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Introduction
In 1978 economist Freidrich Hayek put forth his argument for private currencies in his book ‘Denationalisation of Money’ based on theoretical efficiency gains and the potential to mitigate business cycles. The idea of decentralising currency, after numerous failed attempts, was first popularised among the public in the form of "Bitcoin" by a developer under the pseudonym Satoshi Nakamoto in 2009. Based on scholars’ research and other reputable sources, this essay adopted a quantitative, fact-based approach in the analysis of Bitcoin from various aspects. It is argued that, despite recognition of problems in the current system and benefits arising from Bitcoin’s technological innovation, Bitcoin itself is a curse. It is illustrated by the historical fact that it has not only failed to satisfy the sustainability requirement and the money-like feature, the marginal social cost to the economy by Bitcoin also exceeds its marginal social benefit due to its flaw in the design and the associated external cost to society thus far.
The fiat system
One could argue that Bitcoin is a blessing due to its ability to eliminate the possibility of governments and central banks abusing their monopolistic monetary position gifted by the current fiat system: for example, a Country lacking financial integrity may have an incentive to partially default on debts denominated under its own currency by gaining seigniorage at the cost of inflation. This was more than a theoretical concern as Reinhart and Rogoff identified "a striking positive co-movement of the share of countries in default on debt and the share experiencing high inflation above 20%" and "default through inflation became more commonplace over the years as fiat money displaced coinage as the principal means of exchange."
Furthermore, since central banks function as the lender of last resort, there is a potential for moral hazard to arise. This occurs whereby commercial banks raise their financial leverage, taking high risks to pursue profit as they speculate the high probability of being bailed out if necessary. This was argued by many economists as the primary cause of the avoidable 2008 Great Recession. Moreover, the legitimacy of the administration cost of currency management was also questioned by Karl-Friedrich Israel, an Austrian economist, by saying, "in the Euro currency union alone, such spending totalled more than €10.6 billion in 2016".
Blockchain
In addition, it can also be argued that the technology innovation "blockchain" (or public ledger) proposed by Bitcoin makes it a blessing. By virtue of its unique design feature, all information stored in the public ledger is permanently inalterable, preventing data manipulation and loss. This improves the levels of disintermediation where two economic agents can transact directly with each other, negating the need for reconciliations, thus efficiently tracking assets, avoiding additional devotions of capital and diminishing market failure from asymmetric information. It was estimated by PwC that the implications of the innovation of blockchain described above "could boost the global economy US$1.76 trillion by 2030". Such technology progress, argued by the Solow–Swan model, could be of great importance to facilitate the "cutting-edge" long-run economic growth for developed countries operating close to a "steady state" when the marginal benefits of continuing capital accumulation are outweighed by the marginal cost due to the capital's depreciation nature. One primary use of this feature of blockchain is in digital asset registries, which was experimented with by the Swedish government, and, according to the estimation by the consultancy Kairos Future that involved in the project, the blockchain-powered land registry project could save taxpayers over USD 106 million a year by eliminating paperwork, reducing fraud, and speeding up transactions.
Bitcoin as a curse
Bitcoin as “money”
Albeit being conceptually promising, Bitcoin has failed to satisfy the crucial features of money. Harvard professor Greg Mankiw, in Principles of Economics, defined money's functionality as a unit of account, store of value, and medium of exchange. Whilst Bitcoin is being recognised as a unit of account by Germany (despite other central banks suggesting otherwise, it behaves poorly in the sense of storing value and as a medium of exchange. The primary issue here is its extreme value vitality. Dirk G. Baur and Thomas Dimpfl identified that the price volatility of Bitcoin is almost ten times higher than the volatility of major exchange rates (US dollar against the euro and the yen). This not only makes Bitcoin redundant as a unit of account due to the frequent numerical variation in unit value measurement, but also challenges its reliability as a store of value, for that requires the possession of sustained and stable relative value such as gold. Further to the theory, using a mathematical model, Cheah and Fry have demonstrated that a significant component of the Bitcoin price is a speculative bubble, with a conclusion that the currency possesses nearly zero intrinsic value.
The high volatile feature also raises a theoretical sustainability problem as a medium of exchange: combining the absence of regulatory monetary policies and the highly inelastic supply of Bitcoin, a sharp increase in Bitcoin's price would cause unmanageable hyper-deflation due to the future speculation of Bitcoin users; on the other hand, a drastic depreciation could possibly cause negative conjuncture on its future value, causing reluctance in its acceptance among economic agents. These liquidity issues were seen to destabilise the economic activities in Bitcoin markets, such as the “Silk Road”. In addition, from a pragmatic perspective, Bitcoin’s economy can have little economic activity as it executes approximately only three transactions per second on average, which is staggeringly inefficient regarding the 13,000 transactions per second by VisaNet, the financial network operating the central global payment system, Visa.
Negative environmental impact
Moreover, arguments praising Bitcoin for it saves the additional fees paid to traditional financial institutions are short-sighted as it is an ignorance of negative externalities generated by “mining”. To solve the so-called “double spending” problem, the adopted mechanism “proof-of-work” deliberately create a cost to production that raises gigantic social cost, making it unlikely to be justified. It is built upon the competition of computing power as the probability of being awarded bitcoins is positively correlated with the relative processing ability.
Given the winner-takes-all principle of this competition, not only an excessive amount of investment in computing power will inevitably occur as individuals compete for newly issued Bitcoin, but also means that all other miners' contribution of computing power has not been used in verifying transactions, wasting approximately 99.9% of the aggregate consumption by Brody, Global Blockchain Leader at EY.
Empirical evidence is in support of such theory as statistics indicate the system uses colossal energy. From a macro perspective, the annual energy demanded by the system is estimated to be 135.98 TWh, exceeding the yearly aggregate quantity consumed by developed countries such as Sweden or Norway. In comparison, research from a fin-tech company estimated that the entire global banking system uses 263.72 TWh of energy each year, only about two times the energy used by the Bitcoin system alone. If comparing transaction efficiency from a micro standpoint, as of March 14th 2022, one Bitcoin transaction, on average, costs 2258.49 KWh, which consumes 1.5 million times more energy per transaction than the regular payment system, VISA.
Moreover, the massive energy consumption has undoubtedly made the network a significant contributor to the global carbon footprint. A calculation from the University of Cambridge illustrates that, in the worst-case scenario, the exercise of mining will be responsible for the emissions of 111 Mt2 of carbon dioxide, which would approximately cost governments up to 33.3 billion USD to completely eliminate. To better understand the impact, scholars from the University of Hawaii at Manoa estimated in 2018 that Bitcoin emissions alone could push global warming above 2 °C within less than three decades. The compensation of such effect imposes additional fiscal burdens on institutions as it contradicts the objectives of net-zero carbon emission by, according to the United Nations, more than 70 countries, including the significant power– China, the United States, and the European Union. This is a critical objection to the argument of saving administrative costs by eliminating the central bank, particularly to countries bonded by the Paris Agreement. Hence, in a world where approximately 790 million people still lack access to electricity and the growing concern over climate change, this energy-inefficient payment system should not be encouraged.
Bitcoin use in illegal activity
Illegal transactions
In addition, acceptance of Bitcoin by legitimate speculators and institutions, both public and private, provide liquidity for criminals. Whereas the government's legislation backs the foundation of fiat money, Bitcoin, ironically, has been suggested by abundant evidence that a considerable component of its intrinsic value is derived from its use in providing trading liquidity between criminals, a negative externality arising due to its wider acceptance. The anonymous nature of decentralisation in Bitcoin is at the expense of liberating all transactions from appropriate regulation, including the illegal ones, thus creating a safe haven for the payments on the black market. In 2012, the FBI expressed its concern about the attractiveness of Bitcoin to illicit activities such as money laundering. This was a year before the shutdown of the most notorious Bitcoin-only trading platform, the "Silk Road", where users were able to purchase drugs and weapons on the Darknet. It was announced later that, even neglecting the potentially missed Bitcoin, the US government seized a total of 1 billion USD worth of Bitcoin from this illegal trading platform alone. Moreover, Investigation by scholars showed that thousands of similar trading platforms are still situated on the Darknet, where Bitcoin transactions grew from approximately $250 million in 2012 to $872 million in 2018. Sean Foley and Jonathan R Karlsen estimate that around $76 billion of illicit activity per year involves Bitcoin (46% of Bitcoin transactions), which is close to the scale of the US and European markets for illegal drugs. They further indicated that approximately one quarter of bitcoin users are involved in unlawful activity.
Tax evasion
Furthermore, the fact that Bitcoin is not being recognised as a legal tender (with only one exemption, El Salvador) does not exclude it from the taxation system, as governments of major countries such as the US and UK consider it a form of a capital asset. While laws regarding income tax on cryptocurrency were introduced tentatively by governments in recent years, it remains controversial whether Bitcoin-based tax evasion could be addressed to all intents and purposes by the current anti-tax-evasion scheme since its operation is independent of a sovereign jurisdiction that offers informational support, as it is theoretically arduous to track down the earning accumulation due to its anonymity. According to Rice University's Baker Institute for Public Policy, the tax evasion related crime significantly increased after the invention of Bitcoin, which was accused by IRS (Internal Revenue Service) Commissioner Charles Rettig, who pointed to the sparsely censored cryptocurrency sector as a primary culprit in the growing tax gap in the United States. This accusation, again, was verified later as the report from the IRS showed that 3.5 billion worth of cryptocurrencies (mainly Bitcoin) were seized by the institution during the fiscal year 2021, accounting for 93% of all the assets seized by tax enforcement that year.
Conclusion
In summary, while an objective assessment must recognise the blessings of Bitcoin, this essay argues that the net benefits are negative. It is acknowledged that potential progress is to be made in the current fiat system. However, not only does Bitcoin fail to satisfy the necessary function of money, the negative externalities in production and its wider acceptance, as well as its illegal utilisations, deviate from positive progression. The significant criminality and stunningly inefficient use of energy associated with Bitcoin demonstrate its unsustainability and destabilising effect on economies. Thus, on balance, Bitcoin is a curse for the modern world.
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