Apr 14, 2020
Ever wanted to know why the media and ‘economists’ get it so wrong about Bitcoin? Here’s the Genesis Node point of view on some of the most fundamental topics that regularly appear about Bitcoin in the mainstream media, which are typically biased or poorly presented.
This is a favourite of the media and hostile regulators. The fact is that Bitcoin operates using the most transparent, verifiable, and traceable accounting ledger that has ever existed. It is true that identity verification is not always required to create a wallet and send or receive transactions so in this regard there is a level of masking that is provided, however, blockchain forensics is a new and emerging capability that could help to track and trace any funds being used for illegal purposes. Danish police made the news in 2017 when they traced criminals through their Bitcoin transaction activity. It is worth remembering that the current banking system is still the most effective means of laundering money in the world with an estimate of $3 Trillion being laundered through the US system annually, so it seems somewhat hypocritical for lawmakers, media and financial services firms to lay the ‘Bitcoin is used by criminals and terrorists’ argument at the door when the current system is guilty of much worse.
There are other cryptocurrencies such as ZCash, Monero, and the newly developed MimbleWimble protocol that underpins Grin and Beam, which use privacy features to obscure the sender and the recipient. There is certainly a theoretical case to be made that these protocols would be more effective at money laundering, however again, transaction volume analysis suggests that any illegal activity funding taking place over these networks is incredibly small if at all present compared to the volumes being transacted through USD.
At a more philosophical level, here we can also return to whether censoring money is an attractive trait. Ultimately, in a free society, an individual ought to have the ability to transfer value for whatever means and ends they desire and any attempt to monitor, trace or prohibit this can be viewed as censorship…any society where a nation-state tries to impose censorship and de-platforming upon its citizens is a society where the citizens desperately need the means to transfer value as required, unencumbered.
This is a particularly sensitive topic and one which the recent trend of climate change activists are sure to latch onto. The truth is that yes, Bitcoin energy consumption is huge, roughly the same as the annual consumption of energy in Ireland or the Czech Republic. The equally huge counter to this that is an uncomfortable truth is that a large percentage of this energy consumption uses green/clean or renewable energy, estimated between 30–70% clean. The range is so high as data is very difficult to verify and as such, allows biased narratives to be deployed by the media.
Further to the country comparisons, it has been reported that the US military alone is the 58th largest consumer of energy in the world — where is the media outcry against this energy consumption?
Whilst that seems a lot, let’s consider some other data points:
The above are simple examples but the oft used phrase is “we could use that energy for something else.” The challenge here becomes a question of libertarian ideology as there is no royal “we” to centralise and co-ordinate energy consumption globally, ultimately if a user pays for the energy they consume and the market is willing to produce and supply it then what that energy is used for is entirely up to the discretion of the consumer.
The incentives of the Bitcoin network align so well that they promote efficient deployment of capital and operational resources by Bitcoin miners. In other words, Bitcoin miners locate their operations in parts of the world that offer the most cost-effective access to energy and to this date there is no market whereby energy consumers pay more/less for the end, usage of their electricity and until a market develops, which ensures that Bitcoin miners need to pay a higher rate for electricity then they will continue to consume at the market rate. Typically, this is either through the use of green or renewable energy sources, which explains why Iceland, with its abundance of geothermal energy, is a key global Bitcoin mining centre.
It is often the case that unused electricity is deployed for use by Bitcoin mining entities, by ‘unused’ we refer to the electricity that is generated by a power station, typically through hydroelectric power but an excess capacity is created over and above the required demand so the electricity is lost as it transmits throughout the network, eventually going unused. In this instance, mining companies set up their operations in remote locations in countries such as China and strike deals for excess energy directly with the energy provider themselves. So whilst a popular argument is — “but the human race could use that energy to much better effects” in many cases, much of it is already going to waste, and it cannot be transmitted for use over vast distances anyway. In a somewhat philosophical view, one could counter-argue that such ‘lost’ electricity is actually turned into a commodity, money (Bitcoin), and sent globally over the internet making its utility, production, and shipping costs infinitely superior to other global commodities.
In an example of well-aligned incentives a Canadian mining company ‘Upstream Data’ recently developed a product that allows oil drillers to attach a Bitcoin mining rig to their methane gas flares in oil and gas fields to convert the excess energy burned off to power a mining rig and re-use some of the energy by-products of drilling that would have otherwise been lost — incentive alignment works.
As Saifedean Ammous, author of the Bitcoin Standard writes in his research blog:
“Everything in our lives is related to energy. Transportation, manufacturing, cooking etc. requires energy. Thus, efficient energy production is essential to our everyday lives. Bitcoin incentivizes efficient energy production and therefore sets the correct incentives for the energy system as a whole.
In addition, Bitcoin is a serious alternative to the current financial system. Bitcoin has the features to be a qualified, stateless, world currency since it is censorship-resistant, permissionless, and trustless and since it provides instant settlement. The network is open and censorship-resistant through proof of work. Essentially, Bitcoin is a common good from the people for the people.
The correct incentivization inherent in the Bitcoin protocol and the importance of Bitcoin as an alternative to the financial system justify the massive use of energy for mining.”
Anyone using this argument is focussing on the wrong metrics and not comparing like for like and even worse, being dragged into the somewhat fanatical and disingenuous world of the white paper title outlining that Bitcoin was intended to be ‘peer to peer electronic cash.’ Over time, Bitcoin has developed and grown to become more akin to a form of digital gold, and to an extent, is a ‘heavy’ digital asset to use as it takes longer than others to confirm transactions on the network. So whilst this comment is partly true as it could take an hour or more to confirm the transaction, it is wrong to compare Bitcoin transaction speed and scalability to that of the Visa, PayPal or Venmo networks.
Essentially Bitcoin is a network for final settlement — it probably is not important to use the Bitcoin network to record your coffee transaction on the most immutable and transparent ledger…forever.
As Bitcoin and blockchain researcher and thought leader Nic Carter states, Bitcoin is best thought of as a large container ship transporting expensive goods over long distances rather than the local postman delivering letters and parcels over the final mile.
When humans began to deploy fiat or paper money for use in an economy in place of a specie backed currency such as the gold standard, this can be referred to as a ‘Layer 2’ technology. The use of precious metals in direct exchange is layer 1, the addition of a 1:1 backed paper is the second layer making portability much easier. Layer 2 or 3 solutions on top of Bitcoin such as the Lightning network, may well deliver the scalability in Bitcoin that many are asking for so it can be used for micro-purchases. Even a bi-metallic standard equivalent digital asset protocol that is less energy-intensive than Bitcoin and serves as a ‘Silver’ or a ‘Copper’ to Bitcoin’s gold could develop.
Ultimately there is a cost to write transactions on the Bitcoin blockchain, in future, this may rise, and as such, these transactions may be pooled and netted off on a less frequent basis in a similar way that central banks settle balance of payments deficits today.
In summary, comparing Bitcoin to Visa, PayPal and Venmo is the wrong comparison to make at this point, but over time, Bitcoin may well have additional layers of technology to solve the scalability challenge, and this may also extend to the inclusion of some form of privacy.
Since 1971 and the complete separation from the gold exchange standard, the US dollar has not had anything backing it. Fiat currency is an established medium of exchange, however, in some countries, it does not serve its purpose well as a store of value or a unit of account due to hyperinflationary challenges. However, if we set these to one side, the notion that fiat currency is backed by anything is a severely misguided notion. It is true that governments mandate the use of fiat currency and as such, they ‘back the use by Law.’ This does not give fiat currency any real value, however, and if the government and central bank mismanage the economy, they undermine the value of the currency and cause inflationary challenges as we saw in countries such as Argentina, Zimbabwe and many others throughout the 20th century.
Money is a collective belief system and anyone who wants to argue that fiat currency is 'backed by fundamentals’ is essentially saying, they don’t really understand how money works, they trust central banks and governments because they haven’t researched or analysed any other potential system, their belief systems, frameworks, and mental models allow them to shortcut thinking and analysis of this nature by buying into the notion that ‘the gold standard failed’ and that we now live in a modern banking world. These arguments will ignore the failures of old that are creeping back into the system today and may very well lead to a Roman Empire-style collapse of the global economy. We know for certain what the monetary policy and scarcity of the Bitcoin network will be for the next 120 years — we have no idea what any central bank or government may do to monetary and fiscal policy from one week to the next.
If anything, Bitcoin is ‘backed’ by the laws of mathematics and code and unlocking these laws costs time, resource (both human and capital), and energy. Whether Bitcoin has any value is determined by the market forces, and the Austrian economics school theories of Mises and Menger with their notions of subjective value theory and the regression theorem of money — ultimately we view Bitcoin as a Veblen good, and it has only ever served the purpose of value transfer.
Hacking Bitcoin is next to impossible. It has been in existence for 10 years, and any kind of threat or attack that exists that could disrupt it has already been attempted. It is reported that eccentric millionaires have even paid teams of hackers $1m over the course of a year to hack the network, and they have not been able to yield any success.
When we discuss hacking Bitcoin, there are two obvious options:
Hacking the software itself is next to impossible as a result of the verification and mining consensus rules any attempt to alter the software will be rejected by each miner running an up to date version of the software and similarly any attempt to process a fraudulent transaction will be detected by each node and rejected.
People often wonder what makes the Bitcoin blockchain secure, and it is often said that a key risk to Bitcoin is the fact that it is software and software could just be hacked, if not now, then in the future with a quantum computer. The reality is that the Bitcoin blockchain is secure as a result of the multiple different failsafe mechanisms that guard against attack, the energy, and computing power used to continue the longest chain of transaction records and the game-theoretical nature of the outcome of such an attack.
To unpick this further, Bitcoin uses complex and advanced cryptographic techniques to guard against a 51% attack. That is the idea that if enough miners grouped together 51% of the total mining resources, then they could unpick the blocks one by one and change the history on the digital ledger to move transactions to other accounts that they hold the private keys for. Such an attack is virtually impossible as the size, cost, and complexity of the attack would require a large number of nation-states to work together — a level of cooperation that has never happened in history aside for coalition forces during world war 1 and 2.
To firstly gain access to the necessary computing power and energy required to undo the confirmed transactions would be no mean feat and would effectively result in a split or a fork of the chain as the history and record would now be different from the original. The actors would then need to undertake the attack all the while being watched and monitored by the other 49% who would continue confirming blocks on the original chain. This means that for the attack on the original chain to be successful, the attackers would also need to amend all the new blocks confirmed every 10 minutes since the attack began — otherwise, the attacked chain of the network would have no value. So the attacker would then need to continue spending money on computing power and energy to catch up to the rest of the 49%, which would be a long drawn out process and would likely bankrupt the malicious attacker. It is estimated that a 51% attack on the Bitcoin network would cost an attacker almost $600,000 per hour.
So, in summary, the incentive to launch a 51% attack and change the ledger is just not present. Similarly, any actor attempting to exploit the code or vulnerabilities in the network will have their attack rejected as each node runs a copy of the Bitcoin client and as such, any attempt to make a change to the code will be rejected by the network as all the other nodes will be running a copy of a different software.
Another popular example the media likes to use is that Quantum computing would break the Bitcoin private key encryption — this is akin to saying that you don’t need to worry about ageing because someone will invent time travel before you die. Quantum computing is at least 30 years away and the current claims regarding quantum computing are overstated. That said, the entire Bitcoin development community are already considering how to respond to quantum computing threats and how to embed quantum-resistant cryptography into the core software so by the time a legitimate quantum threat exists it is highly likely that a legitimate quantum-resistant defence will emerge and the entire Bitcoin code, network, and mining equipment will shift to adopting quantum-resistant technologies.
We are only 10 years into its lifecycle, so speculation and large holders could manipulate price movements, however, it is important to remember the concept of how commodity money goes through various stages of development. Bitcoin has successfully transitioned from being a collectable to the early stages of a store of value. Once more liquidity comes into the Bitcoin network, then it will be harder for large holders to manipulate the price. At some point, these holders will sell and take their profits to spend on whatever they please. Those coins will then be available on the market for new entrants, and in turn, these individuals may well hold for a long time to watch their value increase and more liquidity comes into the system, again, at a certain point, these people will sell their holdings. The pattern will continue, and there will be severe price appreciations and declines, however, these will become less severe as liquidity increases — once this happens, the store of value stage will be complete, and Bitcoin can then progress to becoming a Medium of Exchange and a Unit of Account.
So at present, volatility attracting new market entrants all the time, however over the long term, the rollercoaster needs to settle into a more traditional, long term market cycle for institutional investors to feel comfortable allocating a significant portion of their assets into it.
For others around the world though, Bitcoin already operates as a store of value in countries where governments and money have failed. Countries such as Venezuela, Argentina, Zimbabwe, and Turkey have all seen appreciations in Bitcoin purchases, and despite price declines from c$20k to $3k, this has been a better place to store wealth than the local currency.
Regulation doesn’t solve problems entirely. There is no government in the world that can actually regulate the Bitcoin network. Governments can take action around the edges of the network, but even officials within the US Government finally recognise that they cannot stop the Bitcoin network or Bitcoin transactions.
Governments are, however, able to regulate the edges of the network such as the fiat on/off ramps which are typically subject to ‘know your customer’ regulations and ID checks. Governments are also able to regulate activities such as Bitcoin ownership and Bitcoin mining if they wish. Some governments have banned Bitcoin mining as an activity, and others have gone as far as to outline that only the state is allowed to provide Bitcoin mining facilities.
What is clear is that as a protocol, Bitcoin cannot be shut down. Governments do not have the ability to stop it or come anywhere close to killing it. What regulators are looking at and in particular, US regulators is the introduction of investment-friendly vehicles. These will serve as fiat on/off ramps and will allow institutions access to Bitcoin. A key concern is the notion of custody, who will hold the private keys to access the funds on the Bitcoin network? There are proposals in place at present, and it won’t be long before a Bitcoin ETF (Exchange Traded Fund) exists so in some form or another, a regulatory framework will emerge for Bitcoin and the entire crypto-asset industry.
That is exactly the point. The decentralised nature means the network is upgraded by consensus and any miner that disagrees with the update can choose to ‘fork’ and continue a separate chain. Not having a CEO means there is no single person or entity that can choose the direction and design of the protocol without vigorous debate with the whole community first. A CEO can be called in to testify in government hearings or pursued for mismanagement of funds — without a CEO the Bitcoin network becomes an entity that is not subject to the normal laws of power, control, coercion, intimidation, manipulation, and corruption — this is one of its greatest assets.
Bitcoin is the 5th iteration since the 1990s of digital money, and it is the first to fully succeed in generating a system that removes centralised 3rd parties and creates digital scarcity. Bitcoin draws upon other previous protocols such as eGold and Hashcash and implements them in a fully decentralised way.
The game theory involved in creating a fork of the Bitcoin code is such that any fork is unlikely to take a significant amount of value, network, or mining power away from the core BTC code. In 2017 a disagreement about transaction scaling ensued where one group wanted to maintain a low block size at around 1 Mb per block, and another group wanted to increase the block size which would, in turn, increase the throughput and speed of transactions. In principle, the idea seemed logical however an entire debate and discourse erupted around the broader risks and challenges that ‘big blocks’ present. One key issue is that the mining ecosystem would no longer be possible for single and small entities, rather it would start to require a more industrial size and scale — this would put control of mining operations more in the favour of large, server farms and corporations who could afford the CAPEX set up and open running costs of such a huge operation. To maintain decentralisation the original chain was maintained whilst a splinter group forked the Bitcoin blockchain and continued transactions using bigger blocks. This was called the Bitcoin Cash or BCash chain. Not long after, further divisions occurred within the BCash community and this chain then split into BCash ABC and BCash Satoshi’s Vision. Needless to say, all of these actions have been almost catastrophic for these chains as they now have next to no value being transferred over them and the mining rewards and incentives are not there as the value of the coins on these chains is very low — the low hashpower as a result also opens up these chains to a 51% attack. The hourly cost to launch a 51% attack on Bitcoin is estimated at $600,000, the equivalent for BCash is $7,500 per hour.
It is by studying the outcomes of chain forks that the beauty of the Bitcoin network, game-theoretical reward mechanisms and the inbuilt self-reinforcing incentive mechanisms that one can really appreciate the brilliance of the system.
If you have managed to stay focussed and read through to this section then you deserve a medal! But more importantly, you should now be able to see how and why the media gets the coverage so wrong. The cornerstone of so many articles is put in the wrong place and often intentionally so to present a biased view of ‘why Bitcoin is a failed experiment’ without informing readers or viewers that there is a different viewpoint. For many, Bitcoin is just too complex to understand and they are happy to accept the word of elected officials at the Treasury or Government regarding what money is and how they should interact with it. Typically, economists find it hard to reconcile that commodity money and Austrian economic principles may actually be a better option than the fiat, state-controlled, centrally managed monetary system that is in place globally which they are likely to have studied for 10+ years and committed a significant portion of their time and energy into contributing to. For these people, the truth that Bitcoin is the most effective form of money the world has ever seen is too painful to accept and as an American writer, Upton Sinclair once said,
“it is difficult to get a man to understand something when his salary depends on him not understanding it.”
About us: Genesis Node is an executive training organisation focussing on helping businesses and individuals to understand Bitcoin, digital assets, blockchain, smart contract technology, how they fit into the world and how they might disrupt existing operating models.