What people do not.know about bitcoin

As bitcoin hits mainstream media, the topic of bitcoin mining begins to be criticized, specifically regarding its effect on our environment.

The Guardian reported that mining Bitcoin:

“uses as much CO2 a year as 1 million transatlantic flights. In November, the power consumed by the entire bitcoin network was estimated to be higher than that of the Republic of Ireland. It’s now on pace to use just over 42TWh of electricity in a year, placing it ahead of New Zealand and Hungary and just behind Peru.”

The reporter then concluded with the statement: “We need to take it seriously as a climate threat.

April 9th, 2019, China decided it may ban bitcoin mining to “protect the environment.”

I won’t deny the truth about bitcoin mining. It uses considerable energy. But we need to understand why.

After all, those ‘1m transatlantic flights’ cause considerable pollution too — but they won’t be grounded because they serve a purpose: getting people places. And the electricity of New Zealand and Hungry won’t be shut off — because people need it.

What Influences Bitcoin’s Price

Normal economic factors influence the price of cryptocurrency just like any other currency or investment — supply and demand, public sentiment, the news cycle, market events, scarcity, and more.

As a new and emerging asset, additional factors influence Bitcoin’s value more than the average currency or security. Here are some:

Scarcity

There are only 18 to 19 million Bitcoins currently in circulation, and minting will stop at 21 million. Industry experts consistently point to this built-in scarcity as a big part of cryptocurrency’s appeal.

“There’s a fixed supply but increasing demand,” says Alexis Johnson, president of the blockchain public relations and events company, Light Node Media.

Other experts point out Bitcoin has value because people give it value. “That’s really why everybody’s buying — because of the psychological aspect,” says Nelson Merchan, Johnson’s Light Node Media co-founder. That can make it difficult for the average consumer to discern whether Bitcoin and other cryptocurrencies are legitimate. The whole concept of supply and demand only works when people want something scarce — even if it previously didn’t exist.

“It actually does almost kind of seem like a scam,” Merchan says about Bitcoin’s origins. Though he says he’s seen his crypto holdings reach millions at times since he began investing in 2017, he’s also seen them disappear in an instant.

“I’m a big believer that if it’s not in cash, you don’t really have that money because in crypto, anything can drop dramatically overnight,” Merchan says. This is why certified financial planners suggest only allocating 1% to 5% of your portfolio to crypto — to protect your money from the volatility.

Mainstream Adoption

One of the main factors driving the price increase of Bitcoin is the rate at which new consumers are buying and exploring cryptocurrency, says Waltman.

“Crypto technology is being adopted at a faster rate than humans first adopted internet technology,” she says. Assuming it continues, the compounding acceleration of new adoption could keep pushing the value of Bitcoin higher and higher.

Bitcoin adoption has been increasing at an annual rate of 113%, according to data from the digital asset management firm CoinShares. (Meanwhile, people adopted the internet at a slower rate of 63%.) If people warm up to Bitcoin at a comparable rate to that of the internet’s early days (or faster), the report makes the case that there will be 1 billion users by 2024 and 4 billion users by 2030. CoinDesk reported last month the number of new wallets worldwide increased 45% from January 2020 to January 2021, to an estimated 66 million. Popular crypto exchange Coinbase says it has now over 73 million worldwide users, while fellow exchange Gemini recently released its “State of U.S. Crypto Report,” which found 21.2 million Americans own cryptocurrency of some kind.

Regulation

Federal officials have made it clear in recent months they are paying attention to crypto. Industry professionals have recently alluded to what crypto insiders perceive as “hawkish” federal regulation being one key driver for Bitcoin’s lagging price. In a recent CoinDesk First Mover interview, Seth Ginns, a CoinFund managing partner, said “the Fed moved to a hawkish position [on crypto regulation] just as Omicron started to tick up in the U.S.,” which could have increased doubt in crypto as a viable asset—resulting in January’s bearish sentiments.

Crypto regulation brings up a lot of unanswered questions. President Joe Biden recently signed an infrastructure bill requiring all crypto exchanges to notify the IRS of their transactions. Similarly, Treasury Secretary Janet Yellen recently said stablecoins — a type of crypto linked to the value of the U.S. dollar — should be subject to federal oversight.

The conversation on regulatory policies is “patchy,” said an industry white paper published by Flourish, a fintech platform designed for investment advisors. With a relatively new asset class like cryptocurrency, any new regulation has potential to impact value.

When China banned crypto in September 2021, for instance, investors saw the price of Bitcoin drop, though it has since risen and resumed its usual volatility. Even though there’s now about a decade of precedent for Bitcoin, the Securities and Exchange Commission is taking all decisions on a case-by-base basis in what experts refer to as its “crawl, walk, run” strategy toward mainstream crypto adoption.

“[Regulation has] kind of evolved over the last five years,” says Ben Cruikshank, head of Flourish, “Regulators can always change their mind.”

Mining Cycles

Finally, another major influence on Bitcoin’s price is a cycle known as halving. It’s complicated and algorithmic in nature, but in essence halving is a step in the Bitcoin mining process that results in the reward for mining Bitcoin transactions getting cut in half.

Halving influences the rate at which new coins enter circulation, which can impact the value of existing Bitcoin holdings. Historically, halvings have correlated with boom and bust cycles. Some experts try to predict these cycles down to the day after a halving event concludes.

Support from a big financial institution

In August 2017, Fidelity Investments became a rare standout among financial institutions in embracing Bitcoin and other cryptocurrencies. The company allows its clients to use the Fidelity website to view their bitcoin holdings held through digital wallet provider Coinbase. “This is an experiment in the spirit of learning what these crypto assets are like and how our customers may want to interact with them,” Hadley Stern, senior vice president and managing director at Fidelity Labs, told Reuters.

Related: 10 Pieces of Financial Advice I Wish I Knew in My 20s

Sean Gallup | Getty Images

4. Few (if any) tangible means to value bitcoin

Another beef with bitcoin is that there’s no tangible way to value it as an asset. For instance, if you want to buy shares of a publicly traded company, you can scour income statements, its balance sheet, read about industrywide catalysts, and listen to management commentary from recent conference calls and presentations. In other words, you can make an informed decision.

With bitcoin, there is no tangible data for investors to wrap their hands around. There’s transaction settlement times and total circulating token supply, but neither of these figures tells us anything about the value or utility of bitcoin.

10. All bubbles eventually burst

Last, but not least, all next-big-thing investment bubbles eventually burst. No matter how excited investors are about bitcoin and its underlying blockchain, history suggests it won’t be enough to match lofty expectations.

Mind you, we’ve already witnessed multiple 80%-plus declines in bitcoin throughout its history. Extreme volatility is a given with digital currencies like bitcoin, and history would suggest that significant downside from its current price is a near certainty as well.

What is the top cryptocurrency? The popularity of a cryptocurrency can be measured in many ways, such as how frequently it trades, how many people own it, or how many transactions it is used for. However, the most commonly used measurement is simply market capitalization. You can calculate the capitalization of a cryptocurrency by multiplying the price of a coin by the number of coins in circulation.

As of November 2021, the market capitalization of the biggest cryptocurrencies by market cap are as follows (hat tip to the Statistics and data YouTube channel):

Compare that to the top-15 from mid-September 2021, and you’ll see a fair amount of change.

If you want to watch the changes in video form from the past several years, check this out. Notice that only three of the top-10 in 2017 were still in the top-10 in 2021.

Super wealthy twins and a smart teen

Other notable investors in Bitcoin include Cameron and Tyler Winklevoss (the Harvard-educated twins who sued Mark Zuckerberg claiming that Facebook was based on an idea they’d had). They bought $11 million worth of Bitcoin in 2013, an amount said to be about 1 percent of all bitcoins in circulation at that time. When Bitcoin’s value reached more than $11,000 in early December, the twins were declared the first Bitcoin billionaires. The Winklevoss twins have been petitioning the SEC to create a bitcoin exchange traded fund. The agency rejected the idea earlier this year.

Another is investor and entrepreneur Erik Finman, who invested $1,000 into Bitcoin when he was 14 years old and is now a millionaire. Stefan Hoederath | Redferns | Getty Images

6. Blockchain is years from being mainstream

A sixth issue is that blockchain is still years away from gaining real relevance. Three years ago, when blockchain companies and cryptocurrency stocks were the hottest thing since sliced bread, it was expected that blockchain technology would be quickly adopted. Little did investors foresee the Catch-22 that would arise. Specifically, no businesses are willing to make the costly and time-consuming switch to blockchain without the technology being broadly tested — yet companies aren’t willing to make this initial leap to test the technology and prove its scalability.

In short, blockchain is years away from being a mainstream technology.

Image source: Getty Images.

Rich investors are manipulating prices!

Look at this headline from the Independent: “Bitcoin price Crash: ‘Manipulative Whales’ cause Cryptocurrency Market Meltdown!”

It’s sensationalism, pure and simple. The article goes on to rant against these so-called “whales” — individuals who own millions of dollars of BTC — as evil-doers who’s only thought is profit.

This type of sensationalism is intended to hurt Bitcoin’s future; to scare people away from doing research and thinking for themselves.

Nonetheless, this statement is somewhat true. Up to 85% of Bitcoin’s supply is only owned by 1% of wallet addresses.

Source: bitinfocharts.com

But there’s an important point to be made about these numbers. Most of the top percentage of wallets is not owned by whales — but by exchanges.

Bitcoin is used for criminal activity and phishing.

One of the first types of headlines the media ran back in 2009 and 2010 consisted of Bitcoin being used for all sorts of nefarious activity: hacking, phishing, drug running, the list goes on.

Even Forbes reported on a scam where hackers emailed their victims and requested BTC payments in exchange for not revealing sensitive information. Therefore, in certain ways, BTC and cryptocurrencies give hackers more options.

Bitcoin is too slow to be used as a currency.

The truth about Bitcoin is that yes, it is slower than VISA, Mastercard, and other centralized electronic payment systems.

Paying with your credit cards takes seconds and the network can handle payments around the world 24/7. However, though Bitcoin can also be used around the world, confirmation of payment takes an average of 10 minutes; during the bitcoin craze of late 2017, confirmation times could take hours.

Moreover, VISA on average processes around 2,000 transactions per second (tps). This means the number of payments people make per second on the network. VISA has a maximum of 24,000 TPS. Bitcoin, by contrast, has a maximum of 10 TPS. This argument has been put forward by many critics over the years and picked up by the media as the doom of bitcoin’s future.

Yes, buying, selling, trading, and spending cryptocurrency is perfectly legal. There are government rules that you are supposed to comply with, and there are penalties for those who are caught breaking those rules. The very nature of cryptocurrency makes it a little easier to skirt government rules, but governments are rapidly finding ways to catch and punish the lawbreakers.

There are risks with cryptocurrency that do not exist in the fiat money system. The first is that, as a new technology unfamiliar to many people and with massive cash flows and asset volatility, the cryptocurrency space is a magnet for scammers, bad business people, and outright criminals.

Another risk is the flip side of one of the benefits—additional privacy that comes from decentralization. Yes, you can do a transaction without anyone else knowing about it, but that also means there is no authority to appeal to when something goes wrong. You can’t get Paypal, a credit card company, the government, or a bank to reimburse you if you get scammed. If you forget the “password to your account” (commonly referred to as a key), you can’t just call up the bank, tell them your mother’s maiden name, and get it back. Your money isn’t gone, but neither you nor anyone else will ever get to it. Reasonable estimates of “lost” Bitcoin run as high as 20%-25%. A big chunk of all the Bitcoin that will ever exist has already become inaccessible to its owners!

Cryptocurrency exchanges also seem to get hacked more frequently than more traditional financial institutions. The consequences of these hacks vary, but the potential for massive consequences exists.

In addition to these risks of permanent loss of capital, cryptocurrencies are massively volatile. Nobody knows exact numbers, but there are surely thousands or even millions of investors who have bought high and sold low, losing substantial amounts of money they used to have.

So no, while cryptocurrencies are legal, they are not perfectly safe. They have a different, unique, and possibly higher risk profile than most other financial assets. Caveat emptor!

Is Cryptocurrency Primarily Used by Criminals?

No, as mentioned above, the primary use for cryptocurrencies at this time is speculation. According to a 2019 paper, 46% of Bitcoin transactions were a result of criminal activity. However, other studies have suggested that number is as low as 0.34%. True crypto fans like to point out that far more fiat money (like 2%-5% of annual global GDP) is used for illegal activities than cryptocurrency. Critics point out that there is a lot of illegal activity that remains undetected, particularly the laundering of money through cryptocurrencies. Criminals certainly embraced cryptocurrency early on, as it had obvious useful applications for them, but their use has since probably been outweighed by non-criminals who are simply speculating with it.

While the blockchain has anonymous elements (your name is not technically assigned to your address on the blockchain), there is still the fact that EVERY transaction is monitored and recorded. This provides a record that can be tracked, and criminals don’t like being trackable. Private firms and law enforcement can and have tracked criminals by tracing transactions through the blockchain to places that know the identity of their users, like cryptocurrency exchanges. So while cryptocurrency can help a small-time criminal stay hidden, it isn’t going to work on a large scale or in any sort of crime that gets wide publicity. In August 2021, the largest known hack of Bitcoin ($600 million worth) occurred. The hacker returned all the money—and probably not just out of the goodness of their heart, given the traceable aspect of the blockchain.

Why would anyone want or need to use bitcoin?

Bitcoin serves as a new kind of currency for the digital era. It works across international borders and doesn’t need to be backed by banks or governments.

Or at least that was the promise when it was created in 2009. The surge and volatility of bitcoin this year may be great for those who invested early, but it undermines bitcoin’s viability as a currency.

Related: Bitcoin boom may be a disaster for the environment

Right now, I can use my bitcoin holdings to pay for purchases at Overstock(OSTBP), or book a hotel on Expedia(EXPE). But if I use bitcoin to buy $25 worth of socks on Overstock today, and the price of bitcoin quadruples next week, I’ll feel like those socks actually cost me $100. Then again, if bitcoin crashes, at least I’ll always have the socks.

Rather than a currency, bitcoin is being treated more like an asset, with the hope of reaping great returns in the future.

Paying with bitcoin isn’t easy.

I’ve heard this argument circulate widely throughout the years. I still hear it from my grandpa every holiday dinner. He didn’t see a Bitcoin checkout option at the grocery when he bought the turkey — therefore it’ll never be used.

His sentiment is accurate though. For instance, a journalist from Business Insider spent a day trying to pay for basic needs with Bitcoin. It didn’t go well.

Bitcoin isn’t widely accepted – yet. But that doesn’t mean it’s a total loss for people with Bitcoin to burn.

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