Bitcoin: a counter-intuitive solution to climate change
For Alexandre Stachtchenko, co-founder of Blockchain Partner, the world's first cryptocurrency has the advantage of being in limited supply, and therefore deflationary, which favours savings (sobriety and the long term) over consumption...
"Mr Pasteur, are you claiming that by injecting me with a virus you're going to cure me?"
Yes I'm starting off strong with a controversial subject that has nothing to do with anything: vaccination.
In reality, it doesn't really have "nothing to do with anything".
What Bitcoin and vaccination have in common is that they both solve problems in counter-intuitive ways.
Medical history is in fact extremely full of examples of this nature, which seem funny to us today but were not at all funny when they occurred. The Hungarian doctor Ignace Semmelweis, for example, was interned in an asylum where he died for suggesting... that washing doctors' hands could reduce infections in mothers during childbirth.
Pasteur, better known in France, fortunately did not have the same fate, and was honoured with numerous national distinctions. But the vaccination process remains counter-intuitive when you're not educated about it: how could injecting a disease prevent said disease?
In the same way, Bitcoin is counter-intuitive: it consumes a lot of electricity... which allows it to promote the fight against climate change.
The assertion may seem disturbing, even shocking, looking very much like "greenwashing", but the aim of this article is to try at the very least to present to you as honestly as possible why Bitcoin is not the ecological disaster you are being presented with, but on the contrary, an unexpected solution.
To do this, I am going to deploy my argument in two parts. The first will not deal with Bitcoin's "operational" functioning, i.e. its energy consumption in particular, but with its systemic implications for human behaviour compared with the current monetary system, and how Bitcoin promotes sobriety. The second will address two broad, more operational categories: the deployment of renewable energy (ENR) on electricity grids, and the use of Bitcoin as a catalyst in the fight against methane.
Part 1: The current monetary system is the greatest environmental-destroying machine mankind has invented
"Argentine inflation pros give their advice to bewildered Americans. "
It was with these words that Bloomberg drew in the crowds in December 2021 on its article dedicated to the "sudden" rise in inflation in the United States.
It has to be said that anyone who had been listening doctrinally to the central banks and other specialists could only be surprised. First of all, inflation did not exist. Secondly, it was supposed to be temporary ("I see an inflation profile which looks like a hump" dixit Madame Lagarde, President of the European Central Bank (ECB) in early December 2021. Understand: it's a temporary bump). And we had to wait until November 2022 (!!) for this same Christine Lagarde to admit for the first time that we had probably not reached the peak. All the while, of course, absolving herself of responsibility, since this inflation would "have appeared out of nowhere!"
But my aim here is not to cast stones. Rather, it is to draw attention to the famous advice given by the Argentines, who are used to terrible inflation, to the Americans, whose daily monetary and financial life is the opposite, thanks to their position as the world's leading economic power, based on the international reference currency.
What is this advice?
"Spend your paycheck right away" the article reports. In French, spend your paycheck as soon as you get it.
To combat rising prices, should we spend faster? This may seem counter-intuitive when you're used to being careful with your wallet. It's counter-intuitive because inflation refers to two different things. In the "common" sense, inflation refers to a general and sustained rise in prices. Initially, however, inflation is the phenomenon of an increase in the money supply, i.e. the quantity of money in circulation in the economy. When this increase is too rapid, for example faster than productivity gains, inflation results in the loss of purchasing power of money, which ultimately leads to a general rise in prices, referred to by the "common" meaning of the word inflation. What is counter-intuitive is actually quite obvious and revealing: we don't spend our money because prices are rising. We get rid of it because its value is diminishing day by day.
To realise this, we need to perform a thought experiment, put ourselves in the shoes of a large part of the world's population, and envisage our daily lives in an economic zone whose currency is collapsing. Some countries, because of the seriousness of their situation, allow us to see these effects before our very eyes, without even needing to open a history book and revisit the period of Weimar Germany.
In Venezuela in particular, for the last ten years, (2013, ironically the date of the fameful tweet by Jean-Luc Mélenchon describing Maduro's model as a "source of inspiration"), the value of the currency has been divided by 400,000. In other words, on average, Venezuelans have been losing two-thirds of their savings every year for the last ten years. If you could afford a nice house in Caracas in 2013, you can only afford a loaf of bread in 2023. In 2019, inflation reached the unimaginable figure of 2,000,000%.
Of course Venezuela is an extreme case, but by 2022, almost half of humanity was living with an "official" double-digit inflation rate, losing at least half their savings every 5 years. In this context, it becomes "rational" to spend our money at any cost and buy anything. Because anything will always be better than losing the fruits of our labour. Indeed, if the money you receive loses its value over a period that is no longer measured in years, but in months, weeks, even days or hours, then every minute counts.
"Consume, you fools!"
This situation of hyperinflation, which we can hope never to see in our country - although its probability of occurrence is increasing - has at least one merit. It opens our eyes, through an extreme situation, to a more insidious daily reality: the system of incentives and economic behaviour induced by traditional fiat currencies.
In fact, whether inflation is 1%, 2%, 10% or 100%, only the intensity changes, but hardly the general mechanism: the incentive to get rid of one's money. In other words, once essential needs have been met, the incentive is to invest it in the hope of beating inflation (shares, property, works of art, etc.), or to spend it on short-term, non-essential goods or services, often fuelling over-consumption.
This second option is generally favoured because it is less risky, and requires less time and expertise. Indeed, how can you reasonably ask the average person to become a seasoned investor and beat inflation (while still keeping their job, of course!), when even almost all (80%) asset management professionals struggle to beat the major indices? Investing is a full-time job, and one that is far from easy.
Money is the lifeblood of the economy, and the monetary system as it is currently constructed influences all our behaviour, all our purchasing decisions, forcing us to favour short-termism and spending, rather than sobriety and the long term, without it even being conscious.
In other words, we will not have sobriety in the current monetary system. It is impossible. And this despite the fact that this sobriety is necessary in all the scenarios envisaged by the IPCC if our planet is to remain livable.
Throughout human history, saving was rather a wise decision, enabling us to insure ourselves against the perils of an uncertain future, or guarantee a future for our children. We sacrifice our short-term well-being and comfort to improve our long-term prospects. In short, we behave with foresight, and in the only way that allows humanity to progress.
Today, in an insidious way, this sober and far-sighted behaviour is punished, in favour of waste, comfort, and short-termism. The climax was reached with the arrival of the covid pandemic, when central bank interest rates went negative. In economics, since interest rates represent the price of future risk, a negative rate means for all economic players (including households, you!) that the future is more certain than the present, which by definition is impossible. Why save if tomorrow is hyper-certain? How can you make any long-term decisions when the rules of the game are so absurd?
The direct and terrible consequence is that any attempt to reduce greenhouse gas emissions or preserve biodiversity through sobriety is doomed to fail in a system where everything you do is directed against the consumption of natural resources. In a flawed system, flawed behaviour is rational behaviour.
To explain this in a more practical way, I'm going to use Endorsen/Baseload's graphic explanation on his medium, itself borrowed from economist Saifedean Ammous in his excellent and lengthy interview with Lex Fridman, although I am not aligned with all of his analysis.
To be able to exchange goods and services, we need a medium of exchange. If farmer A produces oranges and wants apples, and farmer B produces apples but doesn't want oranges, farmer A is going to have to find something that farmer B wants in order to get his apples, for example bananas. The banana becomes the medium of exchange.
Assuming that bananas were used by a company as a medium of exchange, a problem would quickly arise: bananas rot within a few days. The incentive here is to get rid of the bananas as quickly as possible in order to obtain something more durable. Rational behaviour is therefore either to eat the bananas (immediate consumption), which is not necessarily the best thing to do when you're not hungry, or, for example, to pay someone who is actually hungry by giving them a few bananas, and in exchange ask them to cut down a tree so that you can store more durable wood. You hope that this wood will enable you to buy more bananas tomorrow, when you are really hungry. In this case, of course, we hope that you have analysed the wood market, supply and demand, the dynamics of using this resource, etc., at the risk of having to sell your wood for fewer bananas in a few years' time. This is the investment alternative. The end result: a tree that had asked nothing of anyone has been felled.
This metaphor allows us to illustrate quite simply what we saw earlier, i.e. the tragedy of a medium of exchange that cannot preserve purchasing power: it forces people to spend or invest, i.e. to consume natural resources.
Inflation is the name we give to the speed at which bananas rot. In February 2023, inflation in the eurozone was 8.5%. This simply means that your euro will not rot in a few days like a banana, but in a few years. At this rate, in around 5-6 years, any euro held will have lost half its value. Yes, half.
What's the incentive for all participants in such a system? "Spend your paycheck right away" as the Argentinians would say.
You are driven out of savings, forced to find projects to finance to beat inflation. The result is very often the financing of activities that would not have been sustainable in a normal context, once again fuelling the pointless extraction of natural resources.
To this flawed system of incentives must be added a dubious construction that amplifies the ecological absurdity that is the current monetary system.
We all pay in oil.
At the end of the Second World War, the international monetary system, previously based on gold as the standard, and the British pound as the reference currency and main pivot to gold, changed drastically with the Bretton-Woods agreements (1944). Under these agreements, gold retained its role as the world standard, but the US dollar became the sole pivot rather than the main one. In other words, all the world's currencies are expressed and converted in US dollars, and only the latter is convertible into gold at a fixed price: 35 dollars an ounce (today, almost 2000 dollars an ounce. Did you say inflation?).
For the United States, the temptation was strong to give in to the easy way out, by creating dollars ex-nihilo, without backing them up with the acquisition of gold. This was done in the 1960s in particular to finance the Vietnam War and its intensification from 1965, as well as the social programmes of President Johnson's "Great Society". In 1965, it was General de Gaulle's France that began to blow the house of cards by calling for a return to the gold standard, and above all, by beginning to sell its dollars on a sustained basis to recover gold.
In 1970, there was only the equivalent of $11 billion in gold to support... $24 billion in reserves held by foreign countries.
In 1971, the United States defaulted. It would not repay the gold it owed. Gold is no longer convertible at the agreed price. It should be noted that, as is often the case, this major, unilateral, unjust and despoiling political decision was presented as "temporary" in order to make it easier to digest. Nothing is more lasting than a temporary measure said Friedman...
Money, for the first time in history, is therefore backed by nothing. No commodities. This was the birth of purely "fiat" ("So be it") currencies. What followed, as we all know, was a complicated decade: oil shocks, inflation, sluggish growth...
Gold, which had been the very definition of stability for centuries, adjusted to the amount of money available, and its price exploded.
Read this: in 1792, the price of an ounce of gold was set at $19.75 in the United States, a fledgling country emerging from a war of independence against the world's leading power, the British Empire. In 1932, the price was $20.67! In a century and a half, the price has not even fluctuated by 5%! In contrast, since 1971, i.e. in half a century, the price has risen from $35 to $2,000, an increase of 5,600%.
In the early months and years following this monetary cataclysm, the influence of the United States was clearly called into question. The emergence of a multipolar world, against the backdrop of a Cold War that was not helping matters, was a possibility. The Americans had to find a substitute for gold that would allow them to continue to dominate the international financial and monetary scene.
That substitute was oil. And in particular Saudi oil, under a historic agreement, signed in 1974 by Kissinger, the US Secretary of State, and the Saudi Crown Prince Fahd, which led Saudi Arabia to sell its oil exclusively in US dollars, and to recycle those dollars into US debt. Black gold is replacing gold.
As Alex Gladstein, director of strategy at the NGO Human Rights Watch, reports in his article "The hidden cost of Petrodollar ", citing a Bloomberg article, the deal is surprisingly simple: the Americans "buy oil from Saudi Arabia, and supply the kingdom with military assistance and equipment. In return, the Saudis sow billions from their oil revenues in US Treasury bonds, and finance the US government's deficit."
OPEC followed suit in 1975, and soon the whole world was denominating the price of its oil... in dollars. If you want to feed your machines, to speak in Jancovici in the text, you need dollars.
Since that day, therefore, we all pay in oil. And in arms too, since that's the quid pro quo for the agreement. Saudi imports of US military equipment increased from $300 million to more than $5 billion between 1972 and 1975.
The current global monetary machine, launched in 1971, is an incongruous parenthesis in the history of mankind, unfortunately still open, and which, out of habit, is now taught as normality or even progress.
A "progress" whose leg in the space of barely 50 years is quite impressive: devaluation of labour in favour of assets, feeding always