Bitcoin has a coexistence problem. Bitcoin mining is carbon intensive, and Bitcoin's influence grows only at the net expense of the United States' public policy priorities. Until both these issues are resolved, the cryptocurrency remains an ownership risk for any Bitcoin holder (or hodler) and a brand risk for Bitcoin-aligned companies like Tesla, PayPal, and Square.
Washington is big reason why. As a candidate, president-elect, and president, Joe Biden's national policy priorities have remained relatively consistent:
- Racial Equity
- Health Care
- Restoring America's Global Standing
Bitcoin directly and increasingly conflicts with two of these as it grows: climate and restoring America's global standing. By extension, Bitcoin conflicts with even more of the Administration's listed priorities because most of them tend to rise and fall together.
First, take climate. In 2018 - a relatively quiet year for Bitcoin - researchers found emitted as much carbon into the atmosphere as the city of Las Vegas. In March 2021, Bill Gates said, "Bitcoin uses more electricity per transaction than any other method known to mankind." With the Biden Administration committing the U.S. committed to halving our carbon emissions by 2030, and the effects of climate change becoming clearer and more obvious over time, it is hard to imagine current and future U.S. Administrations accepting continued high levels of pollution from Bitcoin.
Second, restoring America's global standing will only become harder if a Bitcoin or any other currency starts to replace the U.S. dollar, the world's most traded currency and primary reserve currency, as a preferred store of value or unit of transaction. U.S. sanctions and the freezing of bank accounts would have much less power if those bank account owners no longer need dollars to conduct commerce. Domestically, a displaced dollar would weaken the Federal Reserve's influence over U.S. monetary policy (interest rate changes become less relevant when a currency decreases in use). Getting less bang for the buck for, say, reducing interest rates would hamper the government's ability to help the economy recover from a recession or depression or respond to international market challenges.
Let alone Bitcoin's effect on climate change and the United States' international influence, Bitcoin is also neutral at best towards any of the Administration's other five priorities. For example, a vast appreciation in Bitcoin would probably increase racial inequity. Bitcoin is limited at 21 million coins - no more can be created - giving it a highly unequal distribution with an estimated Gini Coefficient of around 0.9. (For reference, a Gini coefficient of 1.0 is equivalent to one person owning everything, and the United States' Gini coefficient in 2018 was 0.414.) That Bitcoin appreciation would not help racial inequity should not be surprising because racial diversity disparities are well documented in the technology industry and wealth distribution, past and present, and Bitcoin ownership is largely owned by those who either mined it first or could afford to buy in later.
Fortunately, Bitcoin does have some paths forward. Bitcoin supporters should consider the following as a clear path to solving these problems:
- Decarbonize. Bitcoin could largely mitigate its climate problem in the medium term. Possible solutions include more efficient computing processing, bitcoin mining from renewable energy sources, transacting on a lightning network instead of Bitcoin's blockchain, and switching from proof of work to proof of stake. All of these would materially reduce Bitcoin's carbon emissions, especially the lightning network and proof of stake. Bitcoin-involved companies with social good agendas like Tesla (fast-forwarding green energy) and PayPal (democratizing finance) must get involved in supporting Bitcoin's decarbonization or risk serious brand damage later.
- Stay small for now. Until it becomes clearer how Bitcoin can grow without harming the United States' international influence and ability to protect and serve the nation, staying small is Bitcoin's best hope to avoiding unmitigated large-scale regulation. This goes for any other cryptocurrency, especially so long as cryptocurrency distribution remains highly inequitable. Of course, small is relative for Bitcoin given its roughly $1 trillion market capitalization as of 2021 (18.5 million coins X $55,000/coin).
- Assume governments will regulate Bitcoin, identify a tenable niche, and contribute to the policy development process. Because the U.S. government will want to retain control over U.S. monetary and fiscal policy and cryptocurrencies are growing fast, cryptocurrency regulation is "when" not an "if." Therefore, Bitcoin proponents need to think about influencing and embracing whatever regulation might already be on the way. Bitcoin's best case would be to find a tenable value proposition (digital store of value?) within a defined set of regulatory boundaries. No doubt someone is already thinking about what this might and should look like, especially as Bitcoin supporter MicroStrategy is co-located in the Washington D.C. area.
Some technology concerns have within the past 20 years resisted all attempts at regulation, but for Bitcoin that would be a mistake. Bitcoin regulation is inevitable barring a huge deceleration in its trajectory that has included triple-digit growth to a $1 trillion market capitalization in the past twelve months and a proportional increase in carbon emissions. Any delay induced through lobbying and political activism will only postpone Bitcoin's regulatory day of reckoning that is already on the way. Even if Bitcoin were to disappear tomorrow, crypto would still be a growth industry, and regulation would still be inevitable. Waves can be ridden but not fought.
The facts are the facts: Bitcoin is extremely carbon intensive, and if Bitcoin or any other currency gradually grows to displace the dollar then the United States' influence in the world will decline correspondingly. Both would have a negative effect across the United States and across democracies generally. This is especially true as China would be resistant to a lot of the same pressures given its clear policy stance against domestic use of cryptocurrencies, mines much of the world's new Bitcoin, and pushes forward with its digital yuan. The time is now for Bitcoin to get better for the environment and find a way to coexist with government regulations in support of reasonable public policy priorities.
Until that happens, companies that care about sustainability should avoid Bitcoin. I still have a hard time understanding Tesla's purchase of $1 billion of highly inefficient Bitcoin given its opposite mission to "accelerate the world’s transition to sustainable energy." It has got to be a bad brand move. Or does Tesla know something the rest of us do not?
Update on May 12, 2020: Tesla CEO Elon Musk announced the company's suspension of Bitcoin use until transitions to more sustainable energy.