The multinational investment bank and financial services holding firm recently released a research note on the crypto industry and blockchain technology. The note, titled “Bitcoin’s Dirty Little Secrets” claims that, at this point, Bitcoin is ‘slow’ and ‘impractical’ both as a payment and investment asset. The bank also highlighted concerns regarding the environmental impact of Bitcoin.
According to the report, Bitcoin's energy consumption is comparable to American Airlines, another multinational corporation responsible for flying over 200 million passengers a year. The research further compared Bitcoin’s energy use to the US federal government, a state organization that employs over 2 million people.
"Looked at differently, a single Bitcoin purchase at a price of ~$50,000 has a carbon footprint of 270 tons, the equivalent of 60 ICE cars," stated the research. Calculated at scale, this would mean that for every $1 billion worth of financial inflows to Bitcoin, the energy consumption is equal to roughly 1.2 million average cars.
Bitcoin is not necessarily defined by its price, as this author has previously argued. However, there is a specific correlation between Bitcoin’s price surge and its carbon footprint. The emissions produced by the crypto mining industry paces up as demand for the cryptocurrency rises and transactions increase in volume. As the complexity threshold for mining Bitcoin goes up, so does the required hash power. For miners to stay competitive, more resources are poured into optimizing hardware and reducing costs. The drive to push it forward results in more demand for power, hence the pacing increase in energy consumption.
"Given the relatively linear relationship between bitcoin prices and bitcoin energy use, it is perhaps no surprise that bitcoin's estimated energy consumption has grown over 200% in the past two years," Bank of America said, adding that "another key concern is that most hash power comes from China, where the government actively encourages bitcoin mining and where electricity costs are very low.”
To date, 60% of Chinese electrical generation is sourced from coal power plants, with less than 20% sourced from natural gas, or renewable fuel. According to industry research from University of Cambridge’s Centre for Alternative Finance, China accounts for roughly 65% of the global hashrate for Bitcoin, seconded only by the United States, which runs 7% of the total. For comparison, Russia and Kazakhstan both share around 6% of the total hashrate, based on an average monthly share. Notably, the entire Bitcoin network’s power consumption only accounts for 0.52% production and 0.59% consumption of the world’s total electricity index.
Aside from the concerns on Bitcoin’s impact on global emissions, BofA’s research note also opined that decentralized finance (DeFi) is “potentially more disruptive than Bitcoin” given how the Ethereum blockchain over which it is layered and operated on “has more features, including being more flexible.” DeFi’s radical automation of blockchain-based trading, lending, derivatives, and asset management services has indeed created a significant dent to traditional firms, challenging Wall Street, banks, and insurance companies. DeFi’s current TVL (total value locked) runs at US$44.41 billion, an explosive growth, despite not yet being comparable to centralized finance’s trillions of dollars in value.
The bank also weighed in on the current trend among 86% central banks around the world that are currently engaged in initiatives for developing central bank digital currencies (CBDCs), saying that these implementations are likely to become the “kryptonite for crypto.”
"Bitcoin has also become correlated to risk assets, it is not tied to inflation, and remains exceptionally volatile, making it impractical as a store of wealth or payments mechanism," the bank’s research said, noting that "[...] as such, the main portfolio argument for holding Bitcoin is not diversification, stable returns, or inflation protection, but rather sheer price appreciation, a factor that depends on Bitcoin demand outpacing supply.
Interestingly, the current holders of Bitcoin are heavily concentrated to a privileged few, with 95% of all mined coins held by the top 2.4% addresses with the largest amounts of BTC held. "In our view, the fact that such a small percentage of Bitcoin accounts hold most of the BTC in circulation makes this instrument impractical as a payments mechanism or even as an investment vehicle. It can also create social and governance issues," BofA further noted.
Bitcoin is quickly approaching its maximum circulating supply of 21 million BTC, and it now has roughly $18.6 million in circulation.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.