Bitcoin, Energy Markets, and the Crypto Illusion

Author(s): Scott Douglas Jacobsen

Publication (Outlet/Website): The Good Men Project

Publication Date (yyyy/mm/dd): 2025/08/11

Ed Hirs is a Yale-educated energy economist and an Energy Fellow at the University of Houston, where he teaches undergraduate and graduate courses in energy economics. Known for his precise, nonpartisan analysis, he is a trusted voice on energy markets, corporate governance, and public policy. Hirs frequently contributes to national and international media and co-chairs the Yale Alumni in Energy conference, promoting fact-based dialogue on global energy security and sustainable economic strategies. In conversation with Scott Douglas Jacobsen, Hirs critiques the failure of crypto to function as a genuine currency and highlights its role in market manipulation, energy grid distortion, and financial speculation. Drawing on examples from Texas’s deregulated power sector and the societal impacts of cryptocurrency, Hirs connects the rise of digital assets to systemic risk and exploitation. He warns of parallels to historic financial scams and emphasizes the long-term costs borne by everyday citizens. This expert analysis presents a sobering view of the future and economic implications of crypto.

Scott Douglas Jacobsen: So, what is Bitcoin? What does it do for the economy? And why do people sometimes take issue with your response to that question? 

Ed Hirs: Well, cryptocurrencies like Bitcoin do not meet the traditional definition of a currency—at least, not as economists or financial professionals typically define one. A currency is generally expected to serve as a medium of exchange, a unit of account, and a store of value. Bitcoin and other cryptocurrencies struggle on all three fronts:

• Medium of exchange: While some merchants accept Bitcoin, its adoption in everyday transactions remains limited, mainly due to price volatility and slow transaction times.
• Unit of account: Prices are rarely listed in Bitcoin. Even within crypto markets, values are most often denominated in U.S. dollars.
• Store of value: Bitcoin’s extreme price volatility undermines its reliability as a store of wealth.

Hirs: Earlier today, in a discussion group with other journalists, someone asked: “When will we see federal action to regulate cryptocurrency?” My response was that the point of cryptocurrency, as initially conceived, was to avoid regulation and centralized control. That makes comprehensive regulation extremely difficult.

And unlike traditional financial systems, cryptocurrencies generally lack clear counterparty relationships. There is no central authority or entity responsible on the other side of a transaction—no accountable institution to oversee, audit, or enforce compliance.

Jacobsen: So what can be regulated?

Hirs: The infrastructure around crypto—like exchanges, stablecoins, and custodians—is being increasingly brought under regulatory frameworks. However, decentralized assets like Bitcoin themselves remain largely outside traditional legal control. This creates enormous challenges for enforcement.

If cryptocurrencies were so effective as currencies, you might wonder: why do nearly all users still measure their wealth in dollars? Even Bitcoin investors typically cash out in fiat currency when they want to realize profits or make significant purchases.

Some governments, such as China, have restricted or banned cryptocurrency mining and trading—not just due to crime but also because of concerns over energy consumption, financial instability risks, and capital flight. However, cryptocurrencies have been used in illicit transactions. Chainalysis, a blockchain analytics firm, reported that illegal crypto transaction volumes accounted for roughly 0.24% of all cryptocurrency activity in 2022—a small fraction, but still billions of dollars.

In Texas, for instance, cryptocurrency ATMs are available in gas stations and convenience stores. But I have never seen anyone buy beef jerky with Bitcoin. Instead, such ATMs have been used in money laundering schemes, where illicit funds are converted into cryptocurrency and moved anonymously across borders.

This functionality can make crypto appealing to bad actors. It facilitates the rapid transfer of value without traditional oversight, which undermines anti-money laundering (AML) and know-your-customer (KYC) controls. Some experts argue that cryptocurrencies have, in effect, made it easier to move money anonymously than traditional cash once did.

Back in the Miami Vice era, the Federal Reserve tracked large inflows of drug money—often literally contaminated with cocaine—through South Florida and Texas. Today, the movement of illicit finance may not require bundles of cash at all, thanks in part to crypto.

The public, however, often overlooks these concerns. Many individuals buy or trade crypto much like they purchase lottery tickets—hoping for exponential gains. Some view it as a speculative asset rather than a currency.

Many of the so-called “crypto bros” who gathered at Donald Trump’s recent private event fall into that camp. But despite the hype, cryptocurrencies have not become a major driver of job creation or broad-based economic development. Most blockchain-related jobs are concentrated in speculative finance, marketing, and tech—areas not immune to boom-and-bust cycles.

Jacobsen: What impact has cryptocurrency had on Texas’s energy market?

Hirs: In Texas, the rise of cryptocurrency—particularly Bitcoin—had significant effects on electricity markets. Cryptocurrency miners began entering into contracts to purchase electricity at about 2.5 cents per kilowatt-hour, which was substantially below the average retail rate paid by consumers. In return, these miners agreed to curtail or buy off the grid during periods of high demand.

For example, during the February 2021 winter storm, one major cryptocurrency mining operation, along with its commodity trading partner, reportedly earned over $100 million in profits—not by mining Bitcoin, but by shutting down operations and selling back electricity at peak prices. In June 2023, that same mining firm earned approximately $30 million simply by powering down when demand surged.

Jacobsen: So, everyday Texans are effectively paying for this?

Hirs: Exactly. The average Texan bears the cost through higher electricity rates. In 2021, estimates suggested that crypto miners were consuming as much electricity as the entire city of Austin. Since then, their energy use has only increased.

ERCOT—the Electric Reliability Council of Texas—does not publish detailed data on cryptocurrency-related energy consumption. It’s a politically sensitive issue. However, independent estimates suggest crypto mining has increased the average Texan’s electricity bill by more than 5%. That effectively means everyday residents are subsidizing an industry that undermines the reliability and affordability of the grid.

Jacobsen: And beyond energy, how does this affect broader society?

Hirs: We are facilitating an enterprise that complicates the work of law enforcement, including the Texas Rangers, by making financial tracking and oversight more difficult.

Jacobsen: What exactly is a “Bitcoin bro”?

Hirs: That term usually refers to the promoters and evangelists of the cryptocurrency industry—the ones hyping it online, often without acknowledging the systemic risks or social costs. There’s a great piece by Robert McCauley in the Financial Times from a few years ago. I’ll send it to you. In it, he compares cryptocurrencies to a Madoff-style Ponzi scheme and argues that anyone participating in the hype is, frankly, doing Madoff a disservice.

McCauley also contributed a chapter to the latest edition of Manias, Panics, and Crashes. Are you familiar with that book? It’s a classic—tracing financial disasters from the South Sea Bubble to the tulip craze and virtually every major scam since. The original editions were written by Charles Kindleberger, a renowned professor at MIT. Bob Aliber, professor emeritus at the University of Chicago, handled later editions. McCauley has now taken up the mantle. I believe the most recent edition is the eighth. It’s a terrific book—great for planes, trains, or poolside reading—short, digestible vignettes on financial folly.

Jacobsen: So are you saying some people in power could manipulate the energy grid to favour crypto?

Hirs: Yes. People with vested interests in crypto can, without breaking the law but arguably acting unethically, manipulate energy markets or policy for personal gain.

Take Texas’s leadership. The governor of Texas has been accepting cryptocurrency campaign contributions for over twelve years. Texas also operates a deregulated electricity grid, a system launched during Governor George W. Bush’s administration before he became president.

The rationale at the time, promoted by Enron, was that the fleet of Texas power plants was oversized—built to meet maximum peak demand. Around 20% of plants operated only 4 to 8 weeks per year. The solution? Let them compete in a so-called “electricity-only” market, where producers are paid only for the electricity they sell, not for capacity. That appealed to Bush, a well-known C-minus economics student at Yale. (No joke, that was on his transcript.)

If baseball teams like the Toronto Blue Jays were paid the same way—only for runs scored, not for player salaries or ballpark upkeep—it would be absurd. Yet that is essentially how Texas decided to run its grid.

It’s like this: only the players actually on the field get paid. Those sitting on the bench don’t. That’s how Texas designed its electricity market. So, over the next 20 years, many power plants left the Texas grid. They operated only a couple of months each year and had no revenue during the other ten months. Naturally, they shut down. They disappeared.

Economists were already sounding the alarm as early as 2006 and 2007. In these so-called deregulated grids, incumbent generators were not earning a return on capital. They weren’t reinvesting in infrastructure. The price of electricity in Texas did not cover the cost of building the cheapest new natural gas-fired power plant for eight out of the ten years before the 2021 winter freeze.

Meanwhile, the Texas economy was booming. In 2010, Texas’s gross state product was around $1.25 trillion. By 2021, it had grown to nearly $1.99 trillion. And yet, during that same period, the fleet of dispatchable (i.e., controllable, on-demand) power plants shrunk.

Jacobsen: But critics still blame renewables?

Hirs: Many far-right commentators argue that wind and solar energy have somehow compromised the integrity of the Texas grid. But that is not true. The issue is rooted in the market design itself.

Texas relinquished grid reliability in 2002 when it adopted a deregulated market model. I first wrote about the consequences in 2013, following the deadly 2011 freeze, warning that Texas was attempting to manage its power grid using outdated linear programming models—essentially, the same economic planning tools the Soviet Union employed in the 1960s and ’70s.

I’ve returned to this theme over and over again. I even posted a photo on LinkedIn of one of my presentations at Yale in March. In it, you can see a screenshot of ERCOT’s real-time dashboard behind me. The trolls came out in full force. I was covering the full spectrum of U.S. electricity markets—and comparing Texas’s system to the Soviet model, which historically undervalued capital and discouraged reinvestment.

Over time, if no one has the incentive to invest, then any so-called “excess capacity” disappears. Now, on a hot or cold day, prices can spike from an average of 4.5 cents per kilowatt-hour to $5 per kilowatt-hour. That’s an enormous windfall for those on the supply side.

There are more than 1,200 generating units in Texas. Let’s say we run the Scott and Ed Power Company, and we have 15 units. If I told you, “Hey, tomorrow’s going to be hot—we need to run all 15 units,” you might respond, “Ed, if we’re 5 gigawatts short, the price will hit $5 per kilowatt-hour. We’ll make a fortune running just 10 units. Why don’t you go have a beer and relax?”

That’s the kind of market manipulation and gaming I’ve been pointing out for years. And I’ll send you the original piece I wrote in 2013. It went back and forth with others. If you’ve found the photo, you’ll understand why it stirred controversy. If not, I’ll send it to you.

My professor and colleague, Paul McAvoy, and I were close—colleagues, friends, and co-authors. He would have appreciated the critique. He taught me to follow the economics, not the ideology. I kept cycling this piece back and forth with him. Finally, he said, “I like this so much, I’m going to sign off on it.” When your graduate professor says that, you say, “Let’s do it.”

He had served in the Johnson and Ford administrations on the Council of Economic Advisers. He also coined the term “voodoo economics” about Reaganomics.

Jacobsen: That reminds me of an interview I saw with a guy at Cambridge who works in philosophy of economics. He made a sharp observation: when economics lacks substantive insight, there’s a tendency to apply very sophisticated mathematics as a veneer—as if to buttress a weak argument. It’s misdirection. And people fall for it.

Hirs: The original piece I wrote was titled “ERCOT,” with the ‘C’ replaced by a hammer and sickle. The editor at the time thought it was too inflammatory. Now, he says he regrets not letting it stand.

I’ve written about this topic in 2013, 2016, 2019, and 2021. I’ve been profiled in Texas Monthly and other publications. But the paid analysts at the University of Texas, or the business columnists who are bought off, do not appreciate the irony—at all.

And let’s be honest: many of these so-called “market experts” at UT are civil engineers. They would not recognize a supply and demand curve if it landed on them. They also do not understand game theory.

Not many people truly understood John Nash’s work when he first proposed it. But Nash’s roommate at Princeton, Martin Shubik, was my game theory professor. He wrote a four-page paper that demonstrated Nash’s equilibrium could be disrupted under certain market conditions. Martin had also worked at the Toronto Electric Utility before moving to Princeton. Yes, in Eastern Canada.

I ran all of this by Martin, Paul McAvoy, and William Nordhaus. It’s a deep, inside-baseball look at the Texas grid—and I am still the only academic who lays it out this way. One of the commissioners of the Federal Energy Regulatory Commission (FERC) came up to me at a conference in Colorado last year after I gave a talk. He said, “You’re the only academic who hasn’t been bought off. What can I do for you?”

I told him, half-jokingly, “Make me an offer.”

And the same applies to journalism. If you want to write the kind of articles you think are essential—ones with integrity and critique—you’ll need some luck to get them published. This is the space I’ve carved out. I am correct on the facts. It’s messy, but that’s the nature of economics.

There are criminal records to show it. That 2021 piece I mentioned earlier referred to Bernie Madoff—a man who ran one of the most infamous Ponzi schemes in U.S. history. He defrauded investors for over three decades. That case is a warning: without transparency, the system can and will be exploited.

Jacobsen: So you get these Ponzi schemes—or Ponzi-style schemes—that affect many people, often those who were either not critical enough in their inquiries or were misled by individuals who appeared legitimate. Regardless, cryptocurrency—and the so-called crypto bros or Bitcoin bros—can fall under such a category as well, particularly as you’ve been framing and describing it.

When it comes to financial innovations that emerge and claim to offer new ways of doing finance—or becoming a “currency” while still being priced in U.S. dollars, as you noted earlier—what tends to be, if not always the case, the typical endgame for the people pushing these schemes? And what happens to the people who buy into them?

Hirs: It’s a confidence game or a con game. As long as people continue to believe in it—and maintain confidence—it keeps going. But if 5% or 10% of current Bitcoin holders decide to run for the exits, there likely won’t be anyone on the other side to buy. That’s where market liquidity becomes critical.

In traditional markets—like traded shares, ETFs, or commodities—liquidity may dry up, but there’s some structure and accountability behind them. Take oil, for example. In April 2020, during the pandemic shutdown, the price of West Texas Intermediate crude oil went negative. That happened because demand collapsed—people stopped driving, refineries stopped taking crude, and storage filled up. Some producers in the Permian Basin were so desperate that they were storing oil in swimming pools.

The U.S. Oil ETF, which rolls forward futures contracts each month, got caught. They had bought contracts for physical delivery, but there was no available storage in Cushing, Oklahoma, so they had to sell—fast. Meanwhile, legendary investor Carl Icahn had a million barrels of storage available. He bought oil at a price of minus $17 per barrel, meaning he was paid to take it. He already had a sale lined up for delivery nine months later at around $70.75 a barrel. That’s the kind of market dislocation that happens when liquidity disappears and storage becomes scarce.

With cryptocurrency, if everyone heads for the exit, there is no backstop—no central authority, no entity to ensure liquidity or enforce obligations. And there’s no recourse. At least with tulip mania in the 1600s, you still had an actual tulip.

You have to remain detached. I’ve been in Houston for 43 years. I was there during Enron. I was also the only corporate finance professional in Houston who could be employed by the Department of Justice’s Enron Task Force to work on the prosecution of Enron and its executives.

I served as a consulting expert for the prosecution. There’s a Bloomberg Law piece—a 20th-anniversary interview—with me and Leslie Caldwell, who later served in the Obama administration as Assistant Attorney General for the Criminal Division. She was also Chief of the Enron Task Force for a time. In that interview, we discussed what happened behind the scenes.

We were not in the same recording session. They spliced our comments together. If I had heard her remarks beforehand, I would have said that she still does not fully understand what happened. It was a plain pedestrian fraud. But she was so focused on the minutiae of the off-balance sheet transactions that she missed the larger picture.

Back in 1993, the renowned Forbes journalist Tony Mack explained precisely how Enron’s mark-to-market accounting was intended to function.

Let’s say I entered into a deal to build a power plant—one expected to generate cash flows for 20 years. Suppose I’ve locked in the construction cost and secured a predictable revenue stream. What Enron would do is project the future cash flows, discount them to present value, and book all of it as profit immediately in the current reporting period.

And Enron kept doing this—over and over. Initially, they brought transparency and liquidity to natural gas trading and later to electricity trading. That was a real value. But as transparency and standardization increased, the bid-ask spread narrowed, and profits from trading shrank. So, if you want to keep reporting ever-increasing profits and revenue, you need to manufacture transactions.

That’s when Enron pivoted. Besides using mark-to-market accounting, they began trading with themselves. By 1996, they were making deals with their own publicly traded subsidiaries—EOG Resources and Mariner Energy. They would sell assets at the end of one financial period and then repurchase them in the next to improve the balance sheet.

Journalist Harry Hurt III at Fortune picked up on this in 1996, and that’s when Enron escalated its use of special purpose entities (SPEs) managed by its CFO. CalPERS, the California Public Employees’ Retirement System, was even involved in facilitating transactions that helped Enron beautify its books at each reporting period.

This continued until 2001 when Enron ran out of things to sell. I had refused to work at Enron. A recruiting firm once called me down and told me I was their best story. Additionally, back in 1987, my landlord lost his job at Enron, along with 1,500 others, due to a supposedly one-time $50 million after-tax loss from the infamous Valhalla oil trading scandal.

Jacobsen: That sounds like a familiar scam setup.

Hirs: I bet my landlord two beers it wasn’t $50 million—it was $1.5 billion. Sure enough, in 2003, I collected those two beers.

The DOJ tried to indict Enron for the Valhalla scandal, but the judge ruled that it was beyond the statute of limitations. Still, the government had more than enough to go after them successfully on other grounds.

The math didn’t work. Everyone fooled themselves into believing it did. Some banks refused to do business with Enron—and they were ultimately vindicated. Some law firms declined to represent them, too. But as long as the stock price kept rising, no one wanted to look under the hood.

The same thing happened in the Permian Basin during the build-up to recent oil and gas stock collapses. One geologist kept pointing out that the wells were becoming increasingly gassy, which made them less valuable. The industry turned on him.

His name is Scott LaPierre. He posted on LinkedIn that Scott Sheffield—the longtime CEO of Pioneer Natural Resources—offered him $2 million to stay quiet and disappear. He refused. And, of course, this year, Scott Sheffield admitted—during earnings week—that, yes, they had drilled all the good spots. It is all gassier now. He essentially confirmed that he misled the industry for years, claiming the reserves were more oil-rich than they were.

Jacobsen: Do reputations ever recover from a lie like that—whether admitted or not—once it’s found out years later? Especially when it’s not a one-off but a pattern repeated for personal gain?

Hirs: No, but it seems they don’t care. People move on. Institutions look the other way. The damage is done, and often the perpetrators keep going. Take real estate in New York. Major developers will not do business with anything tied to Donald Trump. Does that matter to Trump? Not. That could be part of why he owns so many golf clubs.

Jacobsen: Because they will not let him join any others?

Hirs: Some are open to the public for dining. But in terms of private membership—he’s unwelcome at many elite clubs. So he built his own. I’ve heard similar things from friends in the art world, academia, and philanthropy. The problem with tainted money, they say, is—if there’s enough of it, it stops being tainted. [Laughing] That’s how it goes.

Jacobsen: Do you think cryptocurrency and Bitcoin—if not all of it, then at least the most speculative parts and the figureheads who promote it—are headed toward that same fate? That is, reputational collapse?

Hirs: Yes. I believe so. Most of it has no economic justification whatsoever. Eventually, I expect it will all collapse. The foundation is hollow—it’s built on hype, not value.

Jacobsen: Do we know yet who was really behind that original Japanese pseudonym—Satoshi Nakamoto?

Hirs: No. There are countless internet theories. Some claim he is alive; others think he’s dead. No one knows for sure. It’s become mythological—almost like a deathbed creation with no real-world accountability.

Jacobsen: So many questions, but not all of them relevant to the urgent ones. Here’s a more grounded one: If oil prices drop significantly, does that hurt the geopolitical and military efforts of regimes like Russia and Iran?

Hirs: Yes. Low oil prices directly undermine the funding of Russian and Iranian war machines. For Iran, oil revenue is central to its regional influence—not just about Israel and the Middle East, but also in its long-standing rivalry with Saudi Arabia, which dates back centuries—not just decades.

Jacobsen: Thank you for the opportunity and your time, Ed.

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