What implications will this have for money and politics?
Money depends on trust. It is accepted in exchange for goods and services only because people can confidently assume that others will accept it in the future.
This is as true for the US dollar as it is for gold. To argue that cryptocurrencies like Bitcoin are merely a confidence game – or a speculative bubble, as many economists have emphasised – is to ignore their popularity.
And yet, cryptocurrencies lack the stable institutional foundations needed to bolster the public’s trust in them. Trust thus ebbs and flows, making them fragile and volatile, as Bitcoin’s wild gyrations have amply demonstrated.
Moreover, with Bitcoin and other cryptocurrencies that rely on “proof-of-work” mechanisms, transactions must be continuously verified and logged in a decentralised ledger (in this instance based on blockchain).
This requires millions of computers to operate continuously to update and verify transactions – work that is incentivised by the opportunity to be rewarded with newly minted Bitcoin.
The energy consumed in these “mining” operations now exceeds that of a medium-sized country like Malaysia or Sweden. Now that the world has awoken to the dangers of climate change (and to the paltriness of our response to it so far), this massive waste should make Bitcoin highly unattractive.
And yet, despite its volatility, fragility, and massive carbon footprint, five factors have conspired to make Bitcoin an attractive proposition to many people: Its political narrative; the criminal activities it enables; the seigniorage it distributes; the techno-optimism of the current age; and the desire to get rich quick at a time when few other economic opportunities beckon.