Bitcoin FUD: Part 2
Market Recap
The Crypto Drawdown Continues
Bitcoin FUD: Part 2
Last week we dived into some of the Fear, Uncertainty and Doubt (FUD) surrounding bitcoin and its network. This week we follow on and discuss some of the other FUD that is often peddled.
Energy consumption
Firstly, we must realise and accept that Bitcoin does consume a vast amount of electricity. According to the Cambridge Bitcoin Electricity Consumption Index, it is around 80.46 TWh per year. To put this in perspective, the Bitcoin network's energy consumption sits between the countries of Chile and Belgium. This immense amount of energy is necessary though, as it is directly tied to the network's security. The Bitcoin blockchain uses a consensus system called Proof of Work; in short, this requires thousands of computers spread across the globe to reconcile and verify every transaction taking place on the network by finding a cryptographic key. It is exceptionally computationally exhaustive to find this key, and the more people competing to find it, the more secure the Bitcoin network becomes. However, all these computers require electricity. Therefore one can infer increases in energy consumption = greater security for the overall network.
The above explains why the more energy expended on the system creates a more robust and secure network. However, why should this energy be expended in the first place? For this, we will allude to the argument made by Ross Stevens, the CEO of Stone Ridge Asset Management. He begins with a basic principle: Bitcoin is a better technology for performing central banking than the current government monopolies on central banking. Humans have naturally gravitated towards the most efficient or best form of technology throughout history, even if they may be more energy-consuming or intensive. Horses use less energy than cars, Thomas Edison's lightbulb won out over the candle, and computers replaced typewriters. These technologies all consume more energy than their predecessor; however, they all offered unique benefits and efficiencies to the end-users. Is it so audacious to think that a new, better monetary system will succeed even though it consumes more energy than its predecessor? In Nic Carter's words, "Ultimately, it's just a matter of opinion as to whether the existence of a non-state, synthetic monetary commodity is a good idea."
Government bans
This is one of the most common reasons cited as to why bitcoin might fail. Governments around the world may wake up one day and decide that they have had enough and outlaw bitcoin. Yes, governments could theoretically flip a switch and ban bitcoin's use, trading and storage within their country. It has been tried before in some countries; however, loosely enforced.
Firstly what needs to be understood is that no country can stop bitcoin. Bitcoin's ledger is held and maintained by thousands of computers across the globe; a government would simultaneously need to stop/destroy/confiscate every single computer that held a copy of the ledger, as well as a crackdown on all mining operations across the globe in a coordinated strategy. This would be near impossible to do.
Any attempt to ban bitcoin will also play directly into a narrative that reinforces it; bitcoin is a monetary system that falls outside the control of governments and banks. It only becomes a problem if it starts challenging the very things government want to control, and surely this should be an indication of a better alternative?
Bitcoin, being a global, apolitical, non-discretionary form of money, also has another barrier to protecting itself. Regulatory arbitrage. Countries around the globe will need to decide whether it is more advantageous to allow business to leverage open, permissionless networks and the benefits that come with it, including open innovation and reduced frictions in conducting global business, or use closed systems with control and barriers to entry. Every country will need to decide this for themselves, and some stand more to gain than others. However, the countries that do adopt it will reap the benefits and, if successful, may start to overtake those who don't.
A bitcoin is too expensive to buy.
For those who aren't familiar with crypto, this is a widespread and easy misconception to hold. One of the primary benefits one gains from bitcoin and other cryptoassets (depending on their design) is their divisibility.
One bitcoin is divisible to eight decimal places or 0.00000001 bitcoin, and this smallest unit is called a "Satoshi" or "Sat". To put this in perspective, even if bitcoin reached $100 000, each Satoshi would be worth $0.001. Therefore, there is a lot of room when it comes to the price a single bitcoin can be without even its smallest unit becoming too expensive.
What happens if the internet goes down/EMP?
This is a fascinating question. At the end of the day, if the internet goes down or we experience a global EMP attack, we are more than likely going to face a massive global collapse. The internet now serves as the backbone of our global financial system. As it stands, only around 8% of the total money in global circulation is physical money or cash; the rest is all a record kept on computers and servers. If the internet went down, we wouldn't be able to use that money anyway, and you can imagine the pandemonium that would ensue.
If the internet permanently stopped working across the globe, yes, bitcoin would, in this case, become mostly obsolete. However, so would a large portion of our current economy.
In the case of an EMP attack, the outcome may be different. This can be localised to a specific area and may cause momentary power outage and failure of internet services, but it should be temporary. The safety (or record) of your assets now comes down to how you stored them. Some crypto custodians have set up their servers that store your private keys in bunkers buried deep in mountain ranges such as the Alps. In this case, the data may be protected from these EMP attacks, and once regular internet services resume, you can continue on as if nothing had happened.
I've heard of "Bitcoin hacks", so Bitcoin will get hacked and is unsafe
Firstly, the Bitcoin Network has never been hacked. Secondly, it has also now reached a point where it is virtually impossible to do so. What you read about when you see news articles that say bitcoin was "hacked" is the wallets, exchanges and other intermediaries that provide services to the end-user running into problems.
This is why it is so essential to understand the custody or storage solution you are using. All come with their benefits and drawbacks, so it depends on the individual user's preferences and needs. At the end of the day, you need to decide how you want to protect your private keys, which is similar to the pin code of your bank card.
Bitcoin isn't scalable
Scalability refers to the number of transactions any platform can settle in a specific period, usually denominated in one-second increments. The higher the number, the greater the number of transactions that the underlying network can handle. There is also one further distinction that needs to be made, those settlements that have reached finality and those that haven't.
Let's take Visa as an example. Visa is a centralised party that processes card transactions; it can process up to 24 000 transactions per second, a rather substantial number. However, none of these transactions has reached a final settlement. What happens is that Visa sends a message to the corresponding bank telling them to subtract money from one account and send it to another account somewhere. Say the banks are based in America; between them, they must settle what is owed using the Fedwire system. This final settlement can take up to days at a time. Centralised parties can have a very high transaction throughput as the number of people agreeing on the ledger's state is small. Having a high throughput becomes a lot more complicated if you want to do it in a decentralised fashion. So complex, in fact, that it has been dubbed the Blockchain Trilemma by the founder of Ethereum, Vitalik Buterin.
The triangle above helps you visualise the trilemma. Blockchains, as they currently stand, can only be designed to emphasise two of the three sides. You can be secure and decentralised, scalable and secure or decentralised and scalable.
Bitcoin has made design tradeoffs to make it the most decentralised and most secure blockchain or settlement infrastructure we currently have. And just how banks and Fedwire use other services to scale their operations, so will Bitcoin. Bitcoin can use other blockchains like Ethereum or alternative scaling solutions like the Lightning Network to increase its transaction throughput.
The Lightning Network is a layer two scaling solution. These layer two scaling solutions can be run by anyone, whether it be a business or a large group of individuals. The way it works from a high level, in general, is that users of the network will broadcast their transactions to the people running the layer two software instead of the underlying blockchain. They will then batch the transactions into groups and then "anchor" them to the underlying blockchain (layer one), where they are now irreversible. This is similar to how Visa sits on top of Fedwire and helps scale its operations. However, these other solutions also abide by the rules of the blockchain trilemma and will have to make tradeoffs. So we can say that something like the Lightning Network will never be as secure or decentralised as Bitcoin, but it will be secure and scalable enough to pay for your coffee or lunch. We will more than likely see people securing the bulk of their wealth on the layer one chain and store a smaller portion on the layer two solution when wanting to make smaller transactions on a more frequent basis, which is good enough for now.
Notable Articles and News Stories This Week:
Brave Takes on Google With Launch of Private Search Engine
The privacy-focused software development company Brave have launched the beta version of their new search engine. Its core value proposition is its privacy features. It will offer "fully anonymous searches", so it doesn't collect identifying information such as IP addresses or personalize search results based on your information. CEO Brendan Eich lauded Brave Search as "the industry's most private search engine, as well as the only independent search engine."
Read more here
Goldman Sachs Taps Galaxy Digital as Bitcoin Futures Liquidity Provider
Galaxy Digital, the digital assets powerhouse started by Mike Novogratz, has been identified as the new liquidity provider for Goldman Sachs' Bitcoin futures trading desk. The trading desk has recently been relaunched three years after the project was shelved. Goldman Sachs is just the latest in a long line of traditional financial institutions that have started offering digital asset-related products.
Read the full story here
US Miner Raises $105M to Recycle Waste Coal Into Crypto
Pennsylvania-based Stronghold Digital Mining has announced the completion of two private equity securities raises worth $105 million. Stronghold converts waste coal into energy that is then used to mine bitcoin and other digital assets. According to Stronghold, the coal they use was produced by coal mining operations in the 19th and 20th century and that this allows them to rehabilitate large areas of land that were devastated as a result of waste coal acid drainage (AMD). Stronghold has already managed to reclaim 1000 acres of land that was described as "unusable". In addition to removing more than 98% of mercury, NOx, and SO2 emissions, the firm's production process creates fly ash — which can be used as a fertilizer.
Read more about their operations here
Curated Articles
Go West, Bitcoin! Unpacking the Great Hashrate Migration - by Nic Carter
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