Re-evaluating Bitcoin Again

A Couple New Threats

When I wrote Re-evaluating Bitcoin last year, the price of Bitcoin was about $26,500. Clearly my timing was off, because after reading Easy Money by Ben McKensie, and considering all the risks, I decided to sell some of my Bitcoin. Now it’s about $70,000 LOL. It’s a good thing I’m not a financial advisor.

However, all of the risks still exist, and I’m now aware of a couple more, which is the reason for this update.

The risks already explained in the first article were hackers, the difficulty of cashing out, the high exchange fees, the lack of ease of use as shown in El Salvadore’s experiment, the very complicated process of securing your Bitcoin with a hardware wallet, the near impossibility of Bitcoin ever becoming universal as a currency because of the time it takes to add each transaction to the blockchain, the number of fraudulent actors like Sam Bankman-Fried in the business, and the difficulty of Bitcoin mining.

On mining, I wrote “…I thought I understood how BTC is mined; now I'm not so sure; still studying it. I'm wondering how, as the permanent blockchain ledger of every single bitcoin transaction gets bigger and bigger, and the miners need bigger and bigger banks of computers and use more and more electrical power to find new 64 digit characters for each transaction, if a limit of capability or feasibility will be reached.”

Now that we’re hearing more and more about the accelerating demand for the power demands of data centers, Bitcoin mining is right in the middle of the problem.

To understand what I now see as a new threat, first we have to look at the difference between Bitcoin and Ethereum. Bitcoin transactions are verified on the blockchain by “proof of work”. The “work” is using vast computer power for each transaction to find a blockchain identifier (like a very long password) that hasn’t already been used. Actually, being “decentralized”, it’s the vast computer power of many miners all over the world all trying at the same time to be the first to find the next identifier. The first one to accomplish this gets the reward, which is in Bitcoins. All this computing power is eating up huge amounts of electrical power for the computing and for cooling the computers. That’s why Bitcoin miners try to locate their data centers close to power sources.

Meanwhile, Ethereum is a platform for developers of crypto programs, software utilizing blockchain technology. Ethereum per se is not a currency, although it is associated with it’s own coin, ETH, which is like a currency. Unlike Bitcoin, ETH uses “proof of stake” to verify each transaction. It is decentralized in that thousands of stakeholders check and verify each transaction before adding it to the blockchain. Proof of stake is quicker than proof of work, and it uses much less electricity.

So the threat, as I see it, is that the power demands of mining Bitcoin will soon force it to change to proof of stake or be outlawed. Our power grid is so vulnerable now with so much of it being based on unreliable wind and solar that serious grid outages are bound to happen in the next few years, and unnecessary power consumption will be in the crosshairs. So far, Bitcoin has refused to consider switching to proof of stake, so whatever will happen is uncertain.

Since ETH uses much less power, and it has actual use cases of value, it may have a much brighter future than Bitcoin.

The second threat that I see, to both Bitcoin and Ethereum and all crypto, is from quantum computing. It sounds like quantum computers may soon be able to crack the blockchain and all encryption and passwords. It’s hard to imagine what that would be like, but it might make it easy for any bad character with access to quantum computing to steal any crypto currency.

At that point, physical gold will regain its luster. Or anything real and tangible.