The bitcoin revolution isn’t coming. Here’s why
Forgot your digital wallet password? Tough luck. More reasons there won’t be a cryptocurrency revolution
“Kidnapped cryptocurrency boss freed in Ukraine after US$1m bitcoin ransom”, read the Financial Times headline last weekend, breathlessly capturing both our fascination with this exotic new concept, and with its seemingly indelible links with the global criminal underworld.
Unlike my tech-loving friends, who are fervently convinced that a cryptocurrency revolution is upon us, I waver between unease and unconcern. Unease because of a random fear that hackers may descend on my laptop, kidnap it, and demand I pay them in bitcoin that I have not the first idea how to buy or deliver. Unconcern, because I still cannot convince myself that this revolution is anywhere in sight.
My appetite for the subject was whetted last week by a brilliant but totally perplexing full-page infographic splashed in the Post, and by three smart but intimidating articles from MIT folks in this month’s Scientific American. I commend both, but warn you will need a quiet room and a cold towel wrapped around your head to digest them.
My conclusion? I marvel at the mathematically mind-boggling lengths to which our tech-savvy enthusiasts have gone to liberate us from bank fees, but see far more downside than up. If our cryptocurrency champions are right that our current global financial system is “too complicated to manage and regulate, let alone understand”, then how come they don’t recognise the mind-numbing complications their labyrinthine “solution” puts in their place?
The tech-savvy idealists and libertarians will at this point dismiss me as a dinosaur that is myopically unable to recognise our inevitable future. But I take comfort that I remain in good company. A recent YouGov survey in the US said that 62 per cent of respondents either had never heard of bitcoin or believed they were used for criminal purposes. A customer survey by HSBC found that 59 per cent of respondents had never heard of blockchain technology. Of the 41 per cent who knew about it, around four fifths did not understand it.
A Deloitte survey of US company executives found that 39 per cent had little or no knowledge of blockchain, while PwC, surveying financial services professionals, found that less than a quarter of respondents were either “extremely” or “very” familiar with blockchain.
Of course blockchain is not the same as bitcoin, and the blockchain technology may in due course provide a wide range of useful services for big financial groups, for government departments wanting to store and use information reliably (like birth and death certificates, licences, medical records or legal documents), and big companies like Samsung who are already using blockchain to track shipping orders.
But bitcoin and the like have the feel to me of beta-versions of the Model T Ford in the early days of motor cars. Fine for proof of concept, but too problem-laden to be useful to most of humanity.
Advocates of blockchain are right to claim that the platform they have constructed is for all practical purposes unhackable. But they overlook the fact that the apps currently operating on the platform can be hacked. Remember the infamous and costly hack of Mt Gox in 2014? Recall that when Etherium went to raise US$100m in cryptocurrency through a public offering, hackers made off with around US$50m of this – none ever recovered?
As blockchain expert Natalie Smolenski notes in the Scientific American: “The application layer is where untold confusion and often outright bad faith can reign.”
For techies who simply love the mathematical virtuosity of the platform they have built – with its nodes, nonces, mining farms, randomly generated number strings, cryptographic hash functions and awesome demands for computing power – such criminality is a temporary headache to be tolerated. As Lucas Nuzzi at Digital Asset Research noted: “With any disruptive technology, many of the initial use cases revolve around illicit activities.”
But for non-techie brains like mine, there are more humdrum concerns. Bitcoin can only manage seven transactions a second (though this apparently involves around 10 million trillion calculations).
Then there is electricity. Taking bitcoin alone, its “mining farms” consume more electricity than eBay, Facebook and Google combined. The MIT professors writing in the Scientific American estimate that bitcoin miners consume more than 27 Terawatt-hours a year. That is the same as Ireland consumes in a year, and two thirds of Hong Kong’s annual power consumption.
For those of us with passing concerns about carbon dioxide and global warming, they calculate that generating 27 Terawatt-hours of power is equivalent to burning about 11 million tonnes of coal, and generating 27m tonnes of CO2: “Fuelling bitcoin by solar power would require harnessing more than half of the entire US’ annual utility-scale solar capacity,” our MIT professors note.
In trying to eliminate the anonymous power of banks, our cryptocurrency wonks seem to have created huge anonymous power in their “mining farms”. Instead of eliminating the concentration of power, they are simply shifting it. Should we be comfortable that at present 71 per cent of mining apparently takes place inside China?
And for someone who has a horrid habit of losing or forgetting passwords, the eternal immutability of blockchain passwords fills me with angst. As the MIT guys note: “If you have a digital wallet full of cryptocurrency and you lose your password, that money is almost certainly gone. There is rich irony in the fact that some cryptocurrency users keep a hard copy of their password in a safety deposit box at the bank.”
Perhaps no wonder, then, that so many governments worldwide, are getting the jitters. Most recently, the South Korean government is considering shutting down all cryptocurrency exchanges, even though the country accounts for about 20 per cent of global bitcoin trading. With around 400 unregulated exchanges now operating worldwide, China, the UK, Singapore and Sweden are considering controls, with India, Indonesia and Vietnam close behind.
As the Post’s Tom Holland pertinently noted a month ago: “With no intrinsic value to support prices and with alternative cryptocurrencies springing up by the hundred … the bitcoin bubble is clearly unsustainable.” I would go further: Bitcoin’s price is not the only aspect of the blockchain revolution that is unsustainable.
David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view