Bitcoin: It’s always difficult to get people to understand something if their wealth depends on their not understanding it.

The rising price of electricity and the plunging value of the cryptocurrency could burst the speculative bubble for today’s prospectors writes John Naughton in The Guardian

Bitcoin mining has previously produced lucrative gross margins as high as 90%. Photograph: Jack Guez/AFP/Getty Images 
In the bad old days, prospecting for gold was a grisly business involving hysterical crowds, pickaxes, digging, the wearing of appalling hats, standing in rivers panning for nuggets, “staking” claims and so on. The California gold rush of 1848-55, for example, brought 300,000 hopefuls to the Sierra Nevada and northern California and involved the massacre of thousands of Indigenous people.

In our day, the new gold is bitcoin, a cryptocurrency, and prospecting for it has become a genteel armchair activity, although it is called “mining”, for old times’ sake. What it actually involves is using computers to perform unfathomably complicated calculations to create cryptographic “hashes” – codes that are, in practical terms, uncrackable.

Sounds intimidating, doesn’t it? But in reality anyone can play the game. You just have to have the right kit – a special bitcoin-mining computer called an Asic (application-specific integrated circuit). These gizmos are readily available online. I’m looking at one as I write: the Bitmain Antminer S19, which costs $6,999 (£5,600) and can do 95 terahashes – 95tn calculations – every second.

Mining is a misleading term for the computational work that’s needed to validate transactions on the blockchain – the cryptographically protected distributed ledger that underpins bitcoin. For every “block” that a miner is able to validate, they are rewarded with a number (currently 6.3) of new bitcoins. The value of the reward is tied to the prevailing price of the currency at the time. Not so long ago, for example, when each bitcoin stood at $68,000, that reward was worth nearly $430,000.

So you can understand why bitcoin mining looks a bit like a contemporary version of what happened in California in the 1840s. While most of the hopeful arrivals then were Americans, there were also thousands from Latin America, Europe, Australia and China. The Judge Business School in Cambridge, which has been tracking bitcoin mining for years, now finds that the US, with 37.84% of global hashrates, remains the biggest location, followed by China (21.11%), Kazakhstan (13.22%), Canada (6.48%) and Russia (4.66%).

So bitcoin mining has become a global phenomenon. And while here and there there are small outfits diversifying into it, such as the Californian pancake-batter maker that bought an Asic after pancake sales plunged during the pandemic, most miners are now industrial-scale operations with large sheds of Asics in serried racks, looking for all the world like small-scale data centres of the kind run by Google and co.

And, like data centres, they are power-hungry. That Bitmain Antminer machine, for example, has a power rating of 3,250 watts. It was recently estimated that bitcoin consumes about 110 terawatt hours per year, which is 0.55% of global electricity production, or roughly equivalent to the annual energy draw of countries such Malaysia or Sweden. 

For many operators, bitcoin mining has up to now been an astonishingly lucrative activity, with gross margins sometimes as high as 90%. But suddenly things have changed. First, bitcoin’s price has plunged – from its peak of $68,000 to $30,587 as I write this. And second, electricity prices have soared – by up to 70% in parts of the world, leading some industry experts to calculate that mining a single bitcoin can now cost up to $25,000. So the industry finds itself squeezed at both ends. Just like any ordinary business, in other words.

There’s an agreeable sense of schadenfreude in all this. Bitcoin has been a fascinating phenomenon from the very beginning, but one that morphed under the pressure of greed. Originally conceived as a currency – that is, as a means of payment – it rapidly became perceived as an asset class and, in a time of low interest rates, was the subject of an hysterical speculative bubble that now seems to have deflated, even if it hasn’t definitively burst.

Although it was predictable from the outset that, as the currency evolved, maintenance of its underpinning cryptographic blockchain would become ever-more onerous, it took a long time for the environmental consequences of that fact to be realised. But perhaps that’s a hallmark of every speculative bubble. It’s always difficult to get people to understand something if their wealth – real or anticipated – depends on their not understanding it. Meanwhile, the rest of us are left with the realisation that even the coolest idea can fry the planet.

Will blockchain fulfil its democratic promise or will it become a tool of big tech?

Engineers are focused on reducing its carbon footprint, ignoring the governance issues raised by the technology writes John Naughton in The Guardian

Illuminated rigs at the Minto cryptocurrency mining centre in Nadvoitsy, Russia. Photograph: Andrey Rudakov/Getty Images



When the cryptocurrency bitcoin first made its appearance in 2009, an interesting divergence of opinions about it rapidly emerged. Journalists tended to regard it as some kind of incomprehensible money-laundering scam, while computer scientists, who were largely agnostic about bitcoin’s prospects, nevertheless thought that the distributed-ledger technology (the so-called blockchain) that underpinned the currency was a Big Idea that could have far-reaching consequences.

In this conviction they were joined by legions of techno-libertarians who viewed the technology as a way of enabling economic life without the oppressive oversight of central banks and other regulatory institutions. Blockchain technology had the potential to change the way we buy and sell, interact with government and verify the authenticity of everything from property titles to organic vegetables. It combined, burbled that well-known revolutionary body Goldman Sachs, “the openness of the internet with the security of cryptography to give everyone a faster, safer way to verify key information and establish trust”. Verily, cryptography would set us free.

At its core, a blockchain is just a ledger – a record of time-stamped transactions. These transactions can be any movement of money, goods or secure data – a purchase at a store, for example, the title to a piece of property, the assignment of an NHS number or a vaccination status, you name it. In the offline world, transactions are verified by some central third party – a government agency, a bank or Visa, say. But a blockchain is a distributed (ie, decentralised) ledger where verification (and therefore trustworthiness) comes not from a central authority but from a consensus of many users of the blockchain that a particular transaction is valid. Verified transactions are gathered into “blocks”, which are then “chained” together using heavy-duty cryptography so that, in principle, any attempt retrospectively to alter the details of a transaction would be visible. And oppressive, rent-seeking authorities such as Visa and Mastercard (or, for that matter, Stripe) are nowhere in the chain.
 
Given all that, it’s easy to see why the blockchain idea evokes utopian hopes: at last, technology is sticking it to the Man. In that sense, the excitement surrounding it reminds me of the early days of the internet, when we really believed that our contemporaries had invented a technology that was democratising and liberating and beyond the reach of established power structures. And indeed the network had – and still possesses – those desirable affordances. But we’re not using them to achieve their great potential. Instead, we’ve got YouTube and Netflix. What we underestimated, in our naivety, were the power of sovereign states, the ruthlessness and capacity of corporations and the passivity of consumers, a combination of which eventually led to corporate capture of the internet and the centralisation of digital power in the hands of a few giant corporations and national governments. In other words, the same entrapment as happened to the breakthrough communications technologies – telephone, broadcast radio and TV, and movies – in the 20th century, memorably chronicled by Tim Wu in his book The Master Switch.

Will this happen to blockchain technology? Hopefully not, but the enthusiastic endorsement of it by outfits such as Goldman Sachs is not exactly reassuring. The problem with digital technology is that, for engineers, it is both intrinsically fascinating and seductively challenging, which means that they acquire a kind of tunnel vision: they are so focused on finding solutions to the technical problems that they are blinded to the wider context. At the moment, for example, the consensus-establishing processes for verifying blockchain transactions requires intensive computation, with a correspondingly heavy carbon footprint. Reducing that poses intriguing technical challenges, but focusing on them means that the engineering community isn’t thinking about the governance issues raised by the technology. There may not be any central authority in a blockchain but, as Vili Lehdonvirta pointed out years ago, there are rules for what constitutes a consensus and, therefore, a question about who exactly sets those rules. The engineers? The owners of the biggest supercomputers on the chain? Goldman Sachs? These are ultimately political questions, not technical ones.

Blockchain engineers also don’t seem to be much interested in the needs of the humans who might ultimately be users of the technology. That, at any rate, is the conclusion that cryptographer Moxie Marlinspike came to in a fascinating examination of the technology. “When people talk about blockchains,” he writes, “they talk about distributed trust, leaderless consensus and all the mechanics of how that works, but often gloss over the reality that clients ultimately can’t participate in those mechanics. All the network diagrams are of servers, the trust model is between servers, everything is about servers. Blockchains are designed to be a network of peers, but not designed such that it’s really possible for your mobile device or your browser to be one of those peers.”

And we’re nowhere near that point yet.

Blockchain explainer: a revolution only in its infancy

Hannah Murphy and Philip Stafford in The Financial Times


The word blockchain has been the equivalent of financial fairy dust in recent weeks, adding tens of millions of dollars to the market value of companies, including former camera pioneer Kodak Eastman, that have announced a project involving the technology or simply added it to their names. 

However, technologists and executives warn that blockchain technology is still developing and the high-profile name changes and often giddy reaction in the stock market are far removed from the real-world experiments. 

What is a blockchain? 

It is an electronic database of transactions, whereby new deals are added to the chain and then stamped and protected with a mathematical equation. 

The database is shared among hundreds of other computers, or “nodes” on the network, to make it virtually impossible for one agent to change it. These nodes use their computing power and compete to verify and decode the latest transaction. This is then appended as a “block” to the chain. Its ability to offer a verifiable, immutable and public record is what attracts many advocates. 

“It can do for the nearly free and frictionless transfer of assets what the internet did for the nearly free and frictionless transfer of information,” says Jonathan Johnson, an executive at Overstock.com, an online retailer that accepts payment in virtual currencies. 

How is it being used? 

Its chief use is as the system behind most of the hundreds upon hundreds of virtual coins that are being created, stored and traded online — of which bitcoin is the best-known. Estonia uses distributed ledgers for the public to follow court, legal and democratic procedures. 

But interest in its potential is far greater, generating great discussion at the recent World Economic Forum in Davos. 

Some countries, such as Russia and China, are interested in creating their own virtual currencies. Sectors from pharmaceuticals to shipping and agriculture are looking at it as a way to streamline record-keeping and improve inventory management through tracking systems. 

Financial markets are among the most enthusiastic adopters. Equity funding into companies building on blockchain technology hit $1bn last year, across 215 deals, according to data from CB Insights, a research group. 

Ventures such as the bank-backed R3 consortium have raised more than $100m. Crédit Agricole, the French lender, on Thursday took a small equity stake in Setl, the UK blockchain technology developer. 

Many institutions — including bulge bracket banks and fund managers — hope that a real-time ledger could automate their creaky and expensive back office systems, saving them millions. 

Several test cases are planned, such as the effort by Australia’s stock exchange to replace its system for clearing and settling trades with blockchain. CLS, the world’s largest currency settlement service, is drawing up plans. Setl has more than 20 institutions on its Iznes record-keeping platform for European funds. 

“People who are working with us trust us. We’re seen as a really specialist market,” says Peter Randall, chief executive of Setl. 

What are its limitations? 

Development is slow while institutions become accustomed to blockchain technology’s biggest features — that the records are public but the owner of the digital currency is anonymous and therefore untraceable. 

Many are creating their own “permissioned” distributed ledgers, where only those with authorisation can access the network. Some are exploring ways to build privacy options into the technology — for example, the ability to mask certain parts of the data such as trade or customer information. 

“Right now any kind of corporate blockchain initiative is using multiple platforms and coins and building their own proprietary technology on top of it,” says Jalak Jobanputra, founder of New-York based venture capital fund Future/Perfect Ventures. “There isn’t anything off the shelf right now that works for these consortia.” 

It has also been held back by the troubled reputation of its associated asset, bitcoin. The anonymity afforded to bitcoin users means it has been used to enable money laundering and organised crime. 

Some experts have questioned whether the technology can be scaled to process thousands of deals and payments per second that other electronic systems routinely handle. As the market develops watchdogs are also weighing up new specific regulations targeting the technology. “There is a lot of focus on the potential conflict between blockchain and data protection laws,” says Sue McLean, a partner in Baker MacKenzie’s IT and commercial practice division. 

Does the future of cryptocurrencies impact the future of the blockchain? 

The current hype around blockchain is partly because of its link to the mania in cryptocurrencies. More than 1,500 have been launched, eight times the number of recognised government-backed currencies, according to CoinMarketcap.com. 

Initial coin offerings (ICOs) — in which blockchain-based start-ups issue their own digital “coins” — have created more incentives for the public to get involved in a nascent market. CB Insights estimates blockchain start-ups using ICO funding pulled in five times as much as equity funding last year, across 800 deals. 

But critics say none of the future uses of blockchain technology would make the cryptocurrencies more valuable. 

Steven Wieting, global chief investment strategist at Citi Private Bank, says the interest is a further indication of a “bull market psychology” in broader global markets. 

“This is evident in the very mild impact that negative events have had in market pricing. The willingness of so many to speculate in cryptocurrencies, an unproven financial innovation separate from the underlying blockchain technology, may be a symptom,” he says.