Kentucky’s digital gold rush
Kentuckians are getting paid millions of dollars to serve as trusted validators of financial transactions happening around the world. How? Bitcoin mining.
Bitcoin mining enables people to make payments online as if they were using cash – no bank intermediation required. It also helps people save money in a currency that, like gold, can’t be devalued by simply printing more of it.
In the future Kentucky may be as proud of its bitcoin miners as it is of its local banks, but for now there are many detractors. I’d like to address a few of these concerns and explain why we should all support Bitcoin and bitcoin mining in Kentucky.
First the common concerns:
I just don’t get the crypto stuff. – Dollars are just as “crypto” as bitcoin. All online payment methods use the same cryptographic tools for security. The only difference with bitcoin is that this activity is done with software that is available for all to see rather than behind bank walls.
Is bitcoin really currency? – If merchants accept bitcoin for payment, then it is currency. The degree to which this happens in the future is up to merchants around the world. Today bitcoin is too volatile to use for everyday purchases. But this volatility could be evidence of a belief by many that bitcoin will be a widely used global currency in the future. If an asset has the potential to be worth half the global money supply in the future, say $ 20 trillion, it will be very volatile today based on the changing views of that potential.
Doesn’t Bitcoin require too much electricity? – The Bitcoin network (big “B”) requires a lot of electricity to validate transactions, but bitcoin (little “b”) itself is just a currency. We can do a transaction in bitcoin off the network without using any power, just as I can hand you a check denominated in dollars. Many transactions off the network can happen with periodic clearing of net balances on the network. As for the power usage of the Bitcoin network, this needs to be compared to the environmental costs of the banking infrastructure that it replaces and balanced against the benefits provided by non-bank payments.
Is bitcoin difficult for national governments? – It depends on the country. Most money is made of credit, not paper or software. This will always be true whether it is dollars or bitcoin. If a country has good credit, it should not have to worry that its citizens can opt out of the banking system. This competition should make the economy of that country stronger relative to other countries that do not provide such freedom. Countries that do not have good credit, however, may lose the ability to devalue their currency, a practice that hurts its citizens. Is that so bad?
Why we need to support Bitcoin and bitcoin mining in Kentucky:
Risk and opportunity for Americans – If people around the world want to use bitcoin, bitcoin will eventually be adopted through the processes of democracy and open markets. What happens if bitcoin becomes a global currency before it is supported in the US? We would all need to buy bitcoin in the future at a much higher price than it is today. This risk should not be ignored by US policy makers as it seemingly is today.
Economic equality – Today bitcoin is too volatile for normal people to buy. Only wealthy people can afford to take the risk. Unless governments put bitcoin in the hands of everyone, this problem will only get worse as bitcoin prices continue to rise.
Benefits for Kentucky – Frankfort is wisely courting bitcoin miners as it does other power-needy industries. We should embrace this activity not only for the usual benefits of taxes and jobs, but also for the sake of innovation and potential economic gains spread to all. If decentralized financial structures like bitcoin are the future, Kentucky has a chance to become a welcoming home to financial innovation globally. We could also get creative and try to keep some of the bitcoin mined in Kentucky for the benefit of all Kentuckians.
I was skeptical of bitcoin when I first learned about it. I had the typical reaction – how can open-source software replace national might as the basis for a currency. But as I learned more, I came to appreciate the power and elegance of bitcoin as a global organic system. It can thrive without any of us, but we should all consider embracing it for the benefit of Kentucky.
Shane Hadden is a lecturer in finance at UK’s Gatton College of Business.
This story was originally published April 21, 2022 11:21 AM.