The Power of Rationalization or why Bitcoin stays a ⚡ hog

MVP, the Minimum Viable Product: you’re laser focused on solving one problem. Everything else is just a distraction. In regards of Bitcoin, the focus is clear: in 2007 our centralized monetary system had quite spectacularly crashed. Total doom was somewhat averted, some monetary were band-aids applied. And seemingly out of the blue falls a software protocol, which jumpstarts the Internet of Money from zero to 10.000 BTC for 2 pizzas to a multi trillion USD market.

4 years after the notorious pizza deal (with roughly 500 USD per BTC now worth a very nice 2 bed room apartment in Manhattan), I had a first look at BTC’s already notorious consumption of energy. Back then, 0.13 nuclear power plants were necessary to feed BTC’s Proof of Work consensus. CPU mining was already a thing of the past, Ethereum still on the drawing board, and Proof of Stake as a less energy hungry consensus model even more unproven than PoW back then.

Where are we now? Here’s the pizzas’ post crash valuation in June 2021. Think something between a fleet of super yachts, a sizeable island archipelago in the Caribbean, or a pre-owned space station.

So what about the power necessary to run the network? Ah, well …

Yes, this certainly sounds like a lot of energy. Or, in other words: it is. And, for the time being, will be. In a bit of a distant future, harvesting energy will be a virtually free commodity. But until then, energy conservation is where we’re heading. Because saving energy is a much quicker win.

Meanwhile, Harvard Business Review reiterates some of the standard arguments of some vocal Bitcoinistas. Mining uses more greener energy than average and its worth it anyways. Finally, the piece ends with a slight finger wagging:

What’s missing here? The alternative. While Ethereum is preparing for the big switch towards PoS, and newer chains like Cosmos, Polkadot, FLOW are live with PoS since their Genesis, the Bitcoin universe seems eternally stuck in its rationalization of being a massive stinker.

There’s three main line of arguments you might encounter:

  1. BTC is much greener than you think. And it’s even an incentive to invest into a green future.
    Let’s call this the Happy Rainbow Fallacy.
  2. Man made climate change is not a thing anyway. Therefore: nothing to worry about, please move on.
    This may be called the I am Right and You are Wrong syndrome.
  3. It’s worth it (and gold, FIAT etc use MUCH more energy).
    Here weg go: Whataboutism meets Low Self Esteem.

The Happy Rainbow at least kind of acknowledges that something may be off here. Yes, we use a lot of energy. But at least compared to let’s say the US average, the CO2 output is much less. Because many miners use green energy. That’s all very fine of course. But let’s put it like this: BTC are not the only scarce commodity. So is clean power equipment. Therefore, every green coin W/h equals a coal plant not converted yet. But hey, look here, the sky is pink and filled with winged unicorns.

I am Right and You are Wrong is an integral part of the fact free universe of climate change denialism, closely related to the “THERE IS NO VIRUS” plandemiacs and the chemtrail survivalists. If you listen to some of the godfathers of coinage, you get an idea that being a brilliant mathematician doesn’t prevent you from becoming a racist blubberhead on other affairs and unfortunately this kind of meme-DNA seems quite prevalent in the space.

Whataboutism meets Low Self Esteem. Yes, we know: the gold is DIRTY by default and what’s to love about the financial system. But maybe you didn’t get the question right? It’s not about the question “is BTC useful enough to put xyz extra tons of CO2 into the atmosphere” but “how do you plan to reduce your carbon footprint”.

Basically, all three line of arguments are based on is the following assumption: there is no alternative to PoW. Let’s not get into the religious wars around the technicalities of the issue. It’s not the year 2007 anymore and there had been quite some learnings and deployments.

But, unfortunately, a range of monetary iconoclasts of yesteryear have turned into functional conservations in regards of the vehicle they’re massively invested in, time- and moneywise.

This purely defensive position comes at a price.

The ESG Dilemma

How is startedHow it ended
When you value your company higher than your crypto holdings.

Bitcoin positions itself as Digital Gold, an immutable store of value, an investment asset where more and more institutional investors are moving in. But some institutionals are a bit hampered here. More and more legislation is now paving the way to funnel money into crypto assets. But the E in ESG (Environment, Social, Governance) is gaining much more weight as well. So being the unapologetic energy hog might be a bit counterproductive.

It’s just like why Musk did flip flop on BTC for TSLA. When the dirt coin story clashed with TSLAs clean knight in shining armour image, Elon became a Tesla-maxi.

Yes, being an unapologetic stinker is bad for business.


Not to forget: energy is a cost factor as well. If you are a true monopolist by default (A.K.A. a true Bitcoin maximalist), OPEX is almost irrelevant. In any other line of business, it’s either you move it down – or you will be moved out.

Regulatory Achilles’ Heel

If you don’t clean up your act I tax you out of the game and here’s our CO2-neutral centralized Central Bank Digital Currency to play with.

But that’s the wheel of life: successfully rationalization away your weak points will be your final weakness.

The true calling of Bitcoin

Here we go. A single Bitcoin is now worth more than one thousand Dollars. Success, success. Well, kind of.

Scary currency or great investment? Deflationary and highly volatile.
Scary currency or great investment? Highly volatile, but going up up up.

I don’t want to be a spoil sport, but let me dissect a bit what’s going on there. If you see Bitcoin as a currency to run your everyday business with, you run into some really crazy problems.
First thing, if you’re a mom and pop store, your accountant will have to introduce you into a multicurrency environment – which has to deal with a type of currency, which makes the volatility of old Italian Lira look like an easy thing to handle. All spikes and drops have to be accounted for for your taxes. And drops can have the unpleasant side effect that you finally make a loss on a deal, which was decently profitable when it took place.

The far more complicated part for Bitcoin as a currency (as in medium of exchange) is the built-in deflationary mechanism. The number of coins is finite (and even shrinking over time, as coins are misplaced, destroyed without a backup,…). So as long as there enough people buying, prices will go up driving more people into the system leading prices to go up and so on and so on.

Now, if inflation is bad and the opposite of deflation, deflation must be the opposite of bad? Unfortunately not. Deflation is bad as well.
A smoothly running economy is like stepping outside and it’s springtime, about 20°C (or 68°F for Americans or 293.15 Kelvin for all you mad scientists out there). Birds are tweeting. Bees and flowers everywhere. Everything is well and fine. But here it comes, the two endemic threats towards your monetary wellbeing:

  • Inflation superheats your environment to temperatures way above the boiling point. If it really gets going, there’s no real way to stop the heat until everything’s cooked way beyond well done. Wood incinerates. Metals evaporate. The end.
    And, talking about inflation, economywise, your money (and all your debts, you lucky b*st*rd) evaporates as well.
  • Deflation cools everything down. 0 Kelvin (or -273.15°C) means: complete standstill. Hell freezes over. The end.
    Economywise what’s happening is that nobody want to invest into anything anymore – besides the deflationary currency. Buying is postponed indefinitely, as prices are in a free fall. The beers I paid for with Bitcoins just a year ago (no, I didn’t; it’s a metaphor!) are now worth an iPad Air with 64GB. An exchange rate of 1 BTC = 10.000 USD doesn’t look to farfetched. And we’re not talking really longterm here: the last tenfold increase took about a year. Do you really want to buy a beer right now  – or save this BTC for now and buy yourself a Ferrari the day after tomorrow?

Which just translates into: in its current state, BTC is a really crappy medium of exchange. But an interesting money store. Highly speculative, with really interesting and not as common risk factors involved. But, hey: as long as it works, it works.

For some people it already worked pretty well. A friend of mine told me about a developer he met. He literally had found on his hard disk a stash of 40 BTC he had bought way back then and completely had forgotten about. The windfall buys him a brand new car – if he’s cashing in now.

It’s stories like this driving the BTC universe. And rightly so. Because investing in BTC isn’t any more esoteric than buying synthetic ETFs, investing in a growth stock (meaning: a company which is not making any money in the foreseeable future, but grows at a maddening speed, while nurturing the promise of phenomenal future riches wich are priced into their stock price as of today), buying yourself some rare stamps, or spending all your disposable EUR and USD and whatevers on fine arts or collectibles like signed baseball trading cards.
It’s fun, it’s risky, it’s exciting, and there might be a monetary benefit coming out of your actions (or inactions, see above).

But wait. The really good about Bitcoin is not just enabling you to make a quick buck (or loosing as quickly).
The really good about Bitcoin is about being what it technically is: a cryptocurrency, which at the same time is a rather volatile (meaning: still crappy) medium of exchange, a quite exciting value store (meaning: of highly speculative interest) – and a software platform for trustless transactions.

The equation goes a bit like this, with

  • A being the great growth in exchange value driving people and monies into platform development


  • B to be defined as the possibilities coming with the promise of becoming a universal medium of exchange, which keeps people and monies in the game.

And now, tadah:

  • A + B = C

And C stand for:

  • the resulting Bitcoin-related cryptocurrency software and platforms exceeding by far the effects of Bitcoin as a currency.

Trustless transactions is one of the major keywords here.
If you look at any kind of transaction between parties, basically we’re looking at a construct of a trustworthy contract between trusted parties using a trusted system. If you buy some real estate, you do want to know that you really bought yourself the Eiffel Tower from this trustworthy seller, when the trusted notary signed off the deal.

Trustless systems take most of this load off you. Because you do not have to trust all participants in the transaction. The model established by Bitcoin works pretty well for currency-type transactions. But there are already system out there using the infrastructure for something quite different. Since a couple of months, a group of students around Cornell’s Emin Gün Sirer is running the Virtual Notary.
With the following caveat:

It is not an official, legally-recognized notary, whose definition is provided by law, whose statements are court-recognized, and whose procedures are regulated. For operations that require legal standing, you should seek the help and services of an official, state-recognized notary. Please do not use Virtual Notary for something critical, like your will — you should enlist the services of a lawyer and a certified notary public.

The Virtual Notary does some nice and fancy things by itself. But finally leaves some code in the Bitcoin blockchain, using it as a public ledger, which cannot be altered.
In the same area, but pretty new around the block is Proof Of Existence. The service allows you to anonymously and securely store an online distributed proof of existence for any document and looks amazingly easy to use, with Argentine developer Manuel Aráoz suddenly finding itself at the center of interest of some quite interesting folks.

Mastercoin is to bitcoin as HTTP is to TCP/IP.
Mastercoin is to bitcoin as HTTP is to TCP/IP.

The real fun starts with two different approaches. Both are not just about leveraging the existing Bitcoin infrastructure, but by enhancing it by establishing new protocols on top of the Bitcoin protocol. That’s why J.R. Willett, masterbrain behind the Mastercoin project, claims for himself to be the author of The Second Bitcoin Whitepaper (with the legendary inventor of Bitcoin, Satoshi Nakamoto, who more or less singlehandedly started the whole craze, being the author of whitepaper No. 1).

Mastercoin is to Bitcoin as HTTP is to TCP/IP, Willett writes on QuoraWe’re building a new protocol layer on top of Bitcoin with a dizzying array of cool features that have never even been done before anywhere. Things like distributed exchange, distributed betting, distributed e-commerce, and coins which can track external values like gold or U.S. Dollars without trusting a human being to back them. 

The Colored Coin: exchanging value over the Internet.
Colored Coins: exchanging value over the net.

Maybe even more exciting are the possibilities of Colored Coins, as it seems, well, a bit more open than the fairly closely held Mastercoin-project.
Colored Coins is an open standard protocol, just like http and bittorrent, to exchange value over the internet, as they state rather matter of factly. Today there is no such standard for an exchange of value on the internet … Today Bitcoin is an amazing protocol, but the only asset you can hold on Bitcoin is the BTC.

The last sentence is probably core to understand all things Bitcoin.

  1. Bitcoin is a protocol
  2. One possible use case is holding BTC (A.K.A. Bitcoins) in this system
  3. But wait: there’s so much more.