The Dark Side of Cryptocurrency By William Lama, Ph.D. & Science Expert
The Dark Side of Cryptocurrency
By William Lama, Ph.D. & Science Expert
The dark side of Bitcoin: Misusing cryptography (99bitcoins.com)
In four essays I’ve recounted the evolution of digital money from the Diner’s Club card to the Bitcoin revolution. (See References) The story has been generally rosy. On the other hand, every new technology has the potential to be harmful. Nuclear energy is one example, social media is another. It depends on how the technology is used. In this concluding essay, therefore, I think it’s appropriate to say a few words about the dark side of the cryptocurrency ledger.
Bitcoin as Money or Asset
Let’s start with the defining characteristics of money, be it fiat or digital. Money needs to fulfill three functions: (1) a medium of exchange, (2) a store of value and (3) a unit of account. To date, Bitcoin is not a reasonable medium of exchange since it is not widely accepted as payment compared to cash, credit cards or bank transfers. Even Tesla stopped accepting Bitcoin payments after a few-month trial. Due to its price volatility, Bitcoin is a nauseating store of value. And as a unit of account, Bitcoin fails miserably as there are almost no merchants who will price items in bitcoin units. Three strikes.
So, what is Bitcoin’s function? In a nutshell, Bitcoin is a highly speculative investment backed up by nothing: no cash or gold, no Amazon stock, no oil wells, not even by the U.S. treasury. On the other hand, Bitcoin has a dark side.
Sex, Drugs, and Bitcoin
Like any new technology there are good and bad ways to use it. A new docuseries from Yahoo Finance takes a deep dive into the dark side of crypto, including black markets, crypto theft, money laundering and drug dealing.
Silk Road: The Dark Side of Cryptocurrency (fordham.edu)
Bitcoin’s involvement in illegal activities began soon after it was launched in 2009. The most infamous case may be the Silk Road black market, which began operating in 2011 as an underground online marketplace where buyers could use Bitcoin to purchase substances like marijuana, LSD and other drugs. Bitcoin’s anonymous nature was the main advantage for the drug dealers using the illegal bazaar. This made it harder for law enforcement agencies to find any trace of the operation, let alone shutting it down. Nevertheless, in the end the FBI was able to shut down the Silk Road and its boss, Ross Ulbricht, was sentenced to life in prison. Still, cryptocurrency remains appealing to criminals due to its pseudonymous nature and its 24/7/365 availability. The good news is that cryptocurrency-related crime fell significantly in 2020 to $10B from $21B in 1919. Crypto Crime Summarized: Scams and Darknet Markets Dominated 2020 by Revenue, But Ransomware Is the Bigger Story - Chainalysis
Wasted Energy
Bitcoin is not innocuous. Transactions are processed by “miners” using massive amounts of computing power, with the bulk of the electricity derived from fossil fuels. The soaring Bitcoin price drives miners to run more and faster rigs, with exploding energy consumption. Bitcoin mining consumes more than 200 TWh (terawatt-hours) of electricity a year— greater than the annual energy consumption of Argentina and the Netherlands, or more than the energy consumption of Google, Apple, Facebook and Microsoft combined. Bitcoin Energy Consumption Index - Digiconomist
Greenidge Bitcoin Mining Farm: a warehouse full of specialized computers
Environmentalists are not amused. In March 2021, Tesla announced that it would accept Bitcoin as a payment option, drawing flak from investors and activists alike. In May, it cancelled the move. Elon Musk wrote: “We are concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions.”
According to David Gerard, author of Attack of the 50 Foot Blockchain, “Bitcoin's energy use, and hence its CO2 production, only spirals outwards. It’s very bad that all this energy is being literally wasted in a lottery.”
An example of industrial scale Bitcoin mining is Greenidge Generation, formerly a coal power plant in Dresden, New York. Greenidge converted to natural gas and installed a mining farm, becoming one of the largest Bitcoin mining facilities in the U.S. Its greenhouse gas emissions increased almost ten-fold between 2019 and 2020. Greenidge doubled its mining capacity in 2021, with plans to double it again by 2022.
U.S. Senator Elizabeth Warren questioned the environmental footprint of Greenidge’s bitcoin mining operation on Seneca Lake in New York State. Warren said that she is concerned about the company’s energy usage and impact on the environment and consumers. “Given the extraordinarily high energy usage and carbon emissions associated with Bitcoin mining, operations at Greenidge and other plants raise concerns about their impacts on the global environment, on local ecosystems and on consumer electricity costs.” Warren Targets Bitcoin Miner Greenidge’s Environmental Footprint (coindesk.com)
Water issues and e-waste
Bitcoin mining plants such as Greenidge consume large amounts of water. Greenidge draws up to 140 million gallons of fresh water out of Seneca Lake each day to cool the plant, and discharges it up to 50°F hotter than the lake’s average temperature, endangering the wildlife and ecology.
(This is a personal concern for my family: We owned a home on Seneca Lake just 10 miles south of Dresden. Good friends live there still.)
Seneca Lake New York
Then there is the e-waste problem. All of the mining machines are competing with each other for the 6.5 BTC reward for generating a new block on Bitcoin’s blockchain. The probability of creating a new block is proportional to one’s share of the total mining power. To be competitive, miners want the most efficient electrical hardware, capable of processing the most computations per unit of electrical energy. Since the electrical efficiency of computing has doubled about every 1.5 years (Koomey’s law) mining farms upgrade to the next generation of hardware every 1.5 years on average.
The obsolete specialized hardware can’t be reprogrammed to do anything other than Bitcoin mining, becoming e-waste. It is estimated that Bitcoin mining generates 33,000 tons of e-waste each year, adding to an already huge problem. Bitcoin Electronic Waste Monitor - Digiconomist
Take a look.
To summarize the negative side of the crypto ledger: Bitcoin is bad money. Its main use is speculation. But unlike equities (with prices based on metrics such as earnings per share) or fiat currencies (based on comparative economic data) there is no way to price Bitcoin. “Bitcoin investors seem to be relying on the greater fool theory—all you need to profit from an investment is to find someone willing to buy the asset at an even higher price.” The brutal truth about Bitcoin (brookings.edu)
Adding to the dark side of the ledger is the energy used in mining, a cost that serves no useful purpose. Bitcoin claims that the energy used in mining “protects” the blockchain transaction data. Proof that mining is not needed is the fact that other digital coins have replaced competitive mining with a lottery. In addition, the wasted energy and the CO2 emitted contributes to global warming. Finally, there is the e-waste that grows exponentially. Worst of all, damage done by cryptocurrency mining disproportionately impacts poor and vulnerable communities around the world.
https://www.sciencedirect.com/science/article/abs/pii/S2214629621004813
Ethereum crypto plans to replace mining with the random selection of block creators picked from a pool of large ETH owners. Ethereum energy use and cost, CO2 emission and e-waste will plummet. Also, the Ethereum blockchain serves a useful purpose by enabling the creation of “smart contracts” with many actual and potential applications. I will not recommend a crypto but urge buyers to beware, since “past performance is no guarantee of future returns.”
References
It’s Not Your Daddy’s Bank by William Lama, Ph.D. — Palos Verdes Pulse
“B” is for Bitcoin by William Lama, Ph.D. — Palos Verdes Pulse
“B” is for Blockchain by William Lama, Ph.D. — Palos Verdes Pulse
https://www.palosverdespulse.com/blog/2022/1/20/crypto-gals-by-william-lama-phd
Dr. William Lama has a PhD in physics from the University of Rochester. Taught physics in college and worked at Xerox as a principle scientist and engineering manager. Upon retiring, joined the PVIC docents; served on the board of the RPV Council of Home Owners Associations; served as a PV Library trustee for eight years; served on the PV school district Measure M oversight committee; was president of the Malaga Cove Homeowner's Association. Writes about science, technology and politics, mostly for his friends.
email: wlama2605@gmail.com
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