Retired investment banker and former US Treasury adviser to Croatia Martin Hutchinson recently penned a hit piece in which he made clear two things. One, he does not understand how Bitcoin mining works and two, this lack of understanding leads him to believe that Bitcoin will fall flat on its face in 2015. In his article for the Reuters Breakingviews site, he uses outdated metrics as well as a clearly weak understanding of how cryptocurrency works to make this prophecy.
Also read: The End of Bitcoin is Always Nigh For Traditionalists
[Bitcoin] is controlled not by a state but by an underlying algorithm by which participants can “mine” bitcoins through solving mathematical problems. […] As a reward, miners receive more bitcoins, distributed randomly.
No mention here of the finding of blocks and how that effects the payment. Indeed, a mining pool who finds a block receives the full 25 Bitcoins generated and then distributes it to the miners involved, a process that is not random at all. However, Hutchinson makes even more clear that his information is quite outdated in the following passage:
Assuming miners are risk-averse, the system slants toward monopoly. This theoretical tendency is validated by the current bitcoin setup, in which a single mine, GHash.IO, which pools the interests of individual participants, currently controls about 39 percent of mining activity, according to Blockchain.com.
As the below chart illustrates, Ghash.io has not been the dominant miner for some time, and further nobody at present is controlling more than 25%. As of this writing, Discus Fish is up to a mere 21%, which is nothing compared to the well over 40% that Ghash.io was controlling when everyone was up in arms about them earlier this year.
If a miner came to control more than half of bitcoin creation, it could choose which blockchains to validate; the participants would then depend upon its integrity, no differently than they depend on trust in a government in a fiat money system.
Here Hutchinson leaves out the fact that at any time after that, miners could choose to redistribute their hashing to correct the situation, or another pool could rise to prominence and overtake them. The present situation leaves Ghash.io a long ways from having monopoly status, at any rate. This does not make the looming problem of a 51% attack a moot issue, but it does make it seem less likely.
He goes on to cite a document from July that marks the cost of producing a single coin around $600, leaving out the that at that time the coins held roughly that much value. Since that time, newer ASIC technology has come about which produces more coin for less electricity and makes it possible for smaller outfits to get involved in the process.
Though, it is abundantly obvious that Hutchinson did not understand the study by Hass McCook in any case, as illustrated here:
As can be conclusively seen, the relative impact of the Bitcoin network does not even register on the radar of the fiat and gold-based monetary systems, representing a very conservative relative environmental impact of just over 0.13%, and a relative economic impact of just under 0.04%. When one considers Koomey’s Law, we can expect energy/GH to continue to half every 18 months until 2048. This means that we can expect our current industry best efficiency of 0.733 W/GH to each 0.0000000873804 W/GH – so even the most ignorant, arrogant, narrow-minded and pseudointellectual critics and arm-chair academics should note that in the event that Bitcoin scales to a million times its current size and market cap over the next 30 years, it’s environmental impact will still be insignificant compared to existing systems. When considering Moore’s Law, we can expect $/GH to continue to half every 18 months until at least 2020. When we consider the advent of centralised emission-free renewable energy, we can expect tCO2/GH, and possibly even $/kWh, to tend towards zero. The more agile and dynamic bitcoin companies can take advantage of these trends, but the sluggish, inert and over-encumbered incumbents simply cannot. As time goes on, Bitcoin only becomes more sustainable, while legacy systems continue to bloat year-on-year.
Pound for pound, it seems that Hutchinson’s experience in the world of fiat finance has not prepared him for the brave new world that is cryptocurrency. Combined with the recent advice of Warren Buffet, it would seem that a certain type of old-worldly investor might just avoid Bitcoin for the foreseeable future. But a future beyond state-backed inflationary currencies and bank bailouts is certainly inevitable. Whether Bitcoin remains the most important of the futuristic monies, time will tell. However, it would certainly be refreshing if folks like Hutchinson and Buffet would take the time to understand what they were talking about before expounding on it.
Images from Blockchain.info and Shutterstock.