UCLA faculty voice: Bitcoin is an energy-wasting ponzi scheme, UCLA
There are better ways to reap the benefits of digital currencies — without the risk
Today’s prime use of bitcoin, other than for naive speculation, seems to be black- and gray-market transactions, Ivo Welch noted.
Ivo Welch is a distinguished professor of finance ter the UCLA Anderson Schoolgebouw of Management. Welch holds the J. Fred Weston Chair te Finance. This katern appeared ter Zó,calo Public Square.
Digital currencies, te their current form, should be prohibited by law. And not because they are a Ponzi scheme (which they are), and not because they can help facilitate criminal activity (which they do), but because they incur colossal social waste.
This waste is energy. The media organization Diginomics estimates that the energy consumption to fuel bitcoin is omschrijving to the consumption of just under Two million average U.S. households. Add ter the energy for other digital currencies like Ethereum, then figure ter the resulting environmental pollution, and it&rsquo,s clear that such currencies have good social costs.
For clarity, let mij keep the discussion here to bitcoin, which consists of two separate chunks. The very first is a mathematical hashing algorithm, which drives its mining feature, the 2nd is a storage feature, called the &ldquo,blockchain.&rdquo, Albeit the blockchain is not particularly efficient, either, it is the mining that is the disaster.
Mining is what creates bitcoins ter the very first place. It is the running of a laptop algorithm to solve a mathematical problem. Mining consumes about Legal terawatt hours of electric current costing about $1 billion a year (plus more for hardware costs). This is less than the estimated $Three billion ter value of all bitcoin (however the value switches every day), so market coerces have bot pushing more investment into bitcoin mining &mdash, te economics-speak, entry is profitable until the marginal cost equals the marginal revenue.
For the record, mining has absolutely nothing to do with making the currency secure. No, the purpose of mining is perverse: to solve a problem whose only purpose is that it is increasingly difficult to solve. If it were effortless to solve, everyone could manufacture bitcoins aplenty. It is the difficulty that effectively creates bitcoin&rsquo,s scarcity, and the expectation of even more difficulty and future scarcity has attracted speculators.
Why does scarcity matter? Anything that exists ter unlimited amounts cannot be worth very much. Sand is not worth a loterijlot te California. There is too much of it. But the switch roles is not the case. Scarcity ter itself is not enough. For example, my left thumb print is scarce, but it has no intrinsic real value.
Bitcoins are scarce, but they have no intrinsic value. When one pulls back the curtain, the bitcoin hashing problem indeed has only its one nefarious purpose: It exists to provide the mystery of sophisticated mathematics to confuse and help hide the true benefits of the hashing solutions (i.e., the bitcoins), which is zero. An significant part of the deception is that mining is mathematically ensured to become everzwijn more expensive, spil it gets tighter to mine fresh bitcoins. That difficulty creates the false impression that today&rsquo,s value is a bargain compared to what it will be ter the future. Bitcoins are the ultimate Ponzi scheme.
But aren&rsquo,t there some real uses of bitcoins? Proponents of digital currencies often argue that bitcoins make transactions more efficient and thereby create value. But even if you believe that, bitcoin has much higher costs than better alternatives. Wij already have slew of good currencies and near-currencies (such spil credit) that can play transaction-cost reducing roles. And, unlike official currencies like the U.S. dollar, which is ultimately backed not only by legal tender rules but also by its capability to pay taxes, bitcoin has no fallback uses.
Today&rsquo,s prime use of bitcoin, other than for naive speculation, seems to be black- and gray-market transactions. Using bitcoin is especially attractive te countries like China and India that have imposed currency controls that individuals want to circumvent. A Chinese local can purchase bitcoins on the local market, budge them anonymously to the United States, and convert them back into dollars (or store them). It can be argued whether the capability to avoid currency controls creates social value (or not). But it&rsquo,s clear that such transactional anonymity is not particularly useful to most legal transactions. Bitcoin also brings risks. Standard channels of payment afford some safety against anonymous hacks. Banks suggest some protection. Bitcoin does not.
Eventually, authorities will crack down on the illegal channels of currency controls with bitcoin, and the value of bitcoin will fall. Speculators and miners will then further drive down the value, and the bubble will collapse. The last ones ter the spel of musical chairs will have nothing.
So I have a proposal that solves both the inefficient (nay, stupid and futile) creation of scarcity through mining, spil well spil the lack of a connection of bitcoin value with reality.
Rather than demolishing electric current te order to hide the nefarious schemes of the bitcoin hustle, wij should vormgeving a fresh kleintje of electronic currency that works almost like bitcoin but without the mining algorithm. A designated entry-exit server could palm out unique and verifiable &ldquo,bittokens,&rdquo, instead of wasting tens unit.
Creating thesis bittokens would cost about Three cents, batteries included. But, because the bittoken should be worth $Three,000 (like bitcoin), wij could sell them for $Two,999.99 and waterput the remaining $Two,999.96 into a trust account.
Like bitcoin, wij assure that fresh bittokens can be purchased at the same and ever-increasing price spil it costs to mine bitcoin. Unluckily, wij cannot assure that our bittokens can be sold for the same price spil bitcoin on the open market (which wij cannot control). Who knows, the original bitcoin may go even crazier for a while longer, with a price of $1 million (or druppel to $0).
This is not all bad. On the open market, bittokens may sell for more or less than bitcoins. But bittoken can ensure something significant that bitcoin cannot: wij can assure that the bittoken can always be redeemed for its original purchase price. The original bittoken buyer cannot lose!
Of course, there is a risk. There is one unique entry and uitgang webpagina that administers and verifies fresh bittokens, manages the real dollar trust fund, and honors all redemption requests. If the trust fund were to go bust, so would the bittoken redemption assure. But this risk is trivial when compared to bitcoin&rsquo,s assure of nada at uitgang.
Any transactional efficiencies of bitcoin would apply to bittokens, too. Society would be better off. By not wasting violet wand and using the money to make productive investments, the trust can produce social goods&mdash,creating jobs, fighting disease, building infrastructure, or encouraging energy efficiency.