Many articles and blogs have been written to proclaim the death of Bitcoin, and many of them have good riddance for it based on environmental concerns. Unjustified extrapolations have been drawn to show the alleged exponential growth of the energy demand to run the Bitcoin blockchain while forgetting the promises of Bitcoin to make the world a better place.
I have previously written on the topic of trustlessness and its benefits, but one of the commonly overlooked qualities of Bitcoin is the potential to reduce waste of all kinds. Bitcoin will be a boon for the environment, not its bane.
A little price theory for starters
Let’s begin with some more theoretical stuff. If you’re content with the fact that fiat currencies depreciate in value over time and that creates incentives to spend rather than save and don’t care about the boring bits, go ahead and skip to the following subheading.
If you’re still with me, let’s review what the aggregate price level (P) consists of. Simply put, it’s the product of aggregate demand (D) and money supply (M). If either one increases, the prices go up.
Monetary regimes with inflationary targeting, necessarily always fiat, operate on the premise of keeping the inflation – or the increase of prices (ΔP) – at a certain level, such as the two percent of the European Central Bank (ECB). Other types of fiat currencies also always end up with price inflation in the same fashion, albeit from slightly different motives.
Nevertheless, under an equilibrium state, the aggregate demand will equal the aggregate production or aggregate supply of products and services (S) in an inverse relationship. The aggregate supply itself is the product of the number of working people (N) and their productivity (A), which are clearly not controlled by a monetary authority.
Therefore it is clear that the remaining means and their required intensity to achieve the desired level of price inflation are the changes in the supply of money (ΔM), which are directly controlled by a monetary authority such as the ECB or its transatlantic counterpart, the Federal Reserve.
When prices increase in response to the increase in the supply of money without a corresponding increase in aggregate demand, this necessarily drives down the value of the money. Each unit of money slowly (or sometimes worryingly rapidly) becomes worth less than before as more units are being distributed across the existing aggregate demand.
While there is a significant moral issue here, namely the redistribution of wealth from the poor to the rich caused by monetary inflation, we are worried more about its environmental impacts this time.
Inflation causes consumerism and induces waste
Have you ever heard an environmentalist say we must reduce waste and curb throw-away consumption? Likely yes, and rightly so. As a society, waste drags us behind and hinders our progress.
When inflationary policies make the prices go up and the value of the money down, it incentivizes people to spend their depreciating euros or dollars sooner rather than later and even pile up a debt doing so. In extreme cases, such as the bolivars, people are driven to spend their salaries within the hour of receiving them or expect a heavy financial loss for just getting to the store too slowly.
Conversely, price inflation disincentivizes savings, which directly translates into waste. We just keep buying stuff that we don’t need or use only once or don’t even hesitate to fill up the fridge even if some of the previously bought food will spoil, rot, and get thrown away. This is just the stuff that the environmentalists want us to stop doing. I agree that these perverted incentives of our current monetary system cause a lot of shameful waste.
Bitcoin to the rescue (via deflation)
However, suppose we set the money supply in stone or instead in the protocol as in the limit of twenty-one million bitcoins to be ever produced. In that case, we will have a completely different picture.
As the aggregate supply of products and services increases via population growth (ΔN), the technological advances in productivity (ΔA), or a combination of both, will cause a transient decrease in prices or price deflation until the aggregate demand catches up with the aggregate supply.
The decrease in prices incentivizes postponing or even wholly abandoning some of the planned spending, apart from the daily needs. It disincentivizes running a debt, as saving becomes more profitable.
And while the competition in the market already requires the companies to cut slack and waste, price deflation strengthens any and all such incentives.
Thus, under a deflationary monetary regime such as the Bitcoin economy would be, we will tend to buy things only when we need them and avoid buying stuff that breaks down easily or isn’t recyclable, not to mention the utter disregard for any single-use items, unless for hygiene or other actually valid reasons. Additionally, it guides us to reduce waste in all of our endeavors, be it big or small.
In other words, adopting Bitcoin as the main currency would realize some of the critical targets of the environmental movement for the benefit of both the environment and mankind and by way of the carrot instead of the stick.
I think that’s a goal well worth some good electricity spent on achieving it.
This blog was written by CTO/COO Pasi Matilainen, and it was initially published on the Coinmotion blog in 2019.