Claim: “Cryptocurrency price collapse offers hope for slowing climate change”

Essay by Eric Worrall

Cryptocurrency, which until recently received a climate pass from Californian anarchy money advocates, is increasingly being seen as a climate villain.

Cryptocurrency price collapse offers hope for slowing climate change – here’s how

Published: May 18, 2022 1.16am AEST Updated: May 18, 2022 2.41am AEST

Peter Howson
Senior Lecturer in International Development, Northumbria University, Newcastle

For years, interest rates have been close to zero, making bank bonds and treasury bills look boring as investments, while cryptocurrencies and digital non-fungible tokens (or NFTs) linked to artwork, look appealing. However, the US Federal Reserve and the Bank of England recently increased interest rates by the largest amount since 2000. 

The most polluting “proof-of-work” cryptocurrencies, like bitcoin, ethereum and dogecoin, together use around 300 terawatt-hours (TW/h) of mainly fossil-fuelled electricity each year. Bitcoin has an annual carbon footprint of around 114 million tonnes. That’s roughly comparable to 380,000 space rocket launches, or the annual carbon footprint of the Czech Republic.

Proof-of-work mining can be thought of as a controlled way of wasting energy. The process involves specialist computers repeatedly taking random shots at guessing a long string of digits. The amount of computing power dedicated to this effort is referred to as the network’s hash rate.

Tipping points and death spirals

Miners with the highest costs are likely to sell off their bitcoin holdings as profitability drops, creating even more selling pressure in the market. Short-term capitulation among smaller mining outfits with high costs (often using intermittent renewable energy) is normal. 

But a domino effect with major mining firms closing down one after another could cause crypto prices, and the network’s carbon emissions, to drop rapidly towards zero. This event is called a bitcoin death spiral in crypto-speak.

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Obviously its hilarious that greens are finally tiring of their anarchic currency which consumes more coal power than a small country.

But what is the real reason Bitcoin has dropped recently?

My theory is the fortunes of Bitcoin are driven by China.

Chinese entrepreneurs a few years ago discovered they could use Bitcoin to bypass China’s strict currency controls.

Essentially Bitcoin functions like the medieval Hawala banking system. If you want to transport money to or from some remote lawless hellhole, carrying a big bag of cash is less than ideal. So you contact an intermediary, who gives you a secret token, like a torn dollar note. A trusted courier carries the other half of the torn note to your destination. If either you or the courier get mugged on the way – even a mugger would likely ignore something as apparently worthless as a torn dollar note. Then when you take the torn dollar note token to the intermediary’s contact at your destination, and they match it to the other half, they pay you your money, minus a handling fee.

Providing the flow of money in both directions more or less balances, no physical money actually has to be transported between the two banking contacts, but the money transfer nevertheless occurs.

Bitcoin functions in a similar way to that torn dollar note – you can exchange goods or cash for Bitcoin, then convert the Bitcoin back into cash, in another location. Like the torn dollar note from the Hawala system, Bitcoin may have no intrinsic value, but it can still function as a carrier of value.

So what went wrong? The Chinese government realised people were flouting their laws, they hate that money is flowing in and out of China without government oversight. So for the last few years, China has been cracking down hard on Bitcoin users. But Bitcoin use is hard to detect, so the crackdown has been less effective than most Chinese enforcement efforts.

A much bigger issue is China may be running out of money. An insane portion of China’s GDP until recently was dedicated to building “Ghost Cities”. A speculative frenzy drove demand for investment properties, even if there was nobody available to live in the new properties. Vast amounts of Chinese savings are tied up in worthless, crumbling property investments. A significant portion of the Chinese economy was dedicated to building these worthless properties.

Up until late last year, generations of people in China considered housing investments a sure bet. Grandparents who made their money out of China’s housing bubble urged their grandkid to invest in that same bubble – they all thought they couldn’t lose.

Chinese people aren’t fools, some of them realised investing everything into a single housing bubble was risky. Some Chinese investors wanted to move the profits out of China, to diversify their portfolios. But sending large amounts of money overseas is all but illegal for ordinary Chinese investors – so they used the modern digital form of that Hawala torn dollar note, Bitcoin, to facilitate the money transfer, and bypass Chinese currency controls.

Now the Evergrande crisis has all but popped the multi decade Chinese housing bubble, and lockdowns have trashed the real economy, hardly anybody is making speculative money in Mainland China anymore.

I don’t think this is the end of the road for Cryptocurrency, someone will always need a way to bypass government currency controls, regardless of the environmental cost of using “proof of work“, or other bizarre variants such as “proof of space“. And I have no advice for which way the price of various cryptocurrencies will go next – there are plenty of other factors driving the price of cryptocurrency, and not all of them are visible. But if I’m right, it is possible the fortunes of China, up or down, could be a major driver of Cryptocurrency price fluctuations for the next few years.

via Watts Up With That?

May 18, 2022 at 08:05PM

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