If Bitcoin had built-in deflation, it would destroy the earth
Bitcoin is a complicated thing to wrap your head around. At its surface it is a digital currency that’s not controlled by anyone. It’s also a risky investment scheme, a money laundry, a way to send money across borders, and for cryptography enthusiasts it’s proof that algorithms really can replace governments.
One thing is clear though: Bitcoin “mining” has spawned an entire industry of nerds running powerful computers in their closets for a chance at capturing some of the 300 Bitcoins are minted every hour. A number which will slowly decrease until 2030 or so, when new Bitcoin production will effectively cease.
And that is one of Bitcoin’s most contested properties: its fixed supply.
For people used to currencies issued by governments that sounds like a recipe for deflation… something they say will be ruinous for the Bitcoin economy. That’s up for debate, but I’d argue that Bitcoin’s fixed supply is important for another reason: carbon emissions.
The way the incentives work, people will bring more and more mining resources online until the value of the Bitcoins mined* just covers the cost of electricity†.
As it stands, the number of Bitcoins mined will steadily decline over the next 20 years, leading people to describe it as “deflationary”.
It turns out, this is great news for the atmosphere.
With mineable Bitcoins dwindling to zero, miners will come to depend on transaction fees instead. The overall supply of Bitcoins available to miners will be governed by market forces. Competition amongst miners will drive down transaction fees to the bare minimum needed to get transactions confirmed quickly.
And as the transaction fees are driven down, so goes the total electricity the network burns up and puffs out in a cloud of heat and CO₂.
Imagine instead that Bitcoin were inflationary, with more and more Bitcoins being mined, to drive down prices and encourage folks to spend rather than save.
In such a world, the Bitcoin network would use more and more electricity,especially as Bitcoins grew in value, and generate more and more pollution.
So let’s be thankful.
* about $14k per hour right now
† 2.5 gigawatts