On January 19th, the Guardian put out a Spotify podcast on bitcoin entitled: Is bitcoin a scam? The interviewee Alex Hern is a Guardian journalist and has been a crypto writer since 2013.
Now it may be no surprise based on the title, but the podcasters take a decidedly bearish tone on the future and purpose of bitcoin. In this piece, the first in a multi part series, I’ll explore some of their claims to understand whether it’s fake news or fact.
Definition of Money
Hern states the properties of a currency as; scarcity, universal agreement that it is a currency, and the ability to trade it.
It’s worth noting that he uses scarcity here to mean that something can’t be created out of thin air, rather than the more typical definition of being finite or in short supply.
He notes that digital currencies have typically lacked the scarcity property since they are easy to copy and, until bitcoin, this was solved through the involvement of central intermediaries such as PayPal and traditional financial institutions. This is correct and the ease of which digital asset can be copied is usually referred to as the ‘Double Spend’ problem e.g how do we ensure Bob can only spend his digital coins once?
Solving this was a central part of bitcoin’s design and the move away from relying on centralised control was the birth of decentralised finance.
Extract from the abstract of the Bitcoin whitepaper: http://bitcoin.org/bitcoin.pdf
Hern outlines the process of mining, the output of which results in consensus about who owns what across the network (as well as creating new bitcoins), and which requires vast amounts of computational power. He asserts that it would be prohibitively expensive to attempt to gain control over the network since the computational power required would need to exceed all honest miners on the network.
This is certainly true with a 1 hour attack on bitcoin costing around $700,000 and estimates for a successful takeover between $5billion and $15billion. It’s also worth noting that control over the network to enable double spending transactions and claim block rewards would most likely lead to a complete devaluation in the price of bitcoin since the protocol would be compromised.
Furthermore the total hashrate — the computational power in the network dedicated to mining — has been increasing over bitcoin’s lifetime with a marked rise from 2018 as mining technology continued to improve.
This means that any would-be-attackers of the network are required to muster more computational power that ever before.
Hern then makes the claim that professional miners tend to congregate in a few physical locations owning to the access of cheap electrical power and the natural cooling effect of the climates. He mentions Iceland specifically.
This is supported by notable research from CoinShares in their Bitcoin Mining Network Dec 2019 report which found the major mining centres to be: Washington and NY in the USA, various provinces of Canada, Iceland, Northern Scandinavia, the Caucasus, the Siberian Federal District of Russian and China — specifically Sichuan. This is also supported by more recent research from Cambridge University who mapped out the location of miners within three of the largest mining pools: ViaBTC, BTC.com and Poolin.
He then mentions ‘coin mining’ as another way to obtain bitcoin. This is more commonly known as ‘cryptojacking’ and is the process of installing malware on someone’s device in order to secretly mine crypto. This was the attack vector of choice for crypto-criminals through late 2017 to early 2019, primarily driven by the service CoinHive. However whilst there was reportedly an increase in cryptojacking through Q2 2020, it’s largely seen as a defunct activity. Most importantly to Hern’s claim, the majority of cryptojacking activity focusses on mining the privacy-enhancing cryptocurrency Monero (XMR) rather than bitcoin.
It therefore feels quite the stretch to claim that any material amount of bitcoin is now obtained by illicit actors through cryptojacking, and it’s clear that exchanges are the route of choice for the average crypto owner with over $400m worth of bitcoin bought and sold every 24hours through Coinbase alone.
Hern then makes his way down the well trodden path of bitcoin and energy use. He compares the electricity use of the network to that of Ireland, calls the network “inherently wasteful”, an “environmental disaster”, and claims that;
“… there is no such thing as a low energy version of bitcoin because burning the processing power is how the bitcoin network works”
Now I’m certainly not going to try to make the claim that bitcoin mining is carbon neutral or a positive for the environment, that would be completely false. However the argument that bitcoin is bad because it uses a very large amount of energy is a hasty generalisation.
The aforementioned CoinShares report found that global bitcoin mining has a 73% renewables penetration in the energy mix, and this is supported by the 2021: 3rd Global Cryptoasset Benchmarking Study which placed the figure at 76%, with 39% of surveyed miners’ total energy consumption coming from renewables. On the smaller scale of mining activities, there are reports of resourceful people using the excess heat from their mining rigs to warm up their greenhouses and chicken coops.
It’s also important to note that the energy used is not ‘wasted’, but powers a global financial network worth over $600billion — or almost $1trillion if accounting for all cryptoassets.
Earlier in the year, Dan Held neatly compared bitcoin’s energy use with traditional fiat systems, and I think it’s also worth viewing bitcoin’s energy use in comparison to the 6 billion kilowatt-hours (kWh)of electricity used every
year in the US to power Christmas lights. Not only is this enough energy to power 14million refrigerators but this is roughly equivalent to the energy consumption of El Salvador.
However, I’m yet to hear calls from the US or beyond to ban fairy lights.
Hern also claims that there is no low energy version of bitcoin because this is an inherent property of the network. Whilst he is correct in his statement in so far that bitcoin’s mining algorithm, proof-of-work, does require high energy expenditure, he’s incorrect in inferring that this shuts off the possibility for lower energy use in the future.
In fact with the mining reward per block halving every 210,000 blocks (c.4 years) then naturally miners will be competing for less newly mined bitcoins and many will go out of business if they cannot cover their operating expenditure with their crypto profits. Trezor’s blog has a wonderful breakdown of this argument which demonstrates that either bitcoin’s energy use will decrease or we’ll be looking at a $90m per BTC price. In addition to this and inline with Moore’s law, we would expect bitcoin mining hardware to become more efficient and therefore less energy intensive. We have already seen this since the introduction of specialised mining hardware called ASICs which are around a million times more energy efficient than the the technology used to mine bitcoin back when the network began.
Furthermore, as we’re seeing with the Ethereum network’s migration from the more energy intensive proof-of-work consensus model to proof-of-stake, it could be possible for bitcoin to make a very significant change which would radically reduce the energy consumption. Whether this is the path of choice for bitcoin is unlikely, however Ethereum’s migration experience could potentially influence other blockchains to rethink their consensus models and scalability.
I say this not to try to convince anyone that bitcoin is environmentally friendly, but that the claim that bitcoin’s energy use is a death knell for the cryptocurrency is reductionist and often poorly researched. Alas Mr Hern’s sweeping generalisation is guilty of this.
All in all, whilst the podcast correctly outlines solving the double spend problem as a pivotal feature of bitcoin, and hits the nail on the head for miner geolocation, it takes a shortsighted and narrow view of the mining process and fails to accurately explain the energy consumption and purpose of the mining process. In part two of Why does the Guardian think bitcoin is a scam? I’m going to take a look at the claims made about who Satoshi is/was.
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(All views expressed are the authors own and do not necessarily reflect that of their employer or any associated organisations.)