Currency, in its many forms, has been part
of human civilisation for thousands of years.
A natural evolution of trade from the the
arduous process of bartering, where traders
needed to find an equivalent exchange of goods
to complete a transaction.
The advent of metal coins, which had a known
and reliable value, allowed trade to flourish.
It facilitated the diversification of jobs,
and even invented a new one, the banker.
As trade flourished, and coins were minted,
the wealthy needed a secure location to keep
their money safe.
Banks became common place, where vasts amount
of money was stored, and the responsibility
of keeping track of it fell into the hands
of these bankers.
The banker could facilitate trades between
people, without the physical coins, from which
the currency gained its value, ever needing
to be seen.
This evolved to the world we now know where
electronic and paper money is commonplace,
a system based on trust.
Trust that this money has intrinsic value,
trust that became tarnished by the global
financial crisis where bankers created excessive
amounts of another new form of currency debt,
a currency based on assumed future earnings.
When this system fell apart with the crash
in property prices, many ran back to the tried
and true method of using gold as a safe and
reliable currency, resulting in the prices
peaking at the height of the crash, but one
clever individual started to wonder is there
are better way.
That person was allegedly “ Satoshi Nakamato”
the mysterious founder of the first cyptocurrency,
Satoshi released this statement conveying
his motivation for creating bitcoin:
“The root problem with conventional currency
is all the trust that’s required to make it
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
Their massive overhead costs make micropayments
Cryptocurrencies were invented primarily to
eliminate the banking system middle men from
this trust system.
To ensure the security of people’s hard earned
money and allow for cheap accessible transactions.
A beautiful idea, that in practice has its
In order to eliminate these middle men, we
need to find a way of creating a trust system
between individuals using the currency.
A way of ensuring that someone cannot simply
write a transaction crediting their account
with bitcoin, without permission.
This is where the blockchain comes in.
In its purest form, Bitcoin is a currency
that uses a system of complicated keycodes
to verify transactions between individuals.
Batches of transactions are filed into something
called a block every 10 minutes.
For bitcoin the max amount of transactions
per block is around 2,400, so bitcoin has
a max transaction speed of 4 transactions
Each of these blocks needs to be verified
in order to verify the transaction history
and cryptocurrencies do this in a pretty surprising
Bitcoin uses a system called a cryptographic
hash function, in this case Sha-256. to verify
each block and it works like this.
SHA-256 simply outputs a string of 256 bits,
that’s a 256 long string of 1s and 0s, for
a given input.
The output seems random, but it’s not.
SHA-256 will always give the same output for
a given input, BUT, as far as we know, it’s
impossible to take the output and figure out
what the input was.
It’s a one way street.
That means, in order to generate a specific
desired output, the only way of doing it is
by trial and error.
Guessing inputs and checking the output.
And to do this quickly requires a significant
amount of computational power.
Essentially employing millions of little monkeys
in your computer to type numbers until one
manages to get it correctly.
So how does this apply to the blockchain verification
For a block to be added to the chain it needs
to be signed with a SHA-256 input that will
result in a predetermined string of zeros
at the start.
The number of zeros needed is determined by
how much computational power is trying to
verify the blockchain.
The more zeros needed, the more computational
power is needed.
We want the blockchain to be verified every
10 minutes, so in order to maintain that verification
time, the number of zeros needed keeps rising
as more computational power is dedicated to
It is through this huge dedication of computation
power that ensures security of the blockchain.
It would be unfeasible for an individual to
rewrite the blockchain with false information,
as they would first need to dedicate enough
power to sign previously written blocks, and
manage to keep up with the blocks currently
being written by the rest of the network.
A herculean task, as we are about to see.
There are more nuances to this system, and
I highly recommend you watch 3blue1brown’s
video on the subject if you want to learn
This blockchain technology is fascinating,
and has a huge amount of potential outside
of just cryptocurrencies, but it has negative
side effects, which have been exacerbated
by the hijacking of the bitcoin hype train.
The blockchain is verified by miners, these
are people who guess the inputs for SHA-256
to generate the desired output, and they are
rewarded for doing so with some bitcoin.
To increase your chances of being the first
person to correctly guess an appropriate input,
you need to maximise your computational power,
basically employ more monkeys, but obviously
this has a breakeven point.
Computation requires expensive equipment,
and equipment prices have only risen as the
demand for blockchain verification tech increases,
and it also requires electricity.
There are giant mining farms in the wastelands
of Iceland that use the cheap geothermal energy
and the abundance of cool air to minimise
their electricity costs for this very reason.
But the price of Bitcoin has inflated so dramatically
that it’s still profitable to dedicate a
huge amount of computation power to mine,
and it has risen to damaging levels.
One Chinese mining facility was reportedly
spending 80,000 dollars a month on electricity,
but was turning over 1.5 million per month.
With returns like that, it would make perfect
sense to expand and increase your electricity
demands, and this is exactly what we are seeing.
Digiconomist have constructed a Bitcoin Energy
Consumption Index which has estimated that
the network of computers that verify bitcoin
transactions draw 3.4 Gigawatts (GW) That
3.4GW adds up to 30.1 terrawatt hours (TWh)
of energy per year.
That is on par with the energy use of the
entire country of Serbia, or roughly 0.8 percent
of total energy demand in the United States,
equal to 2.9 million US households.
To put the energy consumed by the Bitcoin
network into perspective, we can compare it
to another payment system like VISA.
According to VISA, the company consumed a
total amount of 0.19 terrawatt hours of energy
globally for all its operations.
This means that VISA has an energy need equal
to that of around 17,000 U.S. households.
We also know VISA processed 111.2 billion
transactions in 2017.
Vastly more than the Bitcoin network’s 100
million transactions, at a fraction of the
Comparing to VISA may be unfair, as they require
those pesky middle-men that we are striving
to eliminate and move towards decentralisation.
You should however consider that the brunt
of Bitcoin verification is not being performed
by individuals like you and me, we simply
cannot compete with our consumer level technology,
but by a small group of large mining facilities.
Centralised facilities where the power is
in the hands of a few.
So is there any hope for Bitcoin?
We need consider that the system is not in
The Bitcoin network is limited to a production
of 21 million coins.
Over time there will be fewer bitcoins left
to mine, a feature of the original plan by
bitcoin’s mysterious founder Nakamoto.
Once the majority of bitcoins have been mined,
the block reward will become an insignificant
percentage of miners’ overall earnings.
Instead, miners will get their reward from
small transaction fees, which are already
part of the network.
So in equilibrium, the energy demanded by
the network will only be driven by these small
transaction fees, which is currently significantly
Making it even less profitable to flood the
market with computation power.
This is where we come to our next point in
why Bitcoin isn’t working.
Cryptocurrencies have been hijacked by the
The vast majority of transactions occurring
for bitcoin are not to buy goods and services,
as currency was invented for, but are simply
trades of currency.
Swapping traditional currency for a share
of the bitcoins on the market.
This may sound familiar to you, because it’s
exactly what gold is used for.
This is not what Bitcoin was created for.
Bitcoin was created so that you would never
have to use dollars again.
That you would trade your dollars for bitcoins,
and never trade back.
But Bitcoin is too volatile for anyone to
use it like that.
Bitcoin has become an incredible volatile
investment vehicle, with thousands of people
attempting to trade on speculation and achieve
this dream of becoming a bitcoin millionaire.
But in order for a currency to work in a society
it needs stability, people need to trust that
the money the own today will be worth the
same amount tomorrow, this is why the dollar
is so successful.
Several countries around the world use the
dollar because their own currency has become
so volatile no-one can put their trust in
How can we expect Bitcoin to become a useful
currency when it’s value jumps so dramatically
between dates due to irrational speculation,
and market manipulation.
For now Bitcoin is largely a useless environment
damaging investment vehicle, which was not
the vision Satoshi had for it.
Even if the bitcoin prices manage to stabilise
as equilibrium is reached, it’s limited
transaction time of 4 transactions per second
will likely prevent it from ever becoming
a useful currency, and will more likely become
a wealth storage method similar to gold.
Blockchain technology and cryptocurrency are
a fantastic idea in theory.
Just as paper money and debt are, but they’re
flawed for the same reason.
If there are ways of exploiting a system for
financial gain, people will find it.
The only way stopping that is to set up systems
to prevent exploitation, and this is what
other currencies like Ethereum are trying
to do, while building upon the foundation
Bitcoin laid, but if history has proven anything,
if there are ways of exploiting a system for
financial gain people will find it.
You can learn how to manipulate system for
your personal gain by starting this course
on the Math of Quantitative Finance on Brilliant.
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Anyone who follows me on twitter will know
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Even though I’ve rarely talked about Finance
on here, it is just as important for you to
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