Bitcoin, Energy, And The Future Of Money

If you want to hold assets as a store of value, go buy assets.<p>The desire for currency to have "intrinsic value" appears to be driven by the fear of a sudden collapse of currencies that exist only as a system of accounting (like the US dollar). Or the desire to have a store of value that never suffers deflation or inflation. We all want that, but most of us acknowledge that it is no more possible than a utopia.<p>You can't freeze the economic system. Whether you back your money with energy, cryptography, flowers, or seashells, you can never control all the other factors, and thus your currency will fluctate.

This is a profoundly bad idea, and will likely never happen. The OP makes the assertion that quality of life is directly proportional to energy usage, so creating more energy is the primary way to grow an economy.<p>While this is true to a limited extend, do we really /want/ it to be true? Using energy as the measurement of an economy's size would naturally lead to economies across the globe investing in raw energy output, rather than other equally (or more) important areas of technological progress like making future infrastructure more energy-efficient. This wouldn't be so bad if it weren't for the fact that the sources of energy we most commonly turn to today, fossil fuels, are inherently limited and have huge negative externalities. We need to come up with a standard that convinces markets to grow the standard of living in a way that doesn't require increasing the energy supply. If we don't, we risk exacerbating the global environmental and resource crises.

Why? If you want to measure energy, measure energy. The point of currency is something else.<p><i>Currency/money is a data-structure for a kind of cooperation algorithm</i>. That is the way to understand it in an informational world. Note that money is not really about being a 'medium of exchange', a 'unit of account', 'store of value' -- those are tautological ways to look at it, they are its <i>particular</i> forms of activity, the real purpose is cooperation (more) generally.<p>The radical thought is that we do not really want currencies. We want something more information-rich -- something made for our current information tech, rather than originated from cowry shells or whatever. Hardly anyone is thinking in this way though, disappointingly. Yet it is myopia: if you look around non-currency systems are beginning to evolve. What is reputation, or 'karma', are they currency? Not really. What are things like Flattr and Kickstarter, are they markets? Not really.<p>Start deliberately thinking beyond currency.

I was thinking the other day about Bitcoin using proof of work (which uses energy), which makes it an energy proxy. It therefore seems to make little sense that one would pay for energy to be used with energy that has been used. Or is time arbitrage of energy something really useful?

The very premise that the value of a "fuel" is in its energy content alone is wrong. We'd be quick to lower the value of a "dirty Joule" (eg coal) compared to a "clean Joule" (hydrogen). Also, some fuels are inherently much cheaper to extract than others (coal is so cheap, and hydrogen so expensive). These costs of extraction also change over time -- ten years ago some applications naturally called for liquid fossil fuels (heating oil, diesel, gasoline), but after the fracking revolution a new operation starting today would better and more cheaply use natural gas. Natural gas will continue to be cheaper for some industrial applications in some areas until deployed fuel-using industrial capital equipment and vehicles using natural gas increases to take advantage of the cheaper energy.<p>Other factors that affect the pricing of a "Joule": convenience of application (I can't burn coal in my car, I pay a premium for gasoline; gasoline won't get me to the moon, I pay a premium for rocket fuel); ease of refining the mined resource into finished product form; ease of transporting fuels from source to "refinery" to distribution to end user; we'll pay a premium for fuels with a reliable steady supply; outside risks, e.g., political unrest in the Middle East increasing production costs and risk.<p>The "joule" measure for the value of a fuel is flawed. We already have a great measure for the value of a fuel, it is the US$.<p>Also, as many point out, the energy required to create a bitcoin has little bearing on its value. Energy costs help determine the mining effort and technology put toward mining bitcoin, but the value of a BTC will fluctuate depending on other factors. The total energy required to manufacture, transport components of, and assemble a house, along with the "inherent" value of those materials, is less than the US$-denominated utility of that house. If I shock a turd with the same energy used to build the house, it doesn't have any value approaching that of the house unless I'm Andy Warhol.

Why this is ridiculous and in need of some very basic economics lessons:<p>1. Hopefully the words "Monetary Policy" and "Fiscal Policy" ring a bell. The ability to control market fluctuations, let alone wield some level of political power as a government, lies heavily within a government's ability to utilize its money supply. Not all regulation/rule is evil - what would a programming language be without regulation/rules? Additionally, the great depression was more than proof at the need for some level of market regulation (John Keynes).<p>2. Basing money on a fixed supply, IE FUCKING ENERGY (since it can't be created or destroyed), would imply that there is a fixed amount of wealth. That's called Mercantilism and it was disbanded by Adam Smith... and 1000s of other economists/governments/times/etc<p>3. Bitcoin and friends decrease the transaction costs of money exchange (government regulation, forex, taxes). Money creates liquidity for the value you've created, and Bitcoin and friends makes that value more liquid -in certain ways- but it does not replace money.<p>4. Stability. Knowing that there is an entity that will back their currency, filled with fail safes, etc. encourages proliferation of that currency. It's why most investments (forex wies) are done in US dollars. Thing such as bitcoin, do not have that type of security. (FDIC anyone?)<p>5. Decentralization of currency often leads to destabilization of currency. If anyone can make it (and yes, it is far more likely someone will create a bitcoin instead of forging a US dollar), then the value in and of itself will drop.<p>6. "But WallStreet and all the finance people are up in a yipyap about it!" That's because it's an investment - many people play the forex (foreign exchange market) because there is much profit to be made from arbitrating currencies.<p>7. Inflation is needed - Milton Friedman has this at about 4% or so a year to keep up (check on that). Why? Try playing monopoly with 4 players with the set of cash they give you. Then try it with 10. There's not enough money to represent the players, therefore you need more. Inflation isn't always bad.

I'm trying to imagine the inflation that would result from reliable fusion technology. That said, currency that is destroyed as the backing energy is consumed is an interesting concept.

A similar idea I came up with a while back was to back a currency by carbon sequestered from the atmosphere. Anyone who absorbs atmospheric carbon in an auditable way would get vouchers denominated in tons CO2, and anyone who emits would submit those vouchers or pay a fee. Practically, the "emitters" would just be primary sources (coal mines, oil wells) who would pass the costs to the rest of us.<p>Fees paid could be distributed to citizens, making the whole thing work just like Hansen's fee-and-dividend, but adding an incentive to absorb carbon when it's more efficient to do that than to avoid emissions.

This doesn't consider rarity and usefulness. Oil is a lot more useful than hydrogen. As oil becomes rare it will be worth more though it still has the same amount of energy (specific gravity).

Whats the point, if you want to have your wealth in energy you can do so any time, energy is a currency by itself you can trade it, exchange it hold it etc. What difference does it make whether that piece of paper you use to buy bread is at the time of exchange backed by government that holds and taxes the economy producing energy ( and more ) or whether it's backed by some particular asset? ( or backed by nothing except false hopes of few amateur speculators like bitcoin )

I'm sure if you read my previous comments, it's obvious I'm not an economist, but here goes:<p>All money has only the intrinsic value of your labor. That's it. Gold, Silver, U.S. Dollars, wooden coffee tokens, they all represent a claim on human labor. There is effectively an infinite supply of gold on earth(unfortunately most is believed to be in the molten core and no one is able to process it of seawater yet), the only reason it's reasonably valuable by itself is the labor input required to harvest it.<p>At some point, maybe robots will fix themselves and human labor will no longer be required, in which case the whole basis for a money system is going to disappear. However, that hasn't happened, and doesn't look to happen in the near future.<p>People should keep this in mind when thinking about money. Fluctuations in value in a currency leads to the arbitrage of labor. Currency itself has no value, it only represents value. Backing it with energy or some other resource, still simply links it to how much labor that energy source requires.<p>So far, there has been no perfect currency, and I doubt there ever will be. Bitcoin may solve some problems, but it doesn't solve all of them, and it's not clear it solves more problems than many other solutions. While some people may get rich from the arbitrage, not everyone can sit around trading 1's and 0's. Someone has to do the labor.<p>I'll reference Adam Smith again, who's theory was that Late Stage Capitalism would end in the destruction of the Capitalist State when the profits of finance were so high in proportion to the profits of labor, labor ceased. Right now the trading of bitcoins is much more profitable than selling stuff for bitcoins, so bitcoin has pretty much skipped the labor input part and gone straight to finance, so I still don't think it's addressed the main problem with currency, which is that people still think of currency as the value, not the labor it represents.

This was my argument with a friend the other day, that a bitcoin is worth the amount of energy needed to create it.<p>The other point was that it is not important for a currency to be a long term store of value. It's only needed to facilitate transactions.

we have an energy backed currency, its called the (petro)dollar.

This reminds me of kilowatt cards[1].<p>[1] <a href="http://www.kilowattcards.com/" rel="nofollow">http://www.kilowattcards.com/</a>

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