What is wrong with bitcoin

What could go wrong with Bitcoin? BTC threats & potential disadvantages

Here at Exodus we write a lot about everything that’s right with Bitcoin, however, Bitcoin isn’t perfect and it’s important to consider the good with the bad. In this article we’ll look at what’s wrong with Bitcoin, especially as it concerns the long term security of the network.

In this article:

The Satoshi Coins

Satoshi Nakamoto invented Bitcoin and when he/she/they released the protocol, Satoshi was one of the first Bitcoin miners. At the time the Bitcoin block reward was 50 BTC so Satoshi quickly accumulated a significant number of coins. The exact figures vary, but most people in the Bitcoin community believe that there are about 1 million “Satoshi coins.”

These Satoshi coins are sitting in a wallet and have not been accessed since Satoshi left the Bitcoin community in 2011. Given that the market value at time of writing of this BTC is over $40 billion, the fact that they’ve never been spent is pretty incredible. They would make Satoshi one of the wealthiest people in the world, and that’s the problem. While the most likely case is that Satoshi will never access these coins, we cannot say with absolute 100% certainty that the coins will never be moved.

If someone were to access the Satoshi coins it could create some economic chaos in the Bitcoin ecosystem.

The first problem would be the selling pressure. At this point the market is assuming that the Satoshi coins are gone for good, which means that 5% of the Bitcoins that will ever exist are lost.*

*More than 5% of BTC is lost, however, it’s difficult to quantify this number. The 1 million Satoshi coins are easy to identify.

So if Satoshi came back and the coins moved, there would be concerns that Satoshi might want to sell these coins. This could, at least temporarily, crash the price of BTC.

There would be other concerns as well. What would happen if Satoshi tried to exert control over the Bitcoin network? For example, what if Satoshi said that he supported raising the block size of Bitcoin? That could lead to chaos and infighting in the Bitcoin ecosystem.

A resurgence of Satoshi could also attract renewed attention from governments. If Satoshi came back and identified him or herself, it’s theoretically possible that a few governments might want to prosecute him or her for inventing Bitcoin. Could the revealing of Satoshi’s identity change the legal status of Bitcoin?

Satoshi coming back and accessing his or her coins would create chaos in the Bitcoin ecosystem. It wouldn’t be the end of Bitcoin, and eventually the market would calm down, but most people agree that it would be better if Satoshi never accessed his or her coins.

Bitcoin Mining is Centralized in China

The centralization of mining in China is one of the most valid critiques of Bitcoin. Although it’s difficult to say for sure, it’s estimated that about 65% of Bitcoin’s hashrate comes from Chinese miners. В

Anyone who is familiar with Bitcoin will know about a 51% attack, an attack in which a majority of the miners collude to exploit the network. The amount of hashing power in China is quite a bit more than 51% which is what’s so worrisome.

The theoretical threat is that the Chinese government could force all of the Bitcoin miners to execute a 51% attack on the network. Such an attack would seriously damage Bitcoin’s reputation and possibly end its chance of ever becoming a major international currency.

The Chinese government hasn’t given any signal that they would try to force miners to execute a 51% attack. Even by Chinese standards this would be a pretty bold move. If it was going to happen it seems like we might see a few signs first, such as, В

• A full outlawing of Bitcoin and tough criminal prosecutions
• Bitcoin mining being made illegal
• Propaganda statements about crippling the Bitcoin network
• Etc.

We haven’t seen any of this happen yet which suggests that Bitcoin is safe for now.

Another factor is that the Bitcoin mining network is slowly decentralizing in terms of physical location. A few years ago a greater percentage of Bitcoin was being mined in China versus what’s being mined there now. In a few more years we’ll probably even reach the point where less than 50% of Bitcoin’s hashpower is coming from China.

Bitcoin Mining Uses as Much Energy as Denmark

It’s estimated that there are currently more than 1 million ASIC machines that are mining Bitcoin. Each ASIC miner uses about as much energy as a hair dryer and to maximize profitability most miners run 24/7. All of this mining requires a lot of energy, such that researchers have estimated that Bitcoin mining uses as much energy as the country of Denmark.

This energy usage has drawn some criticism. Critics outside of the cryptocurrency industry argue that Bitcoin is environmentally destructive and they’ve expressed a certain pleasure at seeing Bitcoin apparently start to fail (the 2018 bear market, when BTC’s price crashed).

One of the key factors that Bitcoin critics fail to appreciate is that renewable energy powers a lot of Bitcoin mining. For example, the reason Bitcoin mining is centralized in China is that there’s an abundance of inexpensive hydro power. This hydro power is cheap because there’s too much of it, and if Bitcoin miners were not using the electricity it would be wasted.

So while it’s true that Bitcoin does use a lot of energy, what mining critics usually fail to point out is how much of that electricity comes from renewable sources.

Can Quantum Computers Break Bitcoin?

Of all of the concerns in this article, quantum computing is probably the least serious.

The concern is that at some point in the future, an ultra-powerful quantum computer could break Bitcoin’s encryption and reverse engineer a private key. This would allow the owner of a quantum computer to steal Bitcoin at will, much like an expert safe-cracker can open a safe and take what’s inside.

Quantum computers are still in the early development phase and are years away from being fully viable. Their development timeline isn’t clear, with some people saying quantum computers are 5 years away and others saying it could be 20 years or more.

Even if/when quantum computers arrive, crypto developers already have plans to make Bitcoin quantum proof by upgrading its encryption mechanism.

Quantum computers breaking the Bitcoin network is pretty weak FUD. These advanced computers will not be ready for commercial use for years or even decades. By the time that they are commercially available the Bitcoin network will have already been updated such that it can’t be broken by a quantum computer.

Bitcoin isn’t Perfect.

Bitcoin isn’t perfect, but it’s pretty damn good… Furthermore, it just keeps getting better. Mining is decentralizing throughout the world and there are a lot of plans to power even more of the Bitcoin network with renewable energy.

Quantum computers won’t be here for years and there just aren’t that many people who think Satoshi is ever going to move his or her coins.

While every investor should understand what could go wrong with Bitcoin, at this point Bitcoin has proven itself quite resilient and it appears like the world’s most popular cryptocurrency is going to be around for years to come.

At Exodus we have developed a cutting edge, user friendly and secure Bitcoin Wallet to store your Bitcoin and other cryptocurrencies safe. Stay up to date on the price of Bitcoin and other cryptocurrencies in one crypto wallet. Compatible for Desktop & Mobile. Download your Deskrtop crypto wallet, the Exodus Android Bitcoin Wallet or the Exodus Apple iPhone Bitcoin Wallet for free today!

This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.

Источник

What Could Go Wrong with Bitcoin? Part 2

In Part 1 of this series we covered topics like the centralization of Bitcoin mining in China, and whether quantum computing could eventually break the Bitcoin network.

In Part 2 we’ll consider government regulation, Bitcoin’s declining security budget and how Bitcoin’s transparent ledger could enable a two-tiered BTC system.

Government Regulation

Aside from the centralization of mining in China, government regulation poses one of the most immediate threats to Bitcoin. Although governments can’t ban Bitcoin in the strictest sense, any government could make it very difficult to use digital currencies. So difficult that Bitcoin’s chance of becoming a reserve currency would disappear. Here are a few regulations that governments could impose.

• New restrictions that make it harder for investors to sign up for crypto exchanges. For example, in the United States there are financial products that only “accredited investors” can purchase. A registered investor is essentially anyone with $1 million or more in assets. The SEC could pass a law saying that only registered investors can buy Bitcoin on American exchanges.
• Regulations could force Bitcoin exchanges to disallow withdrawals. Anyone who purchased Bitcoin on an exchange would have to keep it on the exchange, they couldn’t withdraw it to a wallet.
• Regulators could mandate that crypto users have to report every single Bitcoin purchase and transaction. Anyone who failed to make these reports could face stiff penalties.
• The capital gains tax on Bitcoin could be raised to something horrible like 60 or 70%. This would heavily disincentivize large investors from buying Bitcoin.

If a government wants to take away Bitcoin’s potency they don’t have to ban it. All they have to do is make it very difficult to use. For Bitcoin to be a viable currency it needs mass adoption, and technologies that are very difficult to use rarely catch on.

While countries like Portugal are doing awesome things with crypto, lately the United States has been trying to push through new regulations. Rules that would force exchanges to keep track of withdrawals and regulations that would force stablecoin providers to get a bank license.

These new rules are likely just the beginning. If Bitcoin hits $100,000, the price will be like a bulb drawing the regulatory mosquitos to the light. В

Lack of a Security Budget

Every four years the Bitcoin community celebrates the halving. This is the day when the Bitcoin supply issuance is cut in half. The most recent halving took place in May of 2020, when the supply rate was cut from 12.5 BTC per block to 6.25 BTC per block.

The next halving is due to take place in May of 2024, when the supply issuance will be further cut in half to 3.125 per block. You can keep track of the halving with this nice countdown timer.

Caption: Just 1,226 days until the next halving!

Typically the Bitcoin halvening is viewed as an overwhelmingly positive thing. Bitcoin’s inflation rate goes down which means fewer Bitcoins are entering the marketplace. Assuming that demand for Bitcoin remains the same, a lower supply and steady demand means higher prices. That’s the bull case.

What doesn’t receive as much attention is the fact that all of that newly created Bitcoin is used to pay miners to secure the network. The result is that when issuance is cut in half, the security budget is cut in half.

So far this has not been a problem because Bitcoin’s price has been continually rising. If the new supply of Bitcoin is cut in half, but each BTC is worth 5x more than it was at the previous halving, there’s not much problem. Looking to the future, however, there could be a problem.

The argument for Bitcoin as a store of value is that one day the volatility will mostly be gone and BTC will hold a steady price. No more 50% drops in one day, or raging bull markets where the price goes up 3,000% in six months. Bitcoin would be like a saving’s account where you could store your money, neither expecting to get rich or lose your savings.

That’s awesome to imagine, however, a stagnant price would create a problem for miners. Their security budget will still be getting cut in half every four years, but the price won’t be going up to compensate for the reduced issuance.

At some point Bitcoin mining could become unprofitable. If that happened then miners would increasingly drop off the network. Bitcoin would become less secure which would make it more vulnerable to attack. This is a long term problem that’s worth considering since we know that,

• Bitcoin’s volatility is decreasing over time, I.e. price growth is decreasing
• The supply is cut in half every four years like clockwork

The counterargument is that even though Bitcoin’s security budget is decreasing, miners will remain profitable because of fees. I.e. Bitcoin users will pay enough in transaction fees to offset the lack of a security budget.

For this to happen the fees on the Bitcoin network will need to be quite high. $100 per transaction in 2030? $1,000 per transaction in 2040? It’s impossible to say for sure. All that’s certain is that the fees will have to be much higher than they are now.

While a $1,000 transaction sounds outrageous, it could actually work. The demand for Bitcoin may be so high that people (institutions mainly) are willing to pay any price and miners can remain profitable. However, we can’t say with 100% certainty that fees will be enough to compensate for a reduced security budget. This is why we’ve included a shrinking security budget as a potential concern for BTC.

Dirty and Clean Bitcoin

One of the most easily exploited features of Bitcoin is its 100% transparent network. Every Bitcoin transaction that’s ever taken place is recorded to the ledger, right there in plain sight for everyone to see.

A couple of problems are associated with having a transparent ledger, but no problem is larger than the potential for a two-tiered Bitcoin system. Here’s what we mean.

Clean Bitcoin. This is Bitcoin that has originated from a KYC source like an approved exchange. If the BTC is taken off of a KYC exchange it is only sent to a wallet which has a KYC identity registered with regulators.

Any Bitcoin that is spent is only spent at an “approved” merchant. Or, Bitcoin could be sent to an “approved” financial institution, like Fidelity. So called “clean” Bitcoin only exists within an ecosystem of KYC and government compliance.

Dirty Bitcoin. This is Bitcoin that has originated from somewhere outside of the system. Maybe it is Bitcoin from an international address or Bitcoin that someone bought in person, from a service like LocalBitcoins.

In the worst case scenario a government could make it illegal to hold dirty Bitcoin. In a slightly better case, you may not be able to use dirty Bitcoin at an “approved” merchant or deposit it with an “approved” exchange. More accurately, you could always send dirty Bitcoin to one of these institutions but they would seize it on behalf of the government.

In this scenario, dirty Bitcoin and clean Bitcoin are not interchangeable. Also, notice how all of the infrastructure to create a two-tiered Bitcoin system can be built without modifying a single line of Bitcoin’s code. Regulations are a way for governments to control Bitcoin without banning it or trying to modify its fundamentals.

It would take an awful lot of work to implement this system, and more technical know-how then the United States government has demonstrated itself as having. Nonetheless, if the price of Bitcoin goes high enough regulators may really start to try to shut down Bitcoin in a big way. This is one of the most pressing issues that the crypto community is likely to face in the next 18 months, especially if the next bull market is as big as previous ones.

Time to Panic?

Government regulations, a decreasing security budget and a two-tiered system are all potential threats to the Bitcoin network. That being said, there’s no reason that these problems can’t be solved.

As Bitcoin matures even more people will be joining the network and more intellectual capital will be driving Bitcoin’s success. So hopefully everything turns out alright in the end, and everything we’ve mentioned in this article never has to be too much of a concern!

Every Bitcoin holder needs a safe & secure Bitcoin Wallet. Download yours for Desktop or Mobile today free. Get access to the live Bitcoin Price and Bitcoin News all in one Bitcoin Wallet app. Stay connected and updated whilst you are on the go! Download for free the Exodus Android Bitcoin Wallet or the Exodus Apple iPhone Bitcoin Wallet.

This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.

Источник