Bitcoin and the Ethics of Wealth Creation — Written by Yakubu Agbese
Is Bitcoin a good investment? Not too long ago, a good investment was solely defined as one with positive risk adjusted returns exceeding a benchmark. Today, good investments must do more than merely turn a profit. Today’s investors want strong returns and strong ethics. So far, Bitcoin has been a profitable investment. It’s appreciated substantially since its debut and, so far, has gone from strength to strength, consistently attaining new all-time highs after weathering a correction.
Evaluating Bitcoin’s merits as an ethical investment is trickier. It’s a disruptive new technology that is still being figured out. One useful framework for determining Bitcoin’s ethical merits is to compare it to other investments. Just as good financial assets are defined in comparison to other market offerings, it’s fair to define ethical investments in comparison to other financial assets. Applying a comparative analysis makes it clear that Bitcoin is a top tier ethical investment. Indeed, compared to other major assets, Bitcoin might be one of the most ethical investments ever created.
Bitcoin & Bubbles
There is quite a bit that Bitcoin lacks. Bitcoin’s price is volatile, which is to say it lacks stability and its price instability makes it a less than ideal store of value. Bitcoin has experienced nine 50% corrections in the past 10 years. In comparison, the S&P 500 has only suffered three 50% corrections in the last 90 years. Furthermore, Bitcoin is hard to price: It doesn’t have a steady stream of cash flows, it’s not a risk hedging derivative, and it’s not a commodity used to create goods. Finally, despite what many Bitcoin advocates claim, there is little evidence indicating that Bitcoin is an inflation hedge. Economies experiencing or anticipating high inflation generally go through dollarization — i.e., people start using dollars instead of their domestic currency. If inflation fears were truly widespread, then “Bitcoinization” — i.e., the substitution of dollars for Bitcoin in everyday transactions — would be mainstream. Since there is so much that it lacks, it’s easy to conclude that Bitcoin has no “real” value beyond acting as a vehicle for speculative bubbles. Bubbles destroy wealth, which means that if Bitcoin is a bubble, it can hardly be called ethical. There are several facts suggesting that Bitcoin is not a bubble. The first, is its resilience. Every Bitcoin correction has been followed by an even greater peak relatively shortly thereafter. This means that, so far, every correction has represented an opportunity to buy Bitcoin relatively cheaply. The bubbles that Bitcoin is most often compared to, namely, Tulipomania and the Nikkei bubble of 1980’s Japan, have still never recovered. The cryptocurrency’s track record of weathering correction after correction might even make it, in some sense, an anti-bubble.
Bitcoin started trading in the range of $0.0008 to 0.08 per coin in early 2010. Today, a single Bitcoin retails for $56,709, meaning that a dollar invested in Bitcoin at the higher end of its initial trading range would have returned $708,862.50. To put that in context, a dollar invested in Facebook, Amazon, Apple, Netflix, or Google when they first went public would be worth $9.32, $2,137, $1,344, $497, and $81 respectively. Even in early 2013, when Bitcoin first started to enter the mainstream, Bitcoin traded for $8–14 per coin. Investing $1 in Bitcoin even at that relatively late stage would have returned $4,050. The ROI of Bitcoin far outstrips the ROI of the major tech names and has done so in much less time, meaning that it’s IRR compared to major technology investments is even more impressive. That said, having a far higher return relative to comparable assets doesn’t make an investment ethical.
One thing that does make it ethical is how it has democratized access to venture scale returns. Unlike the major tech companies, whose initial returns were solely accessible to the most elite venture capital funds and angel investors, Bitcoin‘s stellar returns were accessible to regular people from the very beginning. In 2010, Bitcoin mining didn’t require anything special; all it required was a personal computer. About a year after Bitcoin was introduced, it became tradeable on sites available to the public, rendering Bitcoin accessible even to those without a PC. A major contributor to income and wealth inequality is lack of access — lack of access to the information, connections, and assets that generate real wealth. Bitcoin is a good investment not only because it’s been one of the most profitable, but also because it brought elite level financial returns to everyday people.
Bitcoin vs Gold
Bitcoin is often compared to gold. A number of Bitcoin’s staunchest advocates argue that Bitcoin, like gold, is a safe asset that will rise in value and utility in the event of economic shock or even collapse. Some argue that Bitcoin, because it’s a digital asset, is easier to carry and secure than gold and therefore more valuable. However, gold’s major point of differentiation from Bitcoin is its track record. Bitcoin has only been around for 12 years, whereas gold has been used as a store of value for over five thousand years.
Gold’s very longevity in human affairs points to another aspect of Bitcoin as an ethical asset: it’s low contribution to human suffering. Wars over access to gold and silver mines are a regular and regrettable part of human history and after the wars for access were won, slave labor was used to extract and process gold ore. Unfortunately, even today, precious metals are still extracted by exploited people working in appalling conditions. In Peru, people work in open pit gold mines. After extracting a gold nugget, they wash the nugget by hand, using mercury to wash away impurities. In Central Africa, child laborers descend into the earth and surface the rare earth metals essential for building consumer electronics.
Crypto mining, on the other hand, doesn’t require the exploitation of mass labor. Indeed, Bitcoin miners, unlike precious metal miners, tend to be well educated and compensated. And in a complete reversal of the flow of value in precious metals — in which the fruits of the labor and sacrifice of the poor are enjoyed by a privileged elite, the investments and labor of major bitcoin miners benefit everyone on the network. Bitcoin miners’ work increases cryptocurrency supply. Those who host Bitcoin nodes make the network more secure. Of course, not everyone who works on or near Bitcoin mining rigs is an owner of the rig. Industrial scale Bitcoin mining operations, or Bitcoin farms as they are called, are maintained by regular laborers. If labor conditions at the largest Bitcoin farm, Ordos, are any indication, Bitcoin farms are also much safer and more comfortable places to work than typical industrial workplaces. Bitcoin farms, unlike many factories, are well cooled. Mining rigs, unlike heavy machinery, do not pose a threat to life or limb. Careers in Bitcoin, unlike careers in many industrial sectors, are increasing both in number and sophistication. Bitcoin’s decentralized architecture and rewards system incentivize society’s wealthy and more educated to assume most of the risk and burden of maintaining the system and the jobs miners create in the process of taking risks are also high quality. Generally speaking, the labor- capital relationship in Bitcoin is far more socially responsible and socially just than that of any other commodity.
Technology companies were easy to like when the personal computer and the internet were becoming mainstream. In the early days of the internet, hardware products improved every year, search engines and messengers made finding information fast and convenient, and e-commerce platforms made almost everything cheaper. However, in the past five years, the public attitude toward technology companies has shifted from reverence to suspicion. According to Pew Research, Americans’ perception of tech’s positive impact declined from 71% in 2015 to 50% in 2019. The share of Americans who reported feeling negative toward technology increased from 17% to 33% in the same time period. Several factors explain the change in attitude, but the main one is lack of privacy. Large tech companies collect troves of data on billions of users and use that data to create addictive engagement loops and echo chambers. Compounding the problem of data collection is weak security. Data breaches and negligence make the information that companies collect on people easily accessible to hackers. Bitcoin is designed to be an anonymous and immutable ledger. This is to say that Bitcoin’s design has privacy at its core. It doesn’t collection information in order to target ads more efficiently, increase engagement, or track your location. The network’s anonymity, combined with its decentralization, renders hacking almost impossible. Even Bitcoin’s founder is anonymous. Many leading technology brands attract a sort of cult following around their founders. Elon Musk at Tesla. Mark Zuckerberg at Facebook. Jeff Bezos at Amazon. A brand that’s connected too closely to its founders runs the risk of being tarnished if its founders become entangled in a scandal or support unethical causes. The identity of Bitcoin’s creator, Satoshi Nakamoto, is unknown and what little is known of Satoshi is quite positive. Satoshi did not develop Bitcoin to become rich — in fact, of the more than 980,000 Bitcoin Satoshi mined, a single one has yet to be sold. To be clear, there is nothing wrong with becoming wealthy, but fears that the world’s leading technology companies are generating wealth by disregarding privacy are valid. It’s likely coincidental that as privacy concerns have grown so too has Bitcoin’s price, but it is still interesting how Bitcoin’s core architecture addresses one of the most salient business ethics questions of the decade.
Not all of Bitcoin’s users behave in ethical ways. Many of the cryptocurrency’s earliest and most passionate adopters were users of Silk Road, a website for buying and selling drugs, weapons, and illegal services. Silk Road’s users tapped into its anonymity features and then adopted Bitcoin as a financial medium for evading banks, regulators, and law enforcement. Bitcoin’s use in the underworld is one of its most criticized aspects. One thing to keep in mind though is that just as criminals use Bitcoin to evade just laws, honest citizens use Bitcoin to evade unjust laws as well. For example, in countries racked by instability, people are storing their wealth in Bitcoin and emigrating. Bitcoin is also being used to evade capital controls — limits on foreign exchange and financial transfers. Evading capital controls helps investors allocate capital to the best projects worldwide and helps them protect their investments from governments that seize private assets. On balance, like any new revolutionary technology, Bitcoin is only as good as the person using it. Any technology, whether it be cash, cellular phones, drones, or high-speed internet can be used for good or ill and Bitcoin is no different.
Bitcoin and Energy Consumption
As a result of its Proof of Work architecture, which requires considerable computing power, and its redundancy, which requires that every single transaction be copied several times across the network, Bitcoin consumes vast amounts of energy. There are several estimates for the precise amount, but at the extreme end, the amount of energy Bitcoin uses yearly range from 77.78TWh and 111.08TWh. In comparison, Chile uses about 77.78TWh of energy every year and the Netherlands uses around 110TWh each year. Defenders of Bitcoin’s energy consumption point out that it’s carbon footprint might not be as high as its critics maintain. They point out that Bitcoin miners like to place their rigs near underutilized sources of renewable energy — such as hydroelectric dams and solar farms — in order to capture cost savings. Nevertheless, taking Bitcoin defenders’ arguments as valid and, say, reducing the energy consumption estimates by half, means that Bitcoin might consume 56TWh of energy per year: about as much energy as Israel or Switzerland. There’s no way around it: the world would be a greener place if it were not for Bitcoin.
Fortunately, there is reason to hope that the world can become greener and mine Bitcoin at the same time. Bitcoin mining is becoming more efficient. Because they’re incentivized to do so, mining rig manufacturers release faster and more energy efficient Bitcoin mining computers every year. The energy grid itself is also becoming more environmentally friendly. China, where the majority of Bitcoin mining is thought to occur, has invested heavily in renewable energy over the last decade in order to reduce pollution, and a decent proportion of Bitcoin mining takes place in locations that produce renewable energy. The EU, which accounts for the second largest share of Bitcoin mining, already has an advanced renewable energy power grid, and the United States under the Biden administration will soon pursue a vigorous clean energy agenda. All in all, there are strong reasons to be optimistic about the realization of a future that will accommodate both Bitcoin and a clean environment.
The Mistrust Index
One of the major themes in contemporary world events is lack of trust in elite institutions. Politicians aren’t trusted, and so people elect unconventional leaders. Big employers aren’t trusted and so people dream of working at startups or dream of building startups of their own. The media isn’t trusted, so fake news runs rampant. Bitcoin was developed shortly after the financial crisis of 2008, an event which not only destroyed trillions in wealth, but also, as a consequence, eroded faith in the global financial system. As doubts about elite institutions has risen, so has the price and prominence not only of Bitcoin, but cryptocurrency in general. Bitcoin isn’t perfect, but in many ways, it is more ethically sound than many other assets. It has democratized wealth creation, preserves privacy, created thousands of safe, high paying jobs, and is becoming more environmentally friendly. As mistrust grows and continues to become a bigger part of global culture, expect more people to find financial and psychological refuge in Bitcoin.