By Simon Dürr
The hype about Bitcoin is more real than ever. If you are founding a start-up right now, and you include the words Bitcoin or Blockchain somewhere in your company’s name, you will have investors flocking to you with stacks of money. You do not believe me? Just look at the guys from On-line Plc, who changed their name to On-line Blockchain Plc and saw their company’s shares skyrocket by a staggering 394% in a single day.
In this article I will try to explore some features of Bitcoin, which have huge drawbacks on the currency’s applicability as an everyday currency. If you are late to the party, you should check the video below before reading for a brief explanation of what Bitcoin and the Blockchain (in the video called transaction history) are.
Bitcoin is the most unsustainable currency ever created
We first will look into the energy consumption of the whole Bitcoin network (i.e all computers mining Bitcoin). During the mining process cryptographic problems are solved, which requires a lot of power. It has been estimated by Diginomics that the entire Bitcoin network consumes as much power as the country of Ireland. In relation to Sweden, Bitcoin consumes about ⅕ of Sweden’s total energy consumption. Every single Bitcoin transaction, given that the most efficient hardware is used, is in terms of CO2 emission equivalent to driving a Hummer SUV for about 200 kilometers. It is especially problematic that a lot of the miners are operating where they have access to cheap energy. About 70 to 80% of Bitcoin mining is done in China, specifically in China’s hinterland in Gansu and Inner Mongolia. Electricity there is extremely cheap (0.32 SEK per kWh), as it is mainly sourced from very dirty chinese coal plants.
Even more troubling for the environmental impact of Bitcoin is that as more Bitcoins are generated, the computational problems that need to be solved get more complicated. This in turn means the faster Bitcoin grows, the more energy it will use. This will be offset in part by more efficient hardware, but the energetic costs of Bitcoin will remain high making Bitcoin the most unsustainable currency ever created.
Bitcoin is not as decentralized as it should be and is de facto Chinese
In the early days of Bitcoin, the cryptographic problems for generating new blocks and Bitcoins were mainly calculated on everyday computers during low use periods. With the steep increase in the real-world value of bitcoin, miners have resorted to very specialized hardware in computer clusters. Most often miners use graphic cards or application-specific integrated circuit (ASIC) units (a specialized computer only for mining) to mine Bitcoin.
It is estimated that over 50% of Bitcoin mining power is in the hands of only a dozen individuals (most of them Chinese). This is contrary to the initial philosophy behind Bitcoin: The Blockchain can only be trusted if there are many actors confirming and adding to the Blockchain at all times. If all mining power is concentrated in the hands of a few miners, they effectively have control over the Blockchain. And as soon as you have the majority control over the Blockchain you have total control over all Bitcoin wallets, if you wish. The power of the big miners can be seen in the recent blockade of reforms in Bitcoin (e.g. increasing the block size to 2 megabyte to make transactions faster).
In the biggest bitcoin mining market, China, Chinese regulators also have started cracking down on Bitcoin as they fear it will disrupt their control over the financial markets in China. As of September 2017 all Bitcoin exchanges (the place where Bitcoins are traded) and so-called “initial coin offerings” (cryptocurrency against equity) are forbidden. Mining so far is not forbidden, but a Chinese prohibition of Bitcoin mining could have devastating effects on the value of the currency.
Bitcoin will never be ready as a daily life currency
Have you ever been in a store and paid with your credit card and had to wait a few seconds until the transaction was confirmed? Did you find it annoying? With Bitcoin this whole process will a lot more painful. Because of the way the Blockchain operates, new transactions are only confirmed if a new block is created. Unconfirmed transactions will linger in a queue of other unconfirmed transactions until they can be added to the Blockchain. One of the reasons is the limited block size of 1 megabyte per block. You might have to wait for several blocks until your transaction is confirmed. Average conformation times in recent days (November 2017) ranged from 14 minutes at best, to more than 14 hours at worst. Theoretically, the maximum number of transactions that can be processed per second is around 3 to 4. In comparison, VISA is claiming their network can process up to 56 000 transactions per second at peak. Because of these technical limitations Bitcoin will never be ready to be reliably used as an alternative to a credit card. In a sense Bitcoin is like gold; it has a value because there is a demand for it, but you will rarely be seen paying with it for groceries.
Why are people buying Bitcoin then?
So far, we have seen that Bitcoin has huge technological problems and has an extremely high invisible environmental cost associated with it. This raises the question why, despite these issues, the price of Bitcoin is surging. The answer is clear: many people lack the knowledge of what the technology is capable of, and are blinded by the prospect of quick money. If you were to start your own Bitcoin mine with an investment of 10 million SEK, you would break even at the current price after only around 6 months.
Bitcoins are seldom used as a currency to buy everyday goods although some stores accept Bitcoin payment such as Expedia, Microsoft or Virgin Galactic. Almost all users use them as a form of digital investment with the promise of being able to sell it at a later point for more money. Miners run their expensive and power-hungry mines because they are betting that the Bitcoin value will be propelled to new heights. Some researchers have compared Bitcoin to a big Ponzi scheme. As a small-scale investor in Bitcoin you are subject to the will of a few powerful miners, which are essentially under no control by any governmental authority worldwide. Several fatal flaws in alternatives to Bitcoin, including second runner up Ethereum, have exposed the dangers of owning cryptocurrencies and not being totally in control of the technology behind it. Due to a software bug 2.5 billion SEK of Ethereum assets were recently locked in their accounts, forever irretrievable for their owners.
The rightful question you now may ask is why big companies like big banks or other multinational corporations such as Daimler are investing in Bitcoin and other cryptocurrencies then? They are not necessarily interested in trading Bitcoin, but they are much more interested in the Blockchain technology as it can be used for example in so-called smart contracts. The Blockchain provides a cryptographically secure way of storing and transferring value which has a real world value for companies.
The fate and value of Bitcoin and other cryptocurrencies such as Ethereum, Litecoin or Ripple will be tied to regulatory efforts by governments worldwide. While China outlawed Bitcoin exchanges last month, other governments such as Japan’s have explicitly allowed Bitcoin. However, Japan has put Bitcoin exchanges under the surveillance of the Financial Services Agency (FSA) and hopes to secure investors assets with the same protocols required for banks. With this, the FSA wants to ensure due process in the handling of transactions in what is now — after the Chinese shutdown — the world’s largest marketplace for Bitcoin with over 60% of the market share. It is likely that other governments will try to regulate Bitcoin exchanges to make them more transparent, in order to combat money laundering and completely anonymous transactions. This is however a somewhat futile task. Even if every government worldwide would put regulatory pressure on Bitcoin, criminals would still be able to anonymously conduct Bitcoin transactions by obfuscating their traces on the internet.
Simon Dürr is currently studying computational enzymology as an exchange student. He has lived both in the outskirts of rural Germany on a small farm as well as in London and Montréal. His interests range from geopolitics, sustainability issues and technological innovations, to the chemistry of life. In his free time he is currently either exploring the Swedish outdoors or trying to bake the perfect kladdkaka.
Image: Zach Copley