Bitcoin and Blockchain: The Volatile Pseudo Currency

Cryptocurrencies, Bitcoin, and the Global Warming Effect

As of February 2022 there are more than 10,000 so called cryptocurrencies out there. We probably recognise only a tiny fraction of these mysterious artefacts by name. Bitcoin, Etherium, and perhaps Dogecoin at a push.

The value of these so called currencies will fluctuate wildly. Their value is far too volatile to be considered a currency in the true sense, unless you are more familiar with the Venezuelan Bolívar.

And far too volatile for any casual investor.

So why do these cryptocurrencies exist in the first place, especially since you cannot walk in to any store and spend them like you can the money in your pocket or bank account?

This and other questions make cryptocurrencies quite perplexing, and need answering if we are to try and understand them.

One very obvious question is whether these cryptocurrencies will ever replace 'real' money, which has a tangible value?

And are cryptocurrencies a safe haven for our hard earned savings?

And, of course, is Bitcoin a legitimate currency, or just an investment for the wealthy and to dabble in?

Is Bitcoin a Currency?

So let's clear this question up at the outset - is Bitcoin a curreny? 

Well no, Bitcoin is not a currency.

Bitcoin is instead an investment, just like all the other cryptocurrencies. And a very high risk investment at that.

Dirk G Baur and Thomas Dimpfl wrote the document referenced above, The volatility of Bitcoin and its role as a medium of exchange and a store of value, which gives an empowering analysis of Bitcoin, and the conclusion is something that we should have expected all along.

"Bitcoin is a cryptocurrency but does not work as a currency due to its excess volatility"

We will explore this in a little more detail later on, but in the meantime, a currency's value should never be influenced by a single random individual, or couple of random individuals or institutions. Bitcoin is heavily influenced in this way, and of course we all know who these random individuals and institutions are.  

Bitcoin has received much criticism over the past decade. Is the criticism justified?

Well yes, I believe it is, and here’s why.

A Bit of Bitcoin Background

Bitcoin has been around for a while now (13+ years) and so you may already know exactly what it is, a cryptocurrency built on technology intended to remove any dependency on a central authority, such as a bank. In other words, decentralized, apparently.

Being decentralized should remove any dependency on a single authority, and it should also remove any impact that you may expect from any fiat currency, such as a government printing money for example. Bitcoin should also, and does, reduce the transaction time. This is probably one its most compelling features. We all know how frustrating it can be to make payments and transfer money where banks are involved.

But Bitcoin does not avoid having its own hidden controls and authority which undermines its decentralized nature.

Bitcoin does however represents a decentralized cryptocurrency, which falls under the category of Decentralized Finance (DeFi). This means Bitcoin is a non-custodial financial product. That is, the owner of the Bitcoin wallet, where the details of the holders coins are held, has full control over the wallet and private keys.

One of the consequences of all this decentralization and non-custodial ownership is that there is no official central authority, regulator or ombudsman to ensure that your 'money' or investment is safe. It is unregulated, and so anyone who holds Bitcoins could lose their entire collection of coins in an instant if they were to lose their Bitcoin wallet, or someone else gains access to it.

More than $1.7B in cryptocurrency has already been stolen in 2022. A sobering thought indeed.

So what is so appealing about Bitcoin and other cryptocurrencies apart from the astronomical gains and losses in value?

Well, its in the technology that allows Bitcoin to operate as a decentralized cryptocurrency, which is called Blockchain. Blockchain maintains a ledger of all Bitcoin transactions from Bitcoin’s inception on January 3rd 2009, and is a mechanism that is intended to replace the role of traditional finance houses like banks.

As new Bitcoin transactions are made, the blockchain ledger is updated with a new block, which contains the validated details of all transactions made since the previous block was added to the chain. The new block is appended to the end of the blockchain.

A new block is added to Bitcoin’s blockchain every 10 minutes roughly. As I write this, there are about 723,265 Bitcoin blocks in its blockchain.

There is no limit to the number of blocks in the blockchain, but there is a limit to the number of Bitcoins that can exist.

The maximum number of Bitcoins that can exist is 21 million. There are currently18.9 million Bitcoins in existence, and the number of new Bitcoins grows by 6.25 as each new block is added to the blockchain. This number of new Bitcoins for each new block that is added to the blockchain is the reward for the Bitcoin miners, which we'll get to shortly.

The number on new Bitcoins generated for each new block halves after every 210,000 blocks are added to the blockchain, and the last Bitcoin will be mined by year 2140.

There is inherent security built in to the blockchain architecture. It comes from the distributed nature of the ledger. There are many thousands of copies of Bitcoin’s ledger and they are all identical. Any attempt to tamper with the contents of this ledger, perhaps if you wanted to steal some coins, would need to be made across the majority (at least 51%) of all copies of the stored ledger. This may sound very comforting as you sip on your Long Island Iced Tea, but there are other ways for an investor to lose their coins that may keep them awake at night.

Pickpockets. We'll look at that shortly.

To conclude, Bitcoin’s ledger is stored on multiple ‘nodes’, which are computers on Bitcoin’s network that each have a copy of the ledger. There are about 11,558 Bitcoin nodes out there when I last checked, and therefore at least 11,558 copies of the Bitcoin ledger.

It is important to appreciate that the blockchain architecture is used in many other applications outside of cryptocurrencies. Many industries have recognised that storing information in a blockchain instead of a database has certain advantages.

Ok, so that's the Blockchain and Bitcoin technobabble dealt with, but this is a serious topic, so we need to delve deeper.

Bitcoin Mining

The ledger is where Bitcoin is forced to address some deep-rooted challenges.

The most obvious challenge being the need for the blockchain to be updated and maintained. We know that a new block is created and added to the Blockchain every 10 minutes or so, and the new block contains all new Bitcoin transactions since the previous block was added. This new block needs to be verified and appended to the blockchain ledger.

So how do you provide the incentive needed to encourage people to participate in verifying these new transactions, and building the new blocks?

The answer is Bitcoin mining, which is the act of verifying transactions and updating the blockchain with a new block, and which results in new Bitcoins being generated for the successful miner. It is also where the inefficiencies in the Bitcoin and Blockchain architecture start to become very apparent.

The incentive for the Bitcoin miner is 6.25 Bitcoins if they are the first to produce the new verified transaction block (of which there are about 144 each day).

At the current value of about $20K per Bitcoin (it has dropped from $67K in the past 6 months!), that is still a fairly handsome reward, although it is far less than the reward for the Bitcoin miners 6 months ago, which has got to hurt.

But there is no guarantee that a miner will be the first in the race for each new block. There is plenty of competition.

As well as logging all transactions since the previous block into a new block, the Bitcoin miner must verify the new transactions to make sure that they are legitimate by performing a Proof of Work. This Proof of Work includes having to solve a complex mathematical puzzle, which is then used to generate a hash (digital signature for the new block) that allows the new block to be appended to the ledger.

This is Bitcoin mining, and the IT compute power needed to complete the Proof of Work by all the Bitcoin miners around the globe is truly vast. The environmental impact from this is considered by many to be unacceptable. For a more detailed description of the Proof of Work process, check out the Investopedia Proof of Work page.

Bitcoin Mining: The Environmental Nightmare

Bitcoin mining is an integral part of the Bitcoin ecosystem, and it consumes huge amounts of energy to power the Bitcoin Mining server farms around the world.

The amount of electricity needed to power these Bitcoin mining server farms each year, all competing to complete the Proof of Work and gain the Bitcoin reward, is the same amount of electricity consumed by a country like Argentina (pop. 45m).

But let's put some numbers around this to fully understand the impact that Bitcoin mining has on our global energy resources and the consequences for our planet.

The Cambridge Centre for Alternative Finance (CCAF) has calculated that Bitcoin currently consumes about 116 Terawatt hours of electricity per year (as I write this in 2021, the number fluctuates).

That sounds a lot, but what does it really mean?

Here is a simple example to start with.

The electric kettle that we may use in the morning to boil water for our tea or coffee will consume about 3 kilowatts (kW) of electricity when boiling the water. An electric kettle is the appliance that probably uses the most electricity in your home when used.

3kW is a lot of electricity to draw from your supply, but a kettle will normally boil in a couple of minutes, so it is no great drama. But you would not want your kettle to be boiling water for too long every day, its expensive.

If we compare this to Bitcoin mining, your kettle would need to boil continuously for 4.4 million years to support just one year of Bitcoin mining.

Put another way, the world has a population of about 7.8 billion people. In 2018 the world consumed 22,000 Terawatt hours (TWh) of power. That would make today’s Bitcoin consumption of electricity to be about 0.6% of the world’s total. This is a huge amount of power for a single financial instrument.

And finally, if those facts and figures are not convincing enough to question why Bitcoin is allowed to consume such vast amounts of energy each year:

• A single Bitcoin transaction has the same carbon footprint as 680,000 Visa transactions
• A single Bitcoin transaction has the same carbon footprint as 51,210 hours of watching YouTube

This is a mind-blowing amount of the worlds energy to be consumed, and for what exactly?

Well, with my cynical hat on, it is to support a community of greed all desperate to make as much profit as possible from nothing, despite the global impact, and not to mention supporting a seedy underbelly of criminals.

There is no doubt that the concept of a cryptocurrency that allows everyone to make daily transactions in the real world will one day become the standard, but it will never be that standard in its current form.

Cryptocurrencies including Bitcoin must gain some credibility as a reliable, safe, stable form of currency before it can ever become mainstream.

Bitcoin has no credibility today, and will remain a fanciful investment.

Cryptocurrencies are not Currencies

Bitcoin is not a currency, it is an investment.

There are vendors who accept Bitcoin as payment for goods and services. Not many, but they are out there somewhere, and they largely do so only because they believe it will improve their popularity profile.

It is fashionable accept Bitcoin payments. Not sure why, but I guess that these vendors are anticipating the value of Bitcoin to rise, and  because Bitcoin is still bizarrely cool it seems.

But the value of Bitcoin is not rising as fast as the investors would like.

At the start of 2021 it was anticipated that Bitcoin would reach an absurd $100K USD per coin by the end of the year.

As i write this update in June 2022, the price of Bitcoin is bordering on $20K USD, having plummeted in value from its $67K high only seven months earlier. Bitcoin has lost more than 75% of its value in the last seven months from October 2021.

Bitcoin benefits mainly those investors who bought them a few years ago at a very low price and who have tolerated the ups and downs of the turbulent Bitcoin market, and of course the speculative investor who will wait for he price to bottom out (again) and buy in the hope that the price will start rising.

If you were to invest in Bitcoin today, or any cryptocurrency, you must be prepared to lose your investment.

Bitcoin: The Volatile Market

How erratic is Bitcoin as an investment?

In 2017 the price for one Bitcoin increased from under $1,000 USD to more than $19,000 USD and fell back to $8,000 USD by mid of 2018. A significant swing.

More recently, Bitcoin reached a dizzying $61K USD in value per coin by mid-March 2021, dropping back to $32K by late June.

Today, June 2022, the price sits at a sobering $20K having plummeted from a heady $67K in November 2021. That is a 70% drop in its value.

The volatility of Bitcoin and its role as a medium of exchange and a store of value provides an in-depth study on the volatility of Bitcoin as an investment.

There are some very obvious (embarrassingly so) high profile cases for some of Bitcoin’s volatility. Elon Musk’s Tweets for example. When Musk announces that Tesla will accept Bitcoin as payment for its cars, the price of Bitcoin jumped. When it then transpired that Musk was wrong, and that because of the environmental impact of Bitcoin they were reversing that decision (if indeed it had ever been made in the first place), the price dropped sharply.

You may think that this is a normal consequence for any investment, but for Bitcoin the impact on its value is multiple percentage point fluctuations. You do not want this wild volatility in an investment that you have committed your savings to.

Elon Musk has certainly created significant waves in the cryptocurrency markets with his outspoken comments, and his singular actions have a very big impact on the value of Bitcoin and of course Dogecoin. This is one wealthy individual with a disproportionately large influence on how these investments perform.

But the volatility in Bitcoin's value is not only governed by the activities of the truculent cryptocurrency influencers, it is also heavily influenced by criminal activity. When criminals use Bitcoin as a reward for holding a business to ransom, and then discover that the FBI has recovered most of the ransom from the thieves’ Bitcoin wallet, the consequence for the value of Bitcoin can be significant.

Bitcoin: The Sinister World

There has been a lot of attention on how many Bitcoin transactions are illicit. The selling of drugs; people trafficking; ransomware heists; and far far worse. These are all very nasty activities by very nasty people.

But we need to be careful. According to Harry Leeds' article in beincrypto.com, which is unashamedly bias,  the amount of illicit transactions by criminals is lower than the estimates that were made a few years ago.

But let us be clear - despite what the current statistics may tell us, Bitcoin remains the preferred currency for criminals. We have all received those emails from extortionists, mostly written in broken English, threatening to share dubious webcam sessions that they have apparently hacked in to. They all ask for Bitcoin payments.

The webcam threats are a very lightweight example from opportunists that can be ignored. The serious threats come from ransomware, and again these criminals will demand Bitcoin payments to restore your data.

And it is getting worse. Ransomware has increased 62% since 2019, and the pandemic has fuelled some of this rise.

Bitcoin is the currency of choice for criminals.

One of the assumptions made by some people in the early days of Bitcoin, and more specifically focusing on the blockchain technology, was that all Bitcoin activity was anonymous. The reality is somewhat more complicated.

Bitcoin activity can be tracked by the Bitcoin wallet address that the Bitcoin user connects to online. These addresses will not be easily traceable back to an individual, but will provide an activity trail nonetheless. Some of this activity trail can be hidden further by connecting to the Bitcoin network from the dark web (Tor browser), which will obscure a Bitcoin user’s source address, but that is not a guaranteed way to conceal the source of a Bitcoin users online activity. In short, Bitcoin activity is not anonymous, and law enforcement is getting more sophisticated in its methods.

Criminals take advantage of smoke-and-mirrors that blockchain provides, and there is no doubt that a Bitcoin thief can quite safely avoid being discovered, but their Bitcoin wallet remains vulnerable. And this is why the traditional financial institutions exist today. To make us safe. As much as we may detest some of these bloated institutions.

There are some crypto currencies that provide enhanced anonymity, Zcash for example. But who benefits from this anonymity? That's right, the cyber-criminal. All of this simply reinforces the intent and danger of these investments.

Bitcoin Security

When the hackers known as DarkSide from Russia (and Eastern Europe, but let’s face it, these are Russians, we know what they are like as a people) held the US Colonial Pipeline to ransom recently, the Colonial Pipeline boss paid them $4.4M.

The DarkSide thieves use Bitcoin because they think they can remain anonymous and hide their stash. Their identity will be hard to trace back to their ransom payment.

But like anything that you do online, and anything that you own online, you need some way to identify yourself in order to access it. Like a password or pin number. Bitcoin is no different. You hold your Bitcoins in a ‘wallet’, and you will have a private key that allows you access to your ‘wallet’. If you lose your private key, you lose your wallet and your fortune.

In response to the ransom demand and the subsequent payment, the FBI managed to obtain a private key that gave them access to the DarkSide Bitcoin wallet, and were successful in recovering the majority of what was paid. The value of Bitcoin dropped sharply when news broke of this recovery. Volatility once again.

When it comes to security, traditional banking has measures that will make it impossible for anyone to access your money, as long as you are vigilant. Access to your bank account should include a process called Multi-Factor Authentication (MFA). This makes you the only person that can access your account. Crypto-currencies do not have this.

A wonderful site created by the equally wonderful Molly White called Web2 is going Great gives a fascinating insite in to what is happpening in the crypto world. Specifically the challenges with security. Please explore Molly White's projects, she is pretty amazing.

If you want to understand when and how crypto currencies are being compromised using methods that manipulate things like Oracle Smart Contracts, and other weaknesses in the architectures, then you must follow Web2 is going Great by Molly White.

Bitcoin: Controlled by the Unscrupulous

Bitcoin is run by mining cartels, underpinned by criminal activity, controlled by narcissistic software developers, and driven by greed.

But more worrying perhaps is that the value of Bitcoin is influenced whimsically by wealthy individuals. Elon Musk sends a tweet relating to Bitcoin, and it's value instantly changes.

This is as far as you can get from a fair and democratic system of currency that represents every stakeholder.

Bitcoin should be recognised for what it is, a craze. It cannot be called crypto because it is not ‘concealed’. The ledger is open for anyone to read. And it is only as secure as the holder of a wallet makes it. Ask Mt.Gox of Japan, who were declared bankrupt after hackers removed $450 million from its Bitcoin wallet. 

The notion of cryptocurrencies needs to move on from the avarice that it is cloaked in today. Bitcoin is nothing more than a private self-serving boy/person’s club.