact of mining - the use of energy-intensive GPUs and other rigs to carry out the cryptographic processing needed to produce a coin.

The tweet said: 

Bitcoin. We are concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel.

Cryptocurrency is a good idea on many levels and we believe it has a promising future, but this cannot come at great cost to the environment.

Tesla will not be selling any Bitcoin and we intend to use it for transactions as soon as mining transitions to a more sustainable energy. We are also looking at other cryptocurrencies that use <1% of Bitcoin's energy/transaction.

Environmental campaigners have long criticised the currency, but that hasn't stopped Musk from grabbing as much of it as he can, along with Dogecoin and other virtual cash piles.

So, what's behind the tweet - a move made surprisingly late by an entrepreneur who is so focused on the environment (millions of gallons of rocket fuel notwithstanding)?

As previously reported on diginomica, the Cambridge Centre for Alternative Finance, based at the University of Cambridge, hosts a real-time Bitcoin electricity consumption index. As of 13 May, the index reveals that Bitcoin mining worldwide is using more electricity - at a median annualised consumption estimate of 149.6 TWh a year - than all of Malaysia or Sweden, and nearly as much as Egypt or Poland.

The upper estimate (representing the worst-case scenario) is roughly four times higher than that: 514TWh, which is almost the total amount of electricity generated worldwide from biofuels and waste (577TWh).

The median figure, which CBECI believes is an accurate estimate of Bitcoin's consumption, is enough electricity to run the entire University of Cambridge for 850 years. Significantly for environmental activists and policymakers, it is also one ninth of all the electricity generated worldwide from solar and wind resources.

In short, using Bitcoin wipes out the environmental benefits of owning a Tesla.

There are two underlying issues in Bitcoin's carbon footprint: blockchain, and China.

Ker-PoW!

First, Bitcoin uses proof-of-work- the cryptographic consensus model in which one party proves to all others in a blockchain that computational effort has been expended in the solution of a complex sum.

This is energy intensive and favours users with the most powerful or extensive rigs: a circular problem. Most miners work in pools to combine their hash rates and uncover blocks. GPUs in particular use a lot of energy. More energy-efficient rigs, such as ASICs, are available, with many of the cheapest, fastest ones now made in China.

Nevertheless, the core issue is the methodology, not the hardware. And the impact is getting bigger as powerful institutional investors come onboard, increasing the demand for Bitcoin elsewhere.

As a result of the computational model, however, the environmental problem doesn't just concern Bitcoin, but all blockchains that use a proof-of-work system. The rush of some carbon-offset schemes to proof-of-work blockchains has always been a dumb idea, while most blockchains merely offload energy bills onto their users.

Who knew that accountants might one day set fire to the planet - and ask you to foot the bill?

Srinivasan Keshav is Robert Sansom Professor of Computer Science at the University of Cambridge. He told diginomica:

There is a good case that Bitcoin should be banned. Proof-of-work is a terrible idea and should also be banned. Proof-of-stake is much better and uses about 10,000 times less energy.

Perhaps. Proof-of-stake consensus mechanisms select validators based on the stake they hold in a cryptocurrency or digital token. Although this is more efficient and less processor-intensive, Bitcoin's proponents claim that the PoS model is inherently less secure, rigid, and transparent, and does not achieve the required consensus.

Logic suggests that it also hands power to people who already have it. With estimated Bitcoin holdings of $1.5 billion, a shift to PoS - were that even possible without invalidating the entire Bitcoin blockchain - would also give Musk enormous power in the currency.

Yet Musk's social power is already considerable: the value of Bitcoin fell by 17 percent after his tweet.

Chasing the dragon

The other key issue is China - and it is a massive one. According to CBECI's figures, roughly two-thirds (65 percent) of all Bitcoin mining takes place in China, based on IP addresses (though real locations may be masked) and hash rate.

In very general terms, China has the largest pools of miners - inevitably so in a country of 1.4 billion people. In any financial system that is based on the biggest number of people with the most computer processors, all collaborating to solve problems, China will always win. For some reason, this obvious fact seems to have escaped the proponents of digital currencies.

Indeed, the Cambridge study reveals that most mining (roughly 86 percent) takes place in Asia and Eastern Europe, with just seven percent occurring in the US - only marginally more than Iran.

In this sense, Bitcoin has a huge geopolitical dimension, a factor overlooked by most critics. It's no coincidence that 75 percent of the world's computer chips are also manufactured in Asia. (People used to say ‘follow the money', but really they should follow the chips.)

Digital mines are coal mines

But the environmental impact of Bitcoin's centre of gravity being in the world's most populous country is massive. China currently generates 58% of its electricity from coal and is (unsurprisingly) the world's largest single user of energy.

So, Bitcoin, once proposed as the basis of a new financial system, is little more than a coal-fired monster controlled by Beijing, accountants, computer hardware obsessives, and global currency speculators. Nice.

But what of the future?

With other cryptocurrencies vying for dominance on the world's exchanges, digital tokens representing a growing variety of different goods, services, and assets (and being used as intermediary currencies in global money transfers), and with more than 200 or more stablecoins already in existence, global finance has changed beyond recognition since Bitcoin launched in 2009.

The direction of travel is clear, and it is towards the foundation of national digital currencies - stablecoin versions of the dollar, pound, yuan, and more, controlled by central banks.

The UK is one of these. In April, the Bank of England announced the formation of a Central Bank Digital Currency (CBDC) Taskforce to explore the concept of launching a digital pound - a BritCoin, if you will.

According to a Treasury insider, the likely timescale for launch is five years, with hopes of it being quicker. It may need to be.

Other nations are following suit, with the consensus being that the US is behind the curve, the EU in the middle of it, and China way out in front; the Beijing government has already launched a limited quantity of digital yuan.

The fear among Western economists and central banks is that China's lead in the digital currency world - let alone its dominance in crypto finance - could hand it effective control over the world currency market, by forcing anyone who trades with China to use the digital yuan.

My take

Bitcoin may turn out to be little more than a sideshow to an event it unwittingly created. Whatever the future holds, look East.