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The Truth About Bitcoin

November 28, 2017

 

As a financial planner, I’ve recently had many people ask me about Bitcoin. It seems a bit of a mass craze has developed likened to Tulipmania. I thought it would be timely to bring some clarity and awareness to what it really is.  
 

What is Bitcoin?


Bitcoin was originally developed in response to the growing distrust of the financial system. Ideally, it was meant to revolutionize money and finance by providing a decentralized system that was incorruptible.

It was developed using blockchain technology where transactions are broadcast, and every node is updated - it represents an innovation in information registration and distribution that eliminates the need for a trusted party to facilitate digital relationships. Private key cryptography provides the security and trust required for users to transact with each other.

 

 

The Decentralisation Myth

The Bitcoin blockchain, however, doesn’t magically disappear the need for intermediaries. In theory, blockchain — with its vow to decentralize and operate with open governing — seems to be a favourable alternative to opaque and obsolete institutions. In practice, however, it’s always minority that inevitably takes charge, which tends to increase the chances of abuse of power. To authenticate and provide security to any given transaction between two peers, a small competition with a financial reward must first take place. This process is known as blockchain mining. The alarming point here is that the majority of the network mining power is now concentrated in China (81%), and managed by a handful of companies.

 

 

The Carbon Footprint Dilemna


Now, as a financial planner who specializes in ethical, values based advice, I wondered how Bitcoin rated in the sustainability spectrum.

The answer is very poorly. One Bitcoin transaction now uses as much energy as your house in a week.

 

As mentioned above, the security and integrity of the blockchain is ensured by linking the transaction blocks one after another. Each block contains the signature of the preceding block. If a block were modified, its signature would change. And because it sits inside the next block, the latter would also change. And so too, would all the following blocks.

To generate a new block, the nodes use their mining power to compete with each other. While a malevolent miner is busy forging blocks to catch up with the current chain, all the other miners are simultaneously linking new blocks to it.

 

 

Because it’s the longest chain that obtains consensus, a transaction is only valid once its block is followed by enough blocks to ensure it won’t be discarded for a longer chain. So long as the malevolent user doesn’t hold more than 51% of the mining power, they don’t stand a chance of deceiving the network.

This computation competition, difficult by necessity, requires a tremendous amount of energy. We are talking about 23.82TWh to validate less than 5 transactions per second. That’s equivalent to the electricity consumption of more than 2 million US households, or that of a country like Nigeria.

 

“A BITCOIN TRANSACTION IS ABOUT 4000 TO 5000 TIMES MORE ENERGY INTENSIVE THAN A VISA SWIPE”

CHRISTOPHER MALMO — MOTHERBOARD



The Community Impact

 

Whenever I look at what I invest or spend my money on, I always ask, "what value is this going to bring my family, my community and the world?"

When I apply that to Bitcoin, it seems very little. It's not really designed to spend in everyday transactions.

 

Apparently, Bitcoin-blockchain transactions are recorded only once every 10 minutes. To increase payments security, it is standard practice to wait 50 minutes more after each new record appears because the records regularly roll back. Now imagine trying to buy a snack using bitcoins. It’s no big deal to stand in line for an hour at the store, right?

Furthermore, due to the finite number of Bitcoins distributed, it actually encourages and perpetuates accumulation and greed for the individual rather than the prosperity of the community  (through spending it as a currency).

I understand that Bitcoin is currently changing lives by creating individual wealth. However, I question at what cost and how real and long lasting it actually is. Regardless of what currency or economy we find ourselves in, I believe that we fundamentally need to change the way we use and relate to money. Only by changing our relationship to money can we have any hope of really changing the world and our experience of wealth.

 

 

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