Rethinking Crypto: Towards a Sustainable and Stable World Currency
Bitcoin’s trajectory has veered away from its initial promise as a global currency and has instead morphed into what some see as a high-stakes gamble. According to estimates by the Cambridge Bitcoin Electricity Consumption Index (CBECI), the energy consumption associated with Bitcoin mining soared to staggering levels in 2023, ranging from 67 to 240 terawatt-hours (TWh), equivalent to powering Canada for 2 to 6 months.
Given this immense energy expenditure, Bitcoin now predominantly serves two primary functions: facilitating transactions in illicit activities and serving as a speculative investment vehicle. However, the rationale behind choosing Bitcoin as an investment remains elusive. Its price volatility poses significant risks for investors, and unlike stocks, Bitcoin lacks tangible assets or company ownership.
Consider this: if Bitcoin’s price were to double from its current $60,000 level to $120,000 next year, many investors might find themselves on the brink of jubilation-induced heart attacks. Yet, in the realm of investment, why not consider more stable options? The tech giants like Alphabet, Amazon, Apple, and others have witnessed their stock prices double or even soar beyond. Meta stock price even went up by a factor of 500% since 2022!
Personally, I made the decision back in 2020 to steer clear of the crypto industry for several reasons:
- Volatility: The value of cryptocurrencies swings wildly due to their lack of tangible backing, making them unsuitable as stable currencies.
- Energy Consumption: Cryptocurrencies demand significant energy inputs, primarily for mining, which raises environmental concerns and questions the necessity of this consumption.
- Lack of Traceability: Cryptocurrencies’ decentralized nature often makes tracing transactions challenging, fostering an environment ripe for illicit activities.
Moreover, the actions of certain crypto companies, operating under the guise of tech enterprises but engaging in Ponzi schemes, have prompted several countries to outright ban cryptocurrencies. However, the root cause of these bans lies not solely in moral considerations but also in the challenge that cryptocurrencies pose to governments’ control over monetary policy and currency issuance.
A Sustainable and Stable World Currency
Having said all of that, it’s still interesting to imagine a future with only one world currency that’s not controlled by a single country alone. Currently inflation and foreign exchange rate fluctuation causes direct concern for many individuals’ personal savings.
In Canada, the declining purchasing power of the Canadian dollar is evident. In 2013, one Canadian dollar could be exchanged for one US dollar, but now it’s only worth 0.7 USD. This depreciation represents a significant loss, with many Canadians unknowingly seeing a 30% decrease in their lifetime savings.
Similarly, in the US, although the US dollar currently holds strong, concerns arise with the interest payment on US debt reaching a staggering $1 trillion. Since the abandonment of the gold standard in 1971, the US dollar’s value has been detached from tangible assets, leaving it vulnerable to fluctuations and speculation.
These observations underscore the precarious nature of global currencies, which are essentially constructs of governmental authority and collective trust. Yet, they are susceptible to unforeseen events and disruptions, emphasizing their intangible and vulnerable nature. This vulnerability highlights the allure of a world currency whose value is inherently tangible and impervious to manipulation by centralized authorities.
This vision aligns with the decentralized ethos of cryptocurrency, albeit diverging from its original trajectory. Thus, the question arises: What would constitute the most perfect world currency?
To answer this, it’s essential to address fundamental questions:
Should the currency value slowly decrease or increase over time?
Individuals, even those not actively engaged in investment activities, inherently store their productivity in the form of currency. For example, if I work 8 hours today and save $100, which covers my weekly food expenses, ideally, I’d like that same $100 to retain its purchasing power 30 years from now. Similarly, if I save up half a million dollars to buy a house today, I hope that amount would still afford me a house three decades down the line. However, this ideal scenario is disrupted by the phenomenon of inflation.
When people allocate their funds into assets such as houses, collectibles, luxury items, stocks, or businesses, regardless of the strategy’s correctness, their underlying aim is to convert a medium of wealth that diminishes in value over time into one that appreciates. If the world currency steadily depreciates, individuals seek alternative avenues to preserve and grow their wealth.
However, excessive investment in certain sectors can lead to detrimental outcomes. For instance, an over-investment in houses can inflate a housing market bubble, resulting in wealth erosion and economic instability when it bursts. Similarly, pouring resources into collectibles or luxury items often yields minimal long-term value compared to investments in essential assets like real estate.
Investing in stocks, on the other hand, stimulates innovation and commerce, representing a valuable avenue for wealth generation. Yet, excessive speculation in stocks can lead to wasteful endeavors, such as the proliferation of internet companies in the past decade that focused on solving trivial consumer problems rather than creating substantive value. This phenomenon underscores the importance of prudent investment practices.
Considerations about the potential consequences of currency value fluctuations are crucial. If a world currency were to steadily appreciate over time, individuals might become more cautious with their investments, potentially stifling innovation and economic growth, leading to recessionary conditions.
Economists often advocate for a modest inflation rate of 1% to 2% as a stimulus for overall societal growth. However, this strategy entails a trade-off, as it sacrifices individual financial security for the collective benefit of society. This balancing act reflects the complexities inherent in navigating a free-market economy.
Should transactions be traceable?
The anonymity provided by untraceable transactions can facilitate criminal activities, as it allows individuals to transfer money discreetly. Currently, illicit funds are often laundered through legitimate businesses due to the limitations of financial systems in tracking and scrutinizing every transaction. However, the emergence of artificial intelligence (AI) is poised to revolutionize this landscape by enhancing the capability to detect and analyze financial transactions.
Nevertheless, while complete transaction anonymity may seem regressive, the ideal world currency should strike a delicate balance between preserving user privacy and enabling authorities to combat illegal money transfers. It should offer robust privacy protections while retaining mechanisms for tracking illicit activities.
However, implementing such a system raises questions about who would have the authority to monitor transactions. Most nations are unlikely to relinquish their control over financial oversight. Therefore, one potential solution could involve the creation of a neutral and objective AI agent tasked with overseeing transactions. This AI agent would possess the ability to track and identify suspicious activities while respecting user privacy, thus ensuring a fair and effective system for all parties involved.
How much energy should the world currency use?
A world currency holds the potential to significantly reduce the frictional costs inherent in our current financial systems. By eliminating the need for foreign exchange (FX) transactions, the currency would promote stability, free from the influences of geopolitics, war, regional disasters, and shortages. Additionally, the costs associated with monetary transfers between countries would be virtually eliminated, streamlining global transactions.
The adoption of a world currency would render many existing financial activities obsolete, leading to a substantial reduction in energy and resource consumption. By simplifying and centralizing financial transactions, resources currently allocated to FX businesses and cross-border transactions could be redirected to more productive endeavors.
In terms of energy consumption, a perfect world currency would operate efficiently, utilizing resources in an optimal manner. While the energy requirements may surpass those of Bitcoin mining by a significant margin, the overall resource utilization would remain balanced and sustainable, contributing to a more efficient global economy.
