If you’ve been following the blog for the past couple of weeks, I hope you’re reasonably familiar with what Bitcoin and cryptocurrencies are. Now I want to discuss the two pitfalls of the technology behind Bitcoin: it’s sustainability and its legitimacy.
Sustainability
I briefly discussed the process of mining in my last blog post but want to go in some more detail to make you aware of the inherent problem this causes society and the environment. Since Bitcoin doesn’t have a central bank controlling the supply like normal money, the only way more Bitcoins can be put into circulation is through the process of mining. There are a number of websites that explain mining in great detail such as https://www.bitcoinmining.com and https://www.coindesk.com/information/how-bitcoin-mining-works. Miners use advanced mining software to solve a number of complicated problems in which they get rewarded with Bitcoins. These problems are integral to the Bitcoin system as these are how the network of computers approve transactions. In order to approve a transaction, the network must use trial and error to work out these problems and just guess the correct answer. Once they get the correct answer, the transactions can be approved, and the miner is rewarded with a bitcoin. The idea behind this is that it will encourage people to mine for Bitcoin which will make the network more secure and more transactions will be approved. However, the founder of Bitcoin put a limit to the number of Bitcoins that can be put into circulation, which is 21 million Bitcoins. To make sure they’re not all mined straight away the amount of work needed to mine a Bitcoin increases exponentially by making the problems more difficult to solve. At the time of this blog was written 83.61% of the Bitcoins have been mined at the current difficulty rate is 6,071,846,049,921 which means it is 6,071,846,049,921 times more work to mine a Bitcoin now than the first Bitcoin mined by Satoshi Nakamoto.
With this increased difficulty comes a lot more computer power needed in order to mine Bitcoin which will in turn use a lot of electricity. This is where the sustainability of Bitcoin becomes questioned. As the graph below shows, Bitcoin miners are using more electricity more electricity than countries such as Iraq and Peru. To put this into perspective, the energy consumed to mine Bitcoins is the more than the energy consumed by countries with a population over 30 million people. Obviously this is a serious issue that is only going to get worse, and with people fighting to reduce the harm humans are doing to this planet, Bitcoin mining will only increasing out carbon footprint over time as the mining process becomes more difficult. Although there are more efficient computer chips called ASIC (application-specific integrated circuits) being used by miners that uses less electricity, this still won’t do much in the way of reduces the energy consumed by miners which is only going to grow exponentially in the coming years.
Legitimacy
The second problem with Bitcoin is the legitimacy of the currency. An important feature of cryptocurrencies is that all transactions are anonymous, and the identity of the buyer or seller is never known. Even common sense will tell you that this will lead to a lot of illegal activities being funded by cryptocurrencies. One of the first sites to widely use cryptocurrency called the Silk Road, was widely used for people to buy drugs, stolen identities, weapons and even buy services such as blackmail and extortion. Many Cypherpunks (advocates of using cryptography for privacy-enhancing technology) counter argument for this illegal activity is that cash is used to fund illegal activities too, it doesn’t mean that the cash in my wallet shouldn’t be widely accepted. A paper published at the start of 2018 called “Sex Drugs and Bitcoin: How Much Illegal Activity Is Financed Through Cryptocurrencies?” found that 46% of all Bitcoin transactions was in illegal behaviour. This amounted to $76 billion spent on illegal activities per year through Bitcoin. To put this in context, according to the US White House Office of National Drug Control Policy, drug users in the US in 2010 were estimated to spend $100 billion annually on illicit drugs and the EU Drug Markets Report for the year 2013 found that €24 billion per year was spent on illegal drugs in the European markets https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3102645. So I think that should destroy the Cypherpunks argument, clearly a large proportion of Bitcoin is being used to fund illegal activities, whereas the large majority of cash transactions are for everyday, legal living. Many agree with this sentiment. Bill Harris, the co-founder of Paypal said “Cryptocurrency is best suited for one use: criminal activity. Because transactions can be anonymous – law enforcement cannot easily trace who buys and sells – its use is dominated by illegal endeavours.” https://www.recode.net/2018/4/24/17275202/bitcoin-scam-cryptocurrency-mining-pump-dump-fraud-ico-value. Maybe he’s just bitter because PayPal is so legitimate that it possibly losses out in business in the criminal sector? Although Bill Gates, the father of Microsoft, did say on a Reddit AMA: “Right now crypto currencies are used for buying fentanyl and other drugs so it is a rare technology that has caused deaths in a fairly direct way.” https://www.reddit.com/r/IAmA/comments/80ow6w/im_bill_gates_cochair_of_the_bill_melinda_gates/dux49ll/. So maybe Harris isn’t just jealous…
Although this anonymity feature is loved by all the Cypherpunks who back Bitcoin and cryptocurrencies like it, it is seen as a serious problem by many of the public and regulators. Governments want some regulation regarding transactions, but this leads to the government getting involved in the cryptocurrency which cypherpunks want to keep anonymous which the government don’t like and so on. This is a vicious circle with neither side seeing eye to eye. To take away the anonymity feature of cryptocurrencies is to take away the essence of the technology.
It’s hard to get lost in the hype of Bitcoin as with many people who talk about it will be telling you all the great things about it. I just wanted to present the facts and maybe in most people’s cases play the devil’s advocate. The problems with legitimacy and sustainability of Bitcoin will not go away as changing the system that Bitcoin stands on to alleviate the effects of these problems will simply change the complete fabric of this and other cryptocurrencies, and simply turn cryptocurrencies into regulated, plain, boring currency.
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