Table Of ContentTHE BITCOIN
DILEMMA
COLIN L. READ
Weighing the Economic and
Environmental Costs and Benefits
The Bitcoin Dilemma
Colin L. Read
The Bitcoin Dilemma
Weighing the Economic and
Environmental Costs and Benefits
Colin L. Read
Economics and Finance
SUNY Plattsburgh
Plattsburgh, NY, USA
ISBN 978-3-031-09137-7 ISBN 978-3-031-09138-4 (eBook)
https://doi.org/10.1007/978-3-031-09138-4
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Preface
January 1, 2017, heralded in the modern era of bitcoin. Barely seven years
afterSatoshiNakamotominedthefirstbitcoinandthendisappearedwithout
ever tapping upwards of $50 billion of unspent bitcoin wealth, the digital
currencytransformedahobbycurrencyforself-professednerdsintoapower-
house banking alternative valued upwards of a trillion dollars. In the early
nascentperiod,someoneinFloridapurchasedtwopizzaswithenoughbitcoin
that would have made him a millionaire sixty-eight times over by 2021. By
2017, bitcoin had caught the fancy of many, and spawned new financial
institutions that generated huge wealth for some, but left others, especially
electricity ratepayers, poorer for it.
The story of bitcoin is one of trust, or more precisely, concerns about
whether existing financial institutions could be trusted to provide banking
and transaction services for the greater good. The world was introduced to
bitcoin’s creator Satoshi through a cryptic message on a bulletin board used
by cypherpunks in the latter half of the first decade of a new millennium.
The post on February 11, 2009, read “The root problem with conventional
currency is all the trust that’s required to make it work. The central bank
must be trusted not to debase the currency, but the history of fiat currencies
is full of breaches of that trust.”1
Satoshi was soliciting help to prove the utility of a new digital coin. In the
early days, millions of bitcoin were minted with special software on personal
1http://p2pfoundation.ning.com/forum/topics/bitcoin-open-source, accessed April 26, 2022.
v
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computers and laptops, fifty coin at a time, six times an hour, 24/7/365.
But, by 2016, bitcoin had gone corporate. A visionary Chinese company
called Bitmain had designed and popularized a special-built machine, the
Antminer S9, to much more efficiently mine this fast-emerging medium of
exchange.Almostovernight,thedigitalcurrencyworldwastransformedfrom
the utopian conception of its creator and the domain of cypherpunks and
hobbyminerstoonethatbredgreedandenvironmentaldisregardinaminer
arms race as more and more mining machines compete for upwards of $1
billion of mining rewards every month.
Thesenewmachinesusedspecially designedintegratedcircuitchipscalled
Application Specific Integrated Circuits (ASIC) that were assembled 189 at
a time in S9 miners, then in turn linked upwards of tens of thousands at
a time in mining farms. They have revolutionized the blockchain, bitcoin,
cryptocurrency, and financial markets to this day. These miners and farms
beckoned in a new corporate era for the mining of bitcoin that changed the
landscape almost overnight and caused the coin to diverge dramatically from
the ideals espoused inThe Cypherpunk Manifesto that inspired the creator of
bitcoin. The visionary creator developed the essential ingredient for a new
level of profit-seeking for multi-billion-dollar institutions that Satoshi would
have abhorred.
In 2016, a small city in the most northern corner of upstate New York,
a quicker drive to Montreal, Canada than any other American city, became
ground-zeroforbitcoinminingintheAmericas.Powerwassoinexpensivein
the city that quite literally every home was warmed with resistance heaters,
mostly baseboards lining each room.
APuerto-RicoregisteredbitcoinminingcompanynamedCoinMintcame
to town before Plattsburgh knew what was coming. As is typical in this
industry, bitcoin entrepreneurs do not readily announce their business plan,
but, even if they did, few would have understood it back then. Coin-
Mint arranged for the municipally owned electric company to sell them 10
megawatts of electricity on an ongoing basis, enough electricity to power a
typicaltownof10,000,andfarmorethanthatconsumedbyanylocalmanu-
facturer, a regional hospital, or the State University of New York campus in
Plattsburgh. They set up shop in a converted dollar store at a semi-vacant
strip mall and tried their best to remain below the radar screen.
In the year CoinMint came to town, a university professor of finance and
economics was running for mayor. To teach both disciplines at the college
level is unusual enough. But to teach Money and Banking on one hand,
and energy economics and sustainability on the other was fortuitous. This
professor-candidate had a degree in physics in hand before he went on to
Preface vii
study economics at the London School of Economics, and earn a Ph.D. in
economicsatQueen’sUniversityinKingston,Ontario.Forgoodmeasure,he
studied graduate level electrical engineering in cryptography and completed
a law degree at the University of Connecticut, an MBA at the University of
Alaska, and a Master of Accountancy at the University ofTulsa.
His eclectic background is unusual for a politician, but it was perfectly
suited to understand this novel cryptocurrency bitcoin. When he ran for the
mayor’soffice,hehadnomoreawarenessaboutwhatbitcoinwasdoingtohis
citythananybodyelseinPlattsburgh.EvenhispositionasaClintonCounty
legislatordidnotexposehimtowhatwashappeningundereverybody’snose.
All that changed when he was elected mayor of the City of Plattsburgh
and began serving a four-year term on January 1, 2017. From that point
on was an odyssey of attempts to understand and regulate an industry as
wild as Gold Fever a century and a half earlier. As he studied the industry
and learned bitcoin installations were soon dotting his state, he discovered
something that few realized. The design of bitcoin will continue to devour
increasing amounts of electricity globally almost without limit, and bounded
onlybythepopularityandpriceofbitcoinitself.Itturnsoutthattheincred-
ible wealth bitcoinhas created for someis paid for in higher electricity for us
all and diluted bitcoin value for cryptocurrency owners.
In fact, as you will see, even innovations in better mining machines that
are increasingly powerful and more energy efficient will only lead to greater
amounts of power consumption, which already exceeds the consumption of
any but the world’s top two dozen electricity consuming countries. Just half
a decade later, we know much more about bitcoin, but this story will reveal
toyousomuchwedon’tyetknow,includingresultsfewhaveacknowledged.
This is my story, the entire story of bitcoin and of cryptocurrencies in
general, the good, the bad, and the ugly, and the story of our future. Few
couldhaveimaginedthisstorytonow,butweallhaveachancetodetermine
how the story ends.
Plattsburgh, USA Colin L. Read
2022
About This Book
There are few innovations that have the potential to revolutionize commerce
that which have evolved as quickly as bitcoin. This digital coin sparked a
movement that may well redefine banking, transacting, and public recording
of important transactions. But bitcoin can create problems if not handled
withappropriatecareandisdownrightdangerousifpitfallsarenotnotedand
avoided. I take the reader through the various dimensions of bitcoin, begin-
ningwithitsCypherpunkrootsthatinspiredSatoshiNakamoto,amysterious
butbrilliantcoderwhohassincedisappearedfromthecryptoworld.Satoshi’s
libertarian vision was to allow people to transact with each other just as
they once exchanged music and movies on peer-to-peer networks. Satoshi’s
creation is a robust and decentralized network that has grown in value
to almost a trillion dollars and has spawned new institutions larger than
many Satoshi hoped to replace. I describe Satoshi’s creation and derive The
Bitcoin Dilemma that, for the first time, shows why bitcoin’s almost insa-
tiable energy demand will likely induce another forty-three million tonnes
of carbon dioxide emissions annually by 2030, and will rival the electricity
demand of some of the world’s most populous nations.
The reader will discover that the very nature of bitcoin rewards to its
miners creates an untenable but unavoidable race-to-the-bottom in which
mining farms demand more energy and faster machines. Meanwhile, energy
efficiency improvements simply result in more miners rather than smarter
mining or lower energy consumption. This disturbing result has, to now,
ix
x AboutThisBook
been missed by the extensive literature on bitcoin and has profound rami-
fications as the world struggles to combat global warming.This inevitability
is intrinsic in the Bitcoin Proof of Work design that cannot be easily treated
without global regulatory coordination. I also chronicle the experiences of
local communities when bitcoin mining comes to town, and the effects of
mining on higher electricity costs for residential and commercial ratepayers,
and show that we all pay many times over for profits generated by bitcoin
miners.
The incredible opportunities of this industry will only be realized if
our regulators, legislators, entrepreneurs, and general public garner a more
complete and objective understanding of this and other Proof of Work
miningtechniques.Iprovidethisbroaderperspectiveoftheeffectsofbitcoin
oncommerceandtheeconomy,electricitymarketsandtheenvironment,and
thechallengestoregulatorsastheytrytoameliorateTheBitcoinDilemma.My
analysisisbasedonmyresearchasaneconomist,mypositionasadirectorof
a large regional bank, my understanding as a technologist and as an environ-
mental and sustainability researcher, and my experience as a mayor who had
to develop public policy to address nuisances bitcoin creates.
Introduction
This is a story of a Cypherpunk ideology, so pure and well-intentioned
that, when combined with the genius of bitcoin’s creator, almost resulted in
the dream of democratization of banking, transacting, and personal finance.
Instead, these ideals were eventually coopted and corrupted to create unbri-
dled profit and the concentration of power within a new set of institutions
thatrivalthesizeofthefinancialmonolithscypherpunksandbitcoin’screator
and messiah hoped to replace.
Bitcoin is the product of a genius, but one who, not unlike many inno-
vative computer scientists in their own time, was suspicious of powerful
economic institutions. Satoshi Nakamoto hoped to help create a utopian
digitalsocietyinwhichweallsharebankingconcepts,contracts,andcurrency
in a way that could not be coopted by the large institutions that many of
Satoshi’s ilk believed had done so much damage to the economy in the first
decadeofanewmillennium.Thisgeniuscameouttotheworldforjustafew
short years, and has disappeared ever since. We cannot ask Satoshi whether
bitcoin has become what was anticipated then, but we can imagine from
Satoshi’s own words.
Indeed, Satoshi’s first words to the Cypherpunk public were a terse state-
ment inviting interest in a new digital coin. It read “I’ve been working on
a new electronic cash system that’s fully peer-to-peer, with no trusted third
party.”1 The Cypherpunk world knew little of the person behind this state-
ment, but would soon realize the beauty of what Satoshi had designed. Few
could have imagined the forces Satoshi’s creation would unleash.
1https://www.metzdowd.com/pipermail/cryptography/2008-October/014810.html, accessed April 26,
2022.
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