Earlier this month, 39-year-old Salvadoran President Nayib Bukele made international headlines when he announced — and quickly passed — a bill to make Bitcoin legal tender in El Salvador, making it the first country to do so. This is unlikely to have a massive immediate impact on the economy of El Salvador, where only roughly 30% of people have bank accounts and less than 51% have access to the internet, which is necessary to use Bitcoin. However, the precedent that it sets is noteworthy, and merits debate on whether other countries should follow suit.
One of the most prominent arguments in favor of Bitcoin is that, allegedly, it is immune to inflation in a way that fiat currencies like the U.S. dollar are not. Jack Mallers, CEO of Strike, a payment platform that has partnered with the Salvadoran government to implement Bitcoin in the country, stated, “Holding bitcoin provides a way to protect developing economies from potential shocks of fiat currency inflation.” El Salvador itself has not suffered immense inflation in recent decades, largely due to the fact that it uses the U.S dollar (a choice that has its own flaws). However, in other Latin American countries — like Venezuela or, to a lesser extent, Argentina — that have experienced inflation, a currency that is supposedly immune to inflation would seem attractive.
The problem is that Bitcoin is far from immune to wild fluctuations in value. Indeed, within the last few months alone, Bitcoin has gone from a peak value of $63,347 on April 15 to $32,404 on June 22. Most of that loss in value occurred in just two weeks. Were that rate of inflation to continue for a year, that would be a 5,569% annual inflation rate, roughly equivalent to Venezuela’s projected inflation rate for 2021. Could Bitcoin rebound from where it is now? Certainly. Bitcoin’s current value is roughly equivalent to where it was at the end of January 2021, and obviously, it has increased significantly from there. But that’s precisely the problem. Bitcoin is not a stable currency; it’s prone to the same extreme oscillations in value that some fiat currencies are, and often more so.
Worse yet, those variations can be — and have been — because of policy changes in just one country. Bitcoin’s value fell by almost 50% within a week in December 2017, shortly before South Korea, a country with 51 million people, banned new trading accounts. More recently, China’s crackdown on cryptocurrencies wiped away $400 billion from the global cryptocurrency market in the three days after June 18, including a 16% drop in the value of Bitcoin. These incidents show how, even though Bitcoin is a decentralized currency, governments around the world can meddle with its value. So unless the world’s Bitcoin-using countries get together to establish rules for how countries can legislate — which, given how well the world was able to cooperate to fight COVID-19, I wouldn’t count on — this international currency will forever be prone to giant shocks because of national policies.
This is not to discount the extreme amount of electricity that mining Bitcoin requires, which is incredibly important as the threat of climate apocalypse looms closer and closer. In 2020, the Bitcoin network, which includes mining and transactions, used up 58 terawatt-hours of electricity, roughly equivalent to the annual electricity usage of Switzerland. Bitcoin’s proponents usually have two rebuttals to this statistic: fiat currency also uses a lot of electricity in its creation, and that the majority of Bitcoin mining runs on renewable energy. While both of these are technically true, neither is actually an effective argument in Bitcoin’s favor.
Paper currency production and banking use roughly 100 terawatt-hours of electricity every year, about 80% more than Bitcoin mining. However, this does not take into account the actual monetary value of what is produced with that electricity. In 2020, approximately 420,000 Bitcoin were mined, worth roughly $14 billion at present value. By contrast, approximately 6.2 billion U.S. dollar notes were minted in 2020, for a value of $185.7 billion. And that’s just for the U.S. dollar. So, while production and handling of fiat currency use double the electricity of bitcoin, it creates at least 13 times the monetary value. As for the fact that a majority — 74.1% — of Bitcoin production and handling is done using renewable energy, all that means is that every year nearly 43 terawatt-hours of electricity, roughly the annual electricity consumption of Qatar, is being diverted from other activities to produce and handle a highly volatile currency. And while the number of Bitcoin produced every year is expected to decrease in the future due to limits on the total number of Bitcoin that can ever be produced that were imposed when Bitcoin was invented, those limits are hotly debated and are likely to be strained should Bitcoin become legal tender in countries around the world.
Bitcoin is a wildly unstable currency that consumes the electricity diet of a medium-sized country every year to produce a fraction of the value that national mints do. If Bitcoin were made a national legal tender, it would jeopardize the financial stability of any nation that adopts it as a currency. Any country that makes it their reserve currency — as Bukele seems to want to do in El Salvador — risks the value of its reserves. And any wider usage of Bitcoin risks reversing even the modest gains we’ve made against climate change. I would be wary of any government that tries to give it legal backing, be it in El Salvador or New York City.
Brandon Cowit is an Opinion Columnist and can be reached at firstname.lastname@example.org.