About two months ago, I happened to sit next to Joseph Stiglitz at a dinner. If you're not familiar, he's one of the most influential economists of the past decades. Naturally, we came to discuss Bitcoin and crypto. In our conversation, he went from 'Bitcoin is stupid' to 'I see why this might change the world, but not in my lifetime'. I would consider this a small victory. Let's dive into how he arrived at this conclusion.*
*Joseph Stiglitz might no longer hold this view. I wrote down quotes from memory
In late August I attended the European Forum Alpbach to speak on a panel about the future of finance (read: crypto). That evening we had dinner with the speakers. I sat next to Joe Stiglitz. We chatted a bit about how refreshing it is to be in the mountains (Alpbach is beautiful). He then asked what I had done at the Forum. I mentioned speaking on the crypto panel. He looked somewhat surprised.
'But was there a panel about crypto?' he said. I explained the panel wasn't technically about crypto but about the future of finance, which meant that we talked mainly about crypto. Joe shook his head. Why are you interested in Bitcoin? he asked. I said I think Bitcoin is the single biggest lever to achieve positive change in the world (more on that here). Joe looked even more surprised. I asked him what he thinks about Bitcoin. He said 'I think Bitcoin is stupid'. I asked him why he thinks that. He brought up three points: Bitcoin's energy consumption, the efficiency of existing monetary systems, and the argument that national governments will never voluntarily relinquish their monopoly on issuing currency. These points get brought up in almost every conversation I have about Bitcoin, so I thought it made sense to write down why I think they don't hold up.
Joe: 'Isn't Bitcoin's energy consumption terrible for the environment?'
First of all, I mentioned that Bitcoin is a secure store of value precisely because of its tremendous energy consumption (not despite it). To tamper with the balances of Bitcoin holders you'd need to have 51% of Bitcoin's total hash power (total mining capacity). To do this, an actor would effectively have to double the energy that Bitcoin consumes today - which is about as much as Austria. There are only two actors in the world that could muster these energy resources: the US government and the Chinese Communist Party (CCP). In practice, both are unlikely contenders. China has an energy shortage. The COVID-19 pandemic has shown that the US government is incapable of coordinating anything at all. Bitcoin's energy consumption is not a bug, but a unique security feature.
Secondly, I pointed out that Bitcoin mining is rapidly becoming a catalyst for sustainable energy production. Up until the summer of this year, most Bitcoin mining happened in China where miners had access to free coal to power their operations (not cool). However, the CCP banned mining and kicked all miners out of the country. In June, the Bitcoin Mining Council estimated that more than 50% of Bitcoin mining now comes from sustainable sources (that's more than the EU electricity grid!).
Bitcoin can become fully sustainable soon because its electricity consumption isn't tied to any geographic area. In other words, you can set up a Bitcoin mining rig in places where no one is going to use the energy anyway (for example, next to some solar panels in the Sahara desert). Most importantly, Bitcoin introduces a global floor price for energy. Entrepreneurs who build renewable energy plants can always count on Bitcoin as a customer. Bitcoin makes it easier to finance a renewable energy business. Bitcoin mining can also help us to balance a renewable energy grid. Sometimes when the sun shines and when the wind blows isn't when we really need the electricity. However, electric grids need to stay in perfect balance between supply and demand. Excess energy is simply wasted. Because Bitcoin exists, excess energy can be used to generate income through mining. Bitcoin will land more money into the pockets of renewable energy entrepreneurs, thus accelerating the green energy revolution.
Joe: 'But won't Bitcoin just use all the energy in the world if it were to get adopted?' No. While it's true that it becomes profitable to spend more energy on mining if the value of Bitcoin rises, the Bitcoin reward that miners get is cut in half roughly every 4 years. As a result, every 4 years Bitcoin energy consumption is cut in half. In practice, this means that the energy consumption of Bitcoin remains relatively flat as value increases.
Joe: 'Alright, but we already have a great global currency. It's called the US dollar!'
I said that the dollar is still a solid unit of account, but not a great currency. In crypto, most people denominate their net worth in dollars. However, people who understand crypto rarely use dollars as currency. Instead, they move dollars around on crypto rails (cryptocurrencies pegged to the value of the dollar, i.e. stablecoins). Crypto is simply much faster than the banking system. A USDC or USDT transaction takes about 10 seconds with negligible fees, versus an international bank transfer that can take days with high fees. The demand for these crypto-dollars is also extremely high. A regulated broker will give you 12% interest on your stablecoins. For context, you get 0.00-0.02% on your savings in a Deutsche Bank account in Germany. Even in a world with record-low interest rates, there is an extremely high premium on dollars that exist on the blockchain. This suggests that the dollar is no longer a great currency - its crypto derivatives are.
The dollar's value as a global unit of account is also eroding. Biden's printing press is churning out dollars faster than we can count. This is harmful for developing countries that depend heavily on the dollar. By printing dollars, the US government is effectively taking wealth from these countries and giving it to US citizens. For example, El Salvador relinquished its own currency in 2001 in favour of using the dollar. Printing dollars diminishes the value of dollars held by El Salvadorians, while they get none of the printed dollars (these get spent in the US). No wonder El Salvador started using Bitcoin as legal tender. The US is cashing in on its global supremacy in an unprecedented way. I asked Joe how he - as a champion of global equality - could be in favour of such outright exploitation of the global poor
Joe: 'But what about the money laundering?' It's true that Bitcoin was used a lot for money laundering in the past. However, you would be a bad money launderer if you'd use Bitcoin for this purpose today. Everyone's transactions are publicly visible on the Bitcoin blockchain. If I know your public key, I can look up every payment you've ever made from this address. The government has figured this out too. The government just needs to understand which address belongs to whom and investigate addresses where the owner is unknown. The fight against money laundering is a cat-and-mouse game. Bitcoin was used by money launderers for some time, but the window is closing.
Joe: 'Ok, but do you really think that the governments of the world will voluntarily relinquish their monopoly on issuing currency?’
He added: ‘Imagine El Salvador were to create a new Bitcoin-backed currency, then all countries in the world will just ban this Bitcoin-colon (or whatever it will be called).'
This is a very good point. Governments have the power to make Bitcoin and cryptocurrency useless by uniformly banning the conversion from crypto to the local currency through globally coordinated action. Up until 2017 I too thought it was very likely that governments would ban Bitcoin. However, the COVID-19 pandemic and the increasing US-China rivalry indicate that successful global coordination to ban Bitcoin seems extremely unlikely.
Bitcoin lives in a space of geopolitical ambiguity. The US and the CCP both have incentives to be tough and soft on Bitcoin at the same time, which leads to relative inaction. The CCP has to be tough on Bitcoin when it comes to its own citizens to stop capital flight from the country. The renminbi is not an international currency for the same reason. Yet, the CCP has incentives to keep Bitcoin in existence on the international stage to give countries like Iran and Cuba an opportunity to make international transfers that the US can't block through SWIFT (yes the US has the power to block any international transaction). We often read in the Western press that 'China has banned Bitcoin' (to be precise, 18 times at the time of writing). What's really happening is that China is further restricting access to cryptocurrency for its own citizens. For the US, Bitcoin also lives in ambiguity. Bitcoin could be used as a weapon to promote capital flight from countries like China but it could also undermine its control of the global financial system. As long as Bitcoin remains in this ambiguous geopolitical zone, it will not get banned globally.
There are a few interesting historical parallels to be drawn to illustrate what happens when something exists in geopolitical ambiguity. When the United States was founded in 1776, the European powers could have easily crushed the fledgling state if they banded together. Instead the French and the Dutch used the United States as a stick to beat Great Britain with. In the decades that followed the United States declared itself sovereign over the Western hemisphere without having much hard power to back itself up. It relied on smart diplomacy to stay out of big European disputes. The longer the US managed to stay alive, the stronger it became. After gathering the will to industrialise by surviving its Civil War, the US was on track to become a global superpower. One could say the same about Bitcoin. The longer Bitcoin and cryptocurrency live in ambiguity, the more capital and talent get involved. At some point, it becomes unstoppable. If the price of Bitcoin would increase about 3-4x, some estimates predict that at this point more than half of the world's billionaires will be crypto-native. Many of these people are US citizens. As most members of Congress are for sale, Bitcoin will likely become unstoppable very soon, if it isn’t already.
Joe nodded and said 'well not in my lifetime'. I said that he looks much too healthy to die before this would happen. Then we laughed.
PS: all views are strong but weakly held. We could go much deeper on many of these points. Feel free to comment here if there’s something you don’t understand or disagree with.
Some links to go further:
Energy:
Analysis by Galaxy Digital of Bitcoin energy consumption before the mining exodus from China
The sustainable energy case for Bitcoin, by Nick Grossman
Example of a sustainable mining company (Stronghold) that grew from 0 to $1bn in a year
Crypto as currency:
Stablecoin usecases, by USDC founder Jeremy Allaire
Why India should buy Bitcoin, Balaji Srinivasan making the case why Bitcoin makes sense for developing countries
Central banks are watching stablecoins extremely closely, a speech by former ECB member Benoît Cœuré
The geopolitics of Bitcoin: