Latest news about Bitcoin and all cryptocurrencies. Your daily crypto news habit.
In 2008, after a team of unscrupulous Wall Street bankers and regulators sitting in their cushy Herman Miller chairs caused the collapse of the world finance, institutional trust was at an all time low. Reckless, testosterone-infested decision making by all-mighty bankers finally bore its inevitable consequence…but which were paradoxically swallowed by the people.
Many of the lower-middle class saw their homes foreclosed and pensions go to zero, sparking the populist flame that we see being played out in the Trump and Brexit phenomena. But from the ashes of chaos and ruin shone the promise of a better future.
A future where we didn’t need the banks. Didn’t need the middlemen. Didn’t need their hubris.
Bitcoin: A Peer to Peer Electronic Cash System
Contrary to popular belief, the Bitcoin wasn’t the first of its kind. Prior to it, there existed a number of digital cash technologies like bit gold and b-money. These e-cash protocols were developed by a obscure group of cryptographers known as the cypher-punks, the likes of which included suspected Bitcoin founder Nick Szabo and Hal Finney.
The Bitcoin was the amalgamation of all its predecessors. In Oct 2008, anon Satoshi Nakamoto released his seminal paper “Bitcoin: A Peer to Peer Electronic Cash System”. In it, he proposed a digital currency that would be operate on a simple and historically familiar party-to-party level, not requiring traditional institutions to regulate.
But erstwhile, any form of transaction required a validating party. Someone had to keep the books, else how could one trust the legitimacy of any exchange? In the traditional system of Capitalism, banks filled this gap.
The Bitcoin couldn’t skirt this problem either. But the genius of it all lay here: instead of conferring this authority to large institutions riddled with corruption and outright criminality, why not give this power back to the people?
Mining was the protocol that the Bitcoin proposed be used to offer incentive (in the form of Bitcoins) to regular people, in exchange for validating transactions that ran on the program. In theory, anyone could whip open their Macbook and begin mining for coins.
On hindsight, it was inevitable that the Bitcoin shot to fame at the time it did. The 2008 Financial Crash left most of the world seething in anger and hatred for the very institutions Bitcoin proposed to remove. The bankers screwed us all, and suddenly this nascent product of the people comes up from nowhere, offering silent rebellion against highbrow snobs? It sounded too good to be true.
Everybody likes rooting for the underdog. Bitcoin was the ultimate underdog. It was the populist equivalent of MLK — non-violent action against entrenched institutions and culture. It was meant to be humanity’s salvation from the uncaring clutches of the elite.
For the evangelists, this was the end of the story. The future has arrived! All hail the blockchain!
But first renditions are vulnerable to endemic flaws. The Bitcoin will most certainly be replaced for four very simple reasons. Lack of regulation, the unsustainability of mining, soaring coin prices and the inevitable regression to big market players.
First. The Bitcoin is an unregulated market. Now, I see how some might view this fact in a diametrically opposed lens, after all, the Bitcoin was supposed to skirt regulation, no? Power to the People!
Unfortunately for the rightists among us, a complete lack of rules that currently characterises Bitcoin exchange would spell its downfall. We must not forget that the very crisis of 08 that the Bitcoin was created to avoid was caused by the same lack of regulation!
Economic power-players like Alan Greenspan and Hank Paulson called for deregulation of the derivatives market, spawning the likes of abominable credit default swaps that ultimately crashed the AIG and the market. The lack of oversight on the practices of Moody’s and S&P also caused a financially incentivised practice of credit rating akin almost to bribery — something that should surely have been deplored but instead went unnoticed.
But most of all, a lack of rules on what bankers could or could not do, like secretly bet against the products that they preached to be supposedly invincible in front of unassuming clients, created a reality where these assholes’ profited proportionately to how badly the things they sold turned out. You read that right. By betting against the CDOs they were selling, bankers thrived on the misfortune of normal people.
Oh, and did I mention they nonetheless receive a hefty commission for each transaction they oversee?
Any system without rules will inevitably be corrupt by human greed, for us Sapiens naturally tend toward self-imposed entropy.
The consequence of the “Wild West of Bitcoin” is being played out, all too familiarly. After the Bitcoin went underground in China, it has been suspected that a small group of uncoordinated rich men and women bought up a significant share of the market. They own a sizable stake of coins, and as a result of a lack of traditional rules of financial trading, are selling the coins to pumping and dumping the coins in an egregious fashion, artificially driving up Bitcoin’s price.
A record-setting price hike in Dec 17
If true, this, people, is the very definition of a bubble. When the cabal decides to reign in the profits, the Bitcoin market will dip. Speculators who don’t believe in its long term value will see it as the beginning of the end and sell too. The result? Ordinary people who bet their livelihood in the promise of a better future will suffer. Ring a bell?
Second. The foundation of the Bitcoin protocol is environmentally unsustainable. Remember how I talked about mining? Mining is an essential aspect of Bitcoin’s system: without it, there would be no willing party to validate the transactions. But on a deeper, more theoretical level, the asset value that Bitcoin assumes (its “real value”) hinges on mining.
In mining, the individual pays a hefty price before they are awarded the right to validate a block of transactions. They have to solve a very complex mathematical problem that demands a huge amount of computer processing power and energy. Once they solve the problem and validate the transactions, they are awarded with a Bitcoin.
Mining thus not only helps in validation, it also gives Bitcoin inherent value. The observant reader would see that miners are, in essence, trading real world cost of electricity for this currency, thus pegging the coin’s value to the cost of electricity (just like how the American Dollar was once upon a time pegged to the stable price of gold). Moreover, miners become financially invested; a shareholder of sorts. This encourages them to uphold the system’s integrity and see the Bitcoin succeed. Cold, hard Adam Smith-type Capitalism. Its beautiful.
Unfortunately, the core tenet of the Bitcoin, its so-called “proof-of-work” mining protocol, is unsustainable. Bitcoin requires huge amounts of electricity to mine, as it stands it is estimated that if the miners formed a nation, they would rank 61st on the global consumption index.
In the future, electricity consumption is projected to be worse; because the limited supply of Bitcoins means that it will take more and more computational power to mine looking ahead. This will entail more supporting infrastructure like cooling systems for processors which consumes even more energy. It is even estimated that mining will consume the world’s electricity by February 2020 — and that isn’t the distant future, its 2 years from today.
Fortunately, in some other cryptocurrencies, we are seeing promises of a more sustainable protocol. For example, Vitalik Bucherin, founder of Ethereum, is considering switching the currency to a proof-of-stake protocol. Suffice to say, many pundits believe that proof-of-stake is a more efficient way of allocating resources than the outdated proof-of-work Bitcoin uses.
Third. Volatile fluctuations in the price of Bitcoin has morphed the nascent institution promising to revolutionise trust into the darling of speculators. It is the new “in” thing, and that is scary. I see friends and relatives recklessly going long in the market, without first understanding what exactly this “cryptocurrency” is. The market has become almost like a game, a challenge to predict the next chapter in Bitcoin’s story and a race to click the big red “buy” or “sell”. And that spells doom.
Uninformed investment is speculation, and speculation degrades value. The price of the Bitcoin has far exceeded its actual asset value, completely undermining the concept of the mining protocol (pun intended). Once again, a beautiful idea that works in theory is ruined by human greed.
You see, everyone in the market is playing a game of musical chairs, waiting for the charts to show an unexpected dip, waiting for the music to stop. For now, its still playing. But by the time it ceases, it might be too late to find a seat. The ones left standing will be the fools.
Coupled with the conspiracy of a small cabal and their market share, this will undoubtedly cause the Bitcoin’s inevitable fall from grace. Once prices hit rock bottom, no miner will be willing to invest electricity in exchange for an invaluable asset. Bitcoin will become the scum of crypto-society, the pariah, the untouchable. Paradoxically, this sky-high interest in the coin will be its downfall.
Finally. The fact that Bitcoins will require more and more computational power to mine means that by economies of scale, it is financially advantageous for mining enthusiasts to band together their resources to compete. Not only is this environmentally unfriendly, it also means that slowly, we will begin to see organisations developing that become the bottleneck of currency flow. This will bring us back to square one: the creation of a central authority capable of significantly manipulating the currency.
So things aren’t looking so good for the Bitcoin. There are some obvious flaws in the protocol, and some not-so-obvious solutions that are being pursued with other currencies.
Ultimately, however, my bets are that the technology behind Satoshi Nakamoto’s thesis is poised to stay. The blockchain is likely to fundamentally revolutionise the way we record transactions. All arrows are pointing in that direction. For example, Mycelia is transforming the way artists receive their song royalties and Gem is revolutionising disaster relief and healthcare. Heck, even one of the old dogs, Barclays, publicly confirmed its faith in the blockchain: “Our belief …is that blockchain is a fundamental part of the new operating system for the planet.”
The Bitcoin showed us a glimpse of a brighter tomorrow. It has been a good first step in Sun Tzu’s thousand mile journey.
Now it is up to us to carry on Nakamoto’s legacy.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.