Last week, the CEO of both the beleaguered Twitter Inc (TWTR) and Square Inc (SQ) made a strong statement in favor of bitcoin by saying that the cryptocoin is expected to become the most significant currency of the world within the next 10 years. (For more, see Bitcoin Will Become World's 'Single Currency': Dorsey.) This was prior to Twitter's Mar. 27, 2018 ban of cryptocurrency ads from its platform.
In a Mar. 21, 2018 interview with the Times of London, Dorsey said, “The world ultimately will have a single currency, the internet will have a single currency. I personally believe that it will be bitcoin.”
However, analysts offer a different version. Refuting the above claims made by one of the most influential entrepreneurs of the Silicon Valley, a report by Financial Times claims that it is virtually impossible for the bitcoin tokens to become the leading currency.
Assumption Around Mining Costs
The analysis hits the assumption at the core of bitcoin’s working mechanism – bitcoin mining. (See also, How Does Bitcoin Mining Work?)
The FT report's argument starts with the concept of “narrow money” - a category of money supply that includes all physical money such as coins and currency, demand deposits and other liquid assets held by the central bank – which is estimated to be at $41 trillion at present as per CIA data.
Expected to grow at a steady OECD average rate of 16%, it will reach $210 trillion by 2028. Around the same time, around 20,367,000 bitcoins are expected to be in circulation by then (That's nearly all of it, as there is a cap at 21 million bitcoins). It will make each bitcoin worth around $10 million. Essentially, a mining reward of 3.13 bitcoins will be worth $32 million.
However, bitcoin mining uses a lot of electricity, which is the major constituent of the big operational overhead for keeping the bitcoin currency agile. (For more, see Crypto Mining Up 8,500% Last Year: Report.)
60% of bitcoin mining revenue could get eaten up by operational costs
Taking cues from the Digiconomist estimates for bitcoin energy consumption, such operational costs are expected to hit 60 percent of bitcoin mining revenues. For the mining reward of 3.13 bitcoins, the operational cost will come to around $19 million, of which 80 percent (around $15 million) would be the cost towards electricity.
Essentially, to generate a bitcoin block, one would spend $15 million worth of electricity. Since each block contains around 1,500 transactions, each transaction will cost around $10,400. At the US-average cost of 11 cent per kilowatt hour, the energy consumption per bitcoin transaction will come to around 101,114 kWh. Assuming a high increase in bitcoin mining efficiency to an optimistic figure of 99 percent over the next decade, the energy consumption per bitcoin transaction will be around 1,011 kWh in 2028.
The analysis then takes input from the 2017 World Payments Report, which states that there were 433 billion electronic transactions in the year 2015. If the number of such transactions continues to increase at a steady pace of 10 percent per year, the number will reach 1.5 trillion by the year 2028.
If bitcoins are expected to be the core currency of circulation for all these transactions at the earlier calculated energy cost of 1,011 kWh per transaction, it will require a high energy of around 1,511,484 terawatt hours!
Despite taking the highest possible 99 percent efficiency in bitcoin mining, and a conservative increase of 10 percent per year in e-payments, it will be impossible to have such high power available even from the best of nuclear power plants put together. The biggest nuclear power plant of the U.S. generates only 34 terawatts of power, which means that it will take more than 44,000 such power plants to generate the enormous power required to keep the bitcoin payments alive and kicking.
In a nutshell, it seems impossible to have bitcoin as the mainstream currency of the future, the analysis concludes.
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