Posted October 5, 2021 by Nick Maggiulli

Corey Hoffstein recently brought the following chart to my attention which shows the required allocation to earn a 7.5% expected return in 1995, 2005, and 2015:

As you can see, the days of decent returns for low risk are far behind us. Investors can no longer rely solely on fixed income to generate a portfolio with good returns. Instead they have had to increase their exposure to equities and alternatives to make up the gap. The end result is a portfolio that has nearly 90% less bond exposure than one from two decades prior (controlling for the same level of expected return).

The common takeaway from this shift in allocations is that investors are craving more risk today than in the past. However, I don’t think this theory is accurate. Yes, some investors (mostly younger ones) have been actively seeking more risk in their portfolios, but this doesn’t imply that all investors are seeking more risk as well.

If we look at the average investor allocation to stocks (from the AAII asset allocation survey) we can see that while allocations to stocks are higher than normal, they are still below the record levels reached during the DotCom Bubble. The chart below illustrates this by plotting the 5-year moving average of investor allocations to both stocks and bonds over time:

But this data alone doesn’t tell the full story. Because even if we observed that the average investor allocation to stocks was at record highs, it wouldn’t necessarily imply that investors were craving more risk. In fact, I’d argue that any change in aggregate allocations over the last few decades has little to do with changing risk appetites and everything to do with lower bond yields. Why?

Because investors today don’t have it as easy as the ones from decades prior. Though you may believe otherwise, earning 7.5% a year on your bonds is not normal. As ValueStockGeek wisely pointed out, bond yields from 1980-2000 were truly exceptional in the context of history:

You might see this chart and say, “Well that makes sense cause inflation was generally much higher in the past.”

That is true, but even after we adjust for inflation, we can see that real bond yields were abnormally high from 1980-2000:

It is this peculiar period of higher yields that investors became accustomed to and which current investor behavior is being compared to. But this comparison isn’t really fair.

It’s not fair because investors from 1980-2000 could have earned decently high returns while taking on very little risk. Investors today can’t do the same thing. Of course, life isn’t fair, but there really is no other period in American history where U.S. stock and bond returns were so incredible.

This is why 1980-2000 will likely go down as the most favorable 20-year period in U.S. investment history. However, we haven’t changed our collective narrative to reflect this yet. We are still acting like this period was “normal” though, in retrospect, it clearly wasn’t. Because, if you look over the last six centuries, interest rates across the globe have been on a slow downward trajectory:

And, as you can see, 1980-2000 stands out in stark defiance of this trend. Does this imply that the low rates of today will remain low forever? I have no idea, but I wouldn’t bet on a return to 1980s-like yields anytime soon.

Unfortunately, I’m not sure how much of the investment community feels the same way. Just imagine how many institutions have set their assumed risk and rate of return based on performance data from 1980-2000. Just imagine how many backtests have been run that rely heavily on this atypical time period.

If you were a pension fund in 2005, you had no other choice but to do this. But what about pension funds today? I’m not so sure that relying heavily on this time period to project your future returns makes as much sense. Maybe I am less imaginative, but I can’t see a world where bonds, even 30-year bonds, are paying 7.5% annually.

As a result, what can investors really do? They have no choice but to take on more risk. And no, not because they crave it. People hate risk. People hate uncertainty. But what they like is reward. And if that means that they need to take on more risk to get the reward that they desire, they will probably do so.

So before we judge investors of today (and investors of tomorrow) let’s consider the incentives and the environment in which they are investing. When you do this, a lot more seemingly odd behavior starts to makes sense.

You see someone YOLOing their life savings into a crazy options position? Maybe they think this is their only way to get rich.

You see someone sitting in cash for years? Maybe they can’t stand the idea of losing their hard-earned money.

Though I have my own opinions on all of these issues, I still know that everyone makes choices based on their own personal experiences and beliefs. I am a hyper-rational, data-driven investor. To me, my investment approach seems undeniable. Just look at the evidence, right? How could you believe anything else?

But I also know that this isn’t completely right. People have different experiences that outweigh any sort of data or evidence. They know that historical averages don’t matter when you are on the unlucky side of history.

It’s good to keep this in mind sometimes. Maybe Morgan was right after all:

To each their own. No one is crazy.

Thank you for reading!

If you liked this post, consider signing up for my newsletter.

This is post 262. Any code I have related to this post can be found here with the same numbering: https://github.com/nmaggiulli/of-dollars-and-data

Source: https://ofdollarsanddata.com/are-we-craving-risk-or-losing-reward loaded 05.10.2021

Bill Buchanan, Edinburgh Napier University

Nothing comes for free, especially online. Websites and apps that don’t charge you for their services are often collecting your data or bombarding you with advertising. Now some sites have found a new way to make money from you: using your computer to generate virtual currencies.

Several video streaming sites and the popular file sharing network The Pirate Bay have allegedly been “cryptojacking” their users’ computers in this way, as has the free wifi provider in a Starbucks cafe in Argentina. Users may object to this, especially if it slows down their computers. But given how hard it is for most companies to make money from online advertising, it might be something we have to get used to – unless we want to start paying more for things.

Units of cryptocurrencies such as bitcoin aren’t created by a central bank like regular money but are generated or “mined” by computers solving complex equations. Cryptojacking involves using someone’s computer without their knowledge, perhaps for just seconds at a time, to mine a cryptocurrency.

In the case of bitcoin, mining requires specialised hardware and consumes masses of energy. For example, each bitcoin transaction takes enough energy to boil around 36,000 kettles filled with water. In a year, the whole bitcoin mining network consumes more energy than Ireland.

But bitcoin is not the only show in town and there are many competing cryptocurrences. One of the most successful is Monero, which builds a degree of privacy into transactions (something bitcoin doesn’t do). Currently it requires no specialised hardware for mining, so anyone with computing power to spare can mine it.

Mining usually takes the form of a competition. Whichever computer solves the equation the fastest is rewarded with the money. With Moreno and other similar cryptocurrencies, a pool of computers can work together and share the reward if they win the competition. This allows individual computers to work on a just small part of the mining task. The larger the pool, the more chance there is of winning the reward.

When a computer is cryptojacked, it is added to a pool for to work on the task. This is often done using a commercially available piece of software, , which can written into what looks like an ad using the common website language JavaScript. As the ad runs in the background, the computer is added to a pool.

This means the website or internet provider doing the cryptojacking can mine cryptocurrency with little cost to themselves. One estimate is that 220 of the top 1,000 websites in the world are conducting cryptojacking, making a total of US$43,000 over a three week period. This might not be very much but file-sharing sites in particular have been searching for new businesses models in order to support their operations and cryptojacking could grow into a new income source.

The problem for the computer’s owner is that this takes up processor power, making other operations take much longer. Pirate Bay users have complained that their processors have been using up to 85% of their capacity compared with less than 10% for normal operations. This can be accompanied by a large battery drain. The Pirate Bay has since said this high processor usage was a bug and the system should normally use between 20% and 30% of processing power.

How do you avoid being cryptojacked?

Coinhive strongly advises the websites that deploy it that they should inform users they are being cryptojacked. But it’s common for the code to run without users realising and without a way to opt out of it. If you want to prevent your computer from being cryptojacked you need a software tool which checks the code as it runs such as an ad-blocker.

But you might feel that allowing a site to use a little bit of your computer’s processing power is a better alternative to being bombarded with advertising. Whatever you do, you’ll likely end up paying for “free” services somehow.

Bill Buchanan, Head, The Cyber Academy, Edinburgh Napier University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Larisa Yarovaya, Anglia Ruskin University and Brian Lucey, Trinity College Dublin

Cryptocurrency entrepreneurs have moved to Puerto Rico to build a crypto utopia – initially dubbed Puertopia but now named Sol – where they plan to pay little in taxes.

The crypto expats also hope to demonstrate how the city of the future will look with blockchain methods used for most transactions alongside the development of a new digital cryptocurrency.

But it’s less clear about whose future – the few or the many – will be the driving force for change on the US territory.

Puerto Rico was devastated by last year’s Hurricane Maria and, with inadequate aid from the US, it desperately needs investment to rebuild the island’s infrastructure. Puerto Rico was already facing severe financial difficulty before the calamity. It goes some way to explaining why local authorities are cautiously welcoming the arrival of cryptocurrency entrepreneurs on the island. But at what cost?

The term crypto-colonialism isn’t new. It was coined 18 years ago by Michael Herzfeld, but had nothing to do with cryptocurrencies – the bitcoin network didn’t come into existence until 2009.

Crypto-colonialism originally referred to countries, such as Greece and Thailand, seeking to acquire political independence at the expense of massive economic dependence. And it used the original meaning of the word “crypto” – concealed, hidden or secret. Such countries are nominally independent, but their national culture is refashioned to suit foreign models. The term colonialism in this sense is not overt at the point of a gun, but covert through the subversion of norms and cultures.

Notably, this definition of crypto-colonialism remains applicable to the socioeconomic consequences of crypto utopia.

Crypto land

There is a deep link between libertarianism and the cryptocurrency movement. Cryptocurrencies such as bitcoin rely on a decentralised, extralegal and unregulated approach. But while the crypto billionaires will enjoy their Caribbean playground, poorer locals with little knowledge of the technology will be excluded.

The mostly male entrepreneurs, who moved to Puerto Rico last year and plan to do more than create a cryptocurrency bank, will perhaps bring crypto libertarian ideas to the island. Their vision is similar to another would-be crypto utopia, the Free Republic of Liberland, which claims to be a “micronation” camped on the western bank of the Danube river. It uses bitcoin as its “national” currency.

Back on Sol, the wealthy crypto expats want to use the blockchain system for decentralised elections and even to issue citizenship ID. But we doubt that locals who are fighting poverty will be enthused by these ideas.

This behaviour reeks of disaster capitalism – the use of a natural or economic crisis to reshape and mould a society into one which entrenches a libertarian, hypercapitalistic worldview. When you are without power for months and feel ignored, any offer of help can seem a good lifeline with little thought for the consequences.

Fight the power

Crypto utopias can also cause severe environmental damage. Puerto Rico remains in a deep power crisis after Hurricane Maria, making the idea of Sol simply impractical. One bitcoin transaction consumes 215 kilowatt-hours (KWh), enough power to supply dozens of households on the island when the grid was at full capacity.

The annual electricity consumption for mining bitcoin increased from 9.5 terawatt-hours (TWh) per year to 48 TWh in the last 12 months – 2.5 times higher than Puerto Rico’s total consumption of 19 TWh. Resources and infrastructure, post-Hurricane Maria, are too stretched to support cryptocurrency mining on the island.

Crypto rich kids made their fortune on the rapid growth of cryptocurrency markets – which are problematic due to their idiosyncratic risks. It’s a game for wealthy people who can cash out early and lock in gains, having been the developers of the bubbly product. This is characteristic of any bubble – those who get in early do well, those who cash in late do poorly.

Our recent research shows that cryptocurrency prices are relatively isolated from the shocks transmitted from other assets, such as gold and equities. But cryptocurrency prices are deeply interlinked with each other, so a fall in the price of bitcoin affects other virtual currencies.

If bitcoin can ride out its latest price fall, then it’s likely that crypto-colonialism will slowly spread around the globe. Crypto libertarians – if they follow the Sol model – could focus on those parts of the world that have been ravaged by earthquakes, tsunamis, hurricanes and economic crises.

But cryptocurrency has also become a panacea for economic recovery. In December, Venezuela announced a creation of a new cryptocurrency – dubbed “petro” – backed up by Venezuelan reserves of precious metals, oil and diamonds. It hopes to use this cryptocurrency to fight US sanctions, high inflation and low oil prices.

However, bitcoin solutions for developing countries – previously known as neo-colonialism – shouldn’t be seen as the ultimate solution for disaster and crisis management. In the transition period, when the potential of cryptocurrencies and applications of blockchain are unexplored, we have to be sceptical of such initiatives as Sol.

Larisa Yarovaya, Lecturer in Accounting and Finance, Anglia Ruskin University and Brian Lucey, Professor of International Finance and Commodities, Trinity College Dublin

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Nafis Alam, University of Reading

A new wave was added to the never-ending Bitcoin mania when the Chicago Board of Exchange (CBOE) became the first major derivative exchange to launch Bitcoin futures on December 10. Such was the euphoria among early investors that trading was halted twice due to CBOE speed breakers, which slow or pause trading when price movements are excessive.

The launch of Bitcoin futures at CBOE is set to be followed by its cross-town rival, the Chicago Mercantile Exchange (CME) Group, which plans to launch its own version of Bitcoin futures trading on December 18. And Nasdaq is preparing for a similar launch in the second-half of 2018.

Bitcoin futures allows traders to speculate on what the Bitcoin price will be at a later date. For instance, at the time of writing this article, the January contract for Bitcoin was trading around US$18,300, up from an opening price of US$15,000. Traders bet on this and profit accordingly.

Such was the excitement at the launch of futures that the Bitcoin price touched an all-time high of US$17,382.64 after one day of CBOE trading. This might sound good for Bitcoin lovers, but it could yet spell doom for the cryptocurrency in the long run.

Bitcoin futures could actually end up reducing the price of Bitcoin. Futures trading gives new investors the choice to bet against Bitcoin and also allows them to settle contracts in dollars, boosting their liquidity. Plus, Bitcoin futures allows investors to trade off the cryptocurrency without actually owning it. This protects them from any volatility in the real-time spot market. This could reduce the demand for Bitcoin, pushing down prices.

Futures lessons

Even though crypto futures are new to the market, futures contract trading dates back to ancient times. In 1750BC in Mesopotamia the Babylonian king, Hammurabi, introduced a legal code, which included stipulations for trading goods at a future date for an agreed-upon price.

A futures contract, in its simplest form, is an agreement to buy or sell an asset at a future date at an agreed-upon price. One party to the contract agrees to buy a given quantity of securities (such as stocks or bonds) or commodities (oil, gold, Bitcoin), and take the delivery on a future date while the other party agrees to deliver the asset.

Futures markets involve hedgers and speculators. Hedgers are concerned with protecting themselves from future price drops. Hedgers will buy or sell their commodity to lock in a price against future risks of it dropping in value. Speculators assume the risk, often borrowing a substantial amount of money to buy contracts that they hope will go up in the future. If the market moves against them, they will lose more than they invested.

One key requirement of futures contracts is that they must be traded on standardised exchanges such as the CBOE or CME. The arrival of Bitcoin futures at an established and well-regulated derivative exchange will encourage more investors to trade in digital currency, giving Bitcoin a place among mainstream finance. Even household names including Goldman Sachs have said they plan to clear Bitcoin futures on behalf of some clients.

This will fuel the cryptocurrency’s price rise, as crypto traders and dealers can hedge their positions based on the future market. For example Bitcoin miners will benefit from futures contracts as they can use them to hedge against their mining cost, getting money in advance from speculators hoping to make a future profit.

On the flip side, the launch of Bitcoin futures will attract greater scrutiny from the regulators which will cast a shadow on the fate of the Bitcoin in the long run. In this regard, the trade association for the futures markets, the Futures Industry Association warned the US regulator that not enough risk evaluation has been done on Bitcoin and the risks it poses to financial stability.

The launch of Bitcoin futures has aggravated other regulators, with scrutiny beginning to encircle the cryptocurrency. Hong Kong’s regulator issued a warning that only licensed firms can offer such products within Hong Kong. In Korea, the Financial Services Commission financial regulator issued a directive that bans securities firms from taking part in Bitcoin futures transactions.

Perhaps more worryingly, the levels of futures trading has not been as high as the initial flurry of excitement may suggest. The volume of trading since bitcoin’s launch on CBOE has been relatively low, especially compared with more established currencies futures.

So, although Bitcoin has the added legitimacy of being traded on futures exchanges, the relatively low levels of interest from big institutional investors is indicative. If history is anything to go by, the tulip bubble burst in February 1637 – not long after the Dutch created a futures market for buying bulbs in 1636 at the peak of tulip mania. The advent of futures trading may well further inflate the “Bitcoin bubble” and push it to its bursting point.

Nafis Alam, Associate Professor, University of Reading

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Ioannis Glinavos, University of Westminster

Everyone is going crazy about bitcoin, yet very few people understand what it is, how it relates to blockchain and whether this is a legitimate investment tool or a massive scam. The extradition case of Alexander Vinnik – the alleged Russian mastermind of a US$4 billion digital money laundering scheme – brings all this to the fore.

Vinnik, who was arrested in northern Greece, describes himself as a bitcoin consultant and denies all charges brought against him by US officials who have accused him of running the BTC-e exchange and laundering billions of dollars via bitcoin transactions.

He had been waiting for Greece’s Supreme Court to decide whether he could be extradited to the US, where he faces a cybercrime trial. On Wednesday, the court ruled that Vinnik can be extradited to face charges in the US. It’s now up to the Greek justice minister to determine whether the extradition will take place – but it is likely Vinnik will be facing US authorities before long.

Vinnik, 38, is one of seven Russian suspects arrested or indicted worldwide this year on US cybercrime charges. He has fought hard against extradition to the US, deploying an expensive team of Greek criminal attorneys before the court. Vinnik has said he is willing to be extradited to his home country of Russia, where he is sought on lesser fraud charges.

If the Greek justice minister decides to send Vinnik to Russia instead it will be a diplomatic issue between Greece and the US.

Is bitcoin too murky?

Some might bristle at the idea of getting involved in bitcoin, given the Vinnik allegations and other not-so-pretty news stories around the bubbling cryptocurrency that is waiting to burst. But you might still be wondering how it works, and whether you can make some money out of it.

A good starting point is to reflect briefly on the value of money. What do you understand by value? Take this year’s must-have Christmas toy – a programmable robot made of little bricks. Your kids want one, you want one, it is in short supply and out of stock pretty much everywhere. Its price is climbing outside standard toy stores. You can buy it for multiples of its retail price on online auction sites. This is a valuable commodity. Perhaps one you could invest in. If you can obtain some of these scarce items at normal price, you could make a killing auctioning them online.

Now consider this, what if the toy wasn’t a physical item? What if the sought after product was a game app? You can download it, but you need an activation code to use it, and codes aren’t easy to come about. Scarcity would be due to rationing in supply, not due to physical lack of stock. Assuming you could buy multiple activation codes and auction them online, you could treat these as an investment. Never mind for a second who makes the app and why there are limited activation codes. It is considered a valuable asset. Could it be a commodity, a source of value, a store of such value? Could it be used as currency?

Substitute the toy robot or app with bitcoin and you get an idea of what is happening. Bitcoin is a type of software. Think of it as a digital token that can be programmed to do various things, containing a variety of information.

Bitcoin and other cryptocurrencies are based on blockchain technology, an information storage system which works as a decentralised ledger. Information is not held on a central server, but is duplicated and dispersed across a huge network. Every time this information is updated, a corresponding change is made across the network.

What is the benefit of this decentralisation? Blockchain enthusiasts will tell you that the system is impossible to corrupt or manipulate. Any attempt to “hack” information will be rejected by other nodes in the system that hold the true copy of the information. If you have been awarded a digital token, a bitcoin, you can be sure (we are told) that it is genuine.

Beyond government control

Great, so we have a supposedly impenetrable digital ledger that evidences little bits of software that people think are valuable. Sounds benign, so why is Vinnik facing allegations of money laundering? Law enforcement officers have realised that the decentralised nature of the ledger and the anonymous nature of the originators and holders of bitcoin potentially make it a wonderful conduit for illegally obtained funds.

Remember, the ledger is currently beyond the control, or knowledge of governments and state authorities. Rightly or wrongly, bitcoins are considered valuable and people exchange them for real money. The value of bitcoin has well exceeded US$10,000 and financial firms are set to start trading futures – which are bets on the price of upcoming contracts to exchange bitcoin. Blockchain could be a revolution not only in finance, but also in money laundering.

But the era of cowboy cryptocurrency trading is set to come to a grinding halt. Regulators worldwide are reacting to soaring values with attempts to inject a degree of transparency in these trades. Starting with the EU, legislation is planned to force online platforms where bitcoins are traded to carry out due diligence on customers and report suspicious transactions. It will bring trades within the network of rules that try to prevent money laundering and dealing in proceeds of crime, including terrorist financing.

If you are thinking of speculating on bitcoin, should you do it? Before you make up your mind, remember this: the last innovation in finance promising incredible rewards with appropriately apportioned risks was the creation of synthetic CDOs and derivative-laden layercakes in the mid noughties. And we all know how that went.

Ioannis Glinavos, Senior Lecturer in Law, University of Westminster

This article is republished from The Conversation under a Creative Commons license. Read the original article.

John Quiggin, The University of Queensland

The recent upsurge in the price of Bitcoin seems to have finally awakened the world to the massively destructive environmental consequences of this bubble.

These consequences were pointed out as long ago as 2013 by Australian sustainability analyst and entrepreneur Guy Lane, executive director of the Long Future Foundation. In recent months, the Bitcoin bubble has got massively bigger and the associated waste of energy is now much more widely recognised.

In essence, the creation of a new Bitcoin requires the performance of a complex calculation that has no value except to show that it has been done. The crucial feature, as is common in cryptography, is that the calculation in question is very hard to perform but easy to verify once it’s done.

At present, the most widely used estimate of the energy required to “mine” Bitcoins is comparable to the electricity usage of New Zealand, but this is probably an underestimate. If allowed to continue unchecked in our current energy-constrained, climate-threatened world, Bitcoin mining will become an environmental disaster.

The rising energy demands of Bitcoin

In the early days of Bitcoin, the necessary computations could be performed on ordinary personal computers.

But now, “miners” use purpose-built machines optimised for the particular algorithms used by Bitcoin. With these machines, the primary cost of the system is the electricity used to run it. That means, of course, that the only way to be profitable as a Bitcoin miner is to have access to the cheapest possible electricity.

---

Read more:
Demystifying the blockchain: a basic user guide

---

Most of the time that means electricity generated by burning cheap coal in old plants, where the capital costs have long been written off. Bitcoin mining today is concentrated in China, which still relies heavily on coal.

Even in a large grid, with multiple sources of electricity, Bitcoin mining effectively adds to the demand for coal-fired power. Bitcoin computers run continuously, so they constitute a “baseload” demand, which matches the supply characteristics of coal.

More generally, even in a process of transition to renewables, any increase in electricity demand at the margin may be regarded as slowing the pace at which the dirtiest coal-fired plants can be shut down. So Bitcoin mining is effectively slowing our progress towards a clean energy transition – right at the very moment we need to be accelerating.

How much energy is Bitcoin using?

A widely used estimate by Digiconomist suggests that the Bitcoin network currently uses around 30 terawatt-hours (TWh) a year, or 0.1% of total world consumption – more than the individual energy use of more than 150 countries.

By contrast, in his 2013 analysis, Guy Lane estimated that a Bitcoin price of US$10,000 would see that energy use figure climb to 80 TWh. If the current high price is sustained for any length of time, Lane’s estimate will be closer to the mark, and perhaps even conservative.

The cost of electricity is around 5c per kilowatt-hour for industrial-scale users. Miners with higher costs have mostly gone out of business.

As a first approximation, Bitcoin miners will spend resources (nearly all electricity) equal to the price of a new Bitcoin. However, to be conservative, let’s assume that only 75% of the cost of Bitcoin mining arises from electricity.

Assuming an electricity price of 5c per kWh and a Bitcoin price of US$10,000, this means that each Bitcoin consumes about 150 megawatt-hours of electricity. Under current rules, the settings for Bitcoin allow the mining of 1,800 Bitcoins a day, implying daily use of 24,000MWh or an annual rate of nearly 100TWh – about 0.3% of all global electricity use.

Roughly speaking, each MWh of coal-fired electricity generation is associated with a tonne of carbon dioxide emissions, so a terawatt-hour corresponds to a million tonnes of CO₂.

So much energy, so few users

An obvious comparison is with the existing financial system.

Digiconomics estimated that Visa is massively more efficient in processing transactions. A supporter of Bitcoin, Carlos Domingo, hit back with a calculation suggesting that the entire global financial system uses about 100TWh per year, or three times as much as the Diginconomics estimate for Bitcoin.

As a defence, this is far from impressive. First, as we’ve seen, if the current high price is sustained, total annual energy use from Bitcoin mining is also likely to rise to 100TWh.

---

Read more:
The bitcoin and blockchain: energy hogs

---

More importantly, the global financial system serves the entire world. By contrast, the number of active Bitcoin investors has been estimated at 3 million. Almost all of these people are pure speculators, holding Bitcoin as an asset while using the standard financial system for all of their private and business transactions.

Another group is believed to use Bitcoin for illicit purposes such as drug dealing or money laundering, before converting these funds into their own national currency. The number of people who routinely use Bitcoin as a currency for legitimate transactions might be in the low thousands or perhaps even fewer.

Shifting the whole global financial system to Bitcoin would require at least a 2000-fold increase, which in turn would entail increasing the the world’s electricity use by around 500%. With the current threat of climate change looming large globally – this constitutes an unthinkably large amount of energy consumption.

Better alternatives to Bitcoin

The disastrous nature of Bitcoin’s energy consumption should not lead us to abandon the associated idea of blockchain technology altogether.

There are alternatives to the “proof of work” method of validating changes to the blockchain, such as “proof of importance”, which is analogous to Google’s page ranking systems. Projects such as Gridcoin are based on calculations that are actually useful to science. But these ideas are in their infancy.

For the moment, the problem is Bitcoin and how to deal with it. There is no obvious way to fix the inherent problems in its design. The sooner this collective delusion comes to an end, the better.

John Quiggin, Professor, School of Economics, The University of Queensland

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Paul Chinowsky, University of Colorado Boulder

Rising temperatures due to climate change are causing more than just uncomfortably hot days across the United States. These high temperatures are placing serious stress on critical infrastructure such as water supplies, airports, roads and bridges.

One category of critical infrastructure being severely affected is the nation’s K-12 schools.

Ideally, the nation’s more than 90,000 public K-12 schools, which serve over 50 million students, should protect children from the sometimes dangerous elements of the outdoors such as severe storms or extreme temperatures.

But since so many of America’s schools are old and dilapidated, it’s the school buildings themselves that need protection – or at least to be updated for the 21st century.

Twenty-eight percent of the nation’s public schools were built from 1950 through 1969, federal data shows, while just 10% were built in 1985 or later.

As a researcher who studies the impact of climate change, I have measured its effects on infrastructure and health for over a decade. During that time, I’ve seen little attention focused on the effects of climate change on public schools.

Since 2019, climate scientist Sverre LeRoy, at the Center for Climate Integrity, and I have worked to determine if the nation’s schools are prepared for the heat waves on the approaching horizon.

Comparing the climate conditions under which U.S. schools were built with the projected conditions over the next two decades, we looked at the vulnerability of all K-12 schools to increasing temperatures. We determined whether current schools have air conditioning or not and whether they would be required to add air conditioning in the future.

The results of our study, “Hotter Days, Higher Costs: The Cooling Crisis in America’s Classrooms,” show that by 2025, more than 13,700 schools will need to install air conditioning, and another 13,500 will need to upgrade their existing systems.

Hot classrooms

Research has shown that high classroom temperatures can make it harder to learn. Hot school days cause difficulty in concentrating, sleepiness, a decrease in energy and even reduced memory capacity.

Local school districts have policies for extreme heat events. However, rising temperatures mean these guidelines are no longer limited to rare occurrences.

Over the past several years, schools across the U.S. are increasingly forced to take “heat days,” cutting school days short because of classrooms that are too hot for students to effectively learn.

This is happening in places that range from Denver to Baltimore and Cleveland.

Compounding the increase in temperatures is the national trend that seasonal temperatures are rising in both the spring and the fall. For example, both Rhode Island and New Jersey have seen average spring and fall temperatures rise over 3 degrees Fahrenheit (1.7 Celsius). Rather than high temperatures only occurring when students are on summer break, these heat events now occur regularly during the school year too. Students today in a greater number of cities are beginning and ending the school year in classrooms that often exceed 80 F (27 C).

Expensive upgrades

The problem of more hot days is due to average temperatures increasing over the past 40 years. The number of days with high temperatures has risen across the country, with notable increases in large northern cities. For example, Chicago has seen the number of days over 80 degrees during the school year increase from 27 in 1970 to 32 in 2020 and a projected 38 by 2025. These increases affect schools in two distinct ways.

Schools in the traditionally cooler north – especially older schools – will need to be retrofitted with new air conditioning systems at an accumulated cost of US$40 billion by 2025. For schools in the traditionally warmer South and West, many existing systems will need to be upgraded at a projected cost exceeding $400 million.

Temperature increases are especially costly in large cities such as Philadelphia, Chicago and Los Angeles, where existing efforts and continued needs will result in outlays exceeding $500 million, $1.5 billion and $600 million, respectively. These large districts have a greater number of older buildings that require upgrades in electrical and structural systems to support new air conditioning systems.

For all schools – even ones that don’t require system upgrades – the additional costs of operating air conditioning systems to meet the new demands will exceed $1.4 billion per year.

An equity issue

Since school districts are dependent on local taxes or bond measures to finance the school system, districts in affluent areas have a greater opportunity to obtain funds through tax increases or voter-approved bond measures.

In contrast, districts located in less affluent counties – including Bell County, Kentucky; Scott County, Tennessee; and DeKalb County, Alabama – face the challenge of creating safe learning environments without a financial safety net. With household incomes for the entire district in the bottom 20% of national averages, or less than $43,000 per year, these districts are unable to absorb significant tax increases.

In this regard, classroom environments become an equity issue. While the increase in temperature may affect all children, the relative impact of the increase and the ability to adapt is not equal.

Unsustainable solutions

Increasingly, school districts are turning to individual window units to address classroom overheating. However, window units do not cool interior offices, cannot circulate and exchange air within the classrooms, and will not meet expected lifespans due to extensive use. Furthermore, they create uneven cooling patterns and classroom disturbance due to noise. While these solutions are popular from an initial budget perspective, they ultimately fail to solve the hot classroom crisis.

Where mechanical systems are not an option due to budgetary constraints, school districts are looking at altering the school year to start later or end earlier. However, there are limits to this approach because there are minimum requirements for the number of days that are in the school year. Some schools are even experimenting with remote learning as a response when extreme temperatures are an issue.

The bottom line for schools and their surrounding communities is that rising temperatures from climate change are a growing threat to school infrastructure. Schools will need additional funding to install or upgrade air conditioning systems, pay for increased energy usage or redesign school buildings to enhance natural cooling. Various cities and states argue that fossil fuel companies have a duty to pay these infrastructure costs associated with climate change.

The only other choice is for America’s students to continue to endure classrooms where it’s simply too hot to learn.

[Like what you’ve read? Want more? Sign up for The Conversation’s daily newsletter.]

Paul Chinowsky, Professor of Environmental Design, University of Colorado Boulder

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Debra Perrone, University of California Santa Barbara and Scott Jasechko, University of California Santa Barbara

As the drought outlook for the Western U.S. becomes increasingly bleak, attention is turning once again to groundwater – literally, water stored in the ground. It is Earth’s most widespread and reliable source of fresh water, but it’s not limitless.

Wells that people drill to access groundwater supply nearly half the water used for irrigated agriculture in the U.S. and provide over 100 million Americans with drinking water. Unfortunately, pervasive pumping is causing groundwater levels to decline in some areas, including much of California’s San Joaquin Valley and Kansas’ High Plains.

We are a water resources engineer with training in water law and a water scientist and large-data analyst. In a recent study, we mapped the locations and depths of wells in 40 countries around the world and found that millions of wells could run dry if groundwater levels decline by only a few meters. While solutions vary from place to place, we believe that what’s most important for protecting wells from running dry is managing groundwater sustainably – especially in nations like the U.S. that use a lot of it.

Groundwater use today

Humans have been digging wells for water for thousands of years. Examples include 7,400-year-old wells in the Czech Republic and Germany, 8,000-year-old wells in the eastern Mediterranean, and 10,000-year-old wells in Cyprus. Today wells supply 40% of water used for irrigation worldwide and provide billions of people with drinking water.

Groundwater flows through tiny spaces within sediments and their underlying bedrock. At some points, called discharge areas, groundwater rises to the surface, moving into lakes, rivers and streams. At other points, known as recharge areas, water percolates deep into the ground, either through precipitation or leakage from rivers, lakes and streams.

Groundwater declines can have many undesirable consequences. Land surfaces sink as underground clay layers are compacted. Seawater intrusion can contaminate groundwater reserves and make them too salty to use without energy-intensive treatment. River water can leak down to underground aquifers, leaving less water available at the surface.

[youtube https://www.youtube.com/watch?v=_oiffKmc0dQ?wmode=transparent&start=0]

Groundwater depletion can also cause wells to run dry when the top surface of the groundwater – known as the water table – drops so far that the well isn’t deep enough to reach it, leaving the well literally high and dry. Yet until recently, little was known about how vulnerable global wells are to running dry because of declining groundwater levels.

There is no global database of wells, so over six years we compiled 134 unique well construction databases spanning 40 different countries. In total, we analyzed nearly 39 million well construction records, including each well’s location, the reason it was constructed and its depth.

Our results show that wells are vital to human livelihoods – and recording well depths helped us see how vulnerable wells are to running dry.

Millions of wells at risk

Our analysis led to two main findings. First, up to 20% of wells around the world extend no more than 16 feet (5 meters) below the water table. That means these wells will run dry if groundwater levels decline by just a few feet.

[youtube https://www.youtube.com/watch?v=TBXrBjk_5go?wmode=transparent&start=0]

Second, we found that newer wells are not being dug significantly deeper than older wells in some places where groundwater levels are declining. In some areas, such as eastern New Mexico, newer wells are not drilled deeper than older wells because the deeper rock layers are impermeable and contain saline water. New wells are at least as likely to run dry as older wells in these areas.

Wells are already going dry in some locations, including parts of the U.S. West. In previous studies we estimated that as many as 1 in 30 wells were running dry in the western U.S., and as many as 1 in 5 in some areas in the southern portion of California’s Central Valley.

Households already are running out of well water in the Central Valley and southeastern Arizona. Beyond the Southwest, wells have been running dry in states as diverse as Maine, Illinois and Oregon.

What to do when the well gives out

How can households adapt when their well runs dry? Here are five strategies, all of which have drawbacks.

– Dig a new, deeper well. This is an option only if fresh groundwater exists at deeper depths. In many aquifers deeper groundwater tends to be more saline than shallower groundwater, so deeper drilling is no more than a stopgap solution. And since new wells are expensive, this approach favors wealthier groundwater users and raises equity concerns.

– Sell the property. This is often considered if constructing a new well is unaffordable. Drilling a new household well in the U.S. Southwest can cost tens of thousands of dollars. But selling a property that lacks access to a reliable and convenient water supply can be challenging.

– Divert or haul water from alternative sources, such as nearby rivers or lakes. This approach is feasible only if surface water resources are not already reserved for other users or too far away. Even if nearby surface waters are available, treating their quality to make them safe to drink can be harder than treating well water.

– Reduce water use to slow or stop groundwater level declines. This could mean switching to crops that are less water-intensive, or adopting irrigation systems that reduce water losses. Such approaches may reduce farmers’ profits or require upfront investments in new technologies.

[Over 100,000 readers rely on The Conversation’s newsletter to understand the world. Sign up today.]

– Limit or abandon activities that require lots of water, such as irrigation. This strategy can be challenging if irrigated land provides higher crop yields than unirrigated land. Recent research suggests that some land in the central U.S. is not suitable for unirrigated “dryland” farming.

Households and communities can take proactive steps to protect wells from running dry. For example, one of us is working closely with Rebecca Nelson of Melbourne Law School in Australia to map groundwater withdrawal permitting – the process of seeking permission to withdraw groundwater – across the U.S. West.

State and local agencies can distribute groundwater permits in ways that help stabilize falling groundwater levels over the long run, or in ways that prioritize certain water users. Enacting and enforcing policies designed to limit groundwater depletion can help protect wells from running dry. While it can be difficult to limit use of a resource as essential as water, we believe that in most cases, simply drilling deeper is not a sustainable path forward.

Debra Perrone, Assistant Professor of Environmental Studies, University of California Santa Barbara and Scott Jasechko, Assistant Professor of Water Resources, University of California Santa Barbara

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Vili Lehdonvirta, University of Oxford

Bitcoin is in decline. Not its price, which has increased 900% this year and (at the time of writing) stands at over US$12,000 per unit, but its actual use as a currency. And this makes its rapid appreciation all the more puzzling.

A few years ago, enthusiasts triumphantly shared announcements from businesses that had started accepting Bitcoin. Over the last couple of years, such announcements have become scarce. Instead, businesses that once accepted the currency have begun to drop it.

The BBC contacted ten businesses in London that once advertised accepting Bitcoin. Four no longer accepted it, and two that did said they hardly ever received payments in Bitcoin. The same is even true online. The Wall Street Journal, citing a report by Morgan Stanley, recently reported that Bitcoin is now accepted by just three of the top 500 global online merchants, down from five last year.

If growing adoption as a currency can’t justify Bitcoin’s rapid appreciation, what can? Many enthusiasts have started to promote the idea of Bitcoin as a store of value. In economics, this is usually defined along the lines of “an item that people can use to transfer purchasing power from the present to the future”. In simple terms, it’s somewhere safe to invest your wealth that won’t lose its worth over time.

Apples can be used to barter services from a neighbour while they’re still fresh, but their purchasing power will disappear as they rot. The purchasing power can be retained into the future by exchanging the apples for money, gold, government bonds or some other store of value.

Some items have attributes that make them better stores of value than others, whether we are talking about physical items or digital objects. Gold is a good store of value because it’s durable. Electronic bond certificates are also durable as long as banks’ systems don’t fail, and have the added benefit of being easier to secure than physical valuables. Money, both physical currency and digital bank money, has the advantage of being very liquid, so it’s easy to convert into a purchase when needed.

Bitcoin does share many of these attributes of a good store of value. It also offers potentially high levels of financial privacy, somewhat similarly to the offshore banking system. This is an important attribute of a store of value for some people, although it also creates a lack of accountability and the potential for tax evasion.

But the most important attribute of a store of value is that it’s valuable. Gold is valuable because it has many industrial and decorative uses. Its price can fluctuate because of speculation on financial markets, but it can never fall to zero. There will always be someone willing to accept gold because it’s a useful commodity.

Similarly, US government bonds are ultimately valuable because they entitle the owner to a relatively secure flow of interest payments. Dollars and euros are valuable because they are widely accepted as a means of payment, and will continue to be so in the foreseeable future. In contrast, the future acceptability of the Venezuelan bolivar is in doubt, so people are desperately trying to exchange it to better stores of value.

Is Bitcoin valuable? It has no industrial or decorative uses, and it doesn’t entitle the holder to receive interest. It was intended to be valuable as a currency that is accepted the world over, but that doesn’t seem to be happening. The only major value that Bitcoin has now is its exchange value. Many people are willing to pay a lot of money today to get hold of some Bitcoin.

But what they are getting for their money is simply the hope that another buyer down the line will pay even more money for the coins. Once the music stops, there is no fundamental value to prevent the coins’ price from falling close to zero, save for their tenuous position as the currency of choice in the online drug trade and grey-area gambling.

Beanie Babies lessons

The idea that Bitcoin is valuable because it’s a store of value is upside down. In reality, something becomes a store of value because it’s valuable. In the 1990s, people started to trade Beanie Babies on eBay. Prices of these limited-edition plush toys rose to thousands of dollars, and by 1997 they made up 6.6% of the entire site’s transaction volume.

Some people invested their life savings into Beanie Babies, fully expecting their value to be preserved and more. But eventually people came to their senses and the market bombed. Beanie Babies are useful as toys and collectables, but that doesn’t justify thousand-dollar valuations.

My advice to individuals and institutions tempted by the headlines is to keep their savings away from Bitcoin and other cryptocurrencies and “initial coin offerings” (ICOs). I know serious blockchain developers won’t mind me saying this, because they see speculative bubbles and bursts as a distraction. For Bitcoin to truly function as a store of value, it first has to gain acceptance as a currency.

Vili Lehdonvirta, Associate Professor and Senior Research Fellow, Oxford Internet Institute, University of Oxford

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Mojtaba Sadegh, Boise State University; Ali Mirchi, Oklahoma State University; Amir AghaKouchak, University of California, Irvine, and Kaveh Madani, Yale University

The 2021 water year ends on Sept. 30, and it was another hot, dry year in the western U.S., with almost the entire region in drought. Reservoirs vital for farms, communities and hydropower have fallen to dangerous lows.

The biggest blow came in August, when the U.S. government issued its first ever water shortage declaration for the Colorado River, triggering water use restrictions.

In response, farmers and cities across the Southwest are now finding new, often unsustainable ways to meet their future water needs. Las Vegas opened a lower-elevation tunnel to Lake Mead, a Colorado River reservoir where water levels reached unprecedented lows at 35% of capacity. Farmers are ratcheting up groundwater pumping. Officials in Arizona, which will lose nearly one-fifth of its river water allotment under the new restrictions, even floated the idea of piping water hundreds of miles from the Mississippi River.

These strategies conceal a more fundamental problem: the unchecked growth of water consumption. The Southwest is in an “anthropogenic drought” created by the combination of natural water variability, climate change and human activities that continuously widen the water supply-demand gap.

In the long run, this can lead to “water bankruptcy,” meaning water demand invariably exceeds the supply. Trying to manage this by cranking up water supply is destined to fail.

More than 7,000 miles away, Iran is grappling with water problems that are similar to the U.S. Southwest’s but more severe. One of the driest years in the past five decades, on the back of several decades of mismanaged water resources, brought warnings of water conflicts between Iranian provinces this year.

As environmental engineers and scientists – one of us is also a former deputy head of Iran’s Department of Environment – we’ve closely studied the water challenges in both drought-prone regions. We believe past mistakes in the U.S. and Iran offer important lessons for future plans in the U.S. Southwest and other regions increasingly experiencing drought and water shortages.

Groundwater pumping: A temporary fix with consequences

As the supply of water from the Colorado River diminishes, Southwest farmers are putting more straws into already declining groundwater that accumulated over thousands to millions of years. But that is a short-term, unsustainable solution that has been tried across the U.S. and around the globe – with major consequences. The High Plains Aquifer and California’s Central Valley are just two examples.

Iran offers a case study in what can go wrong with that approach, as our research shows. The country nearly doubled its groundwater extraction points between 2002 and 2015 in an attempt to support a growing agricultural industry, which drained aquifers to depletion. As its water tables drastically declined, the groundwater’s salinity increased in aquifers to levels that may no longer be readily suitable for agriculture.

As water-filled pores in the soil are drained, the weight of the overlying ground compresses them, causing the aquifers to lose their water holding capacity and accelerating land subsidence. Iran’s capital, Tehran, with more than 13 million residents, subsided more than 12 feet between 2003 and 2017. Similarly, some areas of California are sinking at a rate of up to 1 foot each year.

[youtube https://www.youtube.com/watch?v=ZoKrnrAj4ig?wmode=transparent&start=0]

Interbasin water transfer: A Pandora’s box

Another proposal in the Southwest has been to pipe in water from elsewhere. In May, the Arizona legislature urged Congress to initiate a feasibility study to bring Mississippi River water to replenish the Colorado River. But that, too, has been tried.

In Iran, multiple interbasin water transfer projects doubled the flow of the Zayandeh Rud, a river in the arid central part of the country. The inflow of water supported unsustainable growth, creating demand without enough water to support it. In dry years now, no one has enough water. Many people in Khuzestan – the region supplying water to central Iran – lost their livelihood as their farms dried out, wetlands vanished, and livestock died of thirst. People in central Iran also lost crops to the drought as incoming water was cut. Both regions saw protests turn violent this year.

California diverted water from the Eastern Sierra Nevada to support Los Angeles’ growth in the early 1900s, turning the once prosperous Owens Lake Valley into a dust bowl. Costs of mitigating dust storms there now exceed US$2 billion. Meanwhile, California needs more infrastructure and investment to meet its water demand.

Another project, the California Aqueduct, was constructed in the 1960s to transfer water from the Sacramento-San Joaquin Delta in Northern California to the Central Valley and southern parts of the state to support agriculture and some urban demand. This also did not close the water demand-supply gap, and it pushed economically and culturally important native fish species and ecological systems in the delta to the point of collapse.

Looking ahead in light of looming water bankruptcy

As the continued influx of population into the U.S. Southwest raises water demand in the face of shrinking water supply, we have to wonder whether the Southwest is heading toward water bankruptcy.

While there is no easy solution, a number of actions are possible.

First, recognize that water shortages cannot be mitigated only by increasing water supply – it’s also important to manage water demand.

There is great potential for water savings through efficient irrigation and precision agriculture systems, which could keep agriculture viable in the region.

Cities can save water by curbing outdoor water losses and excess water use, such as on ornamental lawns. Californians successfully reduced their water demand by more than 20% between 2015 and 2017 in response to severe drought conditions. Replanting urban landscapes with native drought-tolerant vegetation can help conserve water.

On the supply side, communities can consider nontraditional water sources, water recycling and reuse in all sectors of the economy, and routing runoff and floodwaters to recharge groundwater aquifers.

[Over 110,000 readers rely on The Conversation’s newsletter to understand the world. Sign up today.]

There are also emerging technological solutions that could boost water resources in some regions, including fog water collection, which uses sheets of mesh to capture moisture from fog, and desalination plants that turn seawater and saline groundwater into drinking water. One new desalination plant planned for Huntington Beach, California, is awaiting final approval. Environmental consequences of these measures, however, should be carefully considered.

The Southwest monsoon returned this summer after a record dry previous year and a half in the region, but it wasn’t enough to end the drought there. Forecasts now suggest a high chance that a La Niña pattern will develop over the winter, meaning Southwest is likely in for another drier-than-normal start to 2022.

Iran is already in water bankruptcy, with demand exceeding supply. It will take a lot more than a wet year to alleviate its water shortages.

Mojtaba Sadegh, Assistant Professor of Civil Engineering, Boise State University; Ali Mirchi, Assistant Professor of Water Resources Engineering, Oklahoma State University; Amir AghaKouchak, Professor of Civil & Environmental Engineering, University of California, Irvine, and Kaveh Madani, Visiting Fellow, Yale University

This article is republished from The Conversation under a Creative Commons license. Read the original article.