Will the cryptocurrency fad fade out?

Who will benefit and who will lose out?

The rapid growth of cryptocurrency tokens (there are now over 22,000 different tokens, pointing to the ease of entry into the wild west of crypto) and some estimates say the dollar value of the cryptocurrency’s so-called “industry” is now $US 5.2 billion growing at a compound rate of about 13% (why anyone would estimate future growth to three significant digits questions their sanity).

The global economy has a GDP estimated at $106 trillion. Cryptcurrency is barely a trace factor hardly worthy of mention for its economic contribution to society.

A U.S. government report estimates the verification of blockchain transactions (often called Bitcoin “mining”) consumers between 0.7% and 0.9% of global electricity generation, or an estimated 120 to 240 billion KwH each year. Using up almost 1% of world electricity generation to fuel an industry that comprises 5.15 billion/106 trillion = 0.005% of world GDP illustrates a problem - cryptocurrencies are energy intensive and the cost of processing cryptocurrency transactions (of about US$36 billion based on electricity costs of about $0.15 per KwH) is massive in relation to the highly touted “benefits”. The “benefits” claimed are higher security, instantaneous global settlements, and avoidance of the risks seen by many in “fiat currencies” like the U.S. dollar or the Turkish lire.

Security claims are specious. Billions have already been lost to fraud in the cryptocurrency space and billions more will be lost. The average time for a bitcoin transaction to complete is about ten minutes but with a large variance and the average cost today is an estimated US$59.00 according to “Crypto Basics”. I pay my bills online using either Interac, Visa or e-transfer and the average cost per transaction ranges from free to as much as a dollar or two and the settlement virtually instant. It is hard to see why I would ever consider buying a Bitcoin or its ilk and using it to pay for anything. Fiat currencies do suffer exchange rate volatility a lot of which depends on the currency in question and the domestic inflation rate of its host country, but cryptocurrency “value” volatility (posted every day by Bloomberg and others) is a far cry from stable.

The cost per transaction using cryptocurrencies depends on how busy the “block” is in the case of Bitcoin and can be more than the value of transaction itself. This 2017 report shows why. Cryptocurrency transactions always come with fees and “crypto nutters” seem oblivious to this reality but for mere mortals knowing what it will cost to buy a coffee at Starbucks for US$5.00 using “crypto” (if Starbucks took crypto everyhwere, the nutters dream) and finding that it actually cost US$30.00 and took half an hour to transact might bring a dose of reality into the space.

Sooner or later, the world will wake up to the reality that cryptocurrencies are a solution looking for a problem to solve. I liken Bitcoin “mining” as analagous to a fictitious audit firm hiring hundreds and hundreds of CPA’s to reconcile, check and recheck the entries on a single invoice from a utility company to save the payor of the invoice five or six cents arising from a possible (but unlikely) error in the calculation the utility company’s billing algorithmn made in extending the usage, price per unit, rebates, carbon taxes, HST and other elements of utility bills in leftist Canada. A high cost, low return effort for certainty where certainty is unnecessary and infrequent errors are trivial.

When and if cryptocurrencies lose their luster, the high-flying companies that will suffer are semiconductor manufacturers like NVidia who make many of the GPU’s used by crypto “miners” (GPU’s used in cryptocurrency mining are about 25% of total world demand), data centre leasing companies who host the racks and racks of servers used to verify the blockchain, and server chip providers like Intel, AMD and ARM who will see lower growth if not a decline in demand. Electric utilities may also suffer overcapacity for a while but growth in electricity demand to power Electric Vehicle charging stations is likely to offset any softness. Winners will be people who stop investing in cryptocurrency tokens whose “win” will be similar to stopping beating your head against a wall, and there will a minor uptick for efficient Fintech transaction processers like Visa and Mastercard, although crypto has done little to draw away customers from their services to date.

For people who don’t trust banks, pay cash. It is still taken at most places.