Building a bridge is costly: it takes labour and machinery and raw materials that have alternative uses. Does it follow that building it is a waste? No. Waste occurs when the cost incurred exceeds the benefit attained. Cost greater than zero does not imply cost greater than benefit. Does it follow that the bridge is worth building? No again. A bridge to nowhere might be built even though it is wasteful, if the few beneficiaries don’t bear the costs themselves. To know whether a particular bridge is worth building we need to compare benefit to cost.
To count benefits and costs, we observe market prices and transaction quantities. None of us has access to a god-like perspective. Consequently, for normal private goods where costs and benefits fall on producers and consumers, economists normally defer to the judgments of the market participants who actually bear the costs about whether the benefits of an activity exceed its costs. Buyers presumably value a good more than the price they pay, or they wouldn’t buy, and producers incur average costs that are less than that price, or they would exit the industry. In the case of bitcoin, the electricity bills for proof of work are ultimately paid by bitcoin users, just as costs of production for bread and milk are borne by buyers of bread and milk. Bitcoin users pay directly when they pay blockchain fees and indirectly when new Bitcoin is awarded to miners, enlarging the stock of bitcoin and diluting the purchasing power per unit compared to what it would have been with a constant stock.
For bitcoin, as for other goods, a useful accounting needs to consider both costs and benefits. Proponents of bitcoin have been known to downplay the costs, or even count them as benefits, while opponents have been known to downplay the benefits and even count them as costs.
Downplaying costs
Bitcoin proponents sometimes emphasise that bitcoin mining operations are able to locate wherever electricity can be produced at least cost, such as natural gas fields where excess gas would otherwise be burned off or remote hydroelectric plants with few alternative consumers (Goyal 2021). And bitcoin miners plugged into a regular electricity grid will shut down quickly to free electricity for other users during times of peak load that push the price per kilowatt-hour above the miners’ break-even point. These abilities reduce the opportunity cost of bitcoin’s electricity use compared to the counterfactual of using only high-cost electricity. But it does not make the cost zero or turn it into a benefit.
Proponents applaud the fact that the bitcoin mining industry draws a higher proportion of its electricity from renewable or sustainable or non-polluting sources than other industries. But using electricity from those sources of electricity is still a cost and not a benefit of bitcoin. Green energy is still costly-to-generate energy.
When bitcoin mining helps to finance expenditure on materials and labor to build new electricity generating facilities, or on repairs and maintenance crews to bring old facilities back into operation (Murillo 2022), that is not a benefit that bitcoin provides by comparison to cryptoassets that use less energy. It is a cost. Building or refitting power plants is a costly use of labour and material resources, even if the new facilities burn no fossil fuel and emit no carbon.
