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Bitcoin and the Energy of Denial

Wed 29 May 2024 ▪ 7 min of reading ▪ by Nicolas T.
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Is Bitcoin the solution to all problems? Aren’t we asking too much from it ?

bitcoin

Money and the Economy

We often hear the phrase “fix the money, fix the world”, suggesting that economic success is primarily a monetary sleight of hand.

Some “Austrian economists” are even convinced that a fixed money supply (using Bitcoin) is all we need to live in abundance.

More seriously, abundance comes from productivity (the amount of things produced per person). Productivity is achieved with machines and, therefore, energy, not from the fantasized miracles of an absolutely fixed money supply.

From a physical perspective, an economy is a dissipative structure powered by a constant flow of energy. Human beings are also dissipative structures. We need energy in the form of calories from food to stay alive.

Just as we cannot survive on lettuce alone, an economy requires different sources and forms of energy. Uranium is a source of nuclear energy; gas, oil, and coal are sources of chemical energy; dams are sources of potential energy; the sun is a source of radiant energy; and the Earth’s core is a source of thermal energy.

These energy sources can be used directly or converted into other forms of energy. Fossil fuels, for example, are burned in thermal power plants to heat water. The steam generated turns a rotor (mechanical energy) whose rotation creates a magnetic field, generating energy in the form of electricity.

More than 80% of our energy comes from gas, oil, and coal. And only 20% of the energy is converted into electricity!

The low prevalence of electricity is due to the direct use of fossil fuels for building asphalt roads, steel bridges, electrical transmission lines, cement, herbicides, fertilizers, mechanical lubricants, plastics, etc.

Many industrial processes underpinning the economy need the chemical and thermal properties of fossil fuels. In short, electricity alone is not enough. To extend the metaphor, we can’t eat electrons.

Energy Constraint and Inflation

It will be very difficult, if not impossible, to replicate all the services provided by fossil fuels with electricity. A reduction in their consumption will result in fewer goods and services, on average, per person

In fact, this has almost been the case in the West since 1973, year of the first oil shock. Things have gotten even more complicated since 2007, year of the peak of conventional oil (oil easy and cheap to extract).

It’s no coincidence that Western living standards have been eroding since the 1970s. Blaming the end of the Gold Standard is like confusing the chicken and the egg. The United States actually ended the gold standard because of the explosion of the trade deficit directly caused by their national oil peak reached in 1971.

Americans managed to preserve their living standard with a geopolitical masterstroke orchestrated by Henry Kissinger: the petrodollar. But that’s another story.

The price of a barrel of oil is now 26 times higher than in 1971… The recent discovery of the equivalent of 15 years of world consumption in Antarctica will not change the situation. Exploiting this oil requires a barrel price of $300, nearly four times more than the current price. That would cause a lot of inflation…

Advanced nations have other energy sources, but it’s not enough to generate the exponential growth required by our exponential debt, aka the fiat system.

We need to realize that our energy consumption grows at an extraordinary rate of about 2.4% per year. This means that we will consume as much oil, gas, and coal in the next 30 years as we have since the dawn of civilization.

Will we achieve this, or should we rather prepare for more inflation? Don’t miss our article on this topic: Bitcoin and Endless Inflation.

As Michael Saylor recently stated to justify Microstrategy’s investment in Bitcoin:

“The official inflation rate does not represent reality, which means that GDP figures are not true either. You are not measuring real GDP if it is not adjusted for inflation. The CEO of Microsoft made a very subtle remark that no one noticed. He said that in nominal terms, people perceive the economy as growing, but once you adjust for the right inflation rate, the economy is actually contracting.”

Energy Decline and Bitcoin

China and India have based their recent growth on increasing fossil fuels consumption. In contrast, the West envisions the peak of fossil fuels by betting on electric.

But this transition will not happen without disruptions (inflation). Indeed, most people do not realize that industry and transport are sectors that consume very little electricity.

Electricity represents only 13% of the total energy consumed by the industry. Blast furnaces, for example, need very high melting temperatures which are obtained at lower costs by directly burning coal and gas. It is possible to use electric arc furnaces to produce steel, but this is only profitable where electricity is abundant.

The situation is even worse in transport – the central pillar of the economy – which operates at 95% with oil. Replacing the entire world fleet with electric vehicules is a pipe dream due to the vast amounts of copper, lithium, neodymium, and other rare earth metals that would need to be extracted and recycled.

The world will have to produce much more nuclear electricity (which represents only 2% of the energy produced on Earth) AND slow down. It will also be necessary to “close the cycle” with fourth-generation nuclear reactors. The countries least prepared for the inevitable decline of fossil fuels will be hit the hardest.

Can Bitcoin get us out of this predicament? No. There is no oil, lithium, cobalt, copper, nickel, or graphite in the blockchain.

However, it is an absolute store of value that will undoubtedly attract attention as the energy constraint materializes into inflation. Geopolitical/commercial tensions and the fragmentation of global payment systems that we are witnessing are also a blessing for bitcoin.

And as with any global monopoly (Microsoft, Google, Amazon, etc.), the early investors in the bitcoin technological breakthrough will reap the rewards. En route to a capitalization of 10 000 billion dollars before the end of the decade.

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Nicolas T. avatar
Nicolas T.

Bitcoin, geopolitical, economic and energy journalist.

DISCLAIMER

The views, thoughts, and opinions expressed in this article belong solely to the author, and should not be taken as investment advice. Do your own research before taking any investment decisions.