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Home Publications Blogs Beat the Press Bitcoin Mining: Textbook Example of Rent-Seeking and Waste in the Financial Sector

Bitcoin Mining: Textbook Example of Rent-Seeking and Waste in the Financial Sector

Sunday, 22 December 2013 06:01

The NYT gave readers an excellent example of how the financial sector can lead to an enormous waste of economic resources. It reported on a massive set of sophisticated computers in Iceland that is devoted to the sole purpose of "mining" bitcoins. The point is that these computers are used to carry through complex algorithms more quickly than competitors in order to lay claim to new bitcoins as they become available on the markets.

While this can be quite profitable to an individual or firm that successfully claims a substantial portion of the newly created bit coins, it provides nothing of value to the economy as a whole. It is a case of pure rent-seeking, where large amount of resources are devoted to pulling away wealth that is created in other sectors. This is the story of much of the activity in the financial sector, such as high-frequency trading or the tax gaming that is the specialty of the private equity industry, but in few cases is the rent-seeking so clear and unambiguous. The NYT did a valuable service by presenting this example.

Comments (10)Add Comment
Bitcoin Creates First Mover Jobs
written by Last Mover, December 22, 2013 8:28

Not so fast. Actually this is Keynesian stimulus spending in action with one exception. Instead of burying the money and digging it up again, Bitcoin money is created above aground.

As long as those creating it are not crowding out other jobs, unemployment goes down. Even if it is rent seeking in the sense that first movers extract the most Bitcoin value from others with high speed computers, consider it an acceptable pump primer.

After all, as a global sovereign currency beholden to no nation, Bitcoin represents the final proof that free market competition in the private sector - even for money itself - always prevails in full employment through self correcting Keyesian spending.
I wouldn't say bitcoin mining is an example of rent-seeking...
written by LSTB, December 22, 2013 9:12
...So much as an example of fraud.

If rent-seeking is "resources devoted to pulling away wealth that is created in other sectors," it should be noted that bitcoin doesn't "create" any wealth in the first place. Its value is solely based on participants' belief that other people will purchase the bitcoins they bought or mined. Bitcoin itself is rent-extraction as such.

Indeed, there's a paper that argues that as the mining algorithm requires more resources, the likelihood that bitcoin miners will steal electricity increases. At some point bitcoins mined with stolen electricity trade alongside honestly mined bitcoins, violating Gresham's Law. http://iang.org/papers/Bitcoin...amsLaw.pdf Simply put, bitcoin is criminogenic and won't last forever.

If Iceland's authorities are concerned that the bitcoin mining operation is wasting resources, it should adopt a land-value taxation system. That way, Iceland would either profit from the fraud or discourage the miners from using their property as a bitcoin mine in favor of something more productive.
Digital Beanie Babies
written by John Parks, December 22, 2013 9:52
Whether appropriate or not, I can not get the Digital Beanie Baby comparison out of my mind. Back in the 1990's Mr. Abiodun's wife Gloria would have had her guest room full of the little resource eaters. Time will tell us which Abiodun was the sanest.
written by skeptonomist, December 22, 2013 2:32
Bitcoin mining is not strictly rent collection, it's analogous to gold mining (and silver mining when silver was used as currency basis). Real productive facilities are used, which of course is a waste. Many bitcoin advocates object to fiat money but instead think that money has to be created by diverting production to the creation (or unearthing) of money. As Keynes pointed out here are times when gold- and other mining can be useful, especially when there is insufficient money in a non-fiat system. Now there is plenty of money, but it is in the wrong hands. If the unemployed could be put to work either digging up gold or generating bitcoins there might be some benefit. However I doubt that bitcoins are being generated by the otherwise unemployed.
pyramid scheme
written by djb, December 23, 2013 10:13
Enrich the founders .... everyone else is a sucker
written by bobs, December 24, 2013 9:41
Right up there with the billion-dollar trans-atlantic cable built to save 5 milliseconds in high-speed trading...

The difference with gold mining is that (1) gold has intrinsic value -- it's durable and pretty -- (2) it must be mined. But there is no rhyme or reason why bitcoins should be mined. The stated purpose is to order transactions but there are many simpler ways to do that. The *real* reason has to be something else: keeping bitcoin value high while sucking in people, for example.

But if you insist on mining, then for crying out loud, make it useful. You could build a hash function out of a protein folding program. This way you'd be solving protein structure along the way and do your bit(coin) for humanity...
written by Ecomedian, December 24, 2013 11:26
Everyone knows all money should be created by Wall Street bank computers, not computers distributed amongst the public. Is this what Baker and Krugman are upset about?
written by Squeezed Turnip, December 24, 2013 11:43
written by Ecomedian, December 24, 2013 12:26
Everyone knows all money should be created by Wall Street bank computers, not computers distributed amongst the public. Is this what Baker and Krugman are upset about?

Banks don't create money, treasuries do. Wall Street creates credit. That is lower down in the hierarchy of money. Bitcoin attempts to sidestep the hierarchy but if it's socially useful then that is an impossibility, by definition of currency. Value and price do not always match, and in this case Bitcoin is highly overpriced relative to its value (so expect more thefts and arbitrage). Bitcoin will become irrelevant, similar to how Ponzi was irrelevant.
written by Ecomedian, December 24, 2013 6:27
Modern treasuries don't create money, the central bank does. Treasuries borrow it and tax it. Look at your dollar bill that says "Federal Reserve Note", that originated from a bank that is authorized to distribute them.
fed versus treasury notes
written by Squeezed Turnip, December 25, 2013 11:30
Ecomedian, you're ignorant of the powers granted to the treasury and the Fed's money role. The US always had a treasury and hence money, but not always a cereal bank. You should (re?) take a course on exhibits and banking. Or at least go read the Fed's charter.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.