How Bitcoin Destroyed Venezuela

Rising alarmism about the amount of energy used to mine bitcoin is leading to a proliferation of confused articles like Eric Holthaus’s Bitcoin could cost us our clean-energy future (Grist, Dec. 15, 2017).

Most of these articles repeat an error popularized by Christopher Malmo, who has written and rewritten the same article about bitcoin’s awful energy consumption for Motherboard since creating the genre with Bitcoin Is Unsustainable back in 2015. The error is based on Malmo’s conviction that bitcoin is mostly a replacement for credit cards. The fact that a single bitcoin is at present worth more than $14,000 CAD might help him see the difference if he were interested, but he isn’t, because he insists on repeating his conviction in each new article.

Why is this important? Because it leads him into a more serious error, which is confusing bitcoin mining, which takes a lot of energy, and bitcoin transactionswhich do not (except in the sense that the mining, for the time being, validates them). This leads to a raft of horrifying comparisons: each bitcoin transaction “uses as much energy as your house in a week” (my house in frigid Montreal, or Malmo’s house in temperate Vancouver? dunno, but either way he’s wrong); bitcoin consumes as much energy as [ insert name of tropical country here ]. The truth, of course, is not that simple.

The total number of bitcoins is capped at 21 million and most of them have been mined already. As the expense of mining goes up, the reward for mining goes down. At some point—soon—it won’t be worth it.

But the point of this post is not to clear up confusion about bitcoin, which is altogether too widespread for me to do much about it. The point is to respond to one particularly obnoxious sentence in Holthaus’s article:

In Venezuela, where rampant hyperinflation and subsidized electricity has led to a boom in bitcoin mining, rogue operations are now occasionally causing blackouts across the country.

That sentence is a compact marvel of confusion. In the first half of it, Holthaus describes two signs of the chronic governmental incompetence that causes the blackouts, and in the second half, he says that bitcoin causes them!

Holthaus is right that bitcoin is gaining popularity in Venezuela because of the rampant hyperinflation of the government currency. The hyperinflation was caused, as it always is, by government policy. Government policy in Venezuela is the policy of the de facto dictator Nicolas Maduro, successor to Hugo Chavez, whose attempts to control the prices of basic commodities have ended, as they always do, in shortages, and whose other socialist experiments, including subsidizing gas and electricity to buy votes, have also led to shortages and deadweight loss, as they always do.

The gas subsidy might be of interest to someone like Holthaus who is concerned about “our clean-energy future”. Under Chavez, the price of gas was 5¢ a gallon. Two years ago Maduro was forced, in spite of massive protests, to raise it to 17¢ a gallon.

Since there is no disincentive to use gas in Venezuela, the people squander it:

Aside from smaller Caribbean nations, no other country in Latin America consumes more oil-based fuel per person than Venezuela.

As well as being the largest consumer, Venezuela is home to the world’s largest proven reserves of crude oil and is Latin America’s biggest carbon dioxide emitter per person. [ reference ]

And because gas consumption is not subsidized in neighbouring countries, there is a brisk cross-border trade exacerbating shortages in Venezuela and contributing to corruption in both countries.

Venezuela is obviously a basket case and the blackouts there are obviously caused by the incompetence of the government like most of its other woes, but what is most obnoxious about Holthaus’s accusation is the fact that bitcoin is keeping people alive in Venezuela, something their government is incapable of doing.

This is the familiar pattern:

  1. Government subsidizes something
  2. Shortages predictably result
  3. Government finds someone to blame for the shortages

Finding someone to blame has become the main activity of the Maduro government, and it routinely manages to enlist gringo journalists to help in this endeavor, as Holthaus and the entire staff of the Guardian attest. But busy as he is finding wreckers, Maduro did take time out to add grotesque insult to injury by announcing that his government will be launching its own cryptocurrency, the petro, “backed by oil”. This latest, farcical twist in the degradation of a once-thriving nation will pass unremarked by the fools who cheered Hugo Chavez, while a handful of Maduro’s starving victims will continue to survive thanks to bitcoin.