Yet despite the environmental footprint of gold, few today seriously advocate the banning of gold production. Gold mining is widely distributed worldwide, with the largest single producer nation, China, accounting for only 11% of the new supply. Entrepreneurial gold miners emerge to extract the metal anywhere it is sufficiently dense in the earth’s crust, making global regulation virtually impossible. And gold offers a valid insurance policy against currency debasement — one that billions of individuals worldwide, and an increasing number of central banks, are taking advantage of.
The analogies to Bitcoin should be clear. Much like gold, bitcoin is an asset with non-discretionary monetary supply dynamics; no one entity can control the supply. In Bitcoin’s case, it’s not physical properties that define the rate of production, but a credibly-committed-to supply schedule expressed in code. Like gold, bitcoin is attractive because it is scarce and cannot be debased. Bitcoin also improves on gold in some critical respects — it’s more portable, concealable and transportable. Strong auditability and cheap verification of inbound transactions mean that Bitcoin is less prone to getting captured by large custodians, which helped doom the gold standard; clients can always withdraw and self-custody their coins with little difficulty.
As with gold, Bitcoin users are happy to pay for the “costs” of the monetary system they opt into. The resource costs are not socialized — they are borne solely by holders and transactors. Some externalities exist, but they must be considered relative to the externalities of fiat, which has a disastrous track record. All 56 hyperinflations on record have occurred under conditions of fiat currency; none has taken place on a commodity standard.
Gold mining occurs worldwide, as gold is relatively well distributed in the earth’s crust. Bitcoin mining is as of yet more concentrated, but its prospects for continued dispersion look bright. Mining is highly modularizable, and can take place anywhere that energy is present, even outside of the electric grid. Like a starfish losing an arm, Bitcoin can survive the loss of large portions of its industrial base without incident. China’s recent ban took around 45% of Bitcoin’s hash rate offline, but the protocol itself kept ticking along. As a practical consequence of that ban, Bitcoin has no current dependency on a single state. Since Bitcoin mining is a single market (i.e., the protocol pays the same rate per block to miners anywhere, regardless of location), policymakers banning Bitcoin mining locally effectively subsidize the activity elsewhere. Like gold, trying to globally regulate the asset is a fool’s errand.
Much has been said on the prospects for rendering Bitcoin mining more sustainable, and the industry has been galvanized over the last year. The Bitcoin Mining Council has begun releasing disclosures from constituents. A number of large miners have begun voluntarily disclosing their sustainability, and buying offsets for the remainder. The emergence of flared gas mining is a potent near-term lever which could decarbonize Bitcoin mining. But ultimately, Bitcoin mining should be understood similarly to the gold mining industry: a global industry, composed of thousands of heterogeneous participants. Some of them are accountable to U.S. capital markets and hence more inclined to be transparent and sustainable; but a good portion of hash rate will likely always be opaque.
Understanding the Bitcoin energy debate as the continuation of the age-old debate about the resource costs of non-state money helps clarify the terms. The reason critics fixate on Bitcoin’s energy impact is not its particular rapaciousness — mobilizing against an industry accounting for, generously, 0.1% of global emissions will not solve the climate crisis — but because they dispute its relevance and merit as a monetary good. Similarly, critics railed against the purportedly high resource costs of the gold standard not because gold was too expensive — as demonstrated, fiat has increased the resource costs imposed by the acquisition of gold — but because they resented the monetary discipline imposed by the gold standard itself.
Not once have I encountered a critic of Bitcoin formulating a challenge to Bitcoin’s resource costs in a rigorous and data-backed manner. The challenge, were it to appear, would look something like, “Bitcoin’s kilowatt hours (KWh) consumed (or CO2e emissions) per unit of settled (/stored) value is excessively high relative to the equivalent ratio for Fedwire.”
Bitcoin’s costs are the denominator in the equation of its efficiency — yet the numerator is rarely considered. How often do you hear critics conceding that Bitcoin provides valuable monetary freedom for tens of millions of individuals worldwide, especially those in unstable states, lacking meaningful property rights? And with fiat, the denominator — its deleterious effects on society — is scarcely ever included in the accounting of its own resource efficiency.
Now, if bitcoin becomes the base money in a neo-gold standard, does it pose more of a threat to the earth’s resources than gold ever did? Doubtful. Bitcoin’s annualized issuance rate is 1.7%. Throw in aggressive estimates for fees and you can push that to 2.1%. The issuance component of Bitcoin’s security budget halves every four years, with the next halving due in 2024. Unless fees massively increase, and keep increasing every four years to offset the halvings (they’ve never held at much more than 200 BTC per day for a sustained period), Bitcoin’s security spend will likely decline in bitcoin terms over the medium and long term. (I’m aware that this is a controversial assumption.)
If bitcoin reaches parity with gold, as would be presumably necessary for it to serve as specie in a neo-gold standard system (implying a BTC unit price of $579,000 as of today), Bitcoin’s resource costs would be effectively identical to those of gold. How is this possible? Well it’s an odd coincidence that gold’s issuance rate is almost exactly the same as Bitcoin’s in this current halving regime.
In 2020, gold equivalent to 1.76% of the aboveground stock was mined. The figure has averaged 1.83% over the last decade. In 2020, gold producers collectively raked in $191 billion through mining (before any costs are factored in), a figure equivalent to 0.2% of global GDP. So, even if bitcoin completely supplants gold as the global monetary substrate of choice, it will only match gold’s current resource cost (which again, virtually no one ever complains about). Of course, even in the fever dreams of its biggest fans, Bitcoin isn’t likely to hockey stick to gold parity overnight, so if it takes bitcoin longer than three years to achieve parity, the Bitcoin mining industry will likely never match gold mining in terms of economic significance.
Layer on the fact that Bitcoin mining is effectively a fully synthetic version of gold mining, taking place only in data centers, requiring no diesel, arsenic or mercury, and our digital gold looks distinctly more sustainable than its analog counterpart. Gold extraction and refining is a heavy industry that requires the actual manipulation of physical matter, meaning it can never fully mitigate its carbon footprint. By contrast, to decarbonize, Bitcoin miners simply need to direct green power to their machines — which they are already in the process of doing.
The purpose of this comparison is not to denigrate gold, but to demonstrate bitcoin’s likely lower resource burden, even under the most optimistic scenario. Regardless, gold’s resource costs and ecological externalities — significant though they may be — are clearly worth it. The philosophical divide concerns neither gold nor bitcoin nor fiat; it ultimately reduces down to those who believe that money should be the sole purview of the state, and those who question the state’s monetary prudence and look to alternatives. As with gold’s resource costs, the energy debate is just a metonymy for this more fundamental question.
As for Friedman, he ended up dramatically reversing himself on the resource cost critique later in life. In his 1986 tract “The Resource Cost Of Irredeemable Paper Money,” he points out that fiat has very real costs: namely, the exorbitance of unstable prices and inflation.
“I took it for granted that the real resource cost of producing irredeemable paper money was negligible, consisting only of the cost of paper and printing. Experience under a universal irredeemable paper money standard makes it crystal clear that such an assumption, while it may be correct with respect to the direct cost to the government of issuing fiat outside money, is false for society as a whole and is likely to remain so unless and until a monetary structure emerges under an irredeemable paper standard that provides a high degree of long-run price-level predictability.”
In the paper, Friedman provides a simple example of the resource costs of a fiat regime — the new requirement by firms to hedge foreign exchange exposure. As he notes, foreign exchange futures were virtually unheard of until the link between the dollar and gold was severed. Under the first Bretton Woods system, the dollar was a fixed weight of gold and other currencies were linked to the dollar. Once that tether was broken, economic agents were forced to participate in the foreign currency markets. But few have dared to quantify these costs. He ends the paper with the following entreaty:
“I do not know of any attempt to measure the real resource costs of an irredeemable paper currency and to compare such costs with the real resource costs of a commodity currency. That is clearly a much needed research project.”
Today, 35 years on from his request, and 50 years after the total collapse of Bretton Woods, it might be time to revisit Friedman’s question once again.
This is a guest post by Nic Carter. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
