Comment by betterunix2 | Hacker News Reader

Comment by betterunix2 | Hacker News Reader

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The collective energy spent by Bitcoin miners equals the energy consumption of Argentina, yet the Bitcoin network only processes a small fraction of the number of transactions per day that Visa processes. For reference, Visa itself consumes only a small fraction as much energy as Argentina.

In other words, you must cover the cost of vastly more energy per Bitcoin transaction compared to the mainstream financial system. Environmental concerns aside, that amounts to a huge tax on every transaction that reduces the economic efficiency of the system. Note also that this is a per-transaction tax, regardless of transaction size, making Bitcoin less useful for small transactions.

There is also the fact that such a high energy cost per transaction causes the value of Bitcoin to be more strongly correlated with the price of energy. Energy prices are notoriously volatile; hence Bitcoin's value will also be volatile. Volatility makes a currency less useful (it introduces risk into every transaction and disincentives investment) and a very volatile currency will eventually be abandoned entirely. It should surprise nobody that the overwhelming majority of merchants who "accept cryptocurrency" as payment do so via services that immediately convert that cryptocurrency payment into their local fiat currency, because the majority of the world's fiat currencies have very stable values (compared to Bitcoin etc.).

I could go on but to be honest the technical objections to Bitcoin outweigh the economic objections, at least in my opinion. Happy to get into those objections as well if anyone is interested.

>Bitcoin network only processes a small fraction of the number of transactions per day that Visa processes

Btc is not replacing visa. Btc is replacing central banks. The appropriate comparison here is what is the energy cost of the banking infrastructure of the incumbent system.

>Environmental concerns aside I am concerned that you are using electricity to power your computer, access the internet, and comment on HN. Are you the arbiter of "moral" energy use? Am I? Slippery slope, and an anti-human one at that.

>Energy prices are notoriously volatile; hence Bitcoin's value will also be volatile.

This is not how it works. There is an argument to be made for risk of on-grid miners sudden increase of electricity prices in the case of a power shortage. Miners don't like this type of risk, so they choose to locate at places with abundant supplies and stables prices of electricity. Miners sign long-term electricity agreements. Risk to off grid miners is another level removed from on grid miners.

>will eventually be abandoned entirely. According to how you feel? All signs point otherwise.

>the technical objections to Bitcoin outweigh the economic objections You are free to make your own fork, BIP, or new "crypto" and compete. Good luck. By the way, there are 7999 "crypto" coins competing and losing so far.

Western Union has a lower transaction rate than Visa, so does that make it necessarily less useful or valuable (either absolutely or per-kilowatt)?

Also, as you noted the energy usage is correlated with the value, not the transaction rate. Transaction rate limits could be changed arbitrarily without affecting the energy usage of the coin.

However you have the causal relationship backwards: The value of the coin determines what level of electricity spending is profitable for miners. The electricity spending of miners doesn't determine the value.

"Western Union has a lower transaction rate than Visa, so does that make it necessarily less useful or valuable (either absolutely or per-kilowatt)?"

The transaction rate is not what matters; what matters is the energy spent per transaction. Visa process many more transactions for much less energy than Bitcoin, and is therefore more efficient. I suspect Western Union's energy consumption is roughly in proportion to Visa's, but I have no data (the Visa example comes right out of their annual report, which covers both the number of transactions and amount of energy consumed).

"The electricity spending of miners doesn't determine the value."

The energy cost determines the transaction fees. Higher transaction fees make Bitcoin less valuable by imposing a greater burden on using the system. Yes, there are other factors that determine price of Bitcoin, but if nothing else changed ("all things being equal") then volatility in energy prices would trigger volatility in transaction fees and thus volatility in Bitcoin's overall value.

My point was that WU and Visa solve totally different problems which have different challenges. Why should it be expected they would have a similar cost per transaction?

> Higher transaction fees make Bitcoin less valuable by imposing a greater burden on using the system ... volatility in energy prices would trigger volatility in transaction fees and thus volatility in Bitcoin's overall value.

Good point, that is certainly a risk with Bitcoin.

EDIT: Actually thinking about it more I'm not sure why this would be true. Since the transaction rate is not related to the number of miners, volatility in energy prices might cause miners to enter/leave the system but I don't see why it would impact the coin prices.

Whichever miner mines the block that a transaction is included in must collect at least enough in transaction fees to cover the energy spent on mining. Since the block size (and thus number of transactions that can be recorded per block) is fixed, this implies that any increase in the global price of energy will raise Bitcoin transaction fees (all things being equal). This assumes that the transaction rate is always at the maximum possible; if the transaction rate is too low and blocks are not being filled, the effect is even more pronounced as there are fewer transactions over which the energy cost can be recuperated (last I checked, Bitcoin is already operating at its maximum transaction rate, but someone may want to correct me on that).

The reason it impacts coin prices is that higher transaction fees make Bitcoin less desirable as a medium of exchange and reduces demand. To put it another way, let's say I am paid in Bitcoin. If transaction fees increase, I will need to demand a higher nominal salary, at least enough to cover the transaction fees incurred when I spend my salary. Likewise, any merchants that accept Bitcoin payments will raise their prices, to cover the fees they will have to pay. Yet the same work is being done and the same goods are being sold; hence, inflation, or in other words, the value of Bitcoin has decreased.

If transaction demand stays equal, and the rate of transactions that can be processed stays equal, then why would the fees raise? If electricity costs go up, miners will be priced out of the market, and then difficulty will go down for other miners making it profitable again once the hash rate drops enough.

Miners can't choose the transaction fees, they will either process the most expensive transactions they see or just stop mining. If they stop mining, that doesn't impact the rate of transactions that can be processed.

The number of miners does not really matter. Whatever miner mined a given block must receive enough to cover the electricity cost, regardless of how many other miners are involved. There is also no particular incentive for a miner to reduce his own electricity consumption in response to the difficulty being reduced. The only reason miners will shut their equipment down is if they are unable to cover their electricity costs because e.g. nobody is willing to pay the higher transaction fees.

Obviously everything I described is a simplified model where energy costs change equally for all miners. The real world is not that simple, but there is some correlation in energy costs across different regions as there is a global market for typical fuels (coal, natural gas, uranium, etc.).

It is also important to remember that transaction fees are not in proportion to transaction sizes. People doing large Bitcoin transactions could absorb much higher fees, so in all likelihood nobody would be priced out of the market (and Bitcoin would be dominated by large transactions, which is more or less the case right now).

I am not suggesting miners will react to the difficulty change. The difficulty change reacts to the miners.

Miners will shut their equipment down as soon as the electricity costs become greater than the rewards. When some of the miners shut their equipment down, that causes a difficulty change which makes mining profitable again for the remaining miners, and also keeps the transaction rate the same. The miners have no way to impact what transaction fees are acceptable because they have no control over the transaction rate.

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