Bitcoin, at the time of writing this article, has a total market capitalisation of $200,045,873,605 (CoinMarketCap). This trumps the GDP of New Zealand, the Czech Republic, Greece and Qatar, is only $2 billion behind Portugal, with Nigeria and South Africa being the only African countries with higher GDP than Bitcoin’s market capitalisation (source). Bitcoin is released into circulation through a process called mining, which consumes energy at a rate soon to eclipse the national energy consumption of Argentina (Fortune). Yet, with Bitcoin having such a sizeable market capitalisation and energy consumption, we must ask whether and how any of the value inputs in its creation process, or any related activity/transaction in Bitcoin contributes to a country’s GDP.
GDP as a Metric of Economic Output
There are different (albeit comparable) methods of calculating GDP: (1) by adding up all the money spent each year; (2) by adding up all the money earned each year; or (3) by adding up all the value added each year. England combines all three methods into a single GDP figure, whereas the United States produces different statistics for each, but relies predominantly on the spending approach and income approach (Economist).
GDP Based on Spending
The expenditure approach or spending approach, which is the most common method, calculates the monies spent by the different groups that participate in the economy. This approach essentially measures the sum of everything used in developing a finished product for sale. For instance, consumers spend money to buy various goods and services and businesses spend money as they invest in their business activities (buying machinery, for instance). Governments also spend money. All these activities contribute to the GDP of a country. In addition, the GDP calculation also accounts for spending on exports and imports.
GDP Based on Production
The production approach is essentially the reverse of the expenditure approach. Instead of exclusively measuring input costs that feed economic activity, the production approach estimates the total value of economic output and deducts costs of intermediate goods that are consumed in the process, like those of materials and services. Whereas the expenditure approach is forward-looking, starting with input costs used in producing final goods and services, the production approach looks backwards from completed economic activity.
GDP Based on Income
On the other side of the spending is income. Income earned by all the factors of production in an economy includes the wages paid to labor, the rent earned by land, the return on capital in the form of interest, as well as an entrepreneur’s profits. An entrepreneur’s profits could further be invested in his own business or it could be an investment in any outside business. All this constitutes national income (NI), which is used both as an indicator of implied productivity and of implied expenditure. In addition, the income approach further adds items that don’t show up in these payments made to factors of production. This includes some taxes — such as sales taxes and property taxes; and depreciation of business assets.
Another adjustment can made for foreign payments made to a country’s citizens, which is domestic income. The difference between this and payments made to foreigners, provides a net foreign factor income (FFI).
With this approach, the GDP of a country is calculated as its national income (NI) plus its indirect business taxes and depreciation, as well as its net foreign factor income (FFI). GDP calculated in this way — incorporating income received from overseas — is also referred to as gross domestic income (GDI), or as gross national income (GNI).
For more on GDP see Investopedia.
Bitcoin’s Contribution to GDP
A major complication in determining Bitcoin’s contribution to GDP is the various forms which Bitcoin takes for different participants in the economy. To miners, its an output of their capital and labour; to investors, its a speculative investment and profit earning asset; to consumers, its a currency. Each of these forms has different implications for how Bitcoin may be accounted for in a country’s GDP.
We start with Bitcoin as a currency and compare it to fiat money. Fiat money printed by national mints and circulated by central banks is not considered a final good or service, as consumers do not buy currency itself for final consumption. Further, minting fiat currency does not amount to government expenditure, or to an income earned by any individual which is used to pay factors of production. Accordingly, this is not factored into the GDP calculation. Only once spent on final goods and services does fiat money contribute to GDP. In the case of Bitcoin’s use as a currency, using a technique known as monetary velocity, it is estimated that the total amount of Bitcoin actually spent until 2016 was $56 billion, which is only a small fraction of its total value/market capitalisation (Smith & Crown). If one does decide to include this $56 billion as consumer expenditure, one would have to rely on the price of the good or service consumed at the time of consumption, in order to circumvent the issue of Bitcoin’s fluctuating value. Nonetheless, high transaction fees, this varying value, and slow hash times (pending the release of the lightning network) make it ill-suited for use as a currency. Focusing solely on consumer expenditure further ignores other participants in the economy and their Bitcoin-centric transactions.
Part of Bitcoin’s value proposition is the cost of its creation through a process known as mining. To this extent it is worthwhile considering exactly what the Bitcoin mining process entails and comparing it to conventional commodity mining in an economy. Conventionally, mining forms part of the primary sector of an economy and can be accounted for in GDP in multiple different ways. One can consider the cost of the inputs to extract the commodity from the ground (investment expenditure) or the revenue earned from mining operations (mineral rents) — whether domestically or as a result of imports due to foreign earnings (source).
Bitcoin mining farm
Global Bitcoin mining revenue is estimated to be $10 874 961 674 (usually in the form of Bitcoin as well as transaction fees) and costs around $2 200 825 224, which includes energy consumption across the network which closely matches that of Hong Kong (source). Bitcoin mining inputs entail, among others, capital costs for equipment and hardware in the form of large arrays of ASICs to perform hash functions of the network, the purchase/lease of a factory/warehouse, electricity (a significant operational cost), internet costs, and wages for staff. To this extent, a large portion of this $2 200 825 224 can be accounted for by various nations, based on what each nation sources domestically. Furthermore, foreign expenditure in the form of importing parts/labour or exporting computational power, for example, is paid in foreign currency and could be factored into the net exports of a country.
This is useful in determining the annual production cost of Bitcoin and how this contributes to GDP, but it overlooks the $8 674 136 450 in profit made from mining operations. Some of this profit would be in the form of actual Bitcoin. This Bitcoin would have constantly fluctuating value. A possible solution would be to value said coin at the price it was when awarded to the miner. This brings us closer to a realistic GNI figure for Bitcoin. Yet, the coin awarded to miners would only contribute to GDP/GNI only for the year in which it was mined. From there, consumption expenditure would have to be relied upon.
However, the biggest headache remains the speculative investors which represent the significant majority of Bitcoin transactions. The GNI model incorporates returns on investment in the form of profit (retained earnings). Yet, when we consider the return on investment for speculative investors in Bitcoin, this would be an appreciation of its market price which, when realised, becomes a capital gain. Nonetheless, capital gains are a zero-sum transaction in terms of which no goods are actually produced or services actually rendered or paid for (source). According to the Tax Foundation, capital investment is an asset, and capital gains emerge from converting said asset into cash, but this does not make the investor any better off in economic terms; the asset has just been recategorized into cash. Therefore, if we consider profits from cryptocurrency as a capital gain, as several global tax authorities are, then said profits are not counted as part of GDP. Adding capital gains, which do not reflect an economically productive activity, would therefore distort that number. Only a small portion of the value of these profits may in fact contribute to GDP if capital gains taxes were levied on cryptocurrency.
To put it differently, only investment on produced assets forms part of GDP. Any investment expenditure on non-produced assets, such as land (to be distinguished from residential investment) or payments for education and health that enhance the quality of human capital are not included (United Nations Statistics). With the lion-share of Bitcoin being speculative investments, which is investment in non-produced assets, it would not contribute to GDP on an annual basis.
Bitcash, a popular South Korean cryptocurrency exchange
A possible alternative to the speculative investment problem is to consider the purchase of Bitcoin on a domestic exchange as the rendering of a service, and where a foreigner makes said purchase, this would amount to an export (i.e. rendering a service to a foreign national). Nonetheless, in this scenario, only the transaction fees of the exchange would contribute to GDP. The actual value of the coin would have been included in GDP the year it was mined. Including subsequent valuations of the coin distorts the GDP figure and amounts to double counting.
Lastly, as briefly mentioned above, one should consider the spillover effects of an increase in wealth which emerges from investing in cryptocurrency. When an investor withdraws the profits, this increases their disposable income and allows for the purchase of other final goods and services (consumer spending) which does in fact contribute to GDP. This is known as the “Wealth Effect” (Bloomberg). This contributes to GDP to some extent, and would be included in both the expenditure and income methods of calculation, but neither factor in the overall improvement in welfare an investor gains from cryptocurrency profits. One such improvement which GDP overlooks is the improvement of an investor’s solvency. This strikes at the heart of criticisms against GDP being an inadequate measure of welfare.
From the above exposition we see the inherent difficulty in calculating Bitcoin’s contribution to GDP. When considering Bitcoin’s total market of value $200,045,873,605, one must be cognisant that it reflects years of economic activity specifically relating to Bitcoin which have not necessarily been factored into existing GDP statistics. This is water under the bridge. GPD is an annualised statistic and moving forward, useful ways of calculating Bitcoin’s contribution in terms of the expenditure and income methods includes: exchange transactions (in the form of transaction fees); the Wealth Effect; consumer spending and possible capital gains tax.