The Cryptocurrency Crash Is Great News For The Rest of The World. Here’s Why

Cryptocurrencies like Bitcoin were meant to be used as digital money. Instead, they became popular as speculative investors.

In addition to being resource-intensive and inherently wasteful, cryptocurrencies are also incredibly volatile. The prices of the largest cryptocurrencies, Bitcoin and Ethereum, have fallen by more than 55 percent in six months, leading some to suggest that regulation is needed to contain the turmoil.

Some blame the price slide on a specific contagion, a collapsing “stable currency” called TerraUSD that is supposed to be pegged to the U.S. dollar. But the current collapse of the cryptocurrency market is more likely to be a combination of many factors.

For years, interest rates have been close to zero, making bank bonds and treasury bills seem boring as investments, while cryptocurrencies and non-fungible digital tokens (or NFTs) linked to works of art look attractive. .

However, the US Federal Reserve and the Bank of England have recently increased interest rates by the largest amount since 2000. Continued VOCID controls and Russia’s invasion of Ukraine have also overshadowed markets.

Bitcoin was designed to be indifferent to governments and banks, but investors are generally not. They are cutting back on risk sources from their wallets and throwing away cryptography.

Crypto loss, climate gain?

The most polluting “working test” cryptocurrencies, such as Bitcoin, Ethereum and Dogecoin, together use about 300 tera-hours (TW / h) of electricity, mostly from fossil fuels each year.

Bitcoin has an annual carbon footprint of about 114 million tons. This is roughly comparable to the 380,000 space rocket launches or the Czech Republic’s annual carbon footprint.

Work test mining can be thought of as a controlled form of energy waste. The process involves specialized computers that repeatedly perform random shots to guess a long series of digits. The amount of computing power devoted to this effort is called the network hash rate.

If the hash rate drops for any reason, due to power outages or price drops, for example, the difficulty of the guessing game is automatically adjusted to ensure that the network can find a new winner every ten minutes. Each winner begins to verify online transactions and receives 6.25 newly minted bitcoins.

Whether the guessing game is profitable or not depends on how much mining paid to set up your computers and the power to run them.

Most working test mining machines in the world use electricity generated by coal-fired power plants. The higher the price of the cryptocurrency, the more cash mining equipment is prepared to waste this electricity, until the costs of earning outweigh the rewards.

With the fall in the price of Bitcoin, the financial incentive to waste energy to undermine Bitcoin should be less. In theory, this is good for the weather.

But surprisingly, the network’s hash rate (and carbon footprint) is still very close to its all-time high, averaging about 200 quintillion hashes per second.

The scale of this continuing interest means that Bitcoin mining at current prices is likely to still be profitable. But for how long?

Inflection points and death spirals

The value of Bitcoin has temporarily fallen below the estimated cost of production several times before with no significant long-term damage to the hash rate. But if the market stagnates long enough, working-proof cryptocurrencies will begin to see an increasing number of miners capitulate.

Higher-cost miners are likely to sell their bitcoin holdings as profitability falls, creating even more selling pressure on the market. Short-term capitulation is common among smaller mining companies with high costs (often using intermittent renewable energy).

But a domino effect with large mining companies closing one after another could cause cryptocurrency prices and carbon emissions from the network to drop rapidly to zero. This event is called Bitcoin’s death spiral in cryptography.

In addition to the difficulties of Bitcoin mining pricing, there are other possible turning points to consider. Many large investors, especially those who bought at higher prices, are currently underwater, laden with large Bitcoin wallets.

El Salvador President Nayib Bukele has just raised his country’s total Bitcoin reserve to about 2,300, or about $ 72 million at current prices. His country’s cryptocurrency losses add to fears of an impending debt default that would cause significant pain to those who had no voice in their leader’s bet.

Bitcoin ban or boycott

Featured investors can find The Bitcoin bear trades a bore. But research shows that environmental losses from high-priced cryptocurrencies are far more worrisome.

The damage caused by Bitcoin mining disproportionately affects poor and vulnerable communities, as mining clothing and cryptographic developers take advantage of economic instability, weak regulations, and access to cheap energy.

Bitcoin miners can pay locals who want to use these resources for productive purposes. These communities also tend to face the abrupt end of the climate crisis, which fuels cryptographic mining.

Governments around the world want to appear interested in cryptocurrencies as tools for economic growth. But the crash shows that Bitcoin is useless as a primary medium of exchange and as a reliable reserve of value, which causes most users much more pain than benefits.

Following the global financial crisis of 2008-10, governments promised a crackdown on toxic financial instruments with simulated valuations. For the global climate and a stable economy, cracking down on cryptography will now be a blessing to all.

But if environmental regulation efforts are not coordinated globally or are not sufficiently far-reaching, the climate contagion of cryptocurrencies will continue to grow..

Peter Howson, Professor of International Development at the University of Northumbria, Newcastle.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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