Claire Conner, Assistant Opinion Editor
November 17, 2021
In the middle of the Dutch Golden Age, a single tulip bulb was worth as much as a mansion in the center of Amsterdam. The Netherlands’ flourishing merchant class obsessed over exotic varieties of the plant, which was both a status symbol and a lucrative investment opportunity. Driven by scarcity and speculation, “Tulip Mania” brought merchants into a frenzy over flowers that were voguish enough to be valuable despite their impracticality. Now, almost 400 years after the tulip bubble burst, we find ourselves observing the rise of another commodity that is more fashionable than functional: Bitcoin.
This cryptocurrency’s popularity grew rapidly this year following promotions by celebrities like Kim Kardashian West, Matt Damon and Elon Musk. Its value is derived from its finite quantity and modernity: The number of bitcoins in circulation will never exceed 21 million, and its demand is driven by buyers’ excitement for new technology. Bitcoin’s meteoric rise led to widespread fear of missing out. An article in U.S. News and World Report asserted that any fiscally responsible investor should own cryptocurrency due to its mainstream adoption.
Bitcoin, along with other blockchain technologies, has three main components: the currency, the ledger and the consensus algorithm.
The currency is a publicly-traded digital token that represents and stores value. Transactions made with the currency are recorded on the ledger.
The ledger is a decentralized record of transactions. Rather than being kept in one place, it is stored in all of the computers or systems on a network. This ledger is public and immutable, as anyone can access it, and the record of past transactions cannot be changed.
The consensus algorithm allows everyone on the blockchain network to ensure each copy of the ledger is identical. Any time a block is added to the blockchain—or any time a bitcoin is put into circulation—it must be verified by the network. This process is called mining, and it uses advanced hardware to solve a computational math problem. When this problem is solved, a new block can be added to the blockchain, and the miner receives a designated amount of bitcoin as a reward.
Bitcoin enthusiasts argue that we can eliminate the need to rely on human institutions by replacing them with technology. They contend that traditional forms of trust are costly and inefficient, claiming that blockchain technology like Bitcoin can serve as an equalizing force that will democratize finance.
These assertions are not just misguided—they are dangerous. Bitcoin’s uselessness, volatility and trendiness make it comparable to Dutch tulips. But unlike flowers, it has the potential to legitimize itself and inflict serious harm on our society.
Proponents of Bitcoin’s utility often suggest that blockchains can circumvent the cost of traditional forms of trust and remedy the problems of established financial institutions. But the cost of verification on the blockchain network is high, largely due to the demands of Bitcoin’s consensus algorithm.
The computational power required to mine bitcoin uses an enormous amount of energy, making it a major contributor to climate change. A British financial report found that each Bitcoin transaction uses over $100 worth of electricity. The currency consumes more energy than Amazon, Google, Microsoft, Facebook and Apple combined, according to an index published by Cambridge University. A recent study conducted by American and German researchers found that Bitcoin mining emits over 22 million metric tons of carbon dioxide every year, which is more than the annual emissions from 2.6 billion homes. This number is predicted to increase: A study published in Nature estimated that Bitcoin mining in China alone will emit over 130 million metric tons of carbon dioxide by 2024.
The dangers of Bitcoin extend far beyond the collateral damage inflicted by its maintenance. The currency threatens to reproduce the exclusivity and inequality it claims to combat, and economists warned that if it becomes too popular, a Bitcoin aristocracy will emerge. In Bitcoin’s early years, its distribution was controlled by miners with enough technical knowledge to add coins. Since then, wealthy investors have taken over the market for cryptocurrencies, bringing existing disparities into the world of blockchain.
Bitcoin also suffers from inconvenience and security flaws. 20% of existing bitcoin (worth about $140 billion) has been lost simply because owners forgot their passwords, according to the New York Times. After a Japanese exchange was hacked, it lost $97 million in cryptocurrencies only a week after hackers stole $600 million worth of tokens from a finance firm.
If Bitcoin replaced fiat currencies, the government would have little power to fight recessions. While the cap on the number of bitcoins is the source of their value, this ceiling prevents the central bank from providing liquidity during a financial crisis because it wouldn’t be able to “print” bitcoins. Without control over the currency, the government would have no way to manage interest rates or pour money into the economy and would lose its tools for combating recession and encouraging spending.
Despite these consequences, Bitcoin’s patrons have pointed to their belief that blockchain technology will produce a utopian future. They argue that the current ramifications of cryptocurrencies’ use are a fair price to pay for a new system that makes trust in people, institutions and intermediaries like credit cards irrelevant. When we make a financial agreement, we must have trust in other people, trust in a government system that can settle contract disputes and trust in the currency we use, as well as its source.
Blockchain enthusiasts contend that this trust can be replaced by verification and confidence. As long as we are confident in the technology that runs the blockchain and verifies transactions, they argue, we are invulnerable. But technology alone will never eliminate the need for trust or human institutions because humanity, by its very nature, is vulnerable. When we use Bitcoin, we are making ourselves vulnerable to the energy and environmental crises it contributes to. We are vulnerable to machine error and lapses in memory. We are vulnerable to illegalities, bugs and paralysis amid catastrophe. Most of all, we are vulnerable to the trials of the future.
Any new technology that claims to transform or replace institutions that underpin our economy must be easily adaptable. In transition, we will have to make decisions about security, censorship, decentralization and automation. What will happen when developers disagree about major code changes? How can we refine procedures for consensus-building and problem-solving without a centralized governing body that oversees voting and resolves conflicts?
The answer to both of these questions is that human governance is necessary and inevitable. If we’ve learned a single lesson from humanity’s history, it’s that conditions and values change rapidly, and we need institutions to countermand and shape our rules based on these changes.
Confidence and verification are enough to get us through the easy times, but as we evolve and find ourselves confronting unimaginable challenges that put everything at risk, we need to have trust. This goes beyond our certainty in the success or consistency of a process; it’s about our ability to take on risks while facing the inescapable uncertainties inherent to our existence. Trust is not just helpful or comforting—it’s the bedrock of our society.
Once we realize that trust and human institutions are essential, Bitcoin’s shiny facade begins to fade. In order to survive, it will have to rebuild the organizations it intended to destroy. This reconstruction will be pointless and ultimately destructive. In light of the extreme inequality and environmental harm produced by Bitcoin, the blockchain revolution and the world it would build seem dystopian.
The good news is that the Bitcoin battle is ours to lose. The Infrastructure and Investment Jobs Act, which passed Congress on Nov. 5, ensures that cryptocurrency transactions are taxable and forces brokers to report digital asset transfers. Although this is a step in the right direction that pushes back against Bitcoin’s extreme decentralization goals, we are long overdue for a global mindset shift on Bitcoin and its value.
Tulip Mania ended as soon as speculators realized they were pouring their fortunes into useless flowers. Companies, governments and individuals need to take a page out of the Dutch playbook and pop the Bitcoin bubble. We are sleepwalking through a dangerous dreamland where new and exciting technologies are synonymous with prosperity. The nightmare can end—we just have to wake up.