The Fiat Standard — Lecture 17 (Bitcoin Cost-Benefit Analysis) • Study Notes
Introduction
- In Chapter 12, Ammous analyzed fiat’s costs and benefits.
- Here, he applies the same framework to Bitcoin.
- Key difference:
- Fiat economists assume truth is imposed top-down (central banks, academia).
- Real economics studies why people voluntarily act as they do.
- Fiat thinkers dismiss Bitcoin because it is not government money, but Bitcoin works in practice—usage grows, security increases, and adoption spreads.
- This lecture asks: What are the costs of Bitcoin, and what are the benefits?
Costs of Bitcoin
1. Electricity Consumption
- Estimated (2021): 100–150 TWh/year.
- That’s a lot of electricity, but mostly from cheap, stranded, or waste sources.
- Avg. global electricity: ~14¢/kWh.
- Bitcoin miners: ~2–5¢/kWh (sometimes less).
- In bear markets (2022), even miners at 6–7¢ were wiped out.
- Annual global mining cost ≈ $2–6B.
2. Mining Rewards as Security Budget
- Block subsidy + fees = miner income.
- By design, cost ≈ reward (difficulty ensures equilibrium).
- Total block rewards (2009–Jul 2021): ~$29.4B.
- Rough proxy for total network security cost.
3. Infrastructure Costs
- Facilities, ASICs, operations.
- Highly competitive: inefficient miners go bankrupt; efficient miners expand.
- Costs converge on block reward value.
Benefits of Bitcoin
1. Secure Savings
- Bitcoin converts energy + hardware → inflation-resistant savings.
- Market cap July 2021: ~$800B.
- Market cap Nov 2022: ~$350–400B.
- Cost ≈ $35B → Value ≈ $350–400B → 10x return.
2. Long-Term Efficiency
- Stock-to-Flow (S2F) ratio:
- Security cost declines as a % of network value.
- New issuance shrinks → efficiency rises.
- Avg. Bitcoin has appreciated ~23x from production cost to current value.
3. Global Money Transfer
- Bitcoin enables international settlement at negligible cost.
- Fees ≈ 0.02% of transaction value (far cheaper than gold or fiat settlement).
- Example: gold settlement across continents = up to 1% of value.
- Bitcoin: scalable batching, far cheaper.
4. Open Security Market
- No fixed “security budget.”
- If demand rises → users pay higher fees → miners secure more.
- Example: Dec 2017 → avg. $50 fees, yet demand persisted.
- Bitcoin secures itself through market incentives, not central planning.
Comparison: Fiat vs. Bitcoin
- Fiat:
- ~14% supply inflation average.
- Managed by politicians and central banks.
- Finances war, bureaucracy, and political agendas.
- Settlement requires human intermediaries, armies, and banks.
- Bitcoin:
- Fixed 21M cap; predictable declining inflation.
- Decentralized, transparent monetary policy.
- Finances cheap, reliable energy investment (miners).
- Settlement: rules without rulers; proof-of-work consensus.
Analogy with Other Machines
- Every major technology consumes more energy but delivers higher efficiency:
- Washing machine vs. handwashing.
- Airplane vs. kayak.
- Steel houses vs. tepees.
- Computers vs. abacus.
- People choose the energy-intensive machine because the output > input.
- Bitcoin is no different: it consumes electricity but produces superior monetary reliability.
Key Takeaways
- Total costs: ~$30–35B in energy + infrastructure.
- Total benefits: Hundreds of billions secured; ~10x efficiency ratio.
- Stock-to-Flow: ensures rising efficiency as issuance declines.
- Transaction fees: minimal compared to fiat/gold; will adjust dynamically with demand.
- Security model: market-driven, not centrally planned.
- Bitcoin = technological upgrade over fiat—like cars over horses, or computers over abacuses.
Conclusion:
Bitcoin is worth its costs. Its electricity consumption secures hard money, global settlement, and inflation-proof savings—a bargain compared to the destructive costs of fiat.