250,000 dollar by 2022? Nope, you’ll just lose your money! Debunking the Draper price target for Bitcoin

“Every cry of human pride ends as a cry of anguish.”
-Nicolás Gómez Dávila (“Don Colacho”)

 

 

As of speaking, a Bitcoin is sold for a price of 7964 dollar. That’s a lot of money. In fact, speaking as an early investor in this project who has cashed out by now, I’m almost certain a Bitcoin will sell for much less a year from now and will never again reach its height of 20,000 dollar.

In contrast to my claims, there are prominent figures in the media who insist Bitcoin’s price will rise to much greater heights than we’ve seen so far. Tim Draper has gone on record stating Bitcoin will rise to 250,000 dollar per coin by 2022. The Winklevoss twins, who own roughly 1% of all coins in existence, are slightly more conservative and insist Bitcoin’s total value will be three to four trillion dollar at some point between ten to twenty years from now.

Neither the Winkleboss twins nor Tim Draper will be right and it’s relatively simple for me to demonstrate this simple fact. There are three main reasons I’m writing this essay. To start with, I want to prevent uninformed people from losing their life savings in a project that doesn’t work. Second, I want to reduce the environmental and societal damage caused by this phenomenon.

Third, as an early investor in this project I want to clear my conscience. As time goes by and I begin to understand where the money comes from, I’m increasingly starting to think I should just put the money in a big pile and light it on fire. For now, it’ll do to simply warn other people not to participate in this swindle.

So, with no further ado, let us look at why the Draper-Winklevos euphoria is built on shaky foundations. I’m going to assume you’re familiar with the essentials of Bitcoin, but in case you’re not, here’s a brief recap. The idea is that Bitcoin is censorship-resistant digital money based on cryptography with a built-in supply cap hardcoded into the protocol. These coins are produced by mining. A Bitcoin miner is a device that tries out different solutions to a complex computer problem until it finds a solution that solves the problem, thereby awarding its owner with new Bitcoins, as well as some transaction fees paid by users of the system.

People are willing to spend a lot of money to produce these new Bitcoins. In fact, they’re willing to spend as much money to receive a Bitcoin as the Bitcoin can be sold for. Some of those costs consist of building the Bitcoin mining machines, some of the costs consist of housing and cooling the machines in warehouses, but the biggest cost consists of the electricity these mining devices use to find solutions for new Bitcoins. The problem with this fact is that when more of these devices start looking for new Bitcoins, the puzzle that needs to be solved is automatically made more difficult!

The consequence of this method to produce new Bitcoins is that a lot of electricity is wasted to maintain the Bitcoin system. Estimates are currently that 0.33% of the world’s electricity is consumed to mine Bitcoins. That’s an awful lot of electricity! Economics predicts the annual electricity consumption of Bitcoin should scale linearly with the value of the new Bitcoins rewarded to miners per year.

What does this mean for Tim Draper’s Bitcoin price prediction? By 2022, the number of Bitcoins awarded per minute will have been reduced by 50%. However, extrapolating linearly from current electricity consumption levels and assuming transaction fees do not increase means that Bitcoin would consume 15 times as much electricity as it does today. That leaves us with a situation where Bitcoin would consume 5% of the world’s electricity supply.

I’m confident such a thing won’t happen, for a number of reasons. To start with, you have to understand the type of electricity Bitcoin needs. Bitcoin needs electricity that’s both cheap and available 24/7, because blocks can be produced every 10 minutes and Bitcoin miners have to mine continually to break even on their investment.

In addition, Bitcoin can crash very rapidly in value, thereby suddenly justifying far less electricity consumption, so we can’t build expensive electricity facilities for Bitcoin mining. This leaves us with relatively few candidates to deliver electricity. A government won’t spend twenty years to build a new nuclear Power plant or hydropower dam, only to discover after ten years that everyone lost interest in Bitcoin. In fact, experts generally agree that bitcoin mining fits together best with cheap hydropower and dirty fossil fuels. There are news reports of coal power plants that plan to reopen, because the Bitcoin bubble has suddenly made the power plant potentially profitable again!

So, ignoring the fossil fuels for now, a somewhat environmentally friendly way of Bitcoin mining would depend on hydropower. That’s what the Bitcoin mining industry is currently looking at, hydropower facilities where prices are cheap due to excess capacity. The problem of course, is that there are limits to the excess electricity capacity. In addition, the hydropower is limited to particular geographical regions.

The question you need to ask yourself is: What would the economic impact be on a society that tolerates such widespread mining of Bitcoin? The answer is that it would be profoundly destructive. To start with, countries want to reduce their carbon emissions. China is home to as much hydropower as the next four largest producers. But why would China want to spend electricity on a zero-sum game, if it needs its hydropower to deliver clean electricity to its nation?

The only real candidates for Bitcoin mining, would thus be places with electricity available that can’t be used for other purposes. It goes without saying these places are few and far in between. The American and Canadian towns currently invaded by Bitcoin miners normally export their cheap hydropower electricity to big cities. Some Scandinavian countries also have a lot of cheap hydropower electricity available, but if you know Scandinavians, you’ll realize they’re not going to be very fond of the idea of devoting their electricity to ecologically unsustainable pyramid schemes.

The biggest problem Bitcoin miners will encounter in a world where they can gobble up 5% of the world’s electricity, is that governments will be extremely skeptical of the endeavor. Ignore the ecological aspects for a moment. A car plant or a supermarket consumes a lot of electricity too, but it creates sustainable long-term employment. The supermarket will probably still be there twenty years from now, as people will still need to eat.

On the other hand, what is a town signing up for when they invite the Bitcoin miners? A Bitcoin can easily crash in value by 50% in a year. When this happens, Bitcoin mining facilities suddenly become unprofitable and shut down. The people in town who were employed in the mining facilities would suddenly lose their jobs, having ripple effects on the rest of the local economy. The town would be left with empty warehouses, unemployed men who maintained the mining devices and power plants that deliver excess electricity.

To make matters worse, there are reliable moments when you can be pretty much guaranteed a mining facility becomes unprofitable. The inflation rate of Bitcoin drops at predictable moments every four years by 50%, leaving the 50% most expensive mining facilities suddenly unprofitable and prone to shutting down. Who is going to sign their town up for an experiment in wasting electricity that lasts for a few years at most?

There’s also another angle to this issue that shouldn’t be underestimated. Governments don’t like waste. They won’t be very fond of a digital zero-sum game that emits more carbon dioxide than the world’s aviation industry. Keep in mind that governments around the world are banning Hydrofluorocarbons, because they have a disproportionately harmful effect on our atmosphere, despite contributing less than 1% to the global greenhouse effect. These are the chemicals that saved our ozone layer from far more damaging chemicals, but we’re phasing them out through legislation, because we nonetheless consider them excessively environmentally polluting.

Here’s a question: How do you think governments are going to respond to an experimental payment system that uses 5% of the world’s electricity, to handle less transactions per day than Paypal does but with more fraud? My suggestion is that governments will actively work to suppress such a system. They have a relatively easy way of doing so: Intervene at the point of conversion between real money and Bitcoin. Hold the companies involved accountable for the fraud to which they contribute and the scheme falls apart.

The Winklevos prediction faces the same issue as Tim Draper’s. They expect Bitcoin to increase in value roughly forty-fold, but they think it will take longer. However, this means we’re either left with a similar level of electricity consumption as in the Draper prediction, or we’re left with a Bitcoin system that’s far less safe for its users than it currently is, as it could easily suffer double spend attacks.

Objections

There are a lot of common objections you’ll typically encounter to this point. I’ll point some out here:

Bitcoin hasn’t been banned yet, so why would it be in the future?

The point to comprehend is that governments move slowly, when faced with a phenomenon so novel as Bitcoin. The electricity consumption of Bitcoin has only received public attention for a year or so. Governments don’t like being seen as tyrannical, so the novel phenomenon has been left free to blossom, spurred on by the general belief that “blockchain technology” will somehow revolutionize the economy. At this point, the argument that the whole system should simply be banned is a lot more persuasive than it was a few years ago.

Bitcoin will simply end up using less electricity eventually

There are a few issues to consider here. If the systems rules remain unchanged, the safety of Bitcoin transactions depends on the consumption of massive amounts of electricity. It’s true that Bitcoin’s electricity use should drop by half every four years assuming a stable price, but this means the amount of money a malignant actor needs to spend to sabotage the system drops by 50% too. If it’s very easy to destroy Bitcoin, it won’t be worth a lot.

Alternatively, the rules might be changed. One of the many problems with Bitcoin is that it’s easy to make stronger rules, but it’s hard to change the protocol to allow new things that were previously unallowed. To understand why it’s difficult to change the rules to address the electricity consumption issue requires an in depth understand of the manner in which Bitcoin functions.

Consider a different issue that shows how difficult it is to change Bitcoin: Most Bitcoin developers and users wanted bigger blocks. The problem is that it requires changing a rule. But when you change a rule, you don’t just need to agree 100% on changing the rule, you’ll need everyone to agree what the new rule is going to be. Changing a rule sets a precedent to change it again and everytime a rule is changed a new additional version of Bitcoin comes into existence. The result is thus the current situation, where the main version of Bitcoin is stuck with high transaction fees and small blocks, while numerous minor “clones” have popped up with alternative rules.

In addition, changes to the rules need to be approved by the people who waste electricity, the miners. Today these are billion dollar companies. These miners are not going to agree to phase out their own business model. They’re going to fight tooth and nail, to maintain the insane level of electricity consumption. In fact, they’re already funding computer scientists, to come up with poor explanations for why spending so much money on electricity is necessary.

When Bitcoin is used on a broad enough scale, the electricity use is justifiable

The most simplistic version of this argument is the “industry X uses a lot of electricity too”, X generally being the financial sector. It’s a very poor argument however. To start with, Bitcoin isn’t genuinely used for economic activity on the scale of the banking industry. Two thirds of Bitcoin transactions do not represent genuine economic activity. These are spam transactions instead: People sending coins back and forth to hide their criminal origin, mining pools sending coins to the miners, etcetera. The other third includes a lot of people simply speculating on the price, but let’s be generous and pretend 30% of Bitcoin transactions are actual transactions. This means we currently have less than one transaction per second that consists of someone actually using the system.

In contrast, Paypal processes 450 per second on a typical day, while VISA processes 11,000 during peak hours. Bitcoin thus doesn’t deliver us anything near the value generated by credit card companies, Paypal and the rest of the financial industry. For Bitcoin to start making sense, it would need to process a lot more transactions. It currently uses 800,000 times more electricity than a credit card, per individual transaction. This includes every transaction, including the two thirds of transactions that are spam. There are scaling solutions that try to modestly boost Bitcoin’s capacity. But scaling solutions that would allow the system to process even as much as a hundred times as many transactions as it handles today, are solutions nobody has yet come up with.

So, for the system to start making sense from a resource consumption perspective, we need to be looking at a hundred thousand times as many users. If this were to happen overnight, I think you would notice. More importantly, the price would rise in response to such a dramatic increase in usage too. When the price of Bitcoin goes up, electricity usage increases dramatically too.

But let’s first ask a much simpler question: Where are we going to find the millions of people who will want to use Bitcoin to buy stuff? A normal person has no strong reason to want to use a payment system that’s less-user friendly than regular systems, excellently suited for fraud by the merchant, liable to theft or loss if you store it improperly, viewed with suspicion and unease by your environment, and volatile enough to drop by 10% or more on a day. If Bitcoin could suddenly handle a thousand times as many transactions, we simply wouldn’t find enough people willing to use it! In other words, there’s simply not going to be a scenario where the extreme electricity use by Bitcoin would be justifiable.

Advice for Bitcoin owners

My advice for anyone who owns Bitcoin is to sell them, run and never look back. It doesn’t matter if you’re losing money by selling now, you’ll simply lose more money (and integrity) as long as you wait. More importantly, by owning Bitcoins you’re contributing to irreversible environmental damage and severe damage to the fabric of society. It took me a long time to acknowledge this to myself, but by now it’s clear to me that Bitcoin is not just a bad investment, it’s a profoundly unethical project to participate in.

Scammers can use Bitcoin for their scams, because their criminal activities blends into the crowd of speculators like you, who expect to become rich one day by holding onto your coins. Most problematic of all however, is the simple fact that Bitcoin is used to kill people.

Fentanyl is an extremely powerful version of opioids. A lethal dose of fentanyl for a thousand people would easily fit within a small envelope. For drug dealers, Fentanyl is extremely attractive. You take some weak heroin, add a little bit of fentanyl and your customers experience a very strong high and will happily pay high prices for your drug. The problem of course, is that it’s difficult for those drug dealers to get the dose right and mix the fentanyl evenly throughout their product, so they’re going to kill a lot of people in the process.

It used to be difficult to bring the Chinese producers of fentanyl in contact with the American dealers. Today this is easy, thanks to Bitcoin. You install a Tor browser, visit obscure hidden websites and buy the drug you’re going to sell. One analysis found that buyers spent $230,000 on fentanyl, but the US street value of the purchased amount is estimated to be at least $766 million.

It shouldn’t come as a shock, that deaths from fentanyl in America have risen to dramatic heights. Right now, half the deaths from opioids are thought to be from fentanyl. Granted, Bitcoin isn’t entirely to blame for this. The pharmaceutical industry placed a gun against the head of the American underclass, it’s Bitcoin however that pulled the trigger. In the words of Bill Gates: Cryptocurrency is a rare technology that has caused deaths in a fairly direct way.

And sometimes, a tragedy needs a face, rather than a number. Or perhaps it needs two. I’ll leave you to take a look at Grant and Ryan, two thirteen year old boys, who bought a synthetic opioid known as U-47700 from another teen who bought the drug through Bitcoin on the darkweb. How much money is your honor worth?