Monthly Archives: July 2018

Will Bitcoin Consume All Electricity?

The idea that bitcoin will consume an enormous fraction of the world’s electricity is hysteria.

In a recent article in the Communications of the Association for Computing Machinery, June 2018 issue, Nicholas Weaver (a lecturer in computer science at UC Berkeley) raised this issue, in what was otherwise a good article on the security issues around bitcoin.

Weaver quotes a statistic that cryptomining consumes more electricity than Ireland. This may be based on digiconomist.net, which runs toward the high end. Other estimates are only half as large.

He states “If there is profit in mining, the miners will keep using more and more power until there is no more excess profit available”.

This is true, but he overstates things. He evidences a lack of basic understanding of economics and how businesses operate, ignoring all the complexities that go into cryptomining.

Mining costs are a combination of fixed, and variable costs. The variable cost is primarily the electricity consumed. The fixed costs consist of facilities costs, equipment costs, and people and administrative costs. Equipment costs can run over 1/4 of the total.

Total global Hash rate over the past 12 months has grown from 5 to 38 Exahashes, a factor of 7.5.

Difficulty in the Nakamoto consensus protocol has grown by a factor of 7.

Revenue per Terahash per day grew from $1 to $3+ at the peak half a year ago and with the price collapse is down to $0.30. That is before electricity.

According to cryptocompare.com, with the current BTC price of $6500 and at $.10 per kWh for electricity the profit is just $0.06 per Terahash-day currently, but that is before any of the fixed costs are recovered.

If you are not covering your fixed costs plus variable costs you will not stay in business to consume electricity.

Here’s where Weaver really gets it wrong. He states “a 10x reduction in power consumption per hash for Bitcoin mining would have little real effect on Bitcoin’s power consumption. Instead, there would just be 10x as many hash computations needed to produce a block.”

Difficulty rates depend on the total cost burden.

His statement above completely ignores fixed costs. Whether it is an individual mining rig or a huge mining farm, the fixed costs of location, equipment and labor will generally be of order half the total cost.

Do-it-yourself miners in Mom’s basement or my friend Dan might ignore their location costs and equipment burden on their cooling and they might give away their labor for free. But their rigs aren’t as efficiently operated and their electric costs may be higher. They still have to amortize their equipment costs, at least for added ASICs and GPUs.

Suppose the gross revenue is $0.30 per THash-day and the fixed costs can be held to $0.10 and the electricity cost is $0.2. This is a breakeven business example with a large electricity burden.

Now reduce the power consumption per hash by 10x, in which case the total costs drop from $0.30 to $0.12. There would be incentive to increase total hash power by up to 2.5x not 10x. A factor of 4 overestimate.

In practice, it takes time to ramp up hash power. Supplies of equipment are tight. Data center spaces are limited. System administrators are not always available. There are both practical and regulatory restrictions on power available to mining farms. 

Furthermore, ASICs and GPUs for Bitcoin and cryptocurrency mining are in particularly tight supply. As demand goes up, there is a bidding war with equipment going for premium prices. This drives up the fixed cost component of Bitcoin mining.

Doubling capacity takes many months, and is subject to financial planning scenarios about future crypto prices, equipment delivery time lags, and electricity prices and availability.

According to digiconomist.net on July 5th, Bitcoin is just 1/3 of 1% of global energy usage (1 part in 300). Global GDP is some $80 Trillion and annual transaction flows of Bitcoin are over $1 trillion. So for over 1% of the proportional GDP the related energy requirement is proportionally 3 times lower.

According to an article in ZeroHedge, gold mining is much more energy costly. Per $ of value produced bitcoin and gold are roughly comparable, but there is a lot more gold mined.

https://www.zerohedge.com/news/2017-11-04/bitcoin-vs-gold-which-ones-bubble-how-much-energy-do-they-really-consume

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Photo by Michael Steinberg on Pexels.com

They state that per bitcoin the energy consumption is 6.6 million barrels of oil equivalent per year while the consumption for gold mining is 123 million barrels per year.

There are about 88 million ounces of gold produced per year, with a value of around $109 billion, versus 2/3 of a million Bitcoins, value around $4.3 billion. That’s a factor of 25 in value since bitcoin is 5 times more valuable comparing one coin to one ounce.

It seems that the total energy consumed in gold mining globally is around 19 times that of Bitcoin mining. And the number of bitcoins produced per year is dropping due to the halving every 4 years coded into the Nakamoto consensus.

The whole concept is designed to shift miners’ revenue toward transaction fees as the economy develops over time.

If you want to save the environment, focus on gold mining energy efficiency. Improve it by 5% and you can cover the entire Bitcoin mining energy budget.

For a variety of reasons, other cryptocurrencies are less energy intensive than bitcoin. They are also less secure, less battle hardened.

Bitcoin is a digital gold alternative that has the advantages of very low cost portability, and lower costs to secure and store.

It is a valid alternative to gold ownership as a store of value, and is a greener solution. There is a great deal of work (pun intended) on alternatives to Proof of Work mining, including Proof of Stake protocols and delegated Byzantine Fault Tolerant protocols. Also the growth of second layer solutions such as Lightning will support a larger economy and shift miners’ revenue more toward transaction fees.

Is Bitcoin on your Computer? Money in the Internet

No, not asking if you own any Bitcoin. Or the IP address.

This blog is prompted by the Nicholas Weaver article “Risks of Cryptocurrencies” in the June 2018 Communications of the ACM.

He writes, rather misleadingly in our opinion:

“This was not because our Bitcoin was stolen from a honeypot, rather the graduate student who created the wallet maintained a copy and his account was compromised. If security experts can’t safely keep cryptocurrencies on an Internet-connected computer, nobody can. If Bitcoin is the ‘Internet of money’, what does it say that it cannot be safely stored on an Internet connected computer?”

Would you leave a gold coin lying around in the open? Lock that thing up in a safe or safety deposit box.

Bitcoin is not really the ‘Internet of Money’ so much as ‘Money in the Internet’. And the cryptocurrency was not on an Internet-connected computer. Those were the keys.

Your wallet holds one or more private keys, not cryptocurrency itself.

Key distinction (pun intended). The money doesn’t move off the distributed ledger. When it moves from one wallet to another what happens is the send process (that you initiate) changes which private key can access it. Namely the designated receiver’s key becomes the only one that works.

The graduate student’s indiscretion was in making a copy of the key that allowed the safe or safety deposit box to be opened by an unauthorized person. And then not properly securing it.

Where is the Bitcoin stored? Why in the distributed ledger, the blockchain, that is simultaneously existing in many places, but has a single verified history from the Nakamoto consensus protocol that committed it into the blockchain. 

That is effectively the bank where all the safety deposit boxes are.

How do you get to your coin? With a key stored in a wallet, the private key. Visit your bank.

That key must be stored in a safe place. It can be in a hardware wallet (USB device typically) which is stored in a home safe. And then it has the same level of security as the gold coins in your safe.

Better, since you can keep another copy in another secure location (safety deposit box, for example).  

The next best alternative is a pass phrase on a piece of paper again stored in a safe or safety deposit box.

There is no need for your private key to be sitting on the Internet.

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If you use an exchange you can use their vault, or cold storage, option for most of your holdings. Then you are relying on their assurances that they are storing in offline devices.

When you do visit your Money in the Internet bank, do so from the privacy of your home, not from some insecure wifi cafe.

You go to the bank and take some gold coins out from your box and they are already less secure, but that is why they have guards at banks. And when you go out to your car with a couple of the coins, they and you are even less secure.

But we are used to doing that. We understand the procedures.

It’s just that there are new procedures that we have to get used to, with digital gold like Bitcoin. It’s rare to be physically mugged for Bitcoin.

Keep only moderate amounts of cryptocurrencies in exchanges with established security reputations, and modest amounts in mobile wallets.