Commentary: Why is Bitcoin so attractive despite the risks and uncertainties?

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CAMBRIDGE: With the price of Bitcoin reaching new highs, and El Salvador and Cuba deciding to accept it as legal tender, cryptocurrencies are here to stay.

What implications will this have for money and politics?

Money depends on trust. It is only accepted in exchange for goods and services because people can confidently assume that others will accept it in the future.

This is as true for the US dollar as it is for gold. To claim that cryptocurrencies like Bitcoin are just a trust game or a speculative bubble, as many economists have pointed out, is to ignore their popularity.

And yet, cryptocurrencies lack the stable institutional foundations needed to build public confidence in them. Confidence comes and goes as well, making them fragile and volatile, as the wild gyrations of Bitcoins have amply demonstrated.

Additionally, with Bitcoin and other cryptocurrencies that rely on proof-of-work mechanisms, transactions must be continuously verified and recorded in a decentralized ledger (in this case blockchain-based).

This requires millions of computers to be constantly running to update and verify the work of the transactions which is prompted by the possibility of being rewarded with newly created Bitcoin.

The energy consumed in these mining operations now exceeds that of a medium-sized country like Malaysia or Sweden. Now that the world has awakened to the dangers of climate change (and the misery of our response so far), this massive waste should make Bitcoin very unattractive.

And yet, despite its volatility, fragility, and massive carbon footprint, five factors have combined to make Bitcoin an attractive proposition to many: its political narrative; the criminal activities it allows; the seigniorage that it distributes; the techno-optimism of the current era; and the desire to get rich quick at a time when few other economic opportunities present themselves.

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