The Breakdown - Why Comparing Bitcoin to Visa Doesn’t Make Any Sense

Episode Date: February 14, 2021

This week’s “Long Reads Sunday” is a reading of Nic Carter’s latest essay for CoinDesk “What Bloomberg Gets Wrong About Bitcoin’s Climate Footprint.” -- Earn up to 12% APY on Bitcoin, Ethereum, USD, EUR, GBP, Stablecoins & more. Get started at nexo.io -- Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is produced and distributed by CoinDesk.com

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io and produced and distributed by CoinDesk. What's going on, guys? It is Sunday, February 14th, happy Valentine's Day, and that means it's time for Long Reads Sunday. When Tesla announced its Bitcoin buy earlier this week, one of my predictions was that while in the long term, Tesla being involved in Bitcoin was likely to cause a good number of people to reevaluate their priors as it related to Bitcoin's energy consumption.

In the short term, it was way more likely to make people reevaluate their stance on Elon and Tesla's sincerity around being a green company. And boy, has that been so. Mainstream Media's favorite follow-up article to this week was all about Elon's green hypocrisy. Reuters wrote, Elon Musk wants clean power, but Tesla's carrying Bitcoin's dirt. dirty baggage. The Verge, Tesla's 1.5 billion Bitcoin purchase clashes with its environmental aspirations. And then there's this cherry from the BBC. Bitcoin consumes more electricity than Argentina. My read today is from a man who has spent most of his weak fud fighting, first in print and then on TV. Here is Nick Carter's essay on CoinDesk, what Bloomberg gets wrong about

Bitcoin's climate footprint. One last note, this was actually written before the whole Tesla thing happened. It was like he was prepared for it. Recently, Bloomberg published a piece calling Bitcoin an incredibly dirty business. It's undeniable that the Bitcoin blockchain has a carbon footprint. Some Bitcoins are mined with non-renewable energy, although plenty is mined with hydro, nuclear, and otherwise vented natural gas, too. No one contests the externality of Bitcoin, although the precise carbon footprint is debated. However, the article, by opinion columnist Lionel Laurent, unfortunately relies on the flawed assumption that individuals, individual Bitcoin transactions carry an energy overhead. The question of Bitcoin's energy footprint

is riven with misconceptions. Firstly, it's a mistake to compare Bitcoin to payments networks, and comparisons relying on relative energy use are spurious. Second, metrics like the per-transaction energy cost are misleading because transactions themselves do not cost energy, nor does Bitcoin's CO2 footprint scale with transaction count. Bitcoin supporters and critics alike should understand how the protocol works, so the energy costs and externalities of the system can be honestly appraised. Bitcoin and Visa, and apples to koala's comparison. In the Bloomberg piece, the author states, one Bitcoin transaction would generate the CO2 equivalent of 706,000 765 swipes of a Visa card, according to Digiconomist closely followed index, albeit with none of the convenience

of plastic. But the energy exchange rate methodology the author relies on is completely mistaken. Bitcoin transactions are not equivalent to Visa transactions. They are different in both form and substance. First of all, Bitcoin and Visa are fundamentally different systems. Bitcoin is a complete, self-contained monetary settlement system. Visa transactions are non-final credit transactions that rely on external underlying settlement rails. Visa relies on ACH, Fedwire, Swift, the global correspondent banking system, the Federal Reserve, and, of course, the military and diplomatic strength of the U.S. government to ensure all of the above are working smoothly. Any energy comparison must take the above into account, including the externalities from the extraction of oil which implicitly backs

the dollar. As those who make this comparison inevitably fail to mention, the dollar's ubiquity is partly due to a covert arrangement whereby the U.S. provides military support to countries like Saudi Arabia that agree to sell oil exclusively for dollars. It's worth noting that the grossly oversized U.S. military, whose presence worldwide, is necessary to backstop the international dollar system is the largest single consumer of oil worldwide. Bitcoin transactions, by contrast, rely just on Bitcoin. Bitcoin proposes a new monetary unit, also named Bitcoin, and mediates its circulation through the Bitcoin Protocol, which is administered by nodes and miners. Bitcoin's energy footprint is highly transparent due to the accessible and highly integrated

nature of the system. This provides fertile ammunition for critics who can easily estimate the externalities of Bitcoin while insisting no equivalent ones exist for the dollar system. But the two systems are different. Looking for the best way to stay on top of your investment game, nexo.io has you covered in three easy steps with their high-yield savings account for digital assets. Step one, create an account at nexo.io. Step two, transfer assets to your secure nexo wallet with no minimum or maximum limits on funds deposited. Step three, sit back, relax, and earn up to 12% compounding interest. paid out daily on your crypto and fiat. Your passive income made simple. Get started at nexo.io. Bitcoin is a full-stack monetary and payment system. Visa is a thin layer within the international

dollar system, wholly reliant on seamless interoperability of the rest of the payments and settlement pyramid. Until Visa marshals its own private armies to keep the integrity of the dollar intact, the comparison will be a specious one. If you look at the actual characteristics of Bitcoin transactions as compared with Visa, their differences are clear. While both systems transmit trillions of dollars of value per year, they do so in radically different ways. In Q4 2020, Visa processed 2.4 trillion in payments volume via 49.6 billion transactions. That gives us an average transaction size of $46.37. Bitcoin, by contrast, settled $397 billion using coin metrics adjusted volume estimates over the period and handled $25.3 million.

transactions. The average transaction size for Bitcoin over the period, $15,719. During that time, there were eight distinct transactions worth over $1 billion. The largest among these settled a mammoth $2.48 billion given Bitcoin's price at the time. And not only can transactions be very large, but they can direct value to a number of recipients all at once. The largest ever transaction in terms of payments contain 13,107 outputs. Under current constraints, a Bitcoin transaction could theoretically contain up to 32,256 outputs. And of course, layered or side chain approaches with proposed new trust models like Lightning, Liquid, RSK, and Stacks introduce the potential to batch thousands of transactions and settle them on the base layer. A single Bitcoin transaction can settle millions

of lightning payments. So not only are Visa transactions generally much smaller than Bitcoin transfers, but they are different from an assurance perspective. Bitcoin provides final settlement with a few blocks. This means there is no risk of transaction reversal. The payment itself is integrated with the settlement. There is no distinction. Visa credit payments by contrast are designed to be reversible if need be. This is why cardholders generally have the option of making chargebacks within 90 days of their payment. Much to the chagrin of some merchants, payments are not bundled with settlement. Instead, the visa payment process is a tangle of distinct authorization, clearing, and settlement steps. Actual final settlement happens on an aggregate net basis

between merchant banks who manage the accounts for card accepting merchants, and issuing banks, who manage the cardholder accounts via ACH or wire transfer. This means that payments are bundled up and settled on an end-of-day basis through utility-grade settlement channels. The individual payments made when you swipe your card are several layers removed from the final flow of of funds between banks. These gigantic wire transfers that power settlement between cardholder banks and merchant banks for Visa are the transactions most comparable to those of Bitcoin. The individual payments happening between Visa users and Visa merchants are unsettled IOUs. If you consider ACH and especially Fedwire transfers, their characteristics are much more akin to Bitcoin. Typically, ACH transfers clear

thousands of dollars while your average Fed wire transfer settles millions. Fed wire transfers are push rather than pull. Bank accounts have to be fully funded on the originating side for the transfer to process. No netting occurs in Fedwire. That's why it's called a real-time gross settlement system. Fedwire's counterpart, Chips, which is used for international dollar settlements, does include significant netting, checking if banks are paying each other and only sending the difference. Unlike a check or a visa payment, you cannot reverse a wire transfer. This gives wire strong finality and good settlement assurances. Sound familiar? And like Bitcoin, Fed's Bedwire processes a few hundred million transactions a year. In Q4, it averaged 550,000 transactions

per day. In that period, Bitcoin averaged 824,000 daily payments in 305,000 daily transactions. These systems scale with transaction size, not frequency. So if you're going to compare Bitcoin to establish transaction systems, compare like with like. Note that Swift is not an apt comparison to Bitcoin. It is a messaging rather than a settlement system and generally relies on third-party settlement through Fedwire or chips. Bitcoin's energy cost of transactions explained. Now we've established that Bitcoin transfers are much more akin to wire transfers. Let's consider the actual cost of Bitcoin transactions. The quantitative assumptions made by Bitcoin critics that transactions have a certain energy overhead need to be contextualized. Constructing a Bitcoin

transaction and getting the network to accept it costs virtually no energy whatsoever. What costs energy is grinding through the non-space to find valid business. blocks. Miners do this because they are compensated primarily with the coin-based reward of 6.25 Bitcoin per block, which is defined in the protocol. Currently, miners collect about 15% of their total revenue of 40 million per day in fees. But it's important to decompose transaction fees and general revenue from creating blocks. Miners collect that coin-based reward regardless of whether they include transactions in blocks. On occasion, they mine empty blocks and collect the 6.25 per block reward regardless.

The quantity of resources that miners are willing to spend on mining is purely a function of three variables. The price of Bitcoin, the issuance rate, and the fees transactors are paying to use the chain. Of those three, the first two matter most. As mentioned, fees are not a major source of revenue today. The system is naturally equilibuating. If the price of Bitcoin goes up or fees dramatically rise, minor margins expand, inducing existing miners to increase their expenditure or new miners to enter the market. thus margins contract to a level where mining is just barely profitable. As defined in the protocol,

the per block reward is cut in half every four years. This reduces Bitcoin's issuance rate and thus the minor revenue. So in the long term, minor revenue from issuance will dramatically contract. As 88% of all coins have already been mined, mining is structurally shrinking, not a growing industry. Academic prognostications of a climate-destroying feedback loop are therefore wildly off-base. While fees are expected to compensate miners in the long term, it's unlikely that users would stomach $1,000 fees. In a purely fee-based system with $10 fees and, optimistically, 800,000 transactions per day, minor revenue would total $2.9 billion per year, far less than the current $16.4 billion in annualized minor revenue. Thus, most of the minor expenditure and hence

carbon outlay from Bitcoin is due to largely invariant coin issuance rather than any variable that's correlated to transactional intensity. This fact invalidates the energy cost of transactions metric that critics like to promote. It is issuance that largely finances miners, not transactions. And because most coins have been issued already, Bitcoin's future carbon outlay is likely to shrink. This is to say nothing of the energy mix that miners employ, and as we know, renewables and otherwise vented natural gas make up a meaningful component of the industry. According to the Cambridge Center for Alternative finance, 39% of Bitcoin's energy outlay derives from renewables, with 76% of miners using renewables in some capacity. Therefore, comparisons to Visa and other payment systems should be met with

extreme skepticism. Bitcoin is a full-stack monetary system with no outside dependencies. Visa is a small part of the U.S. dollar stack that relies, among other things, on 11 aircraft carriers patrolling the world's oceans and enforcing dollar hegemony. Visa payments rely on a vast interconnected infrastructure of clearing and settlement. Bitcoin-true. Bitcoin-transacted. transactions are natively final and settle right away. They're more comparable to wire transfers. The energy exchange rate comparisons must take these differences into account. So it's back to me, NLW here, and obviously I think Nick's thinking is so precise and is writing so clear that even when dealing with a dense topic, it's just some of the best stuff we have. I think what I wanted to

follow up and end with is just an important extension of the conversation that happened online in the next couple days. Joe Wisenthal took and wrote about this. He had Nick on his show. And basically, his point was this. All of these conversations are ultimately two sides talking past each other because the fundamental thing that matters as it relates to your take on Bitcoin's energy expenditure is whether you find Bitcoin to be a valuable use of energy. In other words, sure, we can debate the specifics, we can debate the comparisons, we can debate the amount of renewables used. But also, Ultimately, if you don't think Bitcoin is a valuable thing, you're not going to want any energy to be used on it.

And I think there's a lot of truth in that. Unfortunately, the context that we live in is one in which the Bitcoin mining energy consumption, boil the oceans narrative, is such an easy dunk. It's such an easy thing to sow doubt among people who haven't made their mind up yet on Bitcoin. And that's the reason why I still think that having these conversations, making sure that people understand the difference between a layer in a much more complex money system and a self-contained monetary system is so important. I hope that you enjoyed this read today. Let me know if you want

to talk more about this particular category of FUD. I obviously think it's super important to engage with, but for now, I appreciate you listening. I hope you're having a great weekend. Until tomorrow, guys, be safe and take care of each other. Peace.