Bitcoin, the ugly truth : 4 hidden facts that you need to know
When looking to the hype train of 2021, it’s hard to resist the appeal of the Bull market. Indeed, we are just past the half year and it’s already been quite an incredible ride :
- Bitcoin reached its all-time high during April with a price above $60,000.
- In March, market capitalization exceeded the 2,5 trillion dollars net worth
The cryptocurrencies are mainly represented by Bitcoin, which still represent today the biggest share of the market capitalization. It has been the first cryptocurrency and while being vastly praised in mainstream medias, it gots some intrinsic flaws. The same goes everything else in life, nothing is perfect : Bitcoin is no exception.
As always, in life and especially in the investing world : Don’t trust, always verify !
Bitcoin is not that Private
Bitcoin transactions aren’t hidden at all : they are in plain sight accessible to anyone on the internet. Remember the transparency in public blockchain protocols ?
I know, i know… I said in the article that there were some level of privacy since the information is concealed and cryptographically secure by SHA 256 hashing method. Since it’s impossible to convert back the information once the protocol has been use, how could someone (a government for instance) trace it back ?
It’s simple! Crypto-Exchanges are compelled to the KYC (know your customer) and anti money laundering norms. Exchanges are expected to be able to provide information on both the sender and receiver side of a cryptocurrency. That means they have to know the name of their customers and must hand it back to governments if asked to. Once you got the name, it becomes easy to use the SHA 256 methods to get the hashing code and search for it in the blockchain database.
💡To be fair, the same could be said for other cryptocurrencies as well. The difference resides in the fact that only a few cryptocurrencies are designed to be use as a mean of paiement. Bitcoin is one of them. 💡
It’s even be acknowledged by a former CIA deputy director
Michael Morell conducted a research to see if Bitcoin was used in illicit activities. He stated it’s in the interest of the States that Bitcoin and the blockchain be adopted by governments because it is a blessing for surveillance purposes.
The blockchain ledger on which Bitcoin transactions are recorded is an underutilized forensic tool that can be used more widely by law enforcement and the intelligence community to identify and disrupt illicit activities. Put simply, blockchain analysis is a highly effective crime fighting and intelligence gathering tool. Michael Morrel
So, it only seems logical that Bitcoin holders are already under some surveillance. But don’t worry, there is still some alternative like privacy coins. We’ll get on that in the future.
Incidentally, he also found that broad generalizations about the use of Bitcoin in illicit finance are significantly overstated. If you ever minded😇
Cryptocurrencies are probably to stay, but not Bitcoin
In 2008, Bitcoin was a revolution:
- A mean of payment transparent, accessible to all with an open ledger
- That took only a few minutes to be executed worldwide
- Offering some security and anonymity due to hashing cryptography
- Secured by a consensus of miners (workers) who have an incentive to be honest, called the Proof of Work system.
These are his greatest strengths but also here lie his liabilities. This inconveniences will probably lead to its decreased usage in the near future until it, eventually, start to fade out.
To begin, because it’s a public ledger : Bitcoin is expected to have scalability issues. It’s going to be difficult to simultaneously scale the capacity of Bitcoin to process transactions while maintaining permanent access to history of all exchanges. There is people working on the lightning network that could help with that, but it’s not even closed to be functional and integrated.
Bitcoin is (very) slow
The transaction rate of Bitcoin is a direct consequence of its design :
- Around 1440 transaction par block. One block is added to the Bitcoin blockchain every 8 minutes.
- Chain scaling : the longer blockchain is always chosen. With the use of the Proof of Work system making mining harder as the time goes by.
Some people, like Edward Snowden (you probably know), claim that bitcoin’s transaction channel can handle only around seven transactions per second. In contrast, Visa and MasterCard are able to process tens of thousands of transactions per second. As you can imagine it’s a signifiant drawback…
Fees are expensive
It’s a direct consequence of this slow process of transaction. To make it interesting for miners to work for the Bitcoin ecosystem and their efforts worth it, the fees have to be higher that in other networks.
In case of a congestion, you have to lay aside something around $20 to gave incentive to the miners to process your transaction without having to wait hours to have it done … 😡
In order to ensure Bitcoin survival in the long run, this is probably the main issue that need to be worked on. The truth is : Proof of Worker consensus is intrinsically inferior to a Proof of Stake. At some point, Bitcoin will have to switch from the former to the latter. I don’t know if it’s even possible but it won’t be easy to say the least : as it means integrally rethinking the system.
Environment or Bitcoin : your choice
There are multiple studies (here, here and here) assessing the environmental impact of Bitcoin. To give you some context, the Financial Times found that the average carbon footprint per Bitcoin transaction ranges from 233.4 to 363.5 kg of CO2. For comparison, the average carbon footprint for a VISA transaction is around 0.4 to 0,5 g of CO2.
On top of that, consequences on environment also have consequences on our health :
The researchers estimate that in 2018, every $1 of Bitcoin value created was responsible for $.49 in health and climate damages in the United States.
Bitcoin carbon footprint is more than 40 000x bigger than traditional payment methods. I don’t think the world is going to tolerate it for much longer, especially with the climate changes we are facing. We already saw Chine banning Mining and i suspect other countries such as USA to quickly follow.
Decentralization is nowhere existent
Speaking of mining, I’m sure you heard that the Bitcoin network is decentralized.
Thanks to Mr CryptoWhale, i discovered that 78,89 % of mining operations were detained in China. Which is a big concern since the recent ban of mining by the Chinese government …
There is rumors to massive migration of mining operations to the USA. I haven’t found any date backing that up but i really doubt the US authorities are going to welcome, for long term, mining operations on their soil with open arms. Mainly, after considering the previous arguments.
To summarize
Here are the key insights :
- There is no search thing as anonymity in Bitcoin blockchain.
- The threat of influence by governments or agencies are real.
- Bitcoin’s Proof of Work system isn’t sustainable for the long term: there are ecological and decentralization problematics still to be solved.
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And as always, Think for yourself.
