The Dangerous Side of Bitcoin

Mining Centralization and Energy Consumption in China

Bitcoin price is falling with a seemingly fatal trajectory. The price, percent growth, market cap, and trading volume have all taken a hefty hit. China and other large holders of bitcoin are liquidating their positions in a strategic manner; sending irregular market signals that attract the volume to push the market in the direction of their choosing. Right now these large owners of the currency are acting as “Bears” pushing down the market by dumping large amounts of currency. Large holders are methodically liquidating their call options and capitalizing off the bubble like prices.

Much of the issued bitcoin are being held in a relatively few amount of private wallets. Because bitcoin uses pseudonymous public keys it is hard to determine where in the world these accounts originated. The pie chart below shows the distribution of bitcoin. It’s important to note that bitcoin has a significant proportion of its supply that is unusable or essentially lost due to forgotten private keys, death of account holders, and coins sent to non-existent wallet addresses. This can mess with the supply side economics of a currency, which is essential to a coins economic health.

A good estimate in determining which countries these wallets reside in may be to look at the mining hash rates of different countries. The logic here is that the countries with the largest hash rates will be rewarded most of the newly issued bitcoin. The more hash rate a country has the more likely they will be to hash the block and collect the new issuance of bitcoin as a reward. When examining hash rates one can see that Chinese influence and centralization has led to a significantly proportional distribution of bitcoins going to a relatively few amount of Chinese wallets. These owners can collaborate with other large holders of bitcoin and can manipulate the market to control the price of bitcoin.

Many investors are holding the currency because they recognize the utility associated with digital currencies and their underlying architectures. Bitcoin and other crypto currencies represent a growing percentage of the remittance market and will enter into many other markets in the near future. Bitcoin’s open source code allows for scrutiny in security and flexibility of future use cases. The coins dynamic nature is conducive of the type of economic and regulatory environment it was created in. The industry is still very young with very little regulation around trading and taxes.

Regulation stifles innovation.

It will take time as these currencies and networks to mature and provide benefits to productivity and the financial sector. While we wait for this regulation many traders are already partaking in bad market behavior including insider trading, double spending, ponzi schemes, and fraudulent ICOs. Bitcoin is sometimes referred to as a thick vault door encased with cardboard walls. Bitcoins blockchain is secured by its cryptography but the scalability, regulation, and centralization have revealed weak spots in the system.

Thanks for reading.

• Josef S Loffler