Bitcoin: The One Currency to Rule Them All? - Part 3
Op-Ed by Georges Haydar, Staff Writer and Sandro Joseph Azzam, Staff Writer
March 9th, 2021
While 2008 might seem like a distant era embroiled in the havoc and the destruction caused by the spiraling of the CDO business, it was also the birth year of a genius and daunting attempt in the world of digital finance. Bitcoin is a technological prowess built around a beautiful take on cryptography applications that has single-handedly, in the span of 11 years, launched its own industry. Be it cryptocurrencies or digital wallets or companies, a whole environment of synergies and symbiosis spurred around a string of bits circulating from one address to the other. And after reaching the symbolic cap of $50,000, one might be tempted to think that the only limit is the sky. But what if we told you that this remarkable growth isn’t organic, or to say the least, what if it can’t be sustained in an organic fashion? Before becoming the heir apparent to the throne of the king of currencies, the cold hard cash, one must be certain that Bitcoin is indeed fit for royalty. And there’s nothing more captivating than a royal with a dark side.
The main argument of the anti-cryptocurrency camp doesn’t lie in the financial wild west it offers, away from taxes and the imposing gravitas of the IRS and SEC. Surprisingly, the major skepticism that clouds the adoption of crypto on a quasi-ubiquitous scale lies in a much more technical sphere: power consumption. As mentioned in part 1, the only way to produce (or mine) bitcoins is by solving a challenging mathematical puzzle. And there’s a good reason why it’s challenging. Here’s how it goes: to have the honor to bestow the next block upon the blockchain, you need to find a hash of your data that is below a certain target. Hashing is a fascinating area in cryptography with intricacies that can take you on a bewildering journey. But, for our purposes, you can think of it as a Blackbox or a machine that, given the transactions that you plan to make into a block, will transform it into a 256-bit string that looks random. And I cannot stress the importance of the word “looks” enough. Although everybody knows how hashing works (there’s a multitude of ways to hash data, and in Bitcoin, the method used is called sha256d, but that’s just a fan service tip for the mathematically inclined minds out there), there is practically no way to understand how the output looks the way it looks.
This statement sounds confusing so let us reiterate this very important point: you can predict what the output will look like given an input but there is no way to single out patterns in the output based on variations in the input. In other words, hashing is almost a game of chance, the same way Casinos want to let you believe roulette is. While you can tip the odds in your favor with the help of weighted dice or secret buttons, there is no way to interfere with the hashing process. Since hashing is a purely hazardous cacophony of attempts, the only way to find out if you can find a hash below the target is to try all the hashes. And this is where the beauty of Bitcoin lies. This is where hordes of enthusiastic miners succumb to a seemingly impregnable fortress. The number of attempts it takes to find the one input combination that unlocks the hefty reward is bewildering, staggering, and intimidating – and that’s a euphemism. To give you a little context, it takes 10.8 quadrillion hashes to generate a bitcoin which is the equivalent of 10 800 trillion or 10 800 000 billion.
In case you’re not well versed with orders of magnitude, allow me to set things straight: 1 quadrillion is 10 times more than the number of cells in a human body and 1000 times the fish population in our oceans – and that’s for just one bitcoin. Given that one block is produced every 10 mins on average and that each block releases 6.25 bitcoins at the moment, this means our tally stands at 67.5 quadrillion hashes every 10 minutes. And if you thought comparing Chernobyl to nuclear bombs was a daunting task, this was just the tip of the iceberg. There’s a good reason why one block appears approximately every 10 minutes. Since the bitcoin supply is fixed, the blockchain system has an auto-regulating mechanism. The same way your blood is kept at a constant pH, the auto-regulating mechanism adjusts the difficulty of mining to keep the rate of bitcoins produced somewhat constant. Hence, if more people try to mine bitcoin, more hashes will be attempted which will likely result in good hashes found earlier which results in blocks appearing at a much higher frequency which consequently leads to an increased difficulty. This vicious cycle keeps on going.
The downside of it all? Electricity consumption. While consuming electricity in itself isn’t a vice, consuming electricity to take a shot at what is seemingly an over glorified guessing game in the hopes of winning intangible “assets” that may turn to dust faster than the cast of Avengers: Infinity War in the movie’s third act is considered a deadly sin by environmentalists. As it stands today, Bitcoin consumes more energy than Argentina. In retrospect, this dwarfs the power cuts in Iran and China caused by huge mining rigs. Translate all of that into a carbon footprint, factor in rising seas and melting ice caps with helpless polar bears standing on top, and you have a global warming scenario of cataclysmic proportions. While some solutions might exist such as a carbon tax, the highly volatile nature of the mining network is far from a sustainable bedrock for the crown prince of the currency royalty line. However, as much of an Achilles Heel the energy consumption blackhole might seem, it barely covers the mischievous arsenal of Bitcoin’s capabilities. Enter the financial boogeyman.
Now picture this, you’re a supervillain looking to make plans for world domination. You need weapons, anything from tanks, rocket propelled grenades and ammunition to soldiers to fight on your side of the battle. Unfortunately for you, there isn’t a LinkedIn for terrorists or an online store for buying intercontinental ballistic missiles, but there is one tool that might help you get your hands on all the equipment you need. Enter the dark web.
Anyone with a computer and a WikiHow thread can get access to the dark web and do all the nefarious deeds their heart desires. The first thing you’ll need to do is install a Tor Browser. This is like any other web browser such as Safari or Chrome except it comes with a hint of crime. The Tor Browser will let you do anything from illegally downloading movies to buying child soldiers. After opening the Tor Browser, you’ll find the search bar in front of you, just like the ones on Bing or Chrome, except this one is called DuckDuckGo. It provides heightened security for the users navigating the web. Simply type “hidden wiki” in the search bar and you’re set. You’ll have landed on a page with a host of different links that allow you to navigate questionable websites. All of the “trusted” websites will end in “.onion” but beware, calling these websites “trusted” or “secured” is equivalent to smoking e-cigarettes over Marlboro reds “because they’re healthier”.
They might in fact be just as toxic if not more. Now that you have what is essentially a Yellow-Pages full of questionable websites, you can find whatever your heart desires. The hidden wiki is to a terrorist what a candy store is to a child: want to buy 10 kg of cocaine? You can. What about hire an army of child soldiers? Also, within the realm of possibility. You can even hire your very own hitman.
Right about now, the NSA, FBI, DHS and CIA are all reading through this article. But here’s the main problem: if someone ends up hiring a hitman or attempting to become the Ali Express version of Pablo Escobar, there’s no way intelligence agencies can find out who it is. Why? Because Bitcoin.
When you decide to proceed to checkout after having chosen the highest-grade weapons you can get your hands on, it doesn’t take you to a traditional Mastercard, Visa or AMEX checkout. Those aren’t anonymous. What’s the point of hiring a hitman if the government knows exactly who hired him? Bitcoin on the other hand, is in fact anonymous. By checking out using cryptocurrencies, you can pick all the nefarious goods and services that you can imagine, yet nobody can find out it was you. Welcome to the dangers of cryptocurrencies.
Three things are certainties in life: your mother, death, and taxes. This doesn’t hold as far as Bitcoin is concerned. Now whilst I doubt that anyone will hire a hitman to “take care of” your mother, tax evasion is a real problem that cryptocurrencies face. Let’s look at a functional economy, since studying the Lebanese one is pointless. In the United States, you pay taxes on realized capital gains. What does this mean?
If you have 100$ invested in Amazon stock and that turns into 200$, as long as you don’t sell your stock, you don’t have to pay taxes on the 100$ gain. In other words, if you don’t sell your stock and earn the cash deposit into your bank, you don’t have any tax to pay. You might see that there’s an issue with Bitcoin when it comes to determining whether you actually “realized” the capital gains. The legal consensus is that, according to the Glenshaw Glass test, an increase in the price of Bitcoin, as long as they remain in your wallet, doesn’t constitute capital gains and is thus not liable to taxation.
Needless to say, Bitcoin is dissimilar to anything else we’ve ever seen insofar as its increase in value is in fact liquid at any time. You can’t compare it to a stock which you’d have to liquidate in order to obtain the cash you need to buy a coffee. With Bitcoin, you can liquidate it at any time, at any price, to buy your rocket propelled grenade or to inject cash into your Baby Escobar business.
Here’s the next problem: what if a French company sells champagne to an American distributor and requests a payment in Bitcoin? Absent any bilateral tax treaties, there might be room for double taxation, but Bitcoin adds a layer of anonymity to the process, making it harder and harder for tax collecting agencies to knock on your door demanding payment. The lack of a paper trail also exacerbates the taxman’s confusion when it comes to determining the amount of taxes to be paid. In the case of France and the US, the infrastructure and treaties are there, but this might not be the case for smaller tax havens around the world: think of the Caymans, Nauru or Curacao. It makes it significantly more expensive for authorities to track down the parties to each transaction leaving them wondering whether the costs even outweigh the benefits: would you engage in a business activity that might actually end up costing you more than the revenue it provides? Has Bitcoin broken the IRS?
To conclude, while major gaps, ranging from power consumption concerns to tax compliance, need to be filled, it is undeniable that Bitcoin will go down in history as the first major attempt to digitize money exchange and make currencies obsolete. It is certain that we’ve come a long way since our barter days. But if we want to go even further into the world of bits and make Bitcoin reach the sky, we need to make sure our wings aren’t made of wax.
References:
https://core.ac.uk/download/pdf/228604591.pdf
https://www.businessinsider.com/tax-havens-for-millionaires-around-the-world-2019-11#8-curacao-8
https://www.comparitech.com/blog/vpn-privacy/access-dark-web-safely-vpn/
https://quantaloop.io/how-many-hashes-create-one-bitcoin/
https://en.wikipedia.org/wiki/Orders_of_magnitude_(numbers)
https://www.bbc.com/news/technology-56012952