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The Big Bitcoin Bet: Currency of the Future or Just a Better Casino?

Bitcoin’s nearly parabolic rise in price this year has, not surprisingly, led to a similar rise in expectations. What does the future hold for bitcoin? Could bitcoin replace gold? Or might it grow even bigger:

Ron Paul: Bitcoin could ‘destroy the dollar’
By Jose Pagliery
December 4, 2013: 12:01 PM ET

NEW YORK (CNNMoney)
Imagine a world in which you can buy anything in secret. No banks. No fees. No worries inflation will make today’s money worth less tomorrow.

The digital currency Bitcoin promises all these things. And while it’s far from achieving any of them — its value is unstable and it’s rarely used — some have high hopes.

“There will be alternatives to the dollar, and this might be one of them,” said former U.S. congressman Ron Paul. If people start using bitcoins en masse, “it’ll go down in history as the destroyer of the dollar,” Paul added.

It’s unlikely that Bitcoin would replace the dollar or other government-controlled currencies. But it could serve as a kind of universal alternative currency that is accepted everywhere around the globe. Concerned about the dollar’s inflation? Just move your cash to bitcoins and use them to pay your bills instead. Tired of hefty credit card fees? Bitcoin allows transactions that bypass banks.

And who knows, maybe bitcoin really will be the “destroyer of the dollar”. But such a possibility raises a fun question: Can a fixed-supply digital currency like bitcoin “destroy” the dollar by supplanting it the world’s reserve currency? Sure, it’s possible:

oftwominds.com
Could Bitcoin (or equivalent) Become a Global Reserve Currency?
(November 7, 2013)
Charles Hugh Smith

It’s a worthy thought experiment to ask if a digital currency could also act as a reserve currency.

Could a non-state issued digital currency like Bitcoin become a global reserve currency? The idea came up in my recent conversation with Max Keiser on the Keiser Report during our discussion of reserve currencies.

The idea is intriguing on a number of levels. In terms of retaining value though thick and thin, the ultimate reserve currency cannot be printed (and thus devalued) with abandon by a government. Gold and silver have served as the ultimate reserve currency, as precious metals can be traded for commodities and services, provide collateral for debt and serve as reliable stores of value.

While many observers believe gold is still the only reliable reserve currency (or if you prefer, the only reliable backing for government-issued paper money), it’s a worthy thought experiment to ask if a digital currency could also act as a reserve currency.

Since there is no real-world commodity backing the digital currency, its value must be based on scarcity and its ubiquity as money. The two ideas are self-reinforcing: there must be demand for the digital money to create scarcity, and the source of demand is the digital currency’s acceptance as money that can be used to buy commodities, goods, services and (the ultimate test) gold.

It follows that the first step in a non-state issued digital currency becoming a reserve currency is that it isn’t created in quantities that dwarf demand. If the digital currency is issued with abandon, it cannot be scarce enough to gain any value. If I own one quatloo (our hypothetical digital currency) and a trillion new quatloos are issued tomorrow, the value of my one quatloo will decline to near-zero.

The second step is its widespread acceptance globally as money, i.e. a store of value and something which can be traded for goods and services.

There is a bit of a built-in conflict in these two requirements. To be useful in the $60 trillion global economy, the quatloo must be issued in size: there must be enough of it around to grease transactions large and small in all sorts of markets. Using the U.S. dollar as a guide (since the USD is the primary reserve currency), we can estimate that a minimum of $1 trillion in quatloos would be needed to become a practical global currency.

To act as a reserve currency, another trillion or two would be needed, as nations would hold these quatloos as reserves. (Nations hold an estimated $7 trillion in USD reserves, about $3 trillion euros and $1 trillion or so in yen, pounds and other currencies.)

But issuing quatloos in these quantities would remove any scarcity value. Thus the issuer of the quatloo would have to carefully issue more quatloos only when demand justified the need for more monetary “grease” for the global economy.

If on the other hand skyrocketing demand/scarcity drove the value to the stratosphere, holders of the quatloo would rejoice, but this volatility would present its own set of risks for those seeking to use the quatloo as a reserve against currency volatility in the home-country currency. If a digital currency can leap ten-fold in a short time, then might it not drop with equal volatility?

Volatility is the enemy of reserves; the holder of reserves needs a liquid (meaning it can easily be sold or traded in size) currency that predictably retains its value. A volatile currency poses risks, as do currencies that cannot be traded in size without drastically influencing the market value of the currency.

These conditions pose a steep challenge for any digital currency, but they are not insurmountable. Even as a niche currency, non-state issued digital currencies could play a role in the global economy, especially if government-issued fiat currencies destabilize/ devalue due to massive money creation by desperate central banks and state treasuries.

Is scarcity enough to back a non-state issued currency? Bitcoin offers a real-world experiment.

So yes, in theory, bitcoin or any other digital fixed-supply currency could become the new dominant global reserve currency if the US really does descend into a hyperinflationary death-spiral and if total value of the new reserve currency becomes worth trillions of dollars (at today’s prices) and also becomes more stable than any of the alternatives. In other words, yes, we could see a new non-state-backed digital reserve currency, but that currency would have to have properties not yet exhibited by bitcoin or any other fixed-supply currency and all other major currencies would have to fail. And such a scenario might not actually do anything to reduce inflation anyways but, in theory, it could happen.

So why is it that so many bitcoin enthusiasts are predicting that the dollar’s deathblow has finally arrive? Well, in part it’s because there are a lot of Libertarians. Also, a lot of Libertarians bought a lot of bitcoins:

Forbes
ECB: “Roots Of Bitcoin Can Be Found In The Austrian School Of Economics”
11/03/2012 @ 11:04AM
Jon Matonis, Contributor

The ECB (European Central Bank) has produced the first official central bank study of the decentralized cryptographic money known as bitcoin, Virtual Currency Schemes. Ignoring for a moment the ECB’s condescending and derogatory use of the virtual currency phrase and scheme phrase, the study produced at least one landmark achievement.

In claiming that “The theoretical roots of Bitcoin can be found in the Austrian school of economics,” the ECB forever linked Bitcoin to the proud economic heritage of Menger, Mises, and Hayek as well as to Austrian business cycle theory. This recognition is also a direct testament to the monetary theory work of Friedrich von Hayek who inspired many with his 1976 landmark publication of Denationalisation of Money.

Bitcoin fully embodies the spirit of denationalized money as it seeks no authority for its continued existence and it recognizes no political borders for its circulation. Indeed according to the report, proponents see Bitcoin as “a good starting point to end the monopoly central banks have in the issuance of money” and “inspired by the former gold standard.”

Economists from the 19th and mid-20th centuries can be forgiven for not anticipating an interconnected digital realm like the Internet with its p2p distributed architecture, but modern economists cannot be. From their own conclusions (on page 48) which inaccurately lump Bitcoin together with Linden Dollars, here is what the modern-day economists at the ECB are still not getting:

1. ECB concludes that if money creation remains at a low level, bitcoin does not pose a risk to price stability. This is incorrect on two levels. One, the creation of new bitcoin is capped at 21 million with eight current decimal places so it grows through adoption and usage rather than monetary expansion. And two, as with gold, silver, and other commodities having a monetary component, price stability is a function of the market not central planners;

2. ECB concludes that bitcoin cannot jeopardize financial stability due to its low volume and limited connection with the real economy. Conversely, bitcoin will tend to increase financial stability and overall soundness. Bitcoin’s connection with the real economy is only a concern for the regulated and taxed economy, whereas bitcoin independently may thrive in the $10 trillion shadow or “original” economy. Besides, with its repeated market interventions, no one has done more to jeopardize financial stability than the ECB itself;

3. ECB concludes that bitcoin is currently not regulated and supervised by any public authority. It would be more accurate to say that State-sponsored regulation is largely irrelevant because of the inherent design properties of a peer-to-peer distributed computing system. But happily, this is still a conclusion that I can agree with and recommend that it remains the case;

4. ECB concludes that bitcoin could represent a challenge for public authorities, given the legal uncertainty and potential for performing illegal activities. While public authorities will certainly be challenged by the introduction of a monetary unit that cannot be manipulated for political purposes, bitcoin in some cases does have the ability to provide tracking capability that far exceeds that of national cash or money substitutes. What authorities will find most troubling though, with bitcoin, is that money flows between individuals and businesses will no longer be exploitable for purposes of unlimited identity tracking and unconstitutional ‘fishing expeditions’;

Bitcoin: Destroyer of the dollar… yuan?

The ECB’s report on bitcoin discussed above was published over a year ago. A lot’s changed with bitcoin over the last year, most notably the price. But there have been plenty of other changes too. For instance, a state-owned Chinese telecom, Jiangsu Telecom, recently announced a decision to accept bitcoin as payments. And just a few days later, the most popular search engine in China stopped accepting Bitcoins as payments.

Why all the sudden bitcoin policy swings in China? Well, in part, it’s because the one of the other big bitcoin changes over the past year has been the growing recognition of bitcoin’s potential for affecting the “real” economy. It’s not that bitcoin is now widely used for legal commerce…that’s still a niche use for digital currencies. Instead, as the author of the above article predicted over a year ago, much of the concern over bitcoin’s impact on the “real” (non-underground) economy is due to bitcoin’s growing applications for underground commerce that can affect the “real” economy in real ways. Especially an economy like China’s with strict capital controls a lot of very wealthy people with a lot of money. Money they would like to launder and then move out of the country.

So a big part of the reason we saw a state-backed telecom announce the acceptance of bitcoin followed by a rejection bitcoins by Baidu just days later is that this happened in between:

The Verge
Bitcoin banned from Chinese banks amid fears of laundering

Regulators say individuals are still free to use the virtual currency at their own risk

By Amar Toor on December 5, 2013 04:04 am

Chinese regulators have banned financial institutions from using Bitcoin, warning that the virtual currency could be used for illegal activities and speculation. China’s central bank, the People’s Bank of China, announced the decision in a statement released Thursday, though it stopped short of banning Bitcoin altogether. Individuals are still free to use the digital currency in China, albeit at their own risk. Bitcoin prices fell in response to today’s announcement, dropping to as low as $970.62 on Thursday after trading at over $1,100 prior to the central bank’s decision.

China has long implemented tight currency controls, so it’s not surprising that regulators would be wary of Bitcoin, which has yet to be regulated in any country. In its statement, the central bank said it would closely monitor the risks that Bitcoin poses, adding that it would take measures to prevent the currency from being laundered for illicit activities.

“As Bitcoin transactions can be done anonymously and are not restricted by location, it’s difficult to monitor capital flows and it therefore facilitates money laundering and financing for terrorist activities,” the People’s Bank of China said.

“There have been criminal activities using Bitcoins, such as trading of drugs and guns,” the bank added. “Relevant cases are under investigation.”

Yes, China just banned financial firms from trading in bitcoins over money-laundering and capital control concerns. For a country like China that has long limited the flow of money crossing its borders bitcoin presents an new and rather potentially powerful threat to China. Why? Because China’s long-standing policy of artificially suppressing the value of the yuan via capital controls has resulted in A LOT of capital in the hands of people that want to move it out of China. Now. And the Chinese government has merely promised to eventually allow them to move all of that money out of the country. Eventually. Maybe in 2020 at the earliest:

South China Morning Post
China promises to loosen capital control, but no rapid progress expected
Despite pledge to speed up deregulation, economists raise concerns over funds outflows and speculative activities that may arise

Jane Cai in Beijing
xuejun.cai@scmp.com
PUBLISHED : Friday, 29 November, 2013, 8:40am
UPDATED : Saturday, 30 November, 2013, 2:03am

Julia Yang’s spirits rose when the Communist Party said this month it would accelerate the deregulation of the mainland’s capital account to facilitate cross-border investment.

“I will sell one of my apartments in Beijing to escape the property tax that will be launched sooner or later,” said the accountant, who owns two flats. “I will buy some US stocks or look into properties in Europe, where investment opportunities should be better.”

Hastening the yuan’s convertibility under the capital account was one of the key reform proposals decided on at the third plenum of the party’s Central Committee, according to a document released on November 15. Targets for what amounts to partial convertibility are planned to be achieved by 2020.

When the capital account is fully opened, foreign direct investment, portfolio investment and other cross-border investment can be conducted without restrictions on converting yuan.

Yang’s plans partly justify the concerns expressed by many economists. They say the pace of capital account opening up will be slow because policymakers are worried about large capital outflows in the initial years of opening up and speculative capital activities that could cause financial turmoil in the absence of sound regulatory measures.

“Many people have high hopes of capital-account liberalisation but I think the new leaders will be cautious in advancing the reform,” said Lu Ting, an economist at Bank of America Merrill Lynch.

Central bank governor Zhou Xiaochuan says the central government will simplify administrative measures governing foreign exchange, draw up a list of sectors where direct investment will be prohibited and expand quotas under the qualified domestic and foreign institutional investor programmes by 2020.

However, Lu said, reforms on more important fronts, including loosening controls on cross-border lending and equity portfolio investment, would “remain quite slow”.

Opposition to rapid capital-account liberalisation has been strong since it was first put on the central government’s agenda in the 1990s. Although central bank officials generally advocate speeding up the process, many academics are against it, bearing in mind lessons from the 1997 Asian financial crisis, when foreign speculators undermined the financial stability of countries with open capital accounts following a credit binge.

Fan Wei, an analyst at Hongyuan Securities, said: “I think the process will be prolonged. Academics, represented by those from the Chinese Academy of Social Sciences, strongly oppose it.”

Yu Yongding, a top economist at the academy, told a forum this month: “So far I don’t see any necessity for the government to accelerate capital-account liberalisation.”

As the above excerpt indicates, if China’s capital controls are liberalized money will flow more easily both in and out of the country but at the moment there is just much more money ready to flow into China than out of it. And the lifting of those capital-controls isn’t going to come any sooner than 2020 and possibly much later. Hence the concerns about bitcoin.

But keep in mind that China only barred its financial institutions from trading in bitcoins. Individuals are still free to buy and sell all the bitcoins they want. And that presumably includes individuals with a lot of money. And gambling problem. A lot of money and gambling problem in Macau:

Business Insider
I’m Changing My Mind About Bitcoin
Joe Weisenthal

Dec. 1, 2013, 4:40 PM

I’m changing my mind about Bitcoin.

I used to think it was a joke or at best a currency for clowns.

Now, I no longer think that. Now, I don’t know what its future is.

Here, let me explain.

Provided the market is liquid enough, and the transaction infrastructure is robust enough, both the buyer and the seller should be able to conduct a mutually agreeable transaction at a fair U.S. dollar-based price, with Bitcoin simply providing the anonymity needed for the actual swap.

The same argument applies to the deflationary aspect of Bitcoin. If I’m buying weed online, what do I care if others are hoarding it, or if the price has gone up five times in the last day? So long as at the current price, the seller and me are able to come to a mutually agreeable price when translated back into U.S. dollars, the price rise just isn’t that big of an impediment. In fact, the price rise might actually be helpful (more on this later).

Even if you don’t think drugs, online gambling, and other illegal activity is enough to sustain a “currency,” the same principle applied above could apply to something more important: money laundering or circumventing capital controls.

This is what the excitement about Bitcoin in China is all about. In the Bitcoin community, there’s tons of talk about how the future of Bitcoin is in China, and there does seem to be tons of trading volume happening there. Here’s the potential: China has lots of rich people, but a fragile banking system, and strict capital controls, meaning it’s difficult to get your wealth out of the country. One way rich people get their wealth out of the country is by laundering it through Macau. Mamta Badkar wrote a great explainer of how this works.

Basically, your Chinese millionaire gives millions of dollars to a “junket” operator in the mainland. That junket operator then provides them with millions of dollars worth of chips at a casino in Macau. The millionaire then plays numerous hands of some game (probably baccarat) then at the end of the session cashes in the chips in Macau’s currency, the Pataca. Then those Patacas are deposited into a bank in Macau, and voila, the millionaire has just escaped China’s capital controls, having successfully moved millions outside of the Chinese banking system.

Bitcoin, theoretically, promises an even easier path to do this. Rich person buys a bunch of bitcoins, transfers them to a Bitcoin wallet associated with a financial institution outside of China, sells the bitcoins into some new currency, and then voila.

Economist Tyler Cowen wrote a long post about Bitcoin and its potential in China last week:

Right now, you can think of the value of Bitcoin being set in the same way that the value of an export license might be set through bids. If/when China fully liberalizes capital flows, the value of Bitcoin likely will fall. A lot. To the extent the shadow market value of the yuan rises, and approaches the level of the current quasi-peg, the value of Bitcoin will fall, by how much is not clear. Or maybe getting money out through Hong Kong (or Shanghai) will become easier and again the value of Bitcoin would fall. If Beijing shuts down BTC China, the main broker, which by the way accounts for about 1/3 of all Bitcoin transactions in the world, the value of Bitcoin very likely will fall. A lot. You will recall that the Chinese government shut down the virtual currency QQ in 2009; admittedly stopping Bitcoin could prove harder but still they could thwart or limit it.

If you are long Bitcoin for any appreciable amount of time, it seems you are betting that the Chinese economy will do poorly and capital controls will remain. Then more people will be increasingly desperate to get more money out of the country. Or you may be betting that the Chinese use of Bitcoin to launder money will increase due to the mere spread of the idea, through social contagion. According to this source, the value of Bitcoin is up by a factor of 66 this year in China.

Note that the Macau casino junket industry is dominated by the Triads so the junket operators are probably pretty good at providing a full-service experience.

Continuing…


Now, earlier I mentioned that the rising price of Bitcoin, rather than being a hindrance, could actually be helpful.

Here’s why. See, while everyone talks about Bitcoin, there are actually a ton of crypto-currencies. The website CoinMarketCap.com lists 42 different ones, and helpfully lists the total “market cap” of each. The “market cap” is just the price of each coin multiplied by the number of outstanding coins there are for each.

Here’s a look at the top eight among them. Bitcoin, at over $10 billion, is the biggest. Feathercoin, at over $19 million, is still pretty substantial.

Now each one of these coin systems are pretty similar, but they have slightly different characteristics. The second biggest one is Litecoin, which advertises that transactions are faster, and that the mining system is fairer than bitcoins.

Theoretically, any one of these would suffice if you’re a rich person in China looking to get your money outside the border. But in practice, several of these wouldn’t suffice. For you to get your money out of China you need to be able to buy coins in size, and then be confident that once you’ve switched them to a wallet outside of the country, that you’d be able to sell those coins in size for roughly the same price.

If you wanted to move $1 million worth of Feathercoin, you’d be trying to move over 5% of the entire Feathercoin market. It’s highly unlikely you’d be able to find that kind of liquidity in any reasonable period of time. You’d be taking a gigantic risk that when you wanted to sell your Feathercoin, that there would be no buyers, and you’d be totally screwed.

Now that Bitcoin has, notionally, billions of dollars in the ecosystem, moving $1 million (just ~1,000 bitcoins) is less likely to cause any kind of splash. You can probably obtain the coins and sell them without much disruption. So although theoretically the competing coins can technically do the job of getting past the border, you really need the network effects of a system with a high “market cap” to make it work. So in a sense, the rising price makes it easier for the whole system to operate. Rather than being discouraging to the Bitcoin ecosystem, it enables it, because there’s enough money in the system to absorb the needs of buyers and sellers doing transactions.

Felix Salmon wrote a post titled Waiting for Bitcoin to get Boring in which he argued that Bitcoin bulls should be more excited by long periods with little volatility rather than the periods like recently where the price goes ballistic. But while that seems intuitive if you think of Bitcoin like a “currency” that needs stability, it doesn’t necessarily jibe with the thinking above. Higher and higher bitcoin prices enable transactions in size. It’s because Bitcoin has gone parabolic, and the number of dollars associated with it are now over $10 billion that it could become a plausible avenue for rich Chinese to start thinking of it as a way for them to get money out of the country. Rather than the high price being a hindrance, the high price expands the market.

So will bitcoin replace casino junkets in Macau as the method of choice for rich Chinese in need of some cleaning services? Only time will tell!

Or maybe gamblers can take their bitcoins to casinos directly and just skip the junket. That’s the idea behind Bitmarker, a new company that’s trying facility the use of bitcoins for the financing interest-free loans from casinos.

Either way, if bitcoin is going to launder in the “big leagues” the bitcoin economy and the total value of bitcoin is going to have to grow by many orders of magnitude.

Gambling on bitcoins can involve a lot of gambling online with bitcoins
Bitcoin’s potential to compete with the casino industry isn’t limited to its potential for money-laundering. Bitcoin also has another feature that makes it a potent competitor with the online casino industry. It’s a feature that makes bitcoin great for money-laundering but not so great for use as actual money: bitcoin transactions are irreversible. It turns out that irreversibility may make bitcoin difficult to use for general commerce, but irreversibility and quasi-anonymity also make bitcoin close to the perfect online poker chip.

Bitcoin’s near-perfect poker chip-status is a reality that’s become self apparent by the fact that Satoshi Dice, the most popular online bitcoin gambling site, has been single handedly generating around half of the total bitcoin transactions for over a year:

Forbes
Bitcoin Casinos Release 2012 Earnings

Jon Matonis, Contributor

1/22/2013 @ 11:35AM

It is earnings season on Wall Street and it is reporting season for some of the leading bitcoin casino operators. Three significant Bitcoin-related gambling sites have reported their earnings and statistics for calendar year 2012. Some of the data is fairly revealing giving us a fascinating glimpse into the worldwide growth of bitcoin and gambling.

First up is the venerable SatoshiDice, which is the leading bitcoin gambling site in terms of amount wagered. Responsible for more than 50% of daily network volume on the Bitcoin blockchain, SatoshiDice reported first year earnings from wagering at an impressive ?33,310. During the year, players bet a total of ?1,787,470 in 2,349,882 individual bets at an average monthly growth rate of 78%. Earnings were calculated from eight months of data covering May to December, 2012.

With servers based in Ireland and promoted by Erik Voorhees, SatoshiDice is considered a blockchain-based betting game and it is self-described as the “most popular Bitcoin game in the world.” Similar to random number generation, the site uses a method to produce a number between 0 and 65,535 which is then wagered on by making a bitcoin transaction to one of the static addresses representing different payouts. The odds are calculated to give the house an edge of 1.90% with full transparency because all dice rolls and earnings statistics are verifiable using the blockchain.

Operating expenses were minimal in 2012 and the company also paid monthly bitcoin dividends to ‘public’ shareholders which represent 10% of the total 100,000,000 outstanding shares. To invest in the operator and bet on the house, SatoshiDice shares are traded on the MPEx bitcoin stock exchange under ticker symbol S.DICE (see August 19th, 2012 Prospectus). At the current exchange rate of $17.00 per BTC, SatoshiDice is a company valued at $8.9 million.

Voorhees emphasizes that until the site’s legal status is clear, all balances and accounting will be maintained in play-money bitcoin, because “it’s better to keep it completely separate from real life.” For all of the venture capitalists out there, here is how SatoshiDice started. Where is the next big one?

With privacy, efficiency, growth, payment irreversibility, and cost savings as demonstrated by the above, it’s only a matter of time before the mainstream casino operators of Gibraltar and Malta realize the benefits of a gaming economy that leverages the ideal digital casino chip.

Keep in mind that SatoshiDice began generating a majority of bitcoin’s daily transcations within 10 days of its launch last year and was still generating about half of the total number of bitcoin transactions as of August if this year. If that sounds like an absurdly high percentage of the total transaction volume for just a single site, keep in mind that bitcoins really aren’t used for much else at this point. The top 100 bitcoin accounts constitute ~20% of the total number of bitcoins minted. The top 500 accounts hold ~35% of the total. The top 927 accounts hold ~50% of the total. And, perhaps more importantly, the concentration of bitcoins held by these big accounts has barely changed over the course of the bitcoin boom. A huge share of old-school bitcoin holders are simply not interested in trading their vast bitcoin hoards for goods and services. As a consequence, bitcoin gambling – which primarily trades just bitcoins back and forth – has become the dominant type of bitcoin transaction.

Does bitcoin have a gambling problem?
The fact that a single gambling site generates close to half of the total bitcoin transactions might seem like just another interesting fun-fact about bitcoins and little more. But there are some serious consequences to the bitcoin gambling phenomena on bitcoin’s potential to grow and become a true alternative currency (and also become a venue for big time money-laundering).

For example, SatoshiDice pays an enhanced “transaction fee” to bitcoin miners, giving the SatoshiDice transactions priority over waiting transactions. When a huge percentage of the total bitcoin traffic has priority in transaction clearing it risks potentially clogging the bitcoin system with spam transactions that create delays for non-gambling transactions. SatoshiDice even once contributed to the much fear “forking” event (the double spending of bitcoin). In other words, the more bitcoin is used for gambling, instead of commercial transactions, the less useful bitcoin becomes for commercial transactions. At least, that’s one potential outcome.

Or maybe bitcoin has a gambling solution
There’s another argument that could be made that bitcoin gambling is actually creating a stronger, more robust bitcoin ecosystem that will have to exist in order for bitcoin to have the transaction processing capacity to compete with credit card transactions. That’s because SatoshiDice, and bitcoin gambling community in general, also acts as a powerful financial incentives to jump into the bitcoin mining game bay providing a steady stream of transaction fees. If the demand for bitcoin transaction clearances exceeds the supply by too much the whole system grinds to a halt. And if bitcoin is ever going to compete with credit cards, it’s going to have to get a lot bigger and a lot faster. Maybe about three orders of magnitude faster:

The Washington Post The Switch
Bitcoin needs to scale by a factor of 1000 to compete with Visa. Here’s how to do it.

By Timothy B. Lee
November 12 at 3:38 pm

At the heart of Bitcoin is the blockchain, a global, shared record of every Bitcoin transaction that has ever occurred. It gets its name from the fact that every 10 minutes, on average, the peer-to-peer Bitcoin network adds a new “block” containing records of recent transactions.

The blockchain is shared among the numerous computers that participate in the transaction-clearing process known as “mining.” To avoid overloading those computers, Bitcoin software currently limits each block to one megabyte in size. The result: right now, the Bitcoin network is only capable of processing around 7 transactions per second. For comparison, the Visa network is designed to handle peak volumes of 10,000 transactions per second.

So far, that hasn’t been a problem because Bitcoin users are only generating around 1 transaction per second. But if the Bitcoin economy continues to grow, it’s only a matter of time before that limit becomes a problem.

Can the Bitcoin network be tweaked to handle the much higher transaction volumes that could occur in the future? To answer that question, I talked to prominent Bitcoin developer Mike Hearn. He helped me understand the current limits on Bitcoin performance and how Bitcoin’s development team plans to overcome them.

Timothy B. Lee: Can you briefly describe the current limits on how many transactions the Bitcoin network can accommodate?

Mike Hearn: There are two different kinds of Bitcoin client: Full nodes and “light nodes” we call simplified payment verification (SPV) nodes. Light nodes don’t care how big the blocks are. And full nodes have a hard physical limit [of one megabyte per block.]

So one megabyte every 10 minutes, dividing by the average size of transactions [gives us] the current limit [of] about 7 per second.

How close are we to that limit right now?

If you look at a chart of the number of transactions per day, we’re peaking at 70,000 transactions per day. We’re not even at one per second [e.g. 86,400 transactions per day] yet. It’s grown. It’s grown pretty nice and fast. If you plot the overall graph from the system. It has this nice little exponential slope. We’re quite a way from hitting these limits. It’s a little bit fuzzy as well, for various reasons. We’re not in any danger of running out of capacity right now.

What’s going to be required to get beyond 7 transactions per second?

We just need to take away the limit and get people to upgrade their nodes. The reason it hasn’t been done yet is that we’re still trying to figure out whether there should be a new limit or no limit at all. [If there’s no limit,] how do we ensure someone doesn’t mine an artificially bloated block that’s just there to annoy people?

Note that debates over topics like “whether there should be a new limit or no limit at all. [If there’s no limit,] how do we ensure someone doesn’t mine an artificially bloated block that’s just there to annoy people?” are, in part, debates over whether or not bitcoin gambling should be allowed.

Continuing…

Gavin [Andresen, Bitcoin’s lead developer] is working on some of the work that’s needed for this to be done. He’s working on reforming the fee system. The design we’re heading toward is that there won’t be any limit, but by default miners will refuse to process blocks that are ridiculously big.

Can you explain how Bitcoin fees work and why the system has them?

You can attach a fee [e.g. a payment to the miner processing the transaction] to any transaction in Bitcoin. Originally when Bitcoin was new, all transactions were free, and over time the rules were adjusted so you can still send free transactions but they’re slower. Fees act as a kind of a throttle for preventing flooding the network with bogus transactions. If every transaction was always free, you’d get people bouncing coins back and forth all the time.

The main issue we have at the moment is the way that fees are set and negotiated across the network is very basic. They’re not really negotiated. The minimum fee size was picked by Gavin less than a year ago. It was picked at a time when the Bitcoin price was much lower than today. Because the numbers are fixed in the software, they’re not specified in terms of dollars, they’re specified in terms of Bitcoins. So Bitcoin transactions have become more expensive for no good reason. Gavin is working on changes to how that works.

Nodes will watch the transactions that get broadcast on the system, and then they’ll watch how long transactions take. So they’ll say “if you want to get processed in 3 blocks, you should pay this much.” The idea is that miners set the fees they are willing to charge, and nodes observe the operation of the market and estimate observed behavior. My hope, if other things have been done correctly, is that fees will fall significantly.

As the above article points out, there is currently a fixed number of bitcoins that gets paid to the mining team that successfully generates the each successive “blockchain” of validated transactions (currently 25). Eventually, once all 21 million bitcoins are “mined”, there will no longer be any bitcoins awarded and instead it will be solely transaction fees that finance the bitcoin mining industry. But for now, every 10 minutes or so a “lucky” bitcoin mining team is awarded 25 bitcoins. On a day like November 29th, 2013, bitcoin was awarding the equivalent of 25 ounces of gold to a mining team every ten minutes on top of any transaction fees that would have been paid by the users.

And bitcoin miners aren’t the only one’s making large amounts of money (or at least making lots of bitcoins): In July of 2013, the owner of SatoshiDice, Erik Voorhees, became the first “Bitcoin millionaire” after selling SatoshiDice to an undisclosed buyer for 126315 bitcoins (worth ~$11.5 million at the time and a lot more now). Erik Voorhees, an ardent Libertarian and staunch opponent of the Federal Reserve, discovered bitcoin in 2011 after moving to New Hampshire to become part of the Free State Project (which calls for +20k Libertarians to move to New Hampshire and get the state to secede). During his experiences with bitcoin Mr. Voorhees learned many lessons. One of the lessons he learned was that “America is a lie” and “America is not the land of free markets and free people that it was advertised to be in Government schools when I was growing up”.

We don’t know yet if any of Mr. Vorhees’s substantial SatoshiDice fortune will be put towards future Free State Projects since he’s not interested in trading his 156,315 bitcoins “for fiat toilet paper”. But should he ever decide to cash out and finance a new country he’ll probably have a lot of similarly minded bitcoin millionaires to join him.

There’s gold in them mines! Want to buy some mining equiptment?
There’s another sector of the bitcoin economy that’s been making quite of bit of money lately. And not just bitcoin “money”: but actual money money. It’s mostly miners’ money:

South China Monrning Post
Bitcoin miners find it increasingly hard to make money

It’s becoming increasingly tough to earn money from making bitcoins; it’s the makers of souped-up computer equipment that are minting it

PUBLISHED : Sunday, 10 November, 2013, 3:26am
UPDATED : Thursday, 28 November, 2013, 9:58am

Tucked away in an airconditioned data centre in Silicon Valley is a hotchpotch of black boxes, circuit boards and cooling fans owned by 27-year-old Aaron Jackson-Wilde, a modern-day prospector looking for bitcoins.

Since discovering the digital currency a few months ago, Jackson-Wilde has paid about US$2,000 for his “rigs”, which are powered by specialised computer chips. They are designed to help operate and maintain the bitcoin network – and, in return, generate a small reward in a process known as “bitcoin mining”.

In a key twist that keeps inflation in check, the difficulty of the cryptographic maths that leads to newly minted coins grows as more computers join the network.

That has led some technology professionals to target a new market in souped-up computers and specialised chips aimed at the growing ranks of bitcoin “miners”.

The goal of bitcoin miners is to pull in more than what they spend on their rigs – some cost over US$20,000 – and the electricity they need to keep the machines running 24 hours a day.

It has become so hard to make a profit that comparisons to the 19th century California gold rush, when money was often made selling shovels to naive prospectors, have become a running joke among bitcoin miners.

“It’s the guys who sell the equipment who are making the money, not the bitcoin miners,” said Jackson-Wilde, a manager at a company that makes motorcycle batteries.

CoinTerra believes spending on new bitcoin mining chips could easily hit US$100 million a year for the next three years, assuming no change in prices. While that is peanuts for large semiconductor companies like Intel and Qualcomm, it is a lucrative market for small developers.

About 11.9 million bitcoins, worth US$2.4 billion at recent prices, have been minted since the currency began circulating. Based on recent activity, the network is on track to create around 1.4 million new bitcoins annually over the next three years, the equivalent of more than US$280 million a year at recent exchange rates.

Reflecting growing competition, Jackson-Wilde says his gear – which features model names like Erupter, Jalapeno and Spartan – now pulls in a tiny fraction of the bitcoins it used to, but he expects another US$10,000 worth of next-generation equipment to put him in the black.

Keep in that the value of the 1.4 million bitcoins slated to be minted over the next three years and awarded to miners will be worth a lot more that $280 million today even after the recent price meltdown following the bitcoin trading ban for Chinese banks. There’s a potential fortune to be “mined” over the next few years, and the higher the bitcoin bubble gets the bigger that ~10 minute award gets and the greater the competition for more bitcoin computing power.

There’s gold in them hills! Let’s set up a casino to mine it.
And, of course, the greater the price of bitcoin, the more temptation there’s going to be for schemes. Schemes like getting a supercomputing mining center and then setting up gambling site so you can mine your site’s own transactions and all the other transactions (which are still mostly gambling transactions that pay fees).

And, of course, someone is already doing that: Massive Luck Investments – a Hong Kong based investment firm that owns betcoin.tm, a SatochiDice clone – recently decided to plunge into the bitcoin mining business. It involves multiple generations of mining machines planned for sale to the public and even a privately held multi-petahash/second cutting edge system for the in-house mining. The advanced chips appear to be targeted towards a cloud-mining operation. Based in China. Using two supercomputing centers. For one of the supercomputing centers, the “Shanghai supercomputer center will be responsible for the overall facility design and staff training”. At least that’s all what they announced this April. Part of that announcement included:

“The Chinese government provides preferential policies to attract FDI [foreign direct investment] in certain high tech areas that benefit the Chinese economy,” said the Massive Luck exec. “They require traditional CPU-based traditional computing power to address the acute shortage of it. Shanghai supercomputer center will be responsible for the overall facility design and staff training.”

Could a supercomputing center dedicated to bitcoin mining that’s designed by the Shanghai Supercomputing Center and run by the owners of a SatoshiDice clone really be in the works? The Chinese government does have an ambitious program to build super-computing sites. The recent ruling by the Chinese government didn’t restrict private bitcoin activity at all and before the bitcoin bank ban, signs were pointing towards an embrace of bitcoin by Beijing. Businesses like this could be handy if the Chinese elites really do have an interest in expanding their opportunities for getting a head start on the lifting of capital controls.

But bitcoin miners with less-than-supercomputing capabilities shouldn’t fret quite yet. Betcoin.tm users have already charged betcoin.tm with not actually implementing the mathematically “provably fair” gambling protocols and are alleged to have been attacking betcoin’s competitors with denial-of-service attacks and generating fraudulent bets using scripts to puff up their numbers. As SatoshiDice founder Eric Voorhees put it “Bitcoin is absolutely the Wild West of finance, and thank goodness“. Yes it is. So this particular bitcoin adventure could end up being mostly good PR. Then again, maybe there really are supercomputing centers in China getting set up to mine bitcoins. That might bode well for the investors in the supercomputing center, but what do possible public-private partnerships with Chinese supercomputing centers say about bitcoin’s potential to live the dream and slay the Beast when you have to own a supercomputing cluster to even begin seriously competing in the Great Digital Gold Rush? We’re not at that point yet, but if bitcoin takes off, it’s coming. And in race of computing speed and power guess who wins.

The story of betcoin.tm and Massive Luck Investments is an example of what is possible nowadays: Bitcoin mining is an unregulated competition and if a public or private organization wants to allocate supercomputing resources towards the bitcoin mining markets they just might go ahead and do that. And maybe there will be public-private partnerships using very powerful computing resources. Why not, especially if bitcoin takes off? Bitcoin has the potential to enrich governments and their private partners too. Don’t forget that bitcoin had a pretty positive reception during the recent US Congressional hearings and China’s government really didn’t do all that much to restrict bitcoin’s usage. And there’s no reason the world’s Big Brothers have to hate digital cryptocurrencies. Especially if the governments of the world continue to seize significant percentages of bitcoins in single criminal busts. Contrary to popular opinion, Big Power (government) may not have much to fear from this digital government-slayer.

We’ll have to wait and see how all of this turns out. Bitcoin could fizzle out in months or just keep parabolically chugging along for years to come. And if bitcoin doesn’t end up slaying the twin beasts of Big Money and Big Power and doesn’t assume the mantel as the new global currency for a post-government crypto-golden age others will keep trying. Some dreams don’t die easily, especially the collective nightmares.

And regardless of whether or not bitcoin succeeds in becoming the gotta have currency, one thing is clear: Big Electricity has got to be loving this new processing-intensive digital cryptocurrency craze. Absolutely loving it.

Discussion

17 comments for “The Big Bitcoin Bet: Currency of the Future or Just a Better Casino?”

  1. @Pterrafractyl–

    Excellent work! The whole bitcoin phenomenon is amazing to me.

    This thing is S-O-O-O full of holes, loopholes, built-in weaknesses and scams that it is amazing to me that anyone dares to get involved.

    Maybe the Erik Voorhees’s of the world can game this to their liking, but this so-called currency has, as I said in FTR #764, all of the weaknesses of the fiat currencies that bitcoiners criticize and NONE of the advantages/safeguards.

    Talk about “caveat emptor,” sheesh!

    Best,

    Dave

    Posted by Dave Emory | December 11, 2013, 9:29 pm
  2. @Dave: Part of what makes the bitcoin phenomena so amazing is that the “value” of the bitcoins are deeply intertwined with the cost of electricity and there seems to be very little recognition of this reality. The bitcoin mining problems are designed to be artificially difficult in order to ensure the entire bitcoin mining community can’t easily alter the blockchain (which introduces opportunities for double spending and other shenanigans). So bitcoin users, as a whole, can’t reap all the benefits from improvements in computing power…if there was a breakthrough tomorrow that made it much easier to “mine” bitcoins the algorithm would simply make the mining much more difficult. So the price of bitcoin has to rise or the cost of electricity has to fall if the bitcoin economy is going to pay for itself as it grows. More efficient use of electricity (via better processor technology) won’t help. And at the current price of ~$900/bitcoin, the bitcoin economy is not paying for itself:

    Quartz
    Miners spend $17 million a day for a shot at $4.4 million of bitcoin
    By Tim Fernholz @timfernholz December 11, 2013

    The price of a single bitcoin, now sitting at $899, is derived from many mysterious sources: supply and demand, potential future business value, animal spirits. One factor is less widely understood: The price of bitcoin depends on the price of electricity.

    Bitcoin are produced by “mining,” having computers solve code-breaking problems that, when completed, yield a unique bitcoin. The more bitcoin that are mined, the harder those problems become, a wrinkle designed to control inflation in the crytpocurrency and one some economists suspect will lead to future deflation. But the cost of solving those problems is basically a function of processor power and electricity. And according to Blockchain, an organization that monitors the peer-to-peer currency, today bitcoin miners spend approximately $17 million on this task daily—and, at current valuations, only make bitcoin worth $4.4 million.

    That calculation is based on a few assumptions, which makes it worth taking with a grain of salt. One is that the network solves 7.5 million billion “hashes” (the problems solved in the mining process) each second, and that each of these gigahashes requires 650 watts of electricity to solve, which in turn costs 15 cents per kilowatt hour. That’s slightly higher than the US average of 12.52 cents per kilowatt hour, and also doesn’t take into account the efforts of bitcoin miners to develop specialized high-speed computers that mine the coins more efficiently, effectively driving your average personal computer out of the business. Still, it’s safe to say that more money is spent attempting to generate bitcoins each day than those bitcoins are worth.

    This processor-speed arms race has rapidly ramped up the difficulty of bitcoin mining, eliminating the average miner’s profits or sending them into cooperative pools. Mining operating margins are now measured at -329.04% by Blockchain.

    For most people to actually profit off their bitcoin-mining efforts, the asset needs to continue to dramatically increase in value. That in turn has spurred on bitcoin competitors like Litecoin that promise a more level playing field. It also sets up potentially troublesome dynamics within the crypto-currency. For one thing it stokes volatility. And if mining is only profitable for people making the largest investments, fears of a miners cartel could come to life.

    Note that there are also transaction fees getting paid out from all the gambling sites so that presumably helps cover some of the mining cost. But since mining awards are scheduled to get cut in half until they disappear around 2040 (when all 21 million bitcoins have been minted) the transaction fees are going to have to grow to pay for larger and larger shares of the total cost or bitcoin’s value is going to have to continue skyrocketing. It raises the question of why anyone would even bother with bitcoin in the long run since that artificially enhanced mining difficulty potentially translates into very real electricity costs that are totally unnecessary. Even assuming one is totally dedicated to the bitcoin idea, why not just switch over to a bitcoin clone with easier mining instead of handing all that money over to Big Electricity?

    Posted by Pterrafractyl | December 12, 2013, 1:29 pm
  3. @Pterrafractyl–

    Much of the technical aspect of “bitcoinery” is over my head–I’m an old guy, well into middle age when the internet phenomenon broke.

    Vis a vis bitcoin, just remember who appears to have developed–NOT the probably fictional “Satoshi Nakamoto.”

    As discussed in FTR #760, bitcoin appears to have been developed by Lantiq, part Siemens (read “BND”), part Golden Gate Capital, composed of alumni of Bain Capital (read “Underground Reich.”)

    Posted by Dave Emory | December 12, 2013, 5:17 pm
  4. @Dave:
    Part of what makes bitcoin rather fascinating is that we’re seeing a kind of real life test of Libertarian ideals and this experiment is only going to get weirder and more revealing as time goes on. The bitcoin model for denationalized currency is being promoted as a fight for the “little guy” to fight against “The Man” (central banking systems run by goverments) to create a truly “free” currency that will usher in an era of global prosperity. But the technical design of bitcoin is almost exactly what one would imagine if banking cartels got together and wanted to create a system that sort of looks like its structured around a one-man-one-vote ideal but is actually run on a one-dollar-one-vote system. It’s great real-life metaphor for Libertarianism.

    Here’s a brief description of how bitcoin’s “mining” system and why its potentially a bankster’s dream: One of bitcoin’s strengths is that, as a distributed system, bitcoin is theoretically very hard to game. That’s because there are so many different people that are participating in “mining” it’s very difficult for people to mess with the “validation” process.

    “Validating” bitcoin transactions is, in a way, a triviality. All you have to do is ensure a person isn’t spending the same bitcoin in separate transactions simultaneously – the much feared “double spending” attack. It’s just basic accounting. That’s it. A single crappy computer hooked up to the internet could potentially accomplish this task on its own. But that single computer could only do this if that computer was somehow designated as “the” computer that validates bitcoin transactions, acting as a sort of central clearinghouse for bitcoin.

    One of the challenges involved with the system of selecting a single computer is that the people running the computer might somehow secretly mess around with the public ledger of transactions and, more importantly, there’s the question of how the bitcoin community decides who gets to run that central computer. Because bitcoin is supposed to be a stateless system run by protocol, and not dictate, there aren’t clear mechanisms for deciding who gets to be the bitcoin clearinghouse.

    Bitcoin’s solution to these problems is where the MADness enters into the system and where the banksters or governments or anyone else with serious resources could collude to take it over: Bitcoin validates all transactions in batches. These batches of validated transactions are the “blocks” in the bitcoin “blockchain”. Because there’s no central bank, or no clearinghouse to oversee and prevent “double spending” the bitcoin system has to rely on a protocol instead. And the protocol chosen by Satoshi Nakamoto is one that basically allows anyone to become the bitcoin’s central bank…but only for a single “block” of transactions. Now the whole network is the central bank! Score one for the little guy, right?

    Well, it turns out that the particular mechanism Satoshi Nakamoto chose to decide who “wins” the right to validate a given block of transactions is the “proof-of-work” algorithm. It’s an algorithm designed to create a cheat-proof system whereby you could have an arbitrary protocol for choosing only one person amongst a large pool of candidates. You could use a random number generator to select the lucky winner, but the random number generator system can potentially be rigged, creating a vulnerability in the system.

    So, instead of randomly deciding a winner, the proof-of-work algorithm is centered around the scheme of giving everyone a really difficult problem to solve. The problem is so difficult that the odds of having two people solving it nearly-simultaneously are really low. The person that solves the really really hard problem first becomes the winner. Behold! A completely distributed and cheat-proof system that doesn’t rely on any central banks, governments, private corporations or any messy democratic decision-making! It’s a self-organizing system that anyone can participate in with no barriers to entry. The Everyman’s currency.

    Yes, instead of the messiness of government and collectively creating rules, bitcoin is run by system that rewards users based on the raw computing power that they put towards “racing” to win the right to validate each block of transactions. A pure test of computing power and that’s it. A true one-dollar-one-vote system outside of government control. What’s not to love?

    So virtually all of that computational power dedicated to bitcoin mining has NOTHING to do with managing bitcoin except that it determines who wins the race for the right to validate each block and collect the fees. And the race is completely unregulated. If a single user set up a supercomputing center that had 10% of the total computing power dedicated to bitcoin mining, that user could expect to win the right to validate about 10% of the blocks issued on a given day. It’s that straight forward.

    How could such a system not end up being dominated by the groups with the deepest pockets on the planet or access to the most advanced technology if the bitcoin system ever truly succeeded in becoming a major currency/commodity? And what are the odds that we aren’t going to see a “selfish-miners” scenario turn into a transaction-fee-rigging scenario once the oligarchs are running the world’s fastest computers? Unless bitcoin undergoes some very fundamental changes where its no longer a system that awards those that are able to muster the greatest resources it’s hard to see how bitcoin doesn’t remain a bankster’s dream and a wonderful metaphor for the Libertarian utopia.

    Posted by Pterrafractyl | December 15, 2013, 6:46 pm
  5. Here’s a nice piece on how the creation of a giant energy sink is central to how bitcoin is supposed to work:

    PandoDaily
    Bitcoin has a dark side: its carbon footprint
    By Michael Carney
    On December 16, 2013

    Bitcoin may be making a few people wealthy, but it’s killing us all. The crypto-currency that’s caught the world by storm has a dark side: its carbon footprint.

    At today’s value of roughly $1,000 per bitcoin, the electricity consumed by the bitcoin mining ecosystem has an estimated carbon footprint – or total greenhouse gas emissions – of 8.25 megatonnes (8,250,000 tonnes) of CO2 per year, according to research by Bitcarbon.org. That’s 0.03 percent of the world’s total greenhouse gas output, or equivalent to that of the nation of Cyprus. If bitcoin’s value reaches $100,000, that impact will reach 3 percent of the world’s total, or that of Germany. At $1 million – which seems farcical but which may not be out of the realm of possibility given the artificially limited bitcoin supply – this impact rises to 8.25 gigatonnes, or 30 percent of today’s global output, and equivalent to that of China and Japan combined.

    Bitcoins aren’t mined from the earth’s crust like most physical commodities – although at least that leaves tangible evidence of its environmental impact. Rather, they are “mined” by computers solving a set of complicated computational problems. These problems are designed to get more difficult over time, until the year 2140 when the 21 millionth (and final) bitcoin is mined. Early in bitcoin’s existence, it was feasible to run a successful mining operation with a standard PC. Now the task requires custom mining rigs that can run orders of magnitude more processes per second.

    The top of the line model, which is currently made by a Swedish company called KnCMiner, costs around $13,000 and can mine at a rate 550 gigahashes per second: They’ve sold $28 million worth, and soon these too will be obsolete. The total computational power of the global bitcoin mining network today is more than seven million gigahashes, and climbing. That’s 256 times greater than the world’s top 500 supercomputers, combined.

    These computers are consuming so much electricity that it’s already unprofitable to mine in some regions of the world. According to Blockchain.info the total electricity cost of all mining acticity conducted over the last 24 hours was $19,652,986.38, as the system consumed 131,019.91 megawatt hours. In April, Bloomberg Sustainability called bitcoin mining it a “real-world environmental disaster.” At the time, the system was consuming just 7,000 megawatt hours per day – things have increased 142-fold in the last eight months.

    Bitcoin’s brilliance may also be its downfall. The entire system is built on a “proof of work” algorithm in which miners race to find the simplest and shortest piece of data to represent the ever-growing bitcoin transaction record, or blockchain. Proof of work solves the biggest challenge facing all preceding cryptocurrencies: How do you build a financial system among distributed nodes without trusted centralized clearinghouse, aka a bank? Chris Dixon recently noted that this problem, which is called the byzantine generals proble in computer science, was previously thought to be impossible.

    The answer to this problem, it turns out, was to pay miners a non-trivial amount to solve these problems and thus verify each block of bitcoin transactions. With enough miners, the system rolls on. But invisible to the naked eye, so does the massive carbon output. In fact, the cost of electricity is a systemic design consideration that bitcoin’s creators realized would regulate the pace at which bitcoins were mined. The thinking goes that as computers get more powerful, per Moore’s Law, the cost of mining bitcoin will fall back into reason – and then the race will begin again in earnest.

    The exact carbon footprint of the bitcoin system is unknown. The above Bitcarbon figures are mere estimates based on several simplistic assumptions. First, the calculation assumes that miners will be willing to spend 90 percent of the value of a single bitcoin to mine it. This could be a gross underestimate if miners are willing to bet on appreciation. Second, these figures are based on the assumption that 50 percent of all mining activity takes place in the US and 50 percent in China. This is a deliberate oversimplification for arriving at a reasonable estimate of the blended cost and carbon output of first-world and second/third-world mining activities. It also raises the interesting point that, from an environmental perspective, not all bitcoins are created equal. Chinese bitcoins are “dirtier,” yet less expensive economically to produce than those mined in the US.

    But, even if taken as just order-of-magnitude accurate, Bitcarbon’s math makes it obvious that we have a real problem on our hands here. Bitcoin’s carbon output impact threatens both the environment and it’s long term viability as an economic system. In fact, it’s inconceivable that major world governments would allow bitcoin (or any other system) to consumer a tenth or a third of the world’s carbon output, as is predicted.

    There are things that can be done to offset or arrest bitcoin’s carbon footprint, but none are likely enough to make up for the design choices made by the system’s creators. Bitcarbon has introduced an offset program through which miners can voluntarily purchase carbon credits created from clean tech projects. But it’s unlikely that the desire for a clean conscience will be enough to drive such behavior.

    Bitcoin could also follow in the footsteps of other alternative currencies, or altcoins, several of which have implemented alternatives to the proof of work system that don’t demand such computational heft. For example Litecoins, which many have referred to as “silver to bitcoin’s gold,” uses a different type of algorithm that is said to negate the benefit of utilizing specialized mining hardware. This doesn’t eliminate the carbon output of the system, but reduces it dramatically. Peercoin, on the other hand, is built upon a proof-of-stake system that distributes new coins based on the size of an individual’s holdings. This has its own drawbacks, but eliminates the need for mining rigs alltogether.

    Unfortunately, the bitcoin ecosystem is likely too big and too distributed to implement significant changes to its proof of work system now. Such changes would require the majority (likely 80 percent) of all mining nodes to agree and to implement the shift simultaneously in order to preserve the systemic integrity. Without a central governing body or even leadership council, this is highly implausible.

    For those concerned about bitcoin’s carbon footprint, the best recourse may be to promote the use of one of these altcoins in favor of bitcoin. The Litecoin system is currently less than 10 percent that of bitcoin in terms of total value, and its underlying infrastructure and level of public awareness both pale in comparison. But as the second largest digital currency it may have the best shot of all existing altcoins at reaching such meaningful scale as to challenge bitcoin’s dominance.

    Note the scheme described above: The cost of electricity is a systemic design consideration that bitcoin’s creators realized would regulate the pace at which bitcoins were mined. The thinking goes that as computers get more powerful, per Moore’s Law, the cost of mining bitcoin will fall back into reason – and then the race will begin again in earnest.

    So, under perfect market conditions with large amounts of competition, bitcoin mining would basically end up transferring the value of all awarded bitcoins and transaction fees right into to the electricity sector (because profit will be minimized under ideal market conditions). The banksters are going to be buying a lot more power plants if bitcoin really takes off.

    Then again, since bitcoin mining is on track to eventually require a supercomputing center just to realistic have a chance of winning your investment back, bitcoin mining could become an extremely imperfect market over time with very few serious competitors due to the enormous costs needed just to get started. And, sadly, perhaps that kind of market imperfection is what we should hope for at this point. It’ll enrich the banksters but at least it might cut down on the electricity consumed. It’s sort of a “Heads: the banksters win. Tails: the power company wins and the environment loses” kind of situation.

    Also, note that switching over to a different “proof-of-work” algorithm that doesn’t benefit from specialized chips like litecoin uses might make bitcoin mining more fair, but it’s not necessarily going to fix the underlying problem.

    Posted by Pterrafractyl | December 16, 2013, 1:06 pm
  6. Uh oh! It looks like that Chinese ban on bitcoin banking might extend to 3rd party payment systems too. That potentially makes bitcoin commerce rather difficult in China. And, perhaps more importantly, it’s a signal that the Chinese government just might want to crush the cryptocurrency craze. Not good news for bitcoin:

    China Bans Payment Companies From Clearing Bitcoin, News Says
    By Bloomberg News Dec 17, 2013 2:52 AM CT

    Chinese central bank officials told third-party payment service providers to stop offering clearing services to online Bitcoin exchanges, according to China Business News, which is affiliated with the Shanghai government.

    Companies currently offering services must end services by the Chinese New Year, a weeklong holiday that begins on Jan. 31, the newspaper cited Zhou Jinhuang, deputy director of payment clearance at the People’s Bank of China, as saying at a meeting with more than 10 third-party payment service providers.

    China’s central bank regulated the virtual currency for the first time on Dec. 5 by banning financial institutions and payment providers from conducting transactions in the virtual currency. Zhou was cited as saying by China Business News that the rules would be “strictly enforced.”

    “The PBOC statement on Dec. 5 was somewhat vague and there is more clarity now,” Zennon Kapron, managing director of financial consultancy Kapronasia, said in an interview in Shanghai. “The way it’s reading now is that after the Chinese New Year, you won’t be able to get your money off the platforms.”

    The PBOC’s news department didn’t immediately comment on the Bitcoin report when contacted by Bloomberg News. Two calls to Li Yue, director general of the central bank’s payment and settlement department, were unanswered.

    Bank Ban

    Bitcoin prices on BTC China, China’s largest exchange, plunged to as low as 3,251 yuan ($535) today before rebounding to 4,155 yuan at 4:16 p.m. local time. The drop in prices was triggered by concern that PBOC officials may visit lenders next to enforce the ban against Bitcoin settlement, Kapron said. The number of banks and payment providers that can transact Bitcoin has shrunk since the ban was announced, he said.

    Posted by Pterrafractyl | December 17, 2013, 12:22 pm
  7. A cryptoragnarok triggered by profit-maximization? Uh oh:

    Quartz
    cryptoragnarok
    The existential threat to bitcoin its boosters said was impossible is now at hand
    By Christopher Mims @mims January 9, 2014

    A doomsday scenario that has long been dismissed by bitcoin’s biggest boosters is now a clear and present danger. At 3am ET this morning, a single bitcoin mining collective known as Ghash.io reached 45% of the computing power of all global bitcoin miners, just six points short of the 51% that would be required to break bitcoin by arbitrarily manipulating the record of future transactions upon which it rests. The result could be, at minimum, “double spending” of existing bitcoins, which would render the currency effectively unusable.

    To put this in context: Imagine that tomorrow, a single corporate entity gained the ability to clone all of its dollars, and then immediately went on an asset buying spree. To say that it would undermine trust in the US dollar would be an understatement. That’s what could happen to bitcoin.

    Update: Ghash.io has issued a press release on the potential for it to launch an attack on bitcoin. The mining pool says it is taking steps to make sure that Ghash.io never reaches 51% of the world’s bitcoin mining capacity, “as it will do serious damage to the Bitcoin community, of which we are part of.” Ghash.io also said that they will temporarily stop accepting new independent bitcoin miners in their pool, and will allow existing members of Ghash.io to mine bitcoins through other pools.

    Update 2: Bitcoin magazine has weighed in, asserting that the success of Ghash.io is indicative of a larger problem in bitcoin: nearly unprecedented centralization of the mining upon which the currency’s security depends.

    Update 3: Bitcoin entrepreneur Henry Brade weighs in on Ghash.io’s proposed solution, and finds it wanting. Quartz’s Ritchie King weighs in: No, bitcoin isn’t about to be taken over by a massive cartel.

    Popular discussion boards devoted to bitcoin are freaking out about this possibility, and every post on the homepage of, for example, the portion of Reddit devoted to bitcoin is currently devoted to the dangerous rise of Ghash.io:

    The entreaties of bitcoin fans on Reddit is having some effect: Between 3am ET and the writing of this article at 10am ET, the power of Ghash.io has diminished by seven points, to 38%, probably because of people leaving the collective in response to the backlash. But how close it came illustrates the long-term problem.

    How this attack on Bitcoin works

    A little background for the uninitiated: The way bitcoin works (see our recent explainer on the topic) is that computers “mine” for the currency by solving tough math problems. In the process, they verify all the recent transactions that have been made via bitcoin. This is part of the genius of bitcoin: The only way to produce new bitcoins is to create the computing infrastructure required to make bitcoin work.

    Because so many different people mine for bitcoin by running bitcoin software and solving these hard math problems, the logic of bitcoin boosters has always been that the currency is safe because the bitcoin network is distributed across so many different computers. As long as at least 50% of the network is owned by “honest” bitcoin miners whose incentive is to keep bitcoin intact, no nefarious manipulations of the record of bitcoin transactions (known as the “blockchain”) will take place.

    What the maker of bitcoin apparently did not anticipate is that many bitcoin miners might band together into “pools” in which their total computing power is harnessed together as if it were one giant supercomputer. Being part of a pool means sharing the profits of that pool, which can lead to a steadier stream of income for individual miners.

    The potential danger of Ghash.io

    We’ve reached out to the founders of Ghash.io and await their comment. In the meantime, many commenters are pointing out that in the past, someone using nothing but Ghash.io’s pool to mine bitcoin has already attempted to spend the same bitcoins twice, at a gambling site called Bitcoin Dice. Whether this person is a rogue actor or more intimately connected with the leaders of Ghash.io, it suggests that at least someone in this mining pool has already realized that they could make a temporary profit by gaming bitcoin, even if it threatens the currency itself.

    Note that the gambling site that appears to have already been hit by double-spending attacks by GHash.io isn’t “Bitcoin Dice”. It’s the same “Betcoin Dice” discussed above in the OP. No word on the status of BetCoin’s 4 petahash/second supercomputer, but if that’s going to happen it had better happen soon because 4 petahashes(4,000,000 Gigahashes)/second ain’t what it use to be.

    Another interesting dynamic tension we’re seeing in these 51%-attack threats is the tension between the fact that a bitcoin mining monopoly is an existential threat to the bitcoin system but monopolies and oligopolies are also what seem to naturally form in bitcoin because that’s what’s most profitable. So it’s hard to see how the 51% threat is going away any time soon because it appears that the profit-maximizing situation for a bitcoin miner is to be a part of the mining pool that has the maximum market share that doesn’t trigger a negative “51% threat”-backlash. That’s one hell of a market equilibrium to maintain: profit is maximized when the blockchain mining is just about ready to spill over into systemic-crisis territory.

    Still, as many point out, the desire not to undermine the value of bitcoin might be enough to allow for self-regulation by the bitcoin community. We’ll see. There’s still the question of what happens when a mining guild comes along with a desire to actually kill bitcoin. In an altcoin world, the better-than-bitcoin alternatives might not mind a cryptoragnarok or two.

    Posted by Pterrafractyl | January 12, 2014, 3:18 am
  8. One thing that will change the dynamics of Bitcoin will be the rise of other cryptocurrenies, like quark, litecoin and ripple. Once Bitcoin becomes too expensive for people to either mine or own the other cryptos will rise in value and popularity. Having said that, part of the scarcity comes from the difficulty in purchasing crypto’s from reliable sources, the risks of getting robbed are high.

    Posted by Chris | January 12, 2014, 9:19 pm
  9. A peak into the future of bitcoin: Corporate mines and network peering (where major miners set up dedicated connections to each other to ensure optimal network performance). The bitcoin mining industry won’t be killed by these trends, but the dream of currency controlled by ‘the little guy’ isn’t looking too good:

    Data Center Knowlege
    The Future of Bitcoin: Corporate Mines and Network Peering?
    By: Rich Miller

    January 24th, 2014

    LAS VEGAS – What’s the end game of the Bitcoin mining arms race? Miners are building ever-more powerful hardware and larger data centers, trying to stay a step ahead of their rivals and keep pace with “the difficulty” – algorithm changes that make it progressively harder to earn new bitcoins.

    Some Bitcoin watchers believe the network will ultimately shift from mining for new coins to a model based on transaction fees, which could accelerate a shift of Bitcoin hardware into data centers and the creation of peering networks to manage fees, just as current peering agreements seek to reduce network transit costs.

    The long-term outlook for Bitcoin is important for the data center industry, where some leases can run from three to 10 years. The emergence of Bitcoin has seen the cryptocurrency soar in value, accompanied by rapid advances in the hardware required to successfully capture new coins. The Bitcoin protocol is designed so that these rewards will become harder to earn and will shrink over time. That means that the economics and business models of bitcoin could shift over the life of a data center lease.

    Fees and the Future

    Over the past two years, gaining block rewards has become progressively more difficult, forcing miners to upgrade their hardware from CPUs to GPUs and then FPGAs (Field Programmable Gate Arrays) and finally specialized ASICs (Application Specific Integrated Circuits) optimized for bitcoin data-crunching. As the hardware has become more expensive, many enthusiasts have been priced out of the mining market.

    Princeton University computer science researchers Ed Felten, Joshua Kroll and Ian Davey have studied the bitcoin reward system and foresee a shift ahead.

    “At present, the mining reward seems to be large enough, but under the current rules of Bitcoin the reward for mining will fall exponentially with time,” the Princeton team wrote in a recent paper on Bitcoin economics. “Transaction fees, which are voluntary under the current rules, cannot make up the difference. The only way to preserve the system’s health will be to change the rules, most likely by either maintaining mining rewards at a higher level than originally envisioned, or making transaction fees mandatory. The choice is likely to drive political disputes within the Bitcoin community.”

    Researchers from Microsoft and Cornell have also explored this scenario and outlined refinements that would be needed to make incentives work in a shift to transaction fees.

    The bitcoin community is “debating that (shift),” said Emmanuel Obiodun, founder and CEO of Cloudhashing, which leases computing power to customers. “It’s becoming more expensive to mine coins. But transaction fees are very low right now, and have very small profit margins. For now, there’s still a lot of upside in bitcoin mining.”

    One Vision of a Fee-Based Future

    The future of mining was a hot topic at the Inside Bitcoins conference in Las Vegas in December, where Josh Zerlan, Chief Operating Officer of Butterfly Labs, gave a presentation on the future role of transaction fees.

    “In the future, there will not be much incentive to mine (for block rewards),” said Zerlan. As rewards become harder to achieve and the growth of bitcoin leads to more transactions, Zerlan says that fees will need to increase to ensure that miners continue to support the network. As this happens, miners will gravitate towards transactions with higher fees attached to them, which will be processed before those with smaller rewards.

    If bitcoin gains wide acceptance as a payment platform or even as a currency, the growth of fees will present several challenges, Zerlan said.

    “If you’re a large company, you have a problem (with paying transaction fees),” he said. “The solution is to maintain a large mining farm in your data center to process your own transactions for free, and your customers’ transactions for free. You can also earn extra income to processing others transactions.”

    Distributed vs. Centralized

    As we noted yesterday, a shift to professional data centers and cloud computing platforms would make the bitcoin network more efficient. But there’s also a built-in cultural challenge: much of the bitcoin community remains wary of efforts to centralize the network.

    Earlier this month bitcoiners raised alarms when Chinese mining pool GHash.io was gaining 45 percent of new coins – approaching the level where a single participant could undermine the network by controlling a majority of its power (known as a “51 percent attack”).

    The growing power of mining pools – consortiums organized to combine the mining power of individuals – has been a concern for some time. This week the four largest mining pools (GHash.io, BTC Guild, Eligius and Slush) held a combined market share of 75 percent of the network’s power, as measured by computing hashrate.

    “We’ve already centralized the mining system,” said Zerlan. “There are already large pools to control a large percentage of the mining. Centralization of mining will be a good thing.”

    Zerland believes the Bitcoin community can adapt to the tradeoffs of a more centralized infrastructure. “It creates a more desirable target, but I think that’s something we have to manage,” he said.

    The CEO of Butterfly Labs makes an important point: As the rewards for bitcoin mining drop off to zero (by ~2040), the transaction fees are going to be the only thing financing bitcoin mining. And at that point, “miners will gravitate towards transactions with higher fees attached to them, which will be processed before those with smaller rewards”. How that tension between cheap transactions and the profit-maximizing desire of corporate miners gets resolved is a pretty big ‘unknown’ for a transaction platform that’s making low-transaction fees a key selling point. Especially when the system is also set up to incentivize the creation of mining cartels that could collude to ensure high wait times for lower fees. The much-feared “51% attack” isn’t the only threat posed by a bitcoin oligopoly.

    Posted by Pterrafractyl | January 24, 2014, 9:59 am
  10. Got 600 2.8 GHz quad-core servers sitting around that your aren’t doing anything with? Well, why not mines some bitcoins! With all that process power you should be able to earn your first whole bitcoin maybe at some point in 2016 if you’re lucky

    Data Center Knowledge
    Mining Experiment: Running 600 Servers for a Year Yields 0.4 Bitcoin

    February 24th, 2014 By: Rich Miller

    Can data centers tap unused server capacity to mine for Bitcoins? The question occurred to the team at the online backup service iDrive, which performs most of its customer backup jobs overnight, leaving its 3,000 quad-core servers idle for much of the day. So the company ran a test with 600 servers to see whether Bitcoin mining could become a secondary revenue stream.

    The result: running Bitcoin mining software on those 600 quad-core servers for a year would earn about 0.43 Bitcoin, worth a total return of about $275.08 at current prices on major Bitcoin exchanges.

    “Its a waste of time, so any other company thinking about mining with their infrastructure, learn from us,” said iDrive’s Matthew Harvey. “Don’t do it. You need custom machines to effectively mine bitcoins and generate a real ROI.”

    The iDrive test-drive reinforced a common theme on Bitcoin mining forums: To earn money by mining, you need to invest in highly-customized computers using ASICs (Application Specific Integrated Circuits) to crunch data for creating and tracking bitcoins.

    Miners Upgrade to Powerful Hardware

    Over the past year, the computing power supporting the bitcoin network has soared. The cryptocurrency is now supported by a powerful global network backed by 150,000 petaflops per second of computing power, roughly 600 times the combined power of the all the supercomputers in the Top500 list. Practitioners of Bitcoin mining – the term for using data-crunching computers to earn newly-issued virtually currency – are adopting more powerful hardware, pooling their efforts and seeking to slash their power bills.

    The horsepower required to succeed in Bitcoin is highlighted by the iDrive simulation, which used 600 servers.

    “Our study projected a year of mining at 100 percent processing power 24/7 and the assumption that the difficulty of mining (the calculating of hashes) would increase linearly,” iDrive noted in a blog post describing its experiment. “In the end, we learned a lot about the interesting process of bitcoin mining, however, for us, the pros did not outweigh the cons. So, IDrive decided to stick with that we do best.”

    They’re not the only ones who’ve contemplated repurposing powerful equipment to pursue cryptocurrency, The 4,000-core Odyssey supercomputer at Harvard was secretly used to mine Dogecoin, the ironic virtual currency used primarily for online tipping. The covert miner has had their computing privileges at the university suspended.

    Posted by Pterrafractyl | February 24, 2014, 2:47 pm
  11. “The network would operate just fine with only 1 percent of the current computing muscle devoted to it…It’s consuming resources that should be allocated differently.”:

    Bloomberg Businessweek
    Bitcoin Miner Taps Dad’s Power Plant in Virtual-Money Hunt: Tech
    By Jason Clenfield and Pavel Alpeyev April 15, 2014

    In the five years since bitcoin was created, the hunt for them has consumed enough electricity to keep the Eiffel Tower lit for 260 years. One man’s way around the utility bills: the family power plant.

    Alex Wilhelm is a bitcoin miner, one of thousands who use computers to solve complex math problems and get their hands on the digital currency. The expatriate living in Tokyo has 30 remote-controlled servers mining virtual gold in an old brick building in the Austrian countryside. His father is donating the electricity, which comes from a water-driven turbine that survived a World War II bombing raid and once powered the entire village of Tattendorf, where Wilhelm grew up.

    While the operation is modest as mining farms go — this year’s yield may total no more than $12,500 — it illustrates a basic point: the race to uncover cyber cash has become so energy intensive that power bills now make it mostly unprofitable.

    “Basically you’re turning electricity into money,” Wilhelm said, sitting in jeans and a red sweatshirt in front of a flat-screen monitor in his Tokyo study. “If the electricity price goes up the math stops working.”

    Globe Trot

    That’s the reason bitcoin miners are scouring the globe for the cheapest power prices.

    Consider Moses Lake, Washington, a quiet town in the Pacific Northwest with more cows than people. With the second-lowest electricity rates in the U.S., after Minot, North Dakota, it may become a bitcoin mecca.

    Robert Van Kirk is planning a move there. At 1.7 cents per kilowatt hour, rates are less than one-fifth the 10-cent national average. They’re also below the 5 cents Van Kirk and partner Damir Kalinkin now pay in Portland for their business, MyRigSpace LLC, hosting mining gear in an old server farm.

    The partners aren’t the only ones to zero-in on Moses Lake’s rates.

    “I called a real estate agent and I told them, we need a location with a lot of electricity,” 24-year-old Van Kirk recounted in a phone conversation. “He said to me, ‘Oh are you guys involved in bitcoin?’ And I was like, ‘Oh wow.’”

    Bitcoin Bottleneck

    Power consumption has always been bitcoin’s bottleneck, says cryptographer Philipp Gühring. By one estimate, mining has gobbled up more than 150,000 megawatt hours of electricity since the cyber currency was invented. That’s a year’s worth of electricity for about 14,000 average U.S. homes, or more than two centuries for the Eiffel Tower.

    “Yes, you need the hardware and you need the software, but electricity is the core thing that drives bitcoin,” Gühring, who co-wrote a 2011 paper on energy’s role in virtual mining, said by phone from Vienna. “It’s going to gravitate to wherever electricity is cheapest.”

    Hence Tattendorf or Moses Lake, or Iceland, where a few wily entrepreneurs are tapping cheap geothermal power from volcanoes to drive one of the world’s biggest mining farms.

    When bitcoin was created in 2009, by a programmer or group under the name Satoshi Nakamoto, it was intended to be finite, like a precious metal that has to be dug out of the ground. That helped the term “mining” take hold, but it’s a misnomer.

    It’s more like a cross between a math quiz and a lottery held six times every hour. People like Wilhelm race with their computers to solve puzzles and reap some of the 25 bitcoins spat out every 10 minutes by Nakamoto’s algorithm. The more machines you have — think of them as tickets – the better your chances are of winning.

    Bitcoin transactions run through a massive public ledger, open to anyone with the right software. Miners use their machines as accountants would, to tally and check all the bitcoins changing hands around the world. The first to do the math gets the reward.

    Never has bookkeeping been so alluring.

    Black Hole

    Bitcoin prices shot up to more than $1,100 last year from about $13. The currency took hits in the last few months though, after China banned banks from dealing in it and the U.S. government decided to tax it. Another blow came when about $500 million in bitcoins disappeared from one of the biggest exchanges, Tokyo-based Mt.Gox, which then went bankrupt. The coins trade at $522 today, according to the CoinDesk Bitcoin Price Index, an average from major global exchanges.

    Even some of bitcoin’s fans say it’s turned into a wasteful arms race. In a blog post widely circulated on Twitter last month, technologist Fred Trotter said mining has become a “black hole of resources.”

    “The network would operate just fine with only 1 percent of the current computing muscle devoted to it,” Trotter, a software developer and health-care consultant, said by phone from Denver. “It’s consuming resources that should be allocated differently.”

    It looks like it might be time for a good old fashioned identity crisis.

    Posted by Pterrafractyl | July 15, 2014, 8:56 am
  12. One of Bitcoin’s existential crises from the very begging has been the embrace an unregulated potentially-winner-take-all system that favors those that make the biggest investments. It’s still one of Bitcoin’s existential crises:

    CoinDesk
    From Gold Rush to Arms Race: Why Bitcoin Mining is Heading North

    Stan Higgins | Published on August 22, 2014 at 21:25 BST

    The face of industrial-scale bitcoin mining is changing with every passing month, having already pushed far beyond the bounds once envisioned, perhaps, by the hobby miners of four years ago.

    The landscape is much different now. Many large-scale mines are shifting from warehouse set-ups to data centers better equipped to deliver the massive power and cooling resources necessary to compete in a steadily accelerating industry.

    CoinDesk spoke with executives from some of the biggest hardware companies in the mining space. During those discussions a picture emerged of an industry undergoing a rapid level of investment, development, and most importantly, competition.

    KnCMiner director of marketing and public relations Nanok Bie put it simply:

    “It’s an arms race. Absolutely.”

    As both he and Spondoolies Tech CEO Guy Corem explained to CoinDesk, the next stage of industrial-scale bitcoin mining will focus on squeezing every ounce of operational efficiency out of both the hardware itself and the facilities that house it.

    The search for these capabilities has led bitcoin companies to the Arctic Circle, focusing on data center space in Norway, Iceland and Sweden in particular, where sub-zero temperatures make an ideal environment for mining.

    Arctic push

    As Bie explained, the industrialization of bitcoin mining has led companies to seek out the lowest resource costs possible. While many areas of the globe offer competitive costs and infrastructure, the Arctic is unique because the nations there actively seek business from bitcoin companies.

    Bie told CoinDesk:

    “It has to do a lot with access to cheap cooling and cheap energy. The energy costs and the energy taxes are interesting in [the Arctic], and there are several countries in the region that are well positioned. These countries are also very keen on getting this business. In general, the Arctic Circle will be the center of these developments going forward.”

    These cultural and political opportunities – as well as the promise of low-cost bitcoin mining – are bringing companies to the region. At the same time, bitcoin mining in the region isn’t exactly new.

    A report by The New York Times from December 2013 shined the spotlight on an Iceland-based mine. Based on conversations with those in the mining space, that company’s early approach could become the standard in the months and years ahead.

    The issue of centralization

    The push for Arctic-based facilities capable of delivering greater hash rates raises a key issue in the bitcoin network: centralization. Many in the community feel that putting control of the transaction process into the hands of a powerful few is dangerous, and for Corem, represents a problem not only facing the bitcoin community but the hardware companies themselves.

    He explained:

    “We think that too much centralization and too much industrial mining is not a good thing. Too much centralization is hurtful for bitcoin and for the ecosystem.”

    Corem continued by saying that the market seems to be moving in favor of centralization, but argued that other players in the space, including Spondoolies, are actively moving to keep the network as decentralized as possible. This can be seen in efforts like MegaBigPower’s franchisee program, which begun explicitly as a means of expanding the network’s capacity in a decentralized manner.

    One of Bitcoin’s other existential crises revolves around the simultaneous and mutually exclusive needs for a steady price to allow for the bitcoins to emerge as a reliable, steady store of value that will making bitcoins attractive to merchants coupled with the need for rapidly rising bitcoin prices in order to attract investors in the new currency. So there’s always been a hope that someday the price of bitcoins will level off, just not today.

    Interestingly, that particular existential crisis appears to be interacting with the “winner-take-all” mining crisis in a way that might actually be making both existential crises worse. Why? Because the cost of mining is rising so rapidly that a growing number of miners are forced to sell their bitcoin holdings just to staying in the mining game, thus ensuring a steady supply of bitcoins for sale that puts a lid on prices. At the same time, the adoption of Bitcoin by a growing number of merchants is also ensuring a steady supply of bitcoins for sale because those bitcoins they accept just get immediately resold for cash. In other words, instead of the seeing bitcoins hit $100,000 in the future before leveling off, Bitcoin might already be flatlining:

    CoinDesk
    Citi: Miners and Merchants Are Keeping Bitcoin Prices Low

    Joon Ian Wong (@joonian) | Published on August 26, 2014 at 18:18 BST

    Bitcoin’s price is poised for “acute instability” due to an oversupply of coins from miners and large merchants, along with a weak growth in demand, according to a new research note from financial giant Citi.

    The Citi analysis points to the increased sophistication and cost of mining as a major driver for growth in bitcoin supply.

    As mining costs rise, miners come under pressure to sell their freshly unearthed bitcoin to recoup the costs of their investment in equipment. Citi notes that about 3,500 BTC are mined daily, against a backdrop of 60,000–10,000 BTC in daily trading volume in recent months. The research note says:

    “If the miners are a steady source of supply and there is no increase in final demand, we have this overhang of bitcoin being sold in the market. In consequence, we have downward price pressures.”

    Merchants add downwards pressure

    Citi also arrives at a counter-intuitive conclusion about prominent merchants embracing bitcoin payments.

    Moves by firms like Dell and Expedia to accept bitcoin for laptops or for hotel bookings are generally viewed with enthusiasm by the bitcoin faithful. However, Citi points out that the merchants are converting any bitcoin they receive from customers into fiat immediately, putting further selling pressure on the bitcoin price.

    Additionally, Citi points out that accounting rules may prevent large corporations from holding bitcoin even if they wanted to.

    Under the generally accepted accounting principles (GAAP), corporations may not be able to count bitcoin holdings as a hedge against currency risk due to the volatile nature of the digital currency. They may instead have to count bitcoin assets as a speculative position, which would increase their risk profile.

    In other words, large merchants can’t be relied on to drive bitcoin demand, nor are they long-term holders of the digital currency.

    “For corporations to receive bitcoin and hold it would be an aberration,” the Citi note said.

    Weak consumer demand

    With bitcoin supply growing from miner and merchant sales, demand for the digital currency has to be taken up by consumers. Citi, however, doesn’t see this happening.

    According to the bank, bitcoin’s potential to provide benefits to the man on the street hasn’t been realised yet. As a result, there are currently few incentives for end-users to use bitcoin instead of a credit card, for example.

    Bitcoin demand is currently buoyed by users who spend the digital currency “for love, not money”, the note says. However, evidence from the market suggests that there isn’t enough love to keep the bitcoin price from declining:

    “Consumers who do use bitcoin […] are doing it for love, not money. And the flat transactions profile suggests that love may not be enough.”

    Other market observers have also concluded that the overhang of supply from miners and merchants could contribute to bitcoin’s price weakness. Mark Lamb, chief executive at Coinfloor, a London-based bitcoin exchange, said that sell-side pressures have intensified in recent months, with miners and merchants as the most likely traders.

    “Last year miners were selling a much lower percentage of new bitcoin mined. Nowadays it’s estimated that they’re selling 70–90% of their bitcoin. Merchants coming in are also probably selling quite a bit of their bitcoin. So we’re having this constant sell-side demand,” he said.

    Keep in mind that this dynamic will eventually change because the amount of bitcoins paid out to miners (3,500 mined a day at this point) keeps getting reduced as the total supply of bitcoins gets closer and closer to 21 million, which should happen around 2040. So as we get closer and closer to 2040, the mining-race crisis that’s forcing mining sell off 70-90% of their mined coins actually ease as the payout keeps shrinking unless. of course, the bitcoin fees also get increased to compensate for the loss of the mining payout and it’s very unclear what those fees will look like and how that could impact demand.

    And then there are the existential crises that definitely won’t go away in 2040 until Bitcoin goes away.

    Posted by Pterrafractyl | August 28, 2014, 8:35 pm
  13. So close, yet so far for Scotcoin:

    Mother Jones
    Could Bitcoin Become Scotland’s Official Currency?
    A reliable medium of exchange is the biggest obstacle to Scottish independence. Enter the world’s leading crypto-coinage.

    —By Josh Harkinson
    | Tue Sep. 16, 2014 6:10 AM EDT

    With Thursday’s Scottish independence referendum too close to call, opponents of an independent Scotland have been stressing the would-be country’s lack of a reliable currency. An independent Scotland could either keep using the British pound and lose control of its monetary policy, join the eurozone’s well-known squabbles, or create a new national currency that’s almost certain to be weak. But there’s an intriguing fourth option: adopting an online crypto-currency such as Bitcoin.

    Scotland actually has some historical experience with this sort of thing: Instead of relying exclusively on the British pound in the 18th and 19th centuries, many Scottish banks issued their own currencies—a fact noted by Guy Debelle, the assistant governor of Australia’s central bank, at a recentconference on digital currencies in London. Here’s Debelle in the Guardian:

    “The Scots can go back to experimenting with a multitude of currencies, Bitcoin and the like, and we can just sit back and see how it goes. A nice natural experiment about the future of money in Scotland—again. Because, as I said, they tried this in the 18th and 19th centuries. It worked for awhile, but eventually fell apart.”

    In the ensuing discussion, David Birch, the director of the digital currency consultancy Hyperion, argued that Scotland’s currency experiment was more successful than one might think. From the Guardian:

    “The economic research shows that in Scotland, the bank failures were fewer, and less disruptive, than the bank failures in England at the time,” he said. “Competing note issue in Scotland didn’t end because it collapsed: it ended because of an outrageous extension of the Bank Act of 1844, which extended the Bank of England’s monopoly over note issue north of the border.”

    But ending the Bank of England’s monopoly might not be the biggest problem with Bitcoin. A national Bitcoin-based currency would, practically speaking, resemble one based on gold: Bitcoins are designed to function as a limited commodity that becomes harder to acquire over time. In either case, the result is a highly inflexible national currency that often can’t keep pace with economic growth. As Felix Martin points out in the New Statesman, one of the first people to identify this problem was a Scotsman: The economist John Law of Lauriston emigrated to France, became that country’s minister of finance, and in 1719 replaced the gold standard with paper money printed at the discretion of the government.

    No matter: Edinburgh-based venture capitalist Derek Nisbet recently launched Scotcoin, which is offering 1,000 free Scotcoins to every resident adult. “Our motivation is to empower the Scottish people with an alternative digital currency opportunity,” he told the Guardian, “which may be used as a medium of exchange, should the need or wish arise.”

    While it doesn’t look like Scotland is about to adopt a digital cryptocurrency any time soon, there is a new national digital currency in the works. A non-crypto dollar-backed currency. Brought to you by the central bank of Ecuador:

    The Guardian
    Ecuador’s ‘digital currency’ explained

    40% of Ecuadorian adults don’t have a bank account, but is their new ‘currency’ more about escaping the US dollar?

    Rachel Banning-Lover
    Guardian Professional, Thursday 11 September 2014 13.02 EDT

    How will Ecuador’s new ‘digital currency’ work?

    Under a new monetary code, the Ecuadorian government in August released more information about plans for what they call a digital currency.

    40% of Ecuadorians do not have access to a bank account, says Pablo Paredes, director of the Institute of Economics at the Universidad San Francisco de Quito. From December 2014 people will be able to exchange physical cash for digital money that they will keep in an electronic wallet on their mobile phones. “It’s no different from other mobile wallets offered in other countries.”

    Who will use it?

    It will take time for it to take off, says Alejandro Salas, the regional director for the Americas at Transparency International. People will have to learn to use mobile technology for banking, leaving the older generation particularly vulnerable to being excluded. Ecuadorians will also need to trust that their money is safe when they no longer have it in their hands. “It will take a change of mindset,” adds Salas.

    As in other countries, it is likely that the electronic wallet will be used in addition to cash, and not as a total replacement by users, Paredes adds.

    Yet digital units do have appeal over cash as they offer a cheaper way to transfer remittances and a more secure way to store their money, says Ben Dyson, founder of Positive Money.

    “Economically, it should also boost the economy because more people will be able to trade further than they would have been able to do in the past.”

    Are comparisons to Bitcoin, the stateless digital currency, accurate?

    Absolutely not, according to Dyson. “Bitcoin is creating new money, which the Ecuadorians won’t. [Ecuador’s digital initiative] is someone giving you a box to put your cash in then giving you an electronic number that says how much money’s in the box.”

    The new legislation requires the digital money to be 100% backed which means for every electronic dollar that they create there has to be a physical dollar at the Bank of Ecuador.

    “What is interesting though is the central bank here is saying that the big banks aren’t doing what we need them to do for financial inclusion so let’s just bypass them – that’s quite a big step forward for any central bank to take.”

    There is much speculation about whether Ecuador is trying to replace the US dollar. Why has the announcement been so controversial?

    The proposed “digital currency”, according to Salas, is the government’s attempt to set up an alternative currency system to the US dollar, the currency it has used since its banking crisis in 2000. But it will run in parallel to the dollar, as there are currently no plans to scrap cash completely.

    The article in the monetary code that most concerns people, according to Paredes, is one that suggests that the central bank can oblige people to sell their foreign currency to it.

    “The question is this: if I have to sell my foreign currency to the bank for its ‘digital currency’, what will it give me in return when I later want to exchange back to cash? A new currency? Government bonds? We just don’t know whether this part of the code will be enforced.”

    Ultimately, will the ‘digital currency’ make transactions more transparent and are consumers safe?

    The intention is that it will – you will have more controls in the system and it will be easier to establish if there are flaws and where money goes, according to Salas. It should be easier to spot counterfeiting.

    However, transparency will depend on how the institutions behind this system behave.

    “This can become a huge invasion of privacy because with electronic banking you can follow, even detect where the person is, and how much the person is spending. It has the potential to be a surveillance programme.”

    While the possibility that Ecuador will suddenly switch away from the dollar to another currency is going to be something to watch, another fascinating possibility is that the non-Ecuadorians locals living just across the border in Peru and Colombia could start using it too since they’ll still be able to spend these things in the local cross-economy. And the more regions that start using these digital dollars greater the appeal and the more it can spread (just like with bitcoins). So, given the dollar’s global utility as a store of value compared to other national currencies, is Ecuador positioning itself to become a sort of focal point for a growing digital dollar economy? If so, you have to wonder who would be more pissed: the bitcoiners, or the banks. The answer isn’t obvious.

    Posted by Pterrafractyl | September 19, 2014, 6:44 pm
  14. Good question:

    Legal Insurrection
    What Ever Happened to Bitcoin?

    The crypto-currency is 2014’s worst performing investment, down over 57%

    Posted by Casey Breznick Friday, December 19, 2014 at 10:00am

    In the race to the bottom, the Russian ruble has finally surpassed oil as a worse-performing asset.

    Over the year, the ruble has tumbled 46% while WTI, the price measure of North American oil, has fallen 42%. Most likely, each will end the year even lower.

    But the claimant to the title of the Worst Performing Asset of the Year is neither oil nor the ruble. Bitcoin, which the public has seemingly forgotten about, has taken that title with a precipitous plunge in value of 57% from $732 to $316.

    [see pic]

    In comparison, the Argentine peso is down 24% on the year despite the Argentine government defaulting on its debts a few months ago..

    For Bitcoin, 2014 was simply not a good year. In fact, the bad market news started in early December, when Bitcoin tumbled from nearly $1200 to just above $500 in a few days after BTC China, China’s largest bitcoin exchange, announced it would no longer accept Chinese yuan deposits.. Bitcoin managed to climb back above $900 in early January, but come early February any hope of restoring bitcoin’s value was lost.

    On Feb. 7 the largest bitcoin exchange in the world, Mt. Gox, halted all bitcoin withdrawals, citing difficulties with “currency processes.” Withdrawals remained barred as Mt. Gox and CEO Mark Karpelès continued to deal with unspecified “security concerns” up through the suspension of all trading on Feb. 24, which was followed by the Mt. Gox website going offline the same day. At the time Mt. Gox was handling 70% of all bitcoin transactions. On Feb. 28, Mt. Gox filed for bankruptcy. (Timeline of bankruptcy here).

    After announcing its bankruptcy, Mt. Gox admitted to losing 750,000 bitcoins belonging to customers and 100,000 of its own, which accounted for 7% of all bitcoins in existence at the time. In total, Mt. Gox lost about $473 million. It turns out these bitcoins were stolen by hackers, but that’s another story.

    Despite this Mt. Gox debacle, a brief recovery ensued; bitcoin prices rose 80%, but by the end of June they were falling again, cleaving the price from nearly $700 to its current $316 level. Clearly, since February and the respite in April-June, confidence in bitcoin as a safe, legitimate asset has eroded, as investigators have partitioned blame for the Mt. Gox failure both to Mt. Gox and to the Bitcoin protocol (computer code).

    But by now, exchanges have improved their security and bugs in the protocol have been addressed, so what explains the non-recovery in prices? Due to the fact that bitcoin supply is self-regulated per its protocol, bitcoin price is mostly a function of demand, and indeed, the death knell for bitcoin this latter-half of the year has simply been the fall-off in interest.

    Last year bitcoin took the nation by storm. Media outlets, and not just the financial ones, had a field-day after field-day with the topic. Reporters spoke every week of new companies adopting bitcoin as a payment method, and pundits debated the crypto-currency’s legitimacy, legality, and investment-grade worthiness.

    There is some hope for bitcoin bulls. Microsoft recently announced it is accepting bitcoins as an online payment, and bitcoin exchanges are reporting huge growth in transactions involving rubles for bitcoins, an indication that Russia’s elite, or the tech savvy, trust bitcoin even more than their home currency.

    A rally to close out the year might provide a catalyst to propel prices upwards once again, but there is no telling what else might lie in store for bitcoin.

    There’s still some time left in the year, so might the rouble overtake bitcoins as the worst performing currency? We’ll find out soon!

    Posted by Pterrafractyl | December 19, 2014, 3:47 pm
  15. Wow. Well, it was probably inevitable, but we’ve finally learned the purpose of 21 Inc, a new Bitcoin venture brought to by a number of Silicon Valley’s cyberlibertarians like Mark Andreesen, Peter Thiel, and Max Levchin, as well as the chip manufacterer Qualcomm: They want to turn the ‘internet of things’ into a giant Bitcoin mining machine. And in order to get you to sign up to your devices for this Bitgoin mining service, which costs you electricity, 21 Inc is going to give away for free the various devices, like a toaster, that people can use for whatever but that also double as Bitcoin miners. The idea is that if you give people these devices for free along with the promise of some share of the bitcoing mining revenue, people will be willing to use them and thus pay the cost of electricity for all the processing that goes into the mining. Plus, presumably, these free devices hooked up to the internet will also be sending all sorts of the usage data on the devices back to 21 Inc.

    So, if this really look off and a substantial portion of the Bitcoin mining sector was taken over by the ‘Internet of Things’, the money in Bitcoin mining would suddenly start coming not from the actual value of the bitcoins mined and/or transactions fees earned. Those would be too diluted to be a substantial income flow. Instead, the value of Bitcoin mining would come from the value of derived from the collection of information from the bitcoin mining devices by companies like 21 Inc.

    The Bitcoin phenomena just keeps getting better and better. Or something:

    FT Alphaville
    Meet the company that wants to put a bitcoin miner in your toaster
    Izabella Kraminska | Apr 30 16:28

    The Manhattan Project-type secrecy surrounding a company called 21 Inc — hitherto known as 21e6 — has been stupendous, even by Silicon Valley standards.

    Not that this has stopped cryptocurrency friendly journalists like Michael J. Casey at the WSJ (co-author of the Age of Cryptocurrency) and Coindesk’s Pete Rizzo from propagating 21 Inc’s claims about bitcoin being bigger than Google.

    All we do know is that the company, headed by Matthew Pauker, has raised more than $116m worth of venture funding, a record for the sector, and claims to be developing technology that they believe will help to mainstream bitcoin.

    Leading investors include Andreessen Horowitz, RRE Ventures, a Chinese PE firm called Yuan Capital and Qualcomm. But, Casey reports, the wider investor list includes everyone from PayPal co-founders Peter Thiel and Max Levchin, to eBay co-founder Jeff Skoll and Dropbox Inc CEO Drew Houston, to Expedia Inc. CEO Dara Khosrowshahi and Zynga Inc co-founder Mark Pincus.

    To date, the only worthwhile snippets of info as to what 21 Inc might actually do have come by way of Balaji Srinivasan, Andreessen Horowitz partner and 21’s chairman. At a recent event Srinivasan claimed things like … “payments are now packets. Bitcoin is here to stay” and that Bitcoins are like “tulips you can send anywhere in the world in arbitrary quantities”.

    Yes, he actually said that: Bitcoins are like “tulips you can send anywhere in the world in arbitrary quantities”.

    You can register for future updates on 21 Inc here and view the jobs here, with a view to working from an office suite in San Francisco…

    But let’s put some meat on these digital bones.

    FT Alphaville is now happy to tell the world exactly what 21 Inc is up to.

    Its core business plan it turns out will be embedding ASIC bitcoin mining chips into everyday devices like USB battery chargers, routers, printers, gaming consoles, set-top boxes and — the piece de resistance — chipsets to be used by internet of things devices.

    21 Inc wants to put your toaster to work, forging our cryptocurrency future.

    According to our knowledgable sources, 21 Inc plans to “onboard” customers by giving many of these devices away for free, proving once and for all that it’s as easy to earn bitcoins as it is to watch Game of Thrones on the telly.

    The company is telling people that it is decommoditising Bitcoin by bringing mining to the masses — and if you struggle to understand how that might be a break-even strategy in an environment of sub $250 bitcoin prices, that’s probably because you, unlike 21 Inc, under-estimated the average punter’s capacity to subsidise ASIC mining costs.

    For example, there used to be a time when Bitcoin miners seeking to subsidise their energy costs had to clandestinely hack into Joe Public’s computer device to enslave their processing power (and their energy) for their own mining purposes. But with 21 Inc’s model, the assumption seems to be that if you give the punter a free device which provides him with some small utility and a promise of some bitcoin revenue (25 per cent if rumours are true) he’ll be more than happy to majority fund your Bitcoin energy mining costs.

    With 75 per cent of the bitcoin revenue left for 21 Inc’s taking, small surprise then that the company anticipates its initial revenue will be impressive when compared to the first two years of zero revenue growth at Google and Facebook. Or, at least, so we understand.

    It’s a tempting money back guarantee for a VC in any case — especially if the hardware being provided is guaranteed to be safe, sound and compliant with local consumer protection regulations. Add to that the fact that 21 Inc is allegedly also working with both Intel and Qualcomm on the development of something it calls “split chip” technology for IoT devices, with further strategic partnerships being sought with Facebook, CISCO and IBM and, well, what’s not to like if you’re an investor?

    On one hand you’ve got the roll-out of devices that mine Bitcoin at the consumer’s own energy cost. On the other hand you’ve got a company promising to embed Bitcoin ASIC chips into IoT devices that are already connected to the internet that might as well be mining bitcoins at someone else’s energy expense.

    If it’s free you’re probably the product

    Now, there is, we’d argue, a deep-seated problem with any business model that relies on a perpetual free lunch to maintain its bottom line. Our contacts, for example, note that bitcoin is already trading below 21 Inc’s worst-case projected price scenario, upon which the original business plan was based.

    But there’s something broader. 21 Inc claims to be democratising and decommoditising bitcoin but seems to be openly corporatising mining by promising to turn everyone into a poorly paid employee.

    As Jaron Lanier, author of Who Owns the Future?, has opined in the past, it is efforts like these that stand to turn Bitcoin into a plutocracy generating machine.

    _______________________

    What about the “internet of things” potential? There must be something in that?

    Well, if IBM’s view on the potential of the blockchain is anything to go by — and IBM is probably amongst the most enthusiastic in the sector about the technology — there are problems even here.

    For one thing, consumer behaviours don’t necessarily compliment the servicing needs of bitcoin mining devices. As IBM’s own note on “device democracy reflects” (our emphasis):

    While many companies are quick to enter the market for smart, connected devices, they have yet to discover that it is very hard to exit. While consumers replace smartphones and PCs every 18 to 36 months, the expectation is for door locks, LED bulbs and other basic pieces of infrastructure to last for years, even decades, without needing replacement … In the IoT world, the cost of software updates and fixes in products long obsolete and discontinued will weigh on the balance sheets of corporations for decades, often even beyond manufacturer obsolescence.

    Namely, those who buy devices for core functions like toasting bread are unlikely to invest in maintaining their secondary functions, especially if they profit only marginally from them, if at all.

    The internet economy, however, is famous for having perfected the art of two-sided dealmaking — the sort that allows the true cost of one thing to be offset or disguised by the functionality of another thing. To the minds of technologists and cyberneticists it’s this sort of symbiosis that allows for the formation of a digital “ecosystem”, the holy grail of the digital economy, made up of a perfect co-dependent state wherein positive feedback loops prevail and where almost anyone can have it all.

    It’s the discovery of these sorts of ecosystems that has led, over time, to the breakdown of creative content markets. So, whereas prices used to be based on the cost of production, demand and quality of content, they’re now determined by the hidden value of one’s digital footprint to advertisers.

    We bring this up because 21 Inc’s efforts seem intent on doing something similar for the world of physical devices.

    So, whereas the cost of white goods and devices is still based around their cost of production and their utility, one can imagine the day these costs will be aligned to how easy or difficult it is to groom economic data or rents from devices instead.

    The devices may be free, but their true cost will probably be based on the value of the information they allow manufacturers to extract (and add to the system as a whole for efficiency’s sake) by having you and your behaviours linked to your devices, and those devices linked to everyone else’s devices and behaviours as a result.

    Indeed, if the IoT is to create a positive two-sided effect of the “ecosystem variety”, it must come at a consumer data or privacy cost. That, in a nutshell, is the faustian pact associated with the rise of the digital economy. A simple case of quid pro quo, which sees the act of sharing information within a network rewarded with additional economic efficiency.

    Herein, we think, lies the ultimate flaw with 21 Inc’s plans to encourage growth of the connected machine economy by waiving transaction fees and monetising nodes. The only way the economics can work is if the data carried through the bitcoin network ends up being attached to meaningful information about the identity and behaviours of the nodes (a.k.a. people) themselves.

    This, however, contradicts the fundamental raison d’etre of bitcoin, whose value — if any — is linked to the system’s ability to obscure data and maintain privacy in the digital world.

    Yet, experts tell us, if and when the pseudonymous but unencrypted data within the blockchain is linked to the real world of fixed devices in people’s homes, it’s likely to get a whole lot less pseudonymous very quickly and provide, ironically, an excellent data-mining resource for almost any corporation, hacker or government.

    This is truly nuts. Please! bring on the tech crash.

    “The devices may be free, but their true cost will probably be based on the value of the information they allow manufacturers to extract (and add to the system as a whole for efficiency’s sake) by having you and your behaviours linked to your devices, and those devices linked to everyone else’s devices and behaviours as a result.” It’s a different kind of ‘Fremium’.

    And since it looks like one of the primary purposes behind this whole scheme is to get people to voluntarily accept vampire devices that leach extra electricity in order to cover the cost of bitcoin mining and the whole enterprise could lead to an ever growing amount of electricity being spent on every single “blockchain” transaction, keep in mind that when we’re talking about Bitcoin “mining”, we’re not actually talking about any sort of useful computations that have anything at all to do with processing the bitcoin transactions. The only purpose of all the incredible amounts electricity consumed is to decide which person gets to “win” each round of the Byzantine Generals’ Problem and decide which set of transactions will go into the next entry in the blockchain. And it’s not even doing that very well:

    Panda Strike
    Bitcoin’s Amateurish, But Cryptographic Payment Networks Are The Future

    April 22nd, 2015Dan Yoder

    This blog post represents opinion, and is absolutely not investment advice. It is provided with absolutely no guarantees or recommendations whatsoever.

    One day, the vast majority of financial transactions will be processed via cryptographically-secured payment networks. Bitcoin popularized this idea. But when this idea takes over the world, Bitcoin won’t be part of any successful, large-scale implementation. Because it’s a mess.

    Unlike a lot of people with opinions about Bitcoin, we’ve looked at the code base. We didn’t like what we saw, but we can make our case without walking you through bad C++, line by line.

    Bitcoin fell from a high of well over $1K each to $237 as of this writing. Speculators have been leaving the market, and most of the financial world has continued on like Bitcoin never happened. The financial world will incrementally adopt payment technologies similar to Bitcoin, because these technologies will reduce transaction costs. But Bitcoin itself is too deeply flawed to be the basis of any real revolution in finance.

    The Byzantine Generals’ Problem

    Let’s begin with one of the grandest claims that the Bitcoin community’s made: that Bitcoin solves the Byzantine Generals’ problem (BGP). To quote Marc Andreessen, among the most credible advocates for Bitcoin, from an article he penned for the New York Times:

    First, Bitcoin at its most fundamental level is a breakthrough in computer science… Bitcoin is the first practical solution to a longstanding problem in computer science called the Byzantine Generals Problem… Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user… The consequences of this breakthrough are hard to overstate.

    The “breakthrough” itself is easy to overstate. Although Mr. Andreessen is usually quite brilliant, his boast was based on a more modest claim made by Bitcoin’s pseudonymous architect Satoshi Nakamoto, in a message posted to a cryptography mailing list in 2008:

    The proof-of-work chain is a solution to the Byzantine Generals’ Problem.

    To be clear, that wasn’t in Nakomoto’s original paper. And he didn’t claim that it was any sort of major breakthrough. He just said it was a solution. In his paper describing Bitcoin, he offers an informal “calculation,” citing a 1957 paper entitled Introduction to Probability Theory.

    Somehow, the Bitcoin community went from an informal calculation, based on an introductory paper an engineering student might read in their freshman year, to proclaiming a fundamental breakthrough in computer science. This would have come as a surprise to Turing Awards recipients Leslie Lamport (2013) and Barbara Liskov (2008), who had already solved the BGP many years earlier. However, they showed no reaction at all.

    Lamport, of course, co-authored the original paper on the BGP back in 1982, which included solutions for the problem and its permutations, along with mathematical proofs of the solutions’ limitations. In 1989, Professor Liskov co-authored a paper demonstrating a distributed filesystem capable of functioning reliably in the face of Byzantine failures.

    If Bitcoin’s BGP solution were truly big news, as Andreessen claimed, then you might expect to hear about it from Liskov or Lamport. But, while both professors have continued to publish papers on distributed systems, neither has made any public statements about Bitcoin. For example, in his 2014 interview with the MIT Technology Review., conducted shortly after he’d been presented with the Turing award, Dr. Lamport mentions Microsoft, Amazon, Google, and NASA—but nothing about Bitcoin. This is very likely because Bitcoin does not, in fact, solve any fundamental problem in computer science.

    Lamport’s original paper proved mathematically that a naive network could not reach reliable consensus unless more than two-thirds of the nodes are trustworthy.

    no solution with fewer than 3m + 1 generals can cope with m traitors

    The paper goes on to outline solutions employing signed messages and operating over partially connected networks. Lamport, et al., conclude:

    Algorithms [guaranteeing reliability] involve sending up to (n – 1)(n – 2) … (n – m – 1) messages [where n is the number of nodes and m is the number of traitors]. The number of separate messages required can certainly be reduced by combining messages. It may also be possible to reduce the amount of information transferred… Achieving reliability… seems to be inherently expensive.

    In other words, we had solutions for reaching reliable consensus back in 1982. The question was whether we could make them cost-effective.

    By 1989, Professor Liskov (along with Miguel Castro) had demonstrated the use of state-machine replication to achieve reliability without sacrificing performance. The following year, Lamport submitted a paper describing the Paxos consensus protocol, based on similar principles, although it wasn’t published until 1998.

    Like the paper on the Byzantine Generals’ Problem, this paper defines the problem of reliability via an extended analogy. This time the culprits were easily-distracted legislators. This paper became the basis for an entire family of protocols, each optimized for dealing with specific kinds of failures. So, thanks to Dr. Lamport, we not only had solutions to the BGP, we had an entire taxonomy of them.

    Practical implementations of consensus algorithms typically accept that you need more than a majority of the nodes on the network to be trustworthy. At its best, this is what the Bitcoin protocol achieves. However, unlike state-of-the-art consensus algorithms, it cannot guarantee this. This is clearly acknowledged on the Bitcoin wiki (emphasis added):

    An attacker that controls more than 50% of the network’s computing power can, for the time that he is in control, exclude and modify the ordering of transactions… With less than 50%, the same kind of attacks are possible, but with less than 100% rate of success. For example, someone with only 40% of the network computing power can overcome a 6-deep confirmed transaction with a 50% success rate.

    In other words, it’s not just that the Bitcoin protocol is not a “breakthrough in computer science” after all. It’s actually a step backwards. But that’s not even really the worst of it.

    Proof-Of-Work Is Just A Waste Of CPU

    The Bitcoin protocol requires nodes to expend significant CPU cycles to participate in the network, basically just playing a guessing game. This is known as a proof-of-work algorithm. The entire point is to artifically inflate the cost of participating on the network. Once you’ve accepted that the Bitcoin protocol doesn’t offer any novel guarantees, you can’t really defend the proof-of-work scheme. It significantly increases the cost of reaching consensus without even being able to match the guarantees provided by existing consensus protocols.

    And the rationale for this is like something right out of Alice in Wonderland. Supposedly, proof-of-work makes it prohibitively expensive for an attacker to control more than half the network. But it also makes it similarly expensive for anyone else to participate in the network at all. So the only people who’d be deterred from participating in the network with malicious intent are people who would also be deterred from participating in the network with any other intent.

    Meanwhile, in reality, a group of nodes, known as GHASH, controlled more than half the network anyway. They had to issue a public announcement that they weren’t going to use their power for evil. The bottom line is that the Bitcoin protocol’s proof-of-work component is simply a giant waste of resources, both in compute cycles and power consumption. It doesn’t prevent attackers from taking control of the network, and doesn’t improve the guarantees the network can make.

    Bitcoin was a great story. In the wake of massive bailouts for dishonest bankers, an anonymous hacker discovers a way to subvert the entire financial system. This was better than stockpiling gold because you could use Bitcoin to buy drugs over the Internet! The story led to hype which led to speculation. Silk Road got busted. Mount Gox collapsed. Speculators fled. And Bitcoin’s capitalization returned to pre-bubble levels.

    The Real Future Of “Cryptocurrency”

    However, many people now understand the basic concept of financial transactions processed via a decentralized network. Many new cryptocurrencies sprang into existence, inspired by Bitcoin. Today there are thousands of developers thinking about how to implement Bitcoin-like networks who wouldn’t have been thinking about it otherwise.

    One of them will leverage the great research that’s already been done on this subject to implement a payment network which is superior to Bitcoin. In fact, that may have already happened. And that will be Bitcoin’s legacy.

    Which isn’t a bad thing (unless you’re holding lots of Bitcoin). Five years ago, it was difficult to explain things like digital signatures and consensus protocols. It’s still difficult to explain those things, but at least now people have heard of them Engineers are in love with the possibilities, and Bitcoin has given us a kind of shorthand to talk about them.

    There were all sorts of great points made in that article, but perhaps this is the most important one in light of the new 21 Inc business model:


    Proof-Of-Work Is Just A Waste Of CPU

    The Bitcoin protocol requires nodes to expend significant CPU cycles to participate in the network, basically just playing a guessing game. This is known as a proof-of-work algorithm. The entire point is to artifically inflate the cost of participating on the network. Once you’ve accepted that the Bitcoin protocol doesn’t offer any novel guarantees, you can’t really defend the proof-of-work scheme. It significantly increases the cost of reaching consensus without even being able to match the guarantees provided by existing consensus protocols.

    And the rationale for this is like something right out of Alice in Wonderland. Supposedly, proof-of-work makes it prohibitively expensive for an attacker to control more than half the network. But it also makes it similarly expensive for anyone else to participate in the network at all. So the only people who’d be deterred from participating in the network with malicious intent are people who would also be deterred from participating in the network with any other intent.

    Meanwhile, in reality, a group of nodes, known as GHASH, controlled more than half the network anyway. They had to issue a public announcement that they weren’t going to use their power for evil. The bottom line is that the Bitcoin protocol’s proof-of-work component is simply a giant waste of resources, both in compute cycles and power consumption. It doesn’t prevent attackers from taking control of the network, and doesn’t improve the guarantees the network can make.

    Yikes. And yes, the method of using a computational guessing game for solving the Byzantine Generals’ Problem that is celebrated as one of Bitcoin’s greatest innovations is arguably one of its greatest weaknessnes. And despite all that we just might see 21 Inc, backed by some of the biggest Libertarian oligarchs in Silicon Valley and Qualcomm, attempt to turn the coming “Internet of Things” into a giant Bitcoin electricity vampire/spy-network (which also happens to be quite beneficial to the Kochtopus, FYI).

    In additiono, thanks to this new ‘Internet of Things Mining Bitcoins (and maybe spying on you)’-business model, we now all have to come to grips with the fact that George W. Bush, who famously prioritized the elimination of vampire electronic devices sapping electricity in standby mode as part of his 2001 national energy saving campaign, is now prescient. That’} on you, Bitcoin!

    So get ready for a fabulous new world of free toasters that pay you in trickles of bitcoin fractions while sucking up your electricity and spying on you. But as the PandaStrike article also notes, also get ready for all the non-crazy new innovations involving decentralized networks that track ownership (which is basically what Bitcoin is) that don’t have Bitcoin’s flaws. At this point, the biggest thing holding back the Bitcoin revolution is Bitcoin and its idiosyncratic mega-flaws like its deflationary bias and being a giant energy suck. If you’re going to set up a new standard it had better be timeless and not be prone to self-imploding. Otherwise it’s sclerotic.

    At the same time, Bitcoin-esque technologies without Bitcoin’s flaws are just a matter of time. A distributed ownership system based on existing Bitcoin technology would probably work find if its just used by a small community of people and doesn’t turn into a global computational arms race and isn’t handling some critical social infrastructure like the financial system. Today’s Bitcoin just doesn’t scale well. But there’s no reason to assume decentralized ownership systems or some other Bitcoin-esque services won’t be sprouting up all over in the future. There are plenty of uses.

    So, since the existing Bitcoin paradigm is so flawed but has so many deeply vested interests with very deep pockets dedicated to Bitcoin’s success, it going to be interesting to see how hard Silicon Valley’s Powers That Be work to ensure that Bitcoin, with its current vampire power-sucking paradigm, continues hold its dominant status in “cryptocurrency” markets. So much of the Bitcoin phenomena is about all the money being made off the waste, like the fortunes made selling mining-optimized machines or super-computing centers. And if the 21 Inc business model is viable, there’s going to be a whole lot more Bitcoin waste to be monetized. Especially once it’s turned into a personal data collection platform. Just imagine, an entire data collection industry that’s based on learning things about you by giving you devices that you will use and when you’re not using them will sit there burning electricity in an attempt to win a pointless mathematical race.

    But it was probably inevitable. The chip manufacturers and Silicon Valley bigwigs have figured out that Bitcoin has a lot of money-making potential as it exists today with its giant computation mining race as a key feature of the system. One of the main features of Bitcoin’s absurd “mining” race is that the level of resources consumed by the mining participants are going to be directly proportional to the value of the mining reward/transactions fees that they can expect to collect, so the more the Bitcoin “economy” grows, the more people you can potentially wrangle in to accepting your ‘free’ Bitcoin mining devices. And, again, all of this ‘mining’ is simply a race to see who gets to decide what the official next set of transactions is in the blockchain and get an award and/or transaction fee. Thanks to companies like 21 Inc, Bitcoin’s systemic energy leak could be magnified and transformed into an Internet of Things data-privacy leak and now our free toasters spying on us but paying us for the spying in the form of a trickle of digital currencies that hopefully covers the cost of electricity.

    It doesn’t have to be this way.

    Posted by Pterrafractyl | May 3, 2015, 11:05 pm
  16. Ghana has a new industry. It’s hard to say if this is actually good news for Ghana, but it’s news: Ghana got its first Bitcoin farm:

    Bitcoin News Service

    Ghana Sets up the First African Bitcoin Farm

    Bitcoin mining has entered the African continent; the very first Bitcoin mining facility in the region is now in Ghana.

    Posted on 5:30 pm March 15, 2016 Author Gautham

    Africa has always been a center of attraction for both Bitcoin and fintech-based businesses. The African continent has provided a lot of positive PR to the Bitcoin ecosystem – It has been and still is the testing ground for Bitcoin-based basic alternate financial services. Banking the unbanked is one of the taglines for the digital currency and there is no dearth of the unbanked and underbanked population in Africa. Also, the phenomenal success of M-Pesa in Kenya has given rise to high expectations among the bitcoin community.

    Many small and medium sized cryptocurrency businesses have made entry to the African market so far. However, the involvement of international companies as well as local startups was so far limited to service offerings. Now, as a sure sign of improvement in the ecosystem, Ghana has displayed that the country, as well as the African continent, can keep up with the technology. The decentralized nature of bitcoin, making it a global currency has also helped in this effort.

    Its Bitcoin After Internet for Ghana Dot Com

    According to local news sources, the Bitcoin mining farm in Ghana is set up by one of the leading IT solutions companies in the country. The company, Ghana Dot Com has been the prime mover of the internet in the country, the same company has now taken up another new technology wonder – Bitcoin to promote in the region. While the exact hashing power of the mining setup is not mentioned, it is believed to have a capacity of several hundred Tera hashes per second.

    Ghana Dot Com was previously known as Network Computer Systems and it was responsible for introducing and promoting the use of internet in Ghana back in the year 1993. The company was later shut down only to start over again as Ghana Dot Com.

    Ghana Dot Com’s Bitcoin farm is said to have produced its first bitcoin on the eighth of last month. The Bitcoin mining project is being spearheaded by one of the respected computer scientists, Professor Nii Narku Quaynor. The professor also happens to be the Chairman of Ghana Dot Com. According to him, the company is committed toward encouraging the adoption of Computer Sciences in the country and it is also in their interest to take the same approach towards cryptocurrencies.

    Professor Nii Narku Quaynor has also mentioned that they are more interested in the encryption technology, hashing, trees etc. behind cryptocurrencies. They seem to be more interested in the blockchain technology and its endless list of applications.

    In many African and Asian countries, the use of blockchain technology in the banking sector will help banks cater to the unbanked and underbanked population at low operational costs. They will also be able to pass on the cost benefit to its customers.

    This is just a start for Ghana, soon the country may start using the crypto-tech to cater to its various needs.

    “Ghana Dot Com’s Bitcoin farm is said to have produced its first bitcoin on the eighth of last month. The Bitcoin mining project is being spearheaded by one of the respected computer scientists, Professor Nii Narku Quaynor. The professor also happens to be the Chairman of Ghana Dot Com. According to him, the company is committed toward encouraging the adoption of Computer Sciences in the country and it is also in their interest to take the same approach towards cryptocurrencies.
    Yes, a giant electricity-sucking black hole where almost all the work is done by machines. It’s just what an economy suffering from years of chronic electricity blackouts needs to prepare its economy for the future.

    Posted by Pterrafractyl | March 17, 2016, 2:19 pm
  17. Here’s a fun article that attempts to provide a range for Bitcoin’s net electricity consumption for “mining” by the year 2020. As the author makes clear, given all the variables that could impact the current trends for both Bitcoin’s popularity, advances in technology used for mining, and the mechanics behind the “mining” process itself, making a prediction four years out is inevitably going to involve a large range of possibilities. So what did the author conclude: Well, if you use his most “optimistic” assumptions (optimistic in terms of minimizing electricity consumption), the total electric consumption for Bitcoin might be around 417 megawatts, which would be around the electricity generated by small power plant. On the high end? 14600 megawatts, which would be around the electricity consumed by Denmark:

    Vice Motherboard

    Bitcoin Could Consume as Much electricity as Denmark by 2020

    Written by Sebastiaan Deetman
    March 29, 2016 // 10:30 AM EST

    I’m an engaged environmental researcher and have recently become a bitcoin enthusiast.

    These are two possibly conflicting fascinations, as previously pointed out by Christopher Malmo here at Motherboard. That’s because bitcoin is incredibly energy intensive: at the time of Malmo’s piece, he calculated that a single bitcoin transaction requires as much electricity as the daily consumption of 1.6 American households, and that number has increased since then. “Adopting Bitcoin as a major currency anytime in the next few decades,” he wrote, “would just exacerbate anthropogenic climate change by needlessly increasing electricity consumption until it’s too late.”

    As I have some experience in developing energy scenarios, I wanted to see how this could develop into the future. My findings weren’t much more encouraging. According to my calculations, if the bitcoin network keeps expanding the way it has done recently, it could lead to a continuous electricity consumption that lies between the output of a small power plant and the total consumption of a small country like Denmark by 2020.

    What determines the energy consumption of the bitcoin network?

    Let’s start with the basics. Bitcoin transactions are validated and processed by a decentralized network of volunteers, usually hosting dedicated hardware to perform calculations, called “hashes,” to find solutions to a complex mathematical algorithm in return for a reward of brand-new bitcoins plus some transaction fees.

    This network of so-called bitcoin “miners” ensures the security of the system, but unfortunately also consumes a lot of electricity—currently about 350 megawatts according to my own calculations, which is roughly equivalent to the electricity demand of 280,000 American households.

    Efficiency of mining hardware

    I started with the the amount of operational mining hardware (measured as the hashrate in number of hashes per second), and the efficiency of the hardware (which can be measured in Joules per hash).

    The total bitcoin mining network currently comprises a calculation speed of over 800 petahashes per second, which requires over 10,000 metric tonnes of hardware, considering that even the newer machines weigh over 12 kilograms each (15 grams per GHash/sec. on average in the analysis below). That is enough material to build another Eiffel tower.*

    In the beginning of the bitcoin phenomenon, miners used any laptop or computer to generate bitcoins. As the difficulty of mining bitcoin increased—part of the cryptocurrency’s design—miners upgraded to graphics cards, and then more sophisticated hardware. The state of the art is dedicated bitcoin mining chips (called application specific integrated circuits, or ASICs). ASICs have been available for three years, so we have a small basis to explore the improvements in the efficiency of mining hardware.

    Let’s have a look at the efficiency of those ASIC miners over time. I took an existing comparison of bitcoin mining hardware, to which I added a few miners myself and looked up all their first shipping dates, based on various sources (company specifications, blog-posts, first reviews, etc.). After exclusion of the ones that were never actually shipped to customers, and after exclusion of some of the early highly inefficient ASIC miners because they didn’t fit any trend, I ended up with a list of 53 types of bitcoin miners and plotted their efficiencies against their original shipping dates as can be seen below.

    [see pic]

    Drawing a trend from the other 46 miners has been done in two distinctly different ways, to represent both an optimistic as well as a more pessimistic assumption for the future development.

    The pessimistic trend line is based on the average of all ASIC miners (the blue dots) and has the form of a power equation, thus it starts with a higher electricity consumption and though it assumes a continued increase in efficiency, it leads to a slightly higher future projection of electricity consumption per hash as compared to the optimistic approach. For the optimistic case, I based the trend line only on the most efficient devices brought on the market (indicated with a black outline in the graph), and assumed an exponential decrease in electricity demand per hash, which actually represented the best fit to the data and leads to an even higher long-term efficiency.

    Though these trend lines give us a hint of the future to come, they are only based on the efficiency of new mining hardware, and as such don’t represent the efficiency of the current bitcoin network, which still partially depends on the calculation power of older, less efficient mining devices. To approximate the effective efficiency of the whole network I assumed that the growth of the network’s hashrate determined the amount of newly installed mining capacity each month, and then used weighted averaging over a period of either three or five years to represent the efficiency of the total stock of bitcoin mining hardware in an optimistic and pessimistic case respectively. The resulting long term trends of both new and effective electricity consumption per hash can be seen below.

    [see pic]

    My internal torment between environmental concerns and my enthusiasm about bitcoin mellowed somewhat when I saw these initial results. Apparently, the technological advancements at chipmakers and hardware manufacturers made sure that in the future, bitcoin miners will probably become more than three times as efficient. I could rest assured without a feeling of guilt. Or could I?

    Knowing that the efficiency of the miners was only one part of the equation, the other part started haunting me at night. Could it be that as bitcoin usage grows, the total hashrate of the bitcoin network kept growing at such a speed that it would outcompete the increase in efficiency of the miners? Could it be that the total energy consumption would keep on growing?

    Popularity of bitcoin

    To complete the picture and answer this question, I dug up the historic development of the monthly hashrate at blockchain.info. Since the introduction of the first ASIC mining hardware in January 2013, the average monthly growth of the network’s hashrate has been a daunting 37 percent. If we use that as a proxy for the monthly growth in the years to come, the bitcoin network would require more electricity than is currently generated globally, by the end of 2016 (yes, December this year, regardless even of the assumptions for mining efficiency).

    That couldn’t be right. The bitcoin price was increasing rapidly in 2013, hitting $1,000 apiece in late 2013 and again in early 2014. This price runup seemed like an anomaly fueled by hype, so it didn’t seem accurate to use in my calculations for expected hashrate growth. I had to find a more realistic estimate.

    As can be seen in the graph below, the high growth in hashrate originated mostly in the early days of ASIC mining, thus averaging over the more modest growth in more recent months should give a more balanced indication of the expected growth.

    [see pic]

    I applied two growth rates on the current 800 Peta hashes per second, one being optimistic and defined by the average of the network growth rate in the 12 months with the lowest growth since the introduction of ASIC miners (covered by the small blue box, which in fact was a period with a flat or sometimes even declining bitcoin price), leading to a 5 percent growth rate each month.

    The other rate is a bit more pessimistic (for the environment, not for the network security), and is based on the period that includes the three months preceding and following these 12 months (the larger blue box), leading to a 12 percent monthly increase.

    Obviously, these growth rates are highly uncertain and are always related to the bitcoin price, as miners will keep adding hashpower as long as it is profitable. However, the price of bitcoin has been so volatile that it is simply impossible to predict. Therefore I use the previously mentioned historic average growth in hashrate as a conservative (5 percent) and a more daring (12 percent) estimate of the stable growth for the years to come.

    The block reward

    Two other factors that may influence the growth rate of the network’s total hashrate are the bitcoin block size and the halving of the bitcoin block-reward, expected to happen this summer. I’ve not accounted for any outcome of the discussion on the block size, as it is still being debated and the outcome is unknown still. However, the block-reward halving is by design, based on the idea that bitcoin transaction fees will slowly take over as the main incentive for mining, thus it may have severe consequences on the energy consumption.

    However, the long-term effect on the total hashrate of this halving is unknown. Some have argued that the reduced bitcoin reward would lower the incentive to bitcoin miners, possibly even leading to a large decrease in mining activity (what some call the “mining gap”) as electricity costs will make mining unprofitable until the price of bitcoin rises again.

    Others have argued that the halving of the mining reward will lead to increased bitcoin scarcity and therefore a quick increase in the bitcoin price, which would possibly lead to an even higher growth in hashrate quickly after the gap. Again, it is impossible to say who is right. But to somehow account for the diminishing block-reward, I assumed that the hashrate will either stop growing and stabilize during the six months following the halving of the block-reward (optimistic) or that it will simply keep growing as it did historically (pessimistic).

    Two scenarios

    With the combination of both optimistic and pessimistic assumptions on the energy consumption of the bitcoin network we have in fact created two wildly different scenarios on how the bitcoin future may unfold. What would this mean for the environmental impact of bitcoin by, say, January 2020? The table below summarizes the main assumptions and gives an indication of the expected power consumption of the bitcoin network.

    [see pic]

    The results show that in an optimistic scenario, the increase in electricity consumption of the bitcoin network compared to now is not shocking, from around 350 MW to around 417 MW, but still on the order of one small power station. If things play out a little less favorably, however, the bitcoin network may draw over 14 Gigawatts of electricity by 2020, equivalent to the total power generation capacity of a small country, like Denmark for example.

    This is by no means a comprehensive analysis and these numbers should be taken with a pinch of salt, but the conclusion is an important one: If the network of bitcoin miners keeps expanding the way it has done, the increased efficiency of mining devices is most likely offset, leaving us anywhere between a slight growth or an explosion of the total energy consumption.

    Even in the optimistic scenario, just mining one bitcoin in 2020 would require a shocking 5,500 kWh, or about half the annual electricity consumption of an American household. And even if we assume that by that time only half of that electricity is generated by fossil fuels, still over 4,000 kg of carbon dioxide would be emitted per bitcoin mined. It makes you wonder whether bitcoin could still be called a virtual currency, when the physical effects could become so tangible.

    Personally, I haven’t given up on the idea of distributed network transactions, but a radical rethinking of how these may be secured would be beneficial, be it at least for the environment. Perhaps a system where all miners are rewarded for their pledged surplus in CPU processing power, but the actual hashing is performed only by a few thousand randomly selected and continuously changing CPUs, would be a solution. We could throw the remnants of our destructive arms race for hashing power out the window, perhaps find a way to make a few old miners useful in functional calculations, and use the rest of them to build a rusty totem in honor of Satoshi.

    “This is by no means a comprehensive analysis and these numbers should be taken with a pinch of salt, but the conclusion is an important one: If the network of bitcoin miners keeps expanding the way it has done, the increased efficiency of mining devices is most likely offset, leaving us anywhere between a slight growth or an explosion of the total energy consumption.”
    So Bitcoin’s carbon footprint is slated to get either a little worse or A LOT worse by 2020. But not any better even under the most optimistic scenario, which is unfortunate since that optimistic scenario doesn’t look all that optimistic:


    Even in the optimistic scenario, just mining one bitcoin in 2020 would require a shocking 5,500 kWh, or about half the annual electricity consumption of an American household. And even if we assume that by that time only half of that electricity is generated by fossil fuels, still over 4,000 kg of carbon dioxide would be emitted per bitcoin mined. It makes you wonder whether bitcoin could still be called a virtual currency, when the physical effects could become so tangible.

    Keep in mind that bitcoins are “mined” around every 10 minutes, so that’s half the annual consumption of an American household (uh oh) every 10 minutes. Optimistically.

    But there was one source of optimism in that article: The author’s suggestions at the end:


    Personally, I haven’t given up on the idea of distributed network transactions, but a radical rethinking of how these may be secured would be beneficial, be it at least for the environment. Perhaps a system where all miners are rewarded for their pledged surplus in CPU processing power, but the actual hashing is performed only by a few thousand randomly selected and continuously changing CPUs, would be a solution. We could throw the remnants of our destructive arms race for hashing power out the window, perhaps find a way to make a few old miners useful in functional calculations, and use the rest of them to build a rusty totem in honor of Satoshi.

    Now, there’s probably all sorts of technical reasons that would complicate a system where just a fractions of mining processors are selected at any given moment. But at least the author is trying to address this issue, which is more than the rest of the Bitcoin community seems to be doing. Who knows? Maybe there’s a clever strategy that could not just prevent an explosive growth in energy consumption but actually reduce the electricity load from where it is today. It’s at least worth looking into, so it’s nice to see someone doing it if Bitcoin is going to keep chugging along.

    But it’s also worth keeping in mind that there’s a very straightforward solution to Bitcoins long-term energy woes: Green energy. If human civilization had already switched over to sustainable green energy sources no one would care how much electricity Bitcoin uses. Keep in mind that the above estimates were just for 2020. It’s only getting worse from there barring some radical overhaul of how the mining process is done. So if Bitcoin wants to do something to address both its growing energy problems and the image problem that’s only going to grow too, shouldn’t the Bitcoin community become champions of green energy? How about a Bitcoin green energy lobby?

    In other words, Denmark’s annual energy consumption patterns might not just be an ominous near-term symbol for Bitcoin. When you factor in how the country actually generates its electricity, Denmark’s electricity consumption patterns are also Bitcoin’s long-term solution. So let’s hope the Bitcoin community invests some bitcoins in convincing the rest of the world to adopt the solution it needs. It shouldn’t be a tough sell.

    Posted by Pterrafractyl | April 7, 2016, 9:14 pm

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