Bitcoin was the first [[Cryptocurrency]] - an implementation of a [[Blockchains]], now turned into a speculative investment in the form of a Ponzi-like scheme. In 2008, a paper called [Bitcoin – A Peer to Peer Electronic Cash System](https://bitcoin.org/bitcoin.pdf) was posted to a mailing list discussion on cryptography by "Satoshi Nakamoto". In 2009 the Bitcoin software is made available to the public for the first time and mining new tokens (the actual "Bitcoins") was possible for the public. The Bitcoin blockchain is used as a public ledger to record the transactions. Around every 10 minutes all transactions are aggregate into a block. To be accepted, the new block must contain a proof of work token, mined earlier. This mining (creation of a PoW token) is what generates bitcoin (the "currency"). The difficulty with which these PoW's can be created is adjusted around every two weeks based on the recent network performance, with the aim of keeping the average time between new blocks at ten minutes. In other words: The more computing power is used to mine bitcoin, the harder it gets for everybody. Originally envisioned as a currency, technical and social problems prevented that so far. See [[#Turtles all the way down]]. ## Value In 2010 the first Bitcoins were commercially traded - 10.000 Bitcoin for two pizzas. Since then it hasn't really caught on due to technical problems (see [[#Turtles all the way down]] and the overall volatility. The overall trend is up, although there are sharp intermediate drops in value. As a result Bitcoin simply does not work as a day-to-day currency and acts more like a long-term investment. However as a long-term investment (aka store of value) it's also problematic as it is not backed by anything. It is backed by the continuous application of energy and the investment itself, so it's not predictably useful. The value is also very volatile with frequent bubbles and price fluctuations, so it does not retain value. Additionally the system behaves like a Ponzi scheme. The value is pumped until it reaches a maximum, then whales and early investors dump (some of) their holdings, which crashes the value. At that point they need to get new people into the system to repeat the process. This works until no more people are willing to invest, at which point the entire system crashes. During [[COVID-19]] there was a lack of investment opportunities, making Bitcoin a vehicle for diversification and even prime investment. This pumped the price up to around 60k USD per BTC in April 2021, until it crashed to 30k USB per BTC in June 2021. [Is there a future for Bitcoin? An investor and a skeptic make their case](https://open.spotify.com/episode/3NEPAGKv6yijzqKShNCdqT?si=RrvfPLJ2QjaqROuqE7z10Q) Steve Hanke is a professor of Applied Economics at Johns Hopkins University, senior fellow and director of the Troubled Currencies Project at the Cato Institute, a former member of President Ronald Reagan’s Council of Economic Advisers, and was the president of Toronto Trust Argentina in Buenos Aires when it was the world’s best performing mutual fund in 1995. He has also advised other countries on how to deal with hyperinflation and how to stabilize currencies. See: [State of Play: Bitcoin and Cryptocurrencies - The Prof G Show with Scott Galloway | Podcast on Spotify](https://open.spotify.com/episode/1VwUjvMNeoOeyiQwP3im6G) ## Bitcoin ideology Bitcoin ideology takes [Austrian Economics](https://en.wikipedia.org/wiki/Austrian_School) and adds Federal Reserve conspiracy theories: > The "Fed" use inflation to steal value from the people; the worldwide economy is in danger of collapse at any moment due to central banking and fractional reserve banking; Bitcoin will protect you from this collapse. Advocates repackage and propagate these ideas almost verbatim, even when they almost certainly don’t know who or where they trace back to. - David Gerard The 0.1 release of Bitcoins states: > The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. - Satoshi Nakamoto From an economics point of view Austrian Economics (aka business cycle theory) was [theoretically and empirically debunked](https://en.wikipedia.org/wiki/Austrian_School#Business_cycle_theory) at the time of Bitcoins creation. So the core is pretty much distrust of the government, wrapped in conspiracy theories involving "the banks", "the Fed", sometimes devolving into [anti-semitism](https://slate.com/technology/2018/08/the-lurking-threat-of-anti-semitism-in-cryptocurrency.html). Beyond that is a layer of "Number go brrr!", essentially acknowledging the ponzi-like structure of Bitcoin, but deflecting to other groups that supposedly do the same: "What about bankers?", "What about the stock market?", "What about the other financial bubbles?" It's a version of "the people sticking it to the man!", which is not helping. Firstly, pointing to another wrong does not innocence make and secondly, [Hedge Funds Always Win](https://www.institutionalinvestor.com/article/b1qfm3mlgbty1v/Hedge-Funds-Always-Win) anyway. So, Bitcoin ideology is rooted in conspiracy theories and morphed into Empathy Deficit Disorder. See also [[Four Perspectives on NFTs#NFTs as property]]. See: * https://open.spotify.com/episode/7IJw2RN9A5l7mxY76smf9m?si=r6BoXVzcTFCF-yJo77R7QQ&utm_source=copy-link * [Bitcoin open source implementation of P2P currency - P2P Foundation (ning.com)](http://p2pfoundation.ning.com/forum/topics/bitcoin-open-source) * [The conspiracy theory economics of Bitcoin – Attack of the 50 Foot Blockchain (davidgerard.co.uk)](https://davidgerard.co.uk/blockchain/the-conspiracist-gold-bug-economics-of-bitcoin/) * [Summer reading for the cryptocurrency skeptic: part 1 – Attack of the 50 Foot Blockchain (davidgerard.co.uk)](https://davidgerard.co.uk/blockchain/2021/07/22/summer-reading-for-the-cryptocurrency-skeptic-pt-1/) ## Decentralization From an ownership point of view, Bitcoin is not decentralized: > The top bitcoin holders control a greater share of the cryptocurrency than the most affluent American households control in dollars. The study showed that the top 10,000 bitcoin accounts hold 5 million bitcoins, an equivalent of approximately $232 billion." > Source: [Bitcoin’s ‘One Percent’ Controls Lion’s Share of the Cryptocurrency’s Wealth - WSJ](https://www.wsj.com/articles/bitcoins-one-percent-controls-lions-share-of-the-cryptocurrencys-wealth-11639996204) In terms on mining, Bitcoin is also not decentralized. In July 2014, mining pool Ghash.io [held more than 51%](https://www.coindesk.com/bitcoin-mining-detente-ghash-io-51-issue/) of the Bitcoin network hash rate. Since then the 3 major mining pools "promise" not to hold more than 51% together, however it is unclear how separated these pools really are, since the owners & operators often act together. Ownership centralization is part of the deflationary design of Bitcoin and mining centralization is based on simple economics. ## Blocksize War The Blocksize War was a debate about the size of Bitcoin's blockchain blocks that took place between 2015 and 2017. The hardcoded block size limit was set to 1MB by Satoshi as a way to keep the blockchain small in its early days. It was likely added to avoid an early attack if blocks would grow beyond 32 MB, which could have broken the system at this point. With blocks being processed every 10 minutes, the theoretical limit of the system is around 7 transactions per second. In 2015, Bitcoin clogged and the transaction cost for each transaction in a block got very high. As a result the suggestion was to increase the block size limit, thus removing the arbitrary speed limit. This would have unclogged Bitcoin and again removed the transaction fees. However miners disagreed as they liked being paid for transactions in addition to their mined Bitcoins. They essentially convinced a large enough group that "*Bitcoin succeeds because it proves its inability to change*" and that "*It just exists whether you like it or not and you can't control it or change the rules to your liking*". In other words: With every added user, miners stood to make even more money, based on a system that was at the limit in 2015 already. A direct result was the creation of "Level 2" infrastructure, essentially conceding that Bitcoin won't ever scale and that another system is needed (see [[#Turtles all the way down]]. See: * [The Bitcoin Block Size Debate Explained (bitrawr.com)](https://www.bitrawr.com/bitcoin-block-size-debate-explained) * [Block size limit controversy - Bitcoin Wiki](https://en.bitcoin.it/wiki/Block_size_limit_controversy) ## Turtles all the way down Although the goal of Bitcoin was to be a global currency, it's technically not able to do that. Since the block size is set to 1MB with blocks being processed every 10 minutes, the theoretical limit of the system is around 7 transactions per second. Additionally the transaction cost for each transaction in a block got very high over time. As a solution additional layers were created on top of the Bitcoin blockchain, for example the Lightning Network. The idea was a mesh network of individual participants, which Bitcoin holders could send small transactions over. However there are a lot of issues making Lightning itself technically unworkable. See [jstolfi comments on Lightning network sounds a bit wack. Is it? (reddit.com)](https://np.reddit.com/r/Buttcoin/comments/8407or/lightning_network_sounds_a_bit_wack_is_it/dvm0haj/). And of course this makes the entire blockchain argument void since transactions are bundled into "channels", which are essentially "*an arbitrary amount of transactions worth X*", so every channel is essentially a micro-bank, but without any regulation. To make Bitcoin and Lightning work, a third layer is then added, which are exchanges. These exchanges use internal databases to manage all transactions within their system and clear them eventually against their Lightning channels, at some point being cleared back into the Bitcoin blockchain. At this point the system is fully centralized within the respective exchange and you have: A bank. This is for example the proposed system for El Salvador with Stripe as the exchange platform. Turns out blockchains only work for currencies if you abstract away the blockchain. ## Environmental impact Bitcoin is based on a Proof of Work [[Blockchains#Consensus Mechanisms]], which is adjusted to the overall processing power available to the system. In other words: The more computation power the network has, the harder it gets to keep the average time between new blocks at ten minutes, making it a [Red Queens race](https://en.m.wikipedia.org/wiki/Red_Queen%27s_race). There is only one "winner" per block that gets the transaction fees as well as the attached Bitcoin, so everybody else has wasted their computing power, aka energy. That means the energy required to create a block is not the energy that the winning node used, but the entire network. See: * Bitcoin mining could derail China’s climate goals: [Policy assessments for the carbon emission flows and sustainability of Bitcoin blockchain operation in China | Nature Communications](https://www.nature.com/articles/s41467-021-22256-3) * [Stephen Diehl on Twitter: "Let's discuss the environmental cost of bitcoin. Because despite all the push for sustainable and green investment in the tech sector, there's a giant smoldering Chernobyl sitting at the heart of Silicon Valley which a lot of investors would prefer you remain quiet about. 🧵 (1/)" / Twitter](https://twitter.com/smdiehl/status/1350869944888664064) * [Glenn on Twitter:" There’s apparently a Bitcoin/cryptocurrency talking point going around that “once a coin is mined, which takes a lot of energy, the transactions take almost *no* energy.” I want to make sure people understand how ridiculous that is" ](https://twitter.com/GlennF/status/1403030039172509696?s=19) * [Energy consumption of a Bitcoin (BTC, BTH) and VISA transaction as of May 21, 2021](https://www.statista.com/statistics/881541/bitcoin-energy-consumption-transaction-comparison-visa/) ## Articles & posts [The ‘halvening’ is coming — what this means for bitcoin – Amy Castor](https://amycastor.com/2024/02/21/the-halvening-is-coming-what-this-means-for-bitcoin/) [Amazon.com: Attack of the 50 Foot Blockchain: Bitcoin, Blockchain, Ethereum & Smart Contracts (9781974000067): Gerard, David, Boyd, Karen, Gutzler, Ben, Wagner, Christian: Books](https://www.amazon.com/Attack-50-Foot-Blockchain-Contracts/dp/1974000060) [Attack of the 50 Foot Blockchain – Blockchain and cryptocurrency news and analysis by David Gerard](https://davidgerard.co.uk/blockchain/) [@DirkSonguer/Bitcoin / Twitter](https://twitter.com/i/lists/1403966842629144577)