The Darkside of Bitcoin

I typically don’t drift too far into speculation, but I’ve come to develop a few concerns with bitcoin.

Bitcoin and other “Proof of Work” currencies consume—and will continue to consume—an enormous amount of electricity. Mining (in the literal sense) started as a way to allow the controlled generation of traditional currencies and new coins. But given the current state of the environment and aging electrical grids, this is now a total disaster. It is estimated that the amount of electricity used to mine bitcoin (only one of the thousands of cryptocurrencies) is more power than a 159 countries combined! It’s a known fact that the only way to mine at a profit is to locate mass amounts of servers in places of the world where heavily subsidize electricity costs make it economically feasible. These same places are often known for mostly using dirty fuels for electricity production.

Blockchain technology is fairly solid in terms of security, but there is one well-known way to compromise the chain. If someone gets 51% control of the network, they could confirm any transaction they wanted to. This is the equivalent of being able to change your bank balance to whatever you want. It is highly unlikely that a single person could ever pull off such a feat, but as blockchain has evolved so has the way coins are mined. Although no one person could ever assemble that much control, pools of people working together could. In fact, it’s already happened. The community may have policed itself but remember there is no centralized authority that controls the ledger and there is nothing to prevent the top to bitcoin mining pools from joining forces one day to take over the system. The truth of matter is that nobody really knows how big these pools are, who runs them or their future plans.

I remember way back in high school studying currency volatility and how it destroyed entire countries. Currently, bitcoin is a secondary or supplemental currency. It’s more akin to a gift card because traditional-based currencies are the primary form of storing and exchanging wealth. As bitcoin becomes more popular that may change. (The evangelists of bitcoin certainly hope it does.)

When that happens, a currently that isn’t stable causes all sorts of real world problems; Just ask anyone who lives in a country with volatile currencies, such as Venezuela. As mining becomes harder and harder (as designed) and/or the currency is in more and more demand, its value will fluctuate even more. This is pretty obvious at the moment, but the inability to “balance” supply and demand for a currency can be horrific. The previous example talks about volatility, but other issues such as deflation could occur. If mining became easier than it is today, the currency could deflate to zero. That isn’t likely with current technology and the way mining works, but if quantum computers start to emerge for mining they could mine much faster than current approaches. Before that happens though, quantum computers could invalidate the encryption, which would also drive all the value out of the currency.

The underlying tech is very secure, but the online trading houses and exchanges don’t have the same level of security that traditionally regulated market exchanges have. This creates a ripe target for hackers. Even as I write this, an exchange in South Korea was hacked. A relatively small amount of money was stolen, but I can’t remember the last time I read about the NYSE being hacked.

Finally, governments are waiting to see how bitcoin progresses before developing any new forms of legislation around digital currencies. But if they did, new laws could collide with this emerging tech. Your local state may not be able to shut down a decentralized currency, but they could outlaw certain aspects of its use which would dramatically curtail its future growth. Worse yet, they could target individuals who participate in mining or using the currency. Some of these concerns may be growing pains while others may be structural, but all of the concerns are very real. I’m predicting that in next five years, new concerns will outpace resolving existing concerns. Want to bet me? If you do, maybe bitcoin is perfect for you.