Why the Bitcoin is not such a good idea after all

 

Over the past few years, the Bitcoin became increasingly popular. Originally, Bitcoin was a payment instrument to do financial transactions, without having the need for an intermediate party, such as a bank. Today, Bitcoin seems to be a more speculative instrument or even a gambling game, given the volatility of the exchange rate of the Bitcoin.

Huge electricity bill

However, Bitcoin cannot be sustainable in the long-term. People often refer to the fact that Bitcoin requires a substantial amount of electric power for the large number of computers required to employ Bitcoin’s consensus mechanism, called proof-of-work. Estimates vary, but the electricity consumption of the Bitcoin network is thought to be similar to that of a medium sized country such as Denmark. The number of Bitcoin transactions is, however,  small, especially compared to the world-wide transactions handled by banks, credit-card companies, and so on. This makes a Bitcoin transaction very expensive compared to, for example, a Visa transaction. The Bitcoin network also comes with a huge environmental impact in terms of CO2 emission and therefore contributes to global warming.

Bills must be paid

But there is more. The immense amount of electricity power needed to keep the Bitcoin network up-an-running, should also be paid by someone. Miners, who are the parties running the proof-of-work consensus mechanism, are rewarded with bitcoins for their effort. However, a detailed analysis we have done (see here for the full paper) shows that on the industry level, mining is not really a profitable business. This is caused by two factors, namely the investments in hardware and the high electricity bill. It becomes even worse because the hardware needs to be replaced, typically after a few months, in order to be competitive with the hardware of other miners. Since the miners are the backbone of the Bitcoin network, their financial sustainability is critical for the survival of the network.

Want to know how to analyse networks like Bitcoin for sustainability? Have a look at the e3value book, or request a training via The Value Engineers.

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