Crytocurrencies have seen spectacular gains and losses - speculation about their future in influential markets like China. We turn over Bitcoin, the most popular cryptocurrency, and find a fatal flaw that no one seems to be talking about.
The Wild West of Crypto
In January 2018, the value of Bitcoin plummeted from a high of nearly US$20,000 to less than US $10,000 in a week. It's since settled down to a fairly steady price between $6,500 and $7,500. However, the enormous ups and downs of recent months caused governments to take action.
According to The Independent, the UK's Treasury Select Committee told the government that 'the "Wild West" of cryptocurrencies must be regulated, because the sale of most cryptocurrencies through Initial Coin Offerings (ICOs) is not currently regulated. Therefore, 'investors are afforded very little protection from a “litany” of risks,' the committee said in its report.
Fortune.com foreshadowed that China was cracking down on cryptocurrency activity. ‘From a halt to virtual currency trading on domestic exchanges to banning initial coin offerings,’ the report said, ‘regulators have taken a proactive role in shaping the stratospheric rise of Bitcoin and its peers.’ That hasn't stopped venerable institutions such as Yale University from investing in cryptocurrencies.
The Independent reports that 'former White House strategist Steve Bannon owns a "good stake" in bitcoin and is interested in creating his own "deplorables coin" cryptocurrency. Bannon told The New York Times that digital currencies could help him regain power and influence, saying, "control of the currency is control of everything."
South Korea passed a law that Bitcoin traders must identify themselves, a law designed to cut out criminals using the currency for anonymous trades in illegal goods. The UK and US governments are planning to introduce similar laws in the near future. The government of Venezuela took a different approach. It decreed that, as of October 8 2018, fees for all passport applications must be paid in Petro, the state-backed cryptocurrency. This prompted a group of US Senators to call for tougher sanctions against Venezuela.
Source: Worldwide Coin Index
The Shadow of Mordor
Lord of the Rings has nothing on this shady underworld, where miners dig day and night for a strange new substance that is worth a small fortune. If the complexities of today’s money market give you a headache, trying to get your head around Bitcoin will give you the worst migraine.
The good news is that you don’t need to dive into the digital dungeon with the miners. There’s no need to let Bitcoin bend your mind because it’s just a new currency traders can gamble on. Bitcoin’s spectacular rise from less than a cent in value 8 years ago to $20,000 caused a stampede. Some people mortgaged their homes to get in on the act. A drop to less than $10,000 in January 2018 caused a stampede in the other direction.
The crypto market as a whole has dropped some 80% in value in 12 months, mirroring the dot.com bust of 2000. The only currency in the world that has performed worse than bitcoin (which has 55% of the crypto market) is the Venezuelan Bolívar.
What determines Bitcoin's Value?
Mystery. Publicity. Speculation. The fear of missing out on the chance to make a fast fortune. Everyone wants the Magical Ring, or at least some of its power. Timothy Lee at Ars Technica explains it this way: ‘During times when the price is rising, there's a lot of traffic to be had writing about Bitcoin. This causes more people to pay attention to the currency, and some of those people decide to buy. That pushes the price up even more, triggering more media coverage and more public interest.’
Bitcoin isn’t backed by a commodity like gold or silver, nor by governments or banks, but then the greenback hasn’t been backed by gold reserves since Nixon occupied the White House. And Apple, Google and Facebook’s dizzy stock prices are founded not on earnings but on expectations. That’s is exactly how Bitcoin has shot up in value, but be warned: the bubble burst several times in recent years, dropping the value by 80% and more, then climbing back up and reaching new heights.
Trading with Bitcoin
‘Cryptocurrency trading volume is now more than of $3bn/day on average,’ says Jens Nordvig, CEO of Exante Data. ‘It will likely soon surpass that of the world's most liquid stock: Apple ($4bn/day).’ It turns out that this currency is a lot easier to buy and sell than to use for buying or selling goods and services, a process that’s far too complicated.
According to CryptoCurrency Facts, ‘Cryptocurrency is an encrypted decentralized digital currency transferred between peers and confirmed in a public ledger via a process known as mining.’ Bitcoin is based on the concept of the blockchain, an online ledger that records bitcoin transactions according to a set of mind-numbing software protocols.
In a nutshell, some serious software dudes came up with this idea of a democratic digital currency that avoided manipulation by governments and banks. This bank is run by consensus on a decentralized network, which receives encrypted Bitcoin transactions through electronic ‘wallets’. The Bitcoin miners then have to crack the encryption through repetitive attempts to verify the transaction as genuine, much like hackers crack passwords. The first miner to verify the transaction gets paid 12.5 Bitcoins.
Bitcoin and Global Warming
The ledger grows as more transactions are added because they’re linked back to all the previous ones. As the blockchain grows in length, new blocks take ever more computing effort to create. That’s why it takes 10 minutes to get a transaction through the system: It’s as convoluted as Frodo Baggins’ attempt to throw the cursed ring into the volcano in Mordor.
In the shadow of the volcano lies a brave new world of massive server farms equipped with Application Specific Integrated Circuit (ASIC) hardware that accelerates the number-crunching for the Bitcoin miners. Most of the number crunching is done in purpose-built, low-cost facilities in China. The amount of computing power required to run the Bitcoin network is staggering, in part because of the elaborate Proof-of-Work algorithm that protects the network from fraud.
The combined electricity used by the Bitcoin miners last year was estimated at 33 billion kilowatt hours. By comparison, all of the data centres in the USA – including those of Google, Amazon and Facebook - consume about 70 billion kilowatt-hours of electricity in a year. Last year, Bitcoin miners used more power than the 15 million citizens of Ireland.
As the network grows, the computations for Bitcoin transactions will become more numerous and more complex, and power consumption is forecast to skyrocket. Last year, Fortune.com cited a Morgan Stanley forecast that said Bitcoin would consume as much electricity as Argentina in 2018. Newsweek ran a story headed 'Bitcoin mining on track to consume all of the world's energy by 2020.'
Bitcoin already consumes 30 Times More Electricity than all the Tesla Cars ever built. The next most popular cryptocurrency, Etherium, consumes about one third the amount of power Bitcoin mining chews up. How on earth is a technology like the blockchain sustainable? And why do governments not legislate against it on environmental grounds? Most of the mining is done in China, which generates most of its electric power from coal power. It’s the nightmare scenario.
What makes Bitcoin Mining so Wasteful?
It’s due to the proof-of-work functions which are designed to prevent malicious exploits by miners adding fake blocks to the chain. Proof-of-work also prevents any single person from deciding which block is added to the ledger next. Proof-of-work is a neat idea except for the ever-increasing amounts of power required to solve computing puzzles of increasing complexity.
Whichever way you look at it, Bitcoin is an environmental disaster. New miners are joining the goldrush every day, and striking gold takes longer as the blockchain grows longer. The only hope for the planet lies in the upper limit to how many Bitcoins can be created - that number is 21 million, and three quarters of these possible 21 million Bitcoins have already been minted.
Will the last Bitcoin mined make the lights go out across the world? Perhaps not, but this whole crazy business is certainly going to impact on the world's efforts to reduce S02 production.
There has been talk of Ethereum developing a new protocol for validating transactions that promises much greater efficiency, and is designed to replace the Proof of Work (PoW) protocol: Proof of Stake (PoS). There are also reports that the Bitcoin network is looking to implement the Lightning Network. But until these solutions become production-ready, the PoW rules will dictate energy consumption. And if investor momentum drives more of these cryptocurrencies harder, the overall power consumption will continue to rise rapidly.
Greed is Good was always a suspect line; these days, it's more suspect than ever.
The Blockchain Explained – Video by Wired
Bitcoin: Seven questions you were too embarrassed to ask Timothy B. Lee, Ars Technica
How Does Cryptocurrency Work? Via CryptoCurrency Facts
Bitcoin Is a Delusion That Could Conquer the World Derek Thompson, The Atlantic
Bitcoin 101 - updated by Eric Richards at Moneymunk
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