Is The Crypto Rally a Barometer of Massive Misinvestment and Wildly Irresponsible Monetary Policy?

At this point nearly everyone knows about the major cryptocurrencies, especially Bitcoin. Ethereum recently passed the $400 USD mark, and Bitcoin traded above $8000 USD for the first time in late November. The size of the market for the two largest cryptos is equally impressive, with Bitcoin worth more than $150 Billion USD, and Ethereum well north of $40 Billion USD. These are no longer small markets, and with the rise of these, and many other cryptos, some important questions need to be asked.

The value of Bitcoin has created a new market for mining operations that use a lot of electrical power, and for the moment, they are extremely profitable. PowerCompare is a website in the UK, and they recently published a study that looks at the amount of power that Bitcoin mining consumes, and how much it costs to supply the market with new Bitcoins for use. It is surprising to say the least, and while Bitcoin mining currently consumes only 0.13% of current global electricity consumption, that is more than many countries, and 12 US States.

Bitcoin was envisioned as a currency, but in practical terms it has become a speculative vehicle that created huge gains for early adopters. Now it is turning into an industry that makes big profits for miners, especially if they have access to low cost electrical energy. The growth rate in mining operations is also quite steep, and if current trends continue, by 2020 Bitcoin mining will use all the power in the world.

This is, of course, an absurd concept, but it goes to show how heated the desire for Bitcoins has become.

Working For Nothing

Bitcoin is an interesting financial instrument.

They are basically a digital fiat currency, but unlike UD Dollars, or any of the others, they actually consume resources to be created. This means coal, natural gas, or some other form of energy is being consumed in ever greater quantities, just so people can create digital tokens that serve to facilitate trade. The reason why Bitcoins need to be mined is obvious, but the results on the world's energy supplies may be an oversight.

The idea of any fiat currency is to create a means trade settlement, that is to say, the facilitation of commerce. Many hard money advocates have argued that a currency should be both a means of settling trade, and storing value, but at least modern fiat currencies don't consume the resources they were designed to create the production of.

Cryptocurrencies are sort of the opposite.

They require that increasing amounts of energy be used to create them, and only then can they contribute to the production of resources. When cryptos were a small time enterprise that was the domain of enthusiasts, this part of their foundational architecture wasn't really an issue. But today, Bitcoins are estimated to use more electrical power than nations like Uruguay or Cambodia, and that is just what has happened over the last calendar year.

Limited Supply?

The algorithms that control the creation of cryptos generally limit the total number that can be created, but there is no way to limit the total number of cryptocurrencies that are introduced. Today Bitcoin and Ethereum are extremely popular, but the market for them, especially at their current levels, hasn't existed for very long.

It could also be argued that energy is expended to create gold, which in some ways acts as a currency. But this overlooks the fact that once the gold mining process is done, we are left with a physical material that is both unique, and extremely useful. The price of gold fluctuates, but since the dawn of time, gold maintains value.

The same thing can't be said of either fiat currencies or cryptocurrencies, and when the dust settles it will be interesting to see which financial instrument is able to maintain its value. It is equally possible that the sudden rise in the price of cryptocurrencies is merely a symptom the money creation that has happened over the last decade finally entering a market that is largely unregulated.

Only time will tell what people accept as valuable, but gold and silver have thousands of years on their side.