“The Bitcoin technology is already obsolete”

Gilbert Fridgen, Professor of Business Informatics and Sustainable IT Management at the University of Bayreuth, warns against the hype surrounding the Internet currency Bitcoin and its high energy consumption.

Gilbert Fridgen (born in 1980) is Professor of Business Informatics and Sustainable IT Management at the University of Bayreuth and deputy head of the Business Informatics project group at the Fraunhofer Institute for Applied Information Technology. In addition, he is deputy scientific director of the core competence center for Finance & Information Management.

Professor Fridgen, how many bitcoins do you own?

Not many. I still have to work. I didn’t buy until mid-2016 – I was already getting annoyed, as I had been involved with bitcoin for a very long time, but didn’t own a single one myself. I am not a day trader, but my daily work gives me an information advantage which I use for long-term investments. 

When the first bitcoin was exchanged in 2009, that was still largely unnoticed by the public. Three years ago a bitcoin was traded for about 400 euros, in December 2017 it was 12,000 euros for the first time, and currently it has fallen again to 9,000 euros. Where does the hype about this digital currency come from?

The real question is, what is the added value of a crypto currency? In my opinion, it is not as high as many people have thought. Electronic payment transactions also work without crypto currencies. Today I can process payments quickly online at low transaction costs with high transaction volumes. I do not need a crypto currency. What is much more interesting is the basic technology behind Bitcoin, the Blockchain – also in the context of networking in the energy industry, by the way. The crypto currency is actually only the obvious use case. The prospects are to be found in future applications, for example in the “machine economy”, where autonomous machines trade with each other and need a method that is trusted.

 

 

Joseph Stiglitz, US Nobel Prize winner in economics, recently accused bitcoin and other digital currencies of being so successful only because they could be used for illegal purposes, such as money laundering...

I can understand that view, because crypto currencies are difficult to monitor. But condemning the technology as a whole is a mistake. A technology should always be measured by its potential. A striking analogy: When the internet came into being, people said that it could only be used for illegal activities. But today you wouldn’t want to do without it any more. From the perspective of a business information scientist, I would say that Blockchain is another layer of internet-based interaction with which I can do business bilaterally with confidence. 

In addition to the volatility of the bitcoin, the immense power consumption for the complex computing operations required to “mine” the digital currency is striking – at currently 48 terawatt hours per year. This corresponds to almost ten percent of annual electricity consumption in Germany. Is bitcoin gobbling up the effects of the energy transition?

I wouldn’t put it that way. The countries in which bitcoins are mainly mined are usually not oriented towards energy efficiency anyway. And here, the mining could be done at times when there is a surplus of electricity in the grid. But this discussion is outdated anyway, because the technology itself is outdated. Bitcoin is the first Blockchain application in widespread use. But there are already crypto currencies and technologies that require much less power. And they will prevail. 

Critics complain that mining will already consume as much electricity in 2020 as the entire world consumes today, despite the increasing energy efficiency of computers...

I don’t think that will happen. Sooner or later, the focus will be on a different technology. Iota for example, which will be the third generation of crypto currencies, is made for the Internet of Things. Cash transactions should then also be possible on small computers.

 

 

 

„The Bitcoin is the first blockchain application that exists in width. But there are already cryptocurrencies and technologies that require much less power. And they will prevail.“

 

 

Since 2015, Fridgen has been working on the commercial application of blockchain technology. To this end, he has helped to set up a blockchain laboratory at the Fraunhofer Institute, within which the possible applications of cryptographic processes in various areas of the economy are being tested – for the present as well as for the future.

Professional “miners” are now increasingly operating their server farms in countries with very low electricity costs – most of them are located in China, especially in the southern province of Sichuan, where hydroelectric power plants supply electricity, and near the coal-fired power plants in Inner Mongolia. Is there a trend to make bitcoin mining more environmentally friendly?

I’m afraid the answer is banal: Mining takes place where it is cheap to do so. Sometimes this is in line with ecological requirements: In Iceland, for example, where electricity is generated from geothermal energy, there is mining – but that is of course also because the electricity there is cheap. 

In Austria, a start-up company has rented written-off hydro power plants in the Alps to operate bitcoin servers in electricity containers. At the same time, the computers, which generate a lot of heat, are supplied with cooling water from the neighboring rivers. Do providers like that have a future, if the efficiency of the computers increases as you described?

At the moment, it’s still possible to earn money in that way, but I don’t see it as promising for the future. Developments are progressing too fast for that. 

Japan recognized bitcoins as an official currency in 2017, and in the Swiss canton of Zug city fees can now also be paid with the internet currency – will crypto currencies be as established as dollars and euros in the foreseeable future?

No, I don’t think so. Because we have a functioning monetary system. Even if it seems remote and people sometimes have the impression that they have no influence on that system, it is still democratically legitimate. This creates confidence in dollars and euros. Crypto currencies, on the other hand, will always have acceptance problems across society. 

There are currently around 700 digital currencies, of which bitcoin is by far the most traded. What will come after the bitcoin?

In the future, crypto currencies will be more user-oriented and develop in a direction that fits the democratic system. If I could make a wish, I would like to be able to offset euros in crypto applications like the ones we are building here at the Fraunhofer Institute. That would open up huge market potential. 

And will you also invest in these new currencies?

Yes, I certainly will. Because that’s the future.