Securities Industry Conference 2018: do Bitcoin’s energy problem and volatility mean it will fail?

The Securities Industry Conference in London is an important fixture in the calendar for the wealth management sector. This year’s conference was sponsored by CREALOGIX and was attended by over 250 senior executives from the UK’s leading firms.

In keeping with the conference theme of analysing trends affecting the near future of investment and financial services, CREALOGIX Senior Vice President UK, Dr Mike Bradford delivered a keynote speech entitled “The Problem with Bitcoin”. Here’s a summary:

  • The ideals of Bitcoin as described by the original Satoshi Nakamoto white paper are attractive at face value: a peer-to-peer payments system resistant to censorship, open source, pseudonymous, and not subject to any controlling authority.
  • The reality has turned out to be more problematic: the deflationary approach of limiting the amount of currency in circulation has turned bitcoin into a speculative asset to hold, rather than a liquid means of payment: more than 60% of bitcoin is locked up in static investment compared to as little as 5% circulating in transactions.
  • Speculation has led to extreme volatility in the value of bitcoin, making it next to impossible for merchants to accept it safely for payments.
  • Another limitation to mass adoption for payments is the speed of the Bitcoin network. Confirmation of transactions can take anywhere from 5-20 minutes currently, which is extremely impractical compared to centralised commercial solutions (cf. VISA at 24,000 transactions per second).

Faced with these issues, the European Bank has declared it does not consider bitcoin to be a currency, while conclusions are contradictory from other central banks and regulators.

The premise of eliminating centralised payment processing authorities, letting people transact with each other directly, is revolutionary. Bitcoin has proved this can work … in a mathematical sense. But the many challenges faced – and created – by Bitcoin probably mean that it is not the technology and currency that will deliver the dream.

Conclusion: a “power-hungry” bubble

Mike described how “power-hungry” the overall system of Bitcoin is. With thousands of miners competing to solve abstract computational challenges of ever-increasing difficulty – the proof-of-work that is essential to Bitcoin’s design – the amount of energy required is enormous.

A May 2018 study by Alex de Vries, published in the journal Joule estimated the global energy consumption of Bitcoin at 2.6 gigawatts [GW]: roughly the same as the entire nation of Ireland. Increased build-up of computing power dedicated to Bitcoin could mean this more than doubling to 7.7GW by the end of 2018. This higher figure is comparable to the electricity consumption of Austria (8.2GW). Clearly it is no exaggeration to be concerned about the environmental impact of Bitcoin. Since this energy consumption is only set to keep on rising indefinitely, it poses big questions both about the ethics and practical viability of the system.

With the combined issues of unsustainable power consumption and the ongoing lack of mainstream utility for payments, it is hard to see high valuations of bitcoin as sustainable. Although the biggest speculative bubble so far burst at the start of 2018, there are still a lot of unrealistic expectations inflating bitcoin’s value. Once more people become aware of these issues, the leading cryptocurrency likely has a lot further to fall.

The conference was chaired by publisher and political commentator Andrew Neil, who thanked Mike for his “absolutely fascinating” talk.

Agility in a time of uncertainty

Other speakers at the conference rang alarm bells about the lack of attention paid to services and financial markets in government contingency planning during the final countdown to Brexit, as well as describing the growing complexity of new regulations affecting wealth management, and the difficulty of predicting when (not if) the next financial crisis will break.

Amid these uncertainties, one piece of advice was constant: financial institutions need to design business systems to be adaptable to change.

From stockbrokers to system integrators, consultants to regulation specialists, the speakers provided examples of where rigid business models are the ones most at threat, while those which are flexible and able to deploy new technology and tactics have a chance of thriving.

To quote business professor Leon C Megginson, paraphrasing Darwin in a 1963 lecture:

it is not the most intellectual of the species that survives; it is not the strongest that survives; but the species that survives is the one that is able best to adapt and adjust to the changing environment in which it finds itself

Securities Industry Conference: list of other speakers

The programme featured compelling talks from the following:

  • Tracy Davidson, CEO, Handelsbanken
  • Mark Gem, Chief Compliance Officer, Clearstream
  • Hugh Burden, Commercial Director, AutoRek
  • Andrew Gray, Global Head of BREXIT, PwC
  • Gerard Gilsenan, Senior Manager, Broadridge
  • Paul Scully MP, Vice Chairman of the Conservative Party for the London region
  • Giles Vardey, Former Director of the London Stock Exchange
  • David Wilson, Business Development Director, Objectway
  • Justin Urquhart Stewart, Head of Corporate Development, Seven Investment Management
  • Andrew Wauchope, Senior Investment Director, Psigma Investment

CREALOGIX thanks Goodacre UK for hosting the 2018 Securities Industry Conference.

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