Is Bitcoin Halal?

To assess the answer to the question “Is Bitcoin Halal?” and determine our level of comfort investing in Bitcoin, we will look at:

• What is Bitcoin?
• What is Bitcoin’s utility?
• Is Bitcoin’s utility in line with the objectives of Sharia?

What is Bitcoin?

Bitcoin is software stored on a network of connected computers.

The number of Bitcoins that can ever be minted is capped at 21 million.

It was created by Satoshi Nakamoto, a pseudonym for an individual who remains unknown to this day.

According to Bitcoin’s white paper, Satoshi intended to create a purely peer-to-peer version of electronic cash which would allow online payments to be sent directly from one party to another without the need for an intermediary.

The value of eliminating the need for mediation between transacting parties according to Satoshi is that:

“The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions, and there is a broader cost in the loss of ability to make non-reversible payments for non-reversible services. With the possibility of reversal, the need for trust spreads. Merchants must be wary of their customers, hassling them for more information than they would otherwise need. A certain percentage of fraud is accepted as unavoidable. These costs and payment uncertainties can be avoided in person by using physical currency, but no mechanism exists to make payments over a communications channel without a trusted party.”

Bitcoin’s Utility

Many Bitcoin investors see it as a store of value similar to Gold. In fact, Bitcoin is often referred to as Digital Gold.

With no central authority able to change this restriction, many investors see Bitcoin as having what traditional currencies do not…incorruptibility.

This is not to say that Bitcoin isn’t being used to pay for goods and services.

In fact, as of September 7th, 2021, Bitcoin became legal tender in El-Salvador. Many stores and websites have started accepting Bitcoin as a payment option as well. 

Bitcoin’s use in illegal activities

In order to bypass the need for a central source of trust like a bank, Bitcoin transactions can be seen by the public. That is, the public can see that someone is sending an amount to someone else, but without information linking the transaction to anyone.

Due to Bitcoin’s inherent privacy, some groups have used Bitcoin to partake in illegal transactions.

Practical Islamic Finance concludes:

Bitcoin’s intended purpose as a peer-to-peer means of payment that eliminates the need for a trusted third party to verify the transaction is not inherently haram. To the contrary, one can argue this feature is supported by shari’a since it causes benefit for the transacting parties in the form of lower transaction fees and less opportunity for fraud.

Bitcoin’s popular use as an incorruptible store of value is supported by shari’a since it prevents central banks from unjustly diluting the purchasing power of people’s savings through issuing more currency.  

Bitcoin’s use in illegal activities is not verifiably more or less than any other currency or asset’s usage in illegal activities. Furthermore, not all that is illegal in a particular country is necessarily unethical. Further still, the use of a technology for unethical activities cannot be deemed a reason for why the technology itself is inherently haram.

Case in point, the internet is used for many unethical activities. Does anyone argue that the internet is haram?

From the aforementioned, Practical Islamic Finance is comfortable with Bitcoin from a halal perspective.

Does Bitcoin promote the use of interest-bearing debt?

Unlike traditional currencies, which for the most part are created from interest-bearing debt, Bitcoin is not.

In fact, Bitcoin is structurally unsuitable for use as a currency in an interest-based economy since interest-bearing loans require an increase in the number of a currency over time whereas the supply of Bitcoin is capped.

Practical Islamic Finance concludes:

Bitcoin is less supportive of interest-based economics than the majority of traditional currencies.

Bitcoin’s ESG Rating

Governance

Governance refers to the incentive structures and the overall intended ecosystem surrounding a cryptocurrency.

Decentralization

Generally speaking, it is harder to corrupt systems that are decentralized. This is because decentralization makes it difficult, and sometimes impossible, for a corrupting influence to affect all points of influence simultaneously.

To determine Bitcoin’s level of decentralization, we will look at three different metrics: nodes, distribution of mining power, and distribution of funds.

Nodes

A node is a computer connected to the network that holds the blockchain data for others to be able to use and download. This requires that all the blocks ever produced be downloaded.

Blockchains with larger blocks will require more expensive hardware to host blockchain data meaning there will be fewer people capable of hosting nodes which lowers decentralization.

Bitcoin has 1 MB blocks and around 12,000 nodes as of November 2021.

Distribution of Mining Power

The more mining power an entity has, the more leverage it can exercise over the ecosystem. Commonly called a 51% attack, if one actor controls over half of the block creation, they can take control of the currency itself.

Mining power is measured in hash rate and refers to the speed that a miner is able to calculate the algorithms required to mine a block.

As of November 2021, the largest mining pool (A collection of miners) is Antpool which holds 19.28% of the total hash rate, with F2Pool taking second with 16.74%.

Distribution of Funds

Currently, the largest holder of Bitcoin is Binance with over 250 thousand coins. This amounts to about 1.5% of the total supply. 

Environmental

A major point of concern for Bitcoin is the amount of energy required to run the network. The difficulty of mining scales up over time in order to make sure that only one block is produced every ten minutes. 

This has caused the total power required to run Bitcoin to increase significantly over the past decade, surpassing the energy consumption of smaller nations like Sweden.  

On top of that, mining hardware becomes obsolete quickly and often can only be used for Bitcoin mining so it produces high amounts of electronic waste.

To address these concerns, miners are switching to renewable energy, according to Forbes, 39% of the energy used for mining is from renewable sources. Some companies have sprung up in order to take this issue head-on by developing efficient solutions to mining and utilizing clean energy.

Social

Bitcoin allows anyone in the world to have access to a currency that is not controlled by any central power offering tremendous utility for those stuck in a hyper-inflated economy.

Practical Islamic Finance concludes:

Bitcoin’s governance structure is in line with the spirit of shari’a since it makes corruption and fraud extremely difficult.

While Bitcoin’s environmental cost is high, it is unclear whether the parts of the traditional banking system which Bitcoin replaces are more or less friendly to the environment.

Bitcoin offers tremendous utility for savers in high inflation environments which often includes the majority of humanity.

Overall we find Bitcoin’s benefits to be substantial and the cost of these benefits on the environment to be decreasing with time as more renewables are developed and used.

Comfort Rating

From Bitcoin’s intended purpose, being structurally unaccommodating to riba, and its positive ESG rating, Practical Islamic rates this cryptocurrency as:

Comfortable to invest in from a Halal perspective.

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Sources

Bitcoin White Paper, Bitcoin Supply Information, Bitcoin Decentralization, Bitcoin Node Count, Bitcoin Mining Distribution, Bitcoin Wallet Distribution, Live Bitcoin Power Demand, Bitcoin’s Energy Usage Forbes