What ever happened to money?

Bitcoin, as most of you know, is a way of making payments and storing financial assets that escapes the oversight of governments (at least so far) because it is a digital currency that rests in virtual world. Creating bitcoin takes real resources with significant consequences for the health and well being of humans and the earth’s climate.  It expends enormous amounts of electricity to “mine” the components of the bitcoins, which are crated on giant computers located in “mining” cities near cheap electricity.  The electricity used could be put to far more important ventures, while creating a block of bitcoin greatly enriches its creators. The market price of a bitcoin is currently over $40,000.

Recently a team of economists estimated the costs of producing bitcoin that are imposed on people other than the owners/creators.  The primary cost to creators is the amortization of the capital equipment required and the electricity and workers to produce it. The costs in increased mortality, climate change, and health damages from these operations amount to 37-49% of the coin’s value, depending on where the production is located. However, those costs are not borne by the producer, but by the rest of us. They are what economists call externalities.  Noise and air and water pollution are familiar examples of externalities.  Because the owners do not have to pay these external costs in the absence of regulation, they will overproduce goods and services that create negative externalities.

The process used by economists to determine those numbers is called cost-benefit analysis. Economists add up the costs of producing X and the benefits of producing X and either subtract the costs from the benefits or take the ratio of benefits to costs to determine whether a project is worthwhile.  When used in public sector projects, like building a highway or creating a new park, all costs and benefits are included, so the externalities are part of the cost.  For a private firm, however, the decision makers only include the costs they actually have to pay.  The purpose of much regulation, especially environmental regulation, is to require that the firm bear those costs as well—sometimes known as full-cost pricing. Bitcoin is not regulated and does not bear these costs..

The bitcoin industry is gulping up huge amounts of electric power, and that electric power creates significant externalities in its production, especially if it is derived from fossil fuels. In the Christian Bible there is a famous quotation: “The love of money is the root of all evil.”  (I Timothy 6:10.) I’m pretty sure the author of this quotation could not foresee bitcoins, but he certainly would have supported the idea that producing a form of money that does great harm to innocent bystanders—humans, animals, earth—while greatly enriching its creator would be a clear application of the evil that money can do..

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