Tag Archives: bitcoin

Can crypto help Russia evade sanctions?

Credit: Canva.

The most ardent proponents of cryptocurrencies claim that, among their many supposed advantages over fiat money, crypto is very challenging if not impossible to regulate by governments. That’s because Bitcoin and other currencies like it are transacted over a peer-to-peer network. The decentralized nature of Bitcoin means that a centralized authority like the US government cannot control financial transactions, and users are free to exchange their tokens with anyone on the network, no matter their geographical location as long as they have an internet connection.

With the recent unprecedented financial sanctions that were imposed on Russia, chiefly by the United States and the European Union, many have wondered if Putin’s administration and his cronies could simply circumvent these rules using a clever laundering scheme involving cryptocurrencies.

Some of the harsh sanctions enacted upon Russia include banning a number of select banks from SWIFT, an international bank-to-bank transfer system, as well as freezing hundreds of billions in foreign currency held by Russia’s central bank overseas. These are the most important economic sanctions, and together they isolate Russia from the global financial system.

In the case of the US sanctions, it becomes illegal for American nationals and businesses to  do business with Russia and individuals connected to the Kremlin regime in ways the U.S. government considers material — and foreign individuals can face sanctions of their own if they don’t comply.

Key to enforcing these sanctions are the banks, which can see who is transferring money through their system, where it’s coming from, and where it’s heading. In order not to get hit by heavy fines or shut down, banks are careful to monitor and block any transactions linked to entities on a black list.

In this heavily restricted environment, cryptocurrency seems like a safe haven and the obvious choice for a sanctioned entity to continue running its business. After all, before the crypto space ballooned a few years ago, Bitcoin was widely used by criminal groups to receive payments for their illegal activities with great success. Why would it be different for a petrol state like Russia?

While Russian criminal organizations, some of which are suspected to receive the Kremlin’s blessing, have made hundreds of millions using hacking techniques like ransomware, it seems unlikely that such tactics could help fill the very deep pockets that a huge state like Russia needs filled.

In a twitter thread, Jake Chervinsky, head of policy at the Blockchain Association, makes his case clear: crypto won’t save Putin.

Chervinsky adds that many huge businesses across the world, not just in the US, are barred from dealing in any way with sanctioned Russian entities, and there’s no reason to convince them that crypto would help them do business without getting caught. While it may be technically possible to launder money and route it to Russia, the risks are huge. Besides, the last sanctions Russia faced when it annexed Crimea in 2014 led to losses amounting to at least $50 billion. That’s peanuts compared to the debacle they’ve gotten themselves into, and that’s not counting the cash they’re bleeding to sustain their war effort, estimated at €20 billion per day.

To support their shambling economy, Russia would need to launder crypto potentially in the hundreds of billions. This kind of liquidity is simply not available on any crypto market at the moment. Then you run into the trouble of somehow converting that crypto asset into fiat (i.e. US dollars, euros, yuan, etc.) in order to sustain your day to day operations. Printing more rouble that nobody wants anyway is obviously not a solution, unless Putin wants to mirror another infamous petrostate, Venezuela.

Another important point is that, contrary to popular belief, crypto transactions are very difficult to mask, even for sophisticated state actors. All crypto transactions are public on a digital ledger, which cannot be doctored or destroyed since the records are stored on the P2P network. You might erase the data on a computer in London, but there are millions more that have the original record. Crypto forensics have also gotten very good at spoofing laundering techniques. For instance, the Justice Department seized $3.6 billion worth of stolen Bitcoin from hackers who had stolen the lot more than six years ago from the Hong Kong-based Bitfinex, one of the world’s largest virtual currency exchanges.

Crypto is likely part of Putin’s plan to evade sanctions and cushion some of the blow dealt by the West — but it’s not the main tool. The Kremlin will probably unleash unprecedented ransomware attacks in order to attract foreign capital, but they can hope for a few billion at most in revenue. That’s woefully insufficient to keep them afloat.

Instead, Russia will likely count on its foreign reserves held in China as well as more trade in the future with its eastern ally. The price of oil is at its highest it’s been in more than a decade, currently around $111 a barrel, which will help a lot. Russia also has a super solid debt-to-GDP ratio of only 18% (the figure is 133% for the US) and a current account surplus, which could help keep the country stable even if it borrows money — for instance, from China — at exorbitant interest rates.

Although Putin seems unstable — he certainly looks that way to me — this invasion has been planned for years most likely. This gave them plenty of time to plan for sanctions, although they may have been much more severe than they bargained for. I don’t know what Plan B looks like, but they most certainly have one and they look prepared to wait this out for years if they have to. It’s just that crypto won’t play a major role in this plan. 

Sweden calls for crypto mining ban to protect the climate

Swedish government officials are asking the European Union (EU) to impose a blanket ban on energy-intensive cryptocurrency mining, so the EU can deliver on its climate targets. The call was made in an open letter signed last week by the directors of Sweden’s Environmental Protection Agency and the Financial Supervisory Authority.

Image credit: Flickr / Stock Catalog.

In the letter, Swedish officials argue that the actual benefits of cryptocurrency are questionable and the “enormous” energy consumption of mining and transferring these currencies outweighs the benefits. They specifically question the so-called “proof of work” verification protocols in which crypto users are asked to solve very complex computer problems. 

“Anyone who wants to mine assets competes to solve an encryption puzzle, and the winner receives new crypto-assets as a reward. The only way to solve the puzzle is by repeatedly running computer programs that guess the right answer. When a large number of crypto-producers’ computers work simultaneously, the demand for electricity soars,” they wrote.

The proof of work is a form of cryptographic proof in which one party (the miner) proves to others that a specific computational effort has been expended to solve a puzzle. The higher the price of cryptocurrency, the more people are interested in participating in the competition. This automatically increases the level of difficulty of the puzzle required, which means more computational effort (and subsequently, more electricity) will be required to solve it — accelerating greenhouse gas emissions (GEI) in the countries where crypto mining takes place. Most crypto production takes place in countries with low energy prices and an energy matrix largely based in fossil fuels. This was especially the case of China, which used to account for two-thirds of Bitcoin mining worldwide. But this has now changed, as the government started a crackdown on the cryptocurrency industry, driving companies overseas. 

The scale of the problem should not be underestimated. In one year, the Bitcoin network, one of the most used crypto currencies, consumes 120 terawatt hours (TWh) of energy — which is the equivalent to the entire energy use of the Netherlands, based on estimates from Cambridge University’s Bitcoin Electricity Consumption Index (CBECI). If it were a country, Bitcoin would rank 32nd in the world by energy consumption, and it’s not the only cryptocurrency.

The renewable drive

In the letter, Swedish government directors said crypto-producers are now turning their attention to Nordic countries, as taxes for mining-related activities are favorable and there’s good access to cheaper renewable energy. In Sweden, electricity consumption for Bitcoin mining now accounts to 1 TWh annually, which equals to electricity 200,000 Swedish households. 

While it’s much better for companies to mine crypto using renewables instead of fossil fuels, the directors said this risks that there won’t be sufficient renewables to cover the climate transition countries have to make. Clean energy is “urgently required” to develop fossil-free steel, to manufacture batteries on a large scale and to electrify the transport sector, the argue. 

In their letter, the directors said EU countries could also introduce a tax on energy-intensive production of bitcoin and communicate more widely the climate problems related to crypto-assets. Nevertheless, these options won’t likely address the “environmental harm we see” from crypto mining today – calling instead for a larger ban. 

Earlier this year, the EU adopted new and more ambitious climate targets to tackle climate change, with a pledge to make then legally binding soon. The legislation, agreed between member states and the EU Parliament, says the bloc will cut its emissions by at least 55% by 2030. Still, the Parliament had initially asked for a 60% reduction. 

The surprising similarity between Bitcoin and ancient stone money from a Pacific island

The meteoric rise of Bitcoin with its fancy blockchain infrastructure is hailed by its proponents as the future of finance. First, there was barter, then there was minted coin, then fiat money, and now crypto. But despite some innovative aspects of cryptocurrency, some scientists have found striking similarities between Bitcoin and an ancient stone money system from Micronesia.

Scott Fitzpatrick of the University of Oregon Department of Anthropology teamed up with finance professor Stephen McKeon of the Lundquist College of Business to investigate how unique and innovative Bitcoin truly is by exploring potential precedents in the history of finance.

Sure enough, they eventually came across the ‘stone money’ of Yap, a group of islands in Micronesia. Stone money, known as “Rai” to the native islanders, are huge stone disks measuring up to four meters, with holes in the middle through which long poles could be inserted to facilitate transportation. Some of these disks are marvelously crafted, adding artistic value to the money.

Now, you might be wondering what some oversized coins have to do with crypto. As it happens, quite a number of things.

Various Rai stone disks. Credit: Matthew Napolitano.

Bitcoin was initially introduced to the world by its creator Satoshi Nakamoto, the pseudonym of a yet-unidentified individual or group, to a small mailing list of cryptography enthusiasts in the wake of the Great Recession of 2008.

In response to the widespread failure of the traditional financial system, Bitcoin promised to become a currency that people could trust that would function without third-party intervention. Central to this aim is its peer-to-peer network where a highly secured distributed ledger, known as a blockchain, is used to document every transaction and ownership of the cryptocurrency.

“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution,” reads a paragraph from the original Bitcoin white paper published by Satoshi Nakamoto on January 12th, 2009.

Because they run on a network of computers, Bitcoin is decentralized and cannot be controlled by a third party, such as a central bank. When two parties exchange cryptocurrencies, the transaction isn’t considered final until it has been verified and added to the blockchain (a sort of digital ledger) by solving complex mathematical equations.

The validation of the cryptographic ledgers when Bitcoins change hands is also how new Bitcoins enter circulation, a process known as “mining”. Since the rate of new Bitcoin was built into the protocol, inflation of the currency is capped. There’s more to it than this and if you want to learn more about cryptocurrencies, there are ample resources available online. But for the purpose of this discussion, this is the gist of Bitcoin and its overarching technology.

Similarly, the Yapese islanders mined the stone Rai out of limestone sourced from hundreds of kilometers away in the Palauan archipelago. The difficulty of sourcing and transporting scarce limestone across the islands naturally limited the supply of Rai, thereby preventing runaway inflation.

The Rai is so heavy that when owners changed hands, they would rarely take physical possession of it. Instead, the new owners would keep them on the side of the road or leave it on the property of the original owner who had exchanged it for goods or services. To verify ownership, the Yapese employed an oral ledger by which multiple members of the community would verify the transaction and ultimate holder of the Rai.

It’s not clear when the Rai was introduced but it is certain that this monetary system was still in operation when the first Europeans made contact in 1783.

“Given that the actual possession of rai was often infeasible, an owner would deem it to be valuable only if they could trust that all participants in the economic system agreed on the record of ownership,” Fitzpatrick and McKeon write in their study published in the journal Economic Anthropology. “Effectively, it was not a bearer asset; ownership was established solely through the ledger. Similarly, Bitcoin is often referred to as ‘trustless.’ It is notable that it emerged during one of the worst economic recessions in recent history, a time during which trust in the financial system was at a historic low.”

Of course, there are important differences as well — as expected when comparing financial systems more than a thousand years apart. Bitcoin is all digital and can be used across the world, whereas the oral ledger of Rai meant it could only be used in a tight-knit small community. Bitcoin can be divided into smaller units while Rai can’t be broken into pieces without destroying the value of the currency. Bitcoin holders are anonymous, whereas all Yapese owners had to be known by their real names for their assets to be verified by the Rai ledger. All Bitcoins are the same, whereas each Rai can differ greatly in terms of size and craftsmanship, a lack of uniformity that is far from ideal.

“The value of rai was dependent on several factors, including shape, size, quality, effort expended, method of transport, and individuals associated with its manufacture and/or ownership. In essence, each rai had a pedigree, and smaller pieces could have greater value if the process surrounding their production and movement had a certain level of significance (e.g., if people had died during the carving, a well-known carver had produced the stone, or it derived from a quarry that was exceptionally difficult to access),” the authors wrote in their study.

Perhaps Nakamoto and collaborators may have heard about the Yapese ancient currency and were inspired by the Rai when designing the Bitcoin blockchain. The similarities are, after all, quite striking. We might never know though since the identities of the original Bitcoin developers are shrouded in secrecy and their communication with the community at large is minimal.

The Rai monetary system collapsed in the late 19th century after administrative control of Yap was taken over by Europeans, beginning with Spain in 1885 and later Germany in 1899. The Europeans brought with them modern technology, including large and fast ships that made the transportation of limestone from Palau to Yap much easier. Modern carving tools also sped up the creation of new Rai stones, resulting in a spike in inflation. The final nail in the coffin was hammered by the Japanese, who seized the island from 1915 up until 1945, forcing the use of their own currency and sometimes turning the once precious Rai stones into anchors, ballast, and other construction materials.

Since Bitcoin is immune to both inflation and seizure by third parties due to the way it was set up, perhaps the cryptocurrency will have a much longer life than the Rai. At least some lessons from history have been incorporated in the design of Bitcoin, whose future nevertheless is quite uncertain.

The relationship between social media and cryptocurrencies is not healthy

Social media platforms have long been seen as a “signal” generator for traders and investors of the crypto space. Due to the relatively small size of Bitcoin ($BTC) and other coins (in terms of market cap, compared to many other stocks or commodities like gold), public opinion can quickly and significantly move crypto markets. But things are going way too far.

Imagine if a few decades ago, you would have told one of the richest people in the world they can control the price of an asset, and make it rise and fall drastically, by merely writing a few words. Their eyes would have flickered and small, green, dollar signs would have appeared in front of each pupil. Well guess what — that’s kind of what’s happening now.

Oh Elon

Credit: Twitter, @elonmsuk.

Elon Musk, the billionaire behind Tesla and SpaceX, has the power. In the past few months, cryptocurrencies like Dogecoin and Bitcoin have fluctuated wildly based on Musk’s tweets. While the tweets may have not been posted for his own financial gain (and in truth, Musk doesn’t really need to tamper with the market, at a net worth of some $160 billion), they did send the crypto market on a wild rollercoaster.

Sometimes, the tweets were semi-relevant to the crypto market, like when Tesla stopped taking Bitcoin (after previously bragging that it does accept Bitcoin), or that time SpaceX launched a Dogecoin-funded satellite into orbit. But other times, it’s just plain silly — like when he posted a meme about breaking up with Bitcoin.

Dogecoin, essentially a meme cryptocurrency that somehow picked up a lot of popularity, was at one point 1,400% up compared to the start of 2021. Now, after a peak value right before Elon Musk hosted Saturday Night Live (SNL), the coin dropped by 75%, after the show failed to live up to the hype.

While Musk is the main exponent of the effect social media can have on cryptocurrency markets, he’s far from the only one.

Crypto and social media go back a long time

Crypto and online discussion boards go back as far as Bitcoin’s creation. Shortly after it was brought to the world, Bitcoin creator Satoshi Nakamoto founded the popular forum BitcoinTalk, where most crypto-related discussions took place.

Shortly after Satoshi chose to disappear forever in 2010, we saw a parallel between an increase in online mentions of Bitcoin and its growth and price. The more people talked about it, the more it seemed to be worth. The platforms that stood out in terms of community building and valuable information was Reddit and Twitter, which are also some of the most bitcoin-friendly social media platforms.

Later, Discord and Telegram caught up to the trend as well, since privacy-oriented discussions and closed groups started to increase in popularity. These platforms of course experienced quite a bit of volatility from users after their use in ICO scams deemed them less trusted as information sources.

For crypto traders, keeping an eye on social media became the norm — a way to track the overall market sentiment, but also anticipate scenarios based on Musk-type interventions and try to anticipate the ebb and flow of prices. When you see that the public starts to feel overwhelmingly positive about Bitcoin (to the points that you see Twitter accounts adding laser eyes to their profile pictures) it may be time to sell. When the same audience starts bashing Bitcoin, writing it off as dead, it might be time to buy bitcoin.

Of course, actually analyzing social media sentiment is not easy. You can scroll through Twitter or Reddit, but you just won’t have enough time for it. You can also harvest data and try to analyze it in bulk, but that may miss out trends. You can also look at all the things niche-related influencers are talking about and try to determine how the public will act based on this information, or even use specialized tools to aid your quest.

This is not what was promised

Bitcoin, and cryptocurrency in general, promised to change the world, but it kind of hasn’t. It’s made some people some money, it’s cost others some money, but the impact on society has been negligible. When you take into account the fact that mining and trading cryptocurrency produces emissions comparable to a medium country, the issue becomes even more thorny

Part of the problem stems from the fact that we’re not really sure how much Bitcoin (or any cryptocurrency really) should be worth. As long as the price runs on emotions, memes, and influencer whims, cryptocurrency will continue to fluctuate wildly and trust will dwindle due to this volatility.

In truth, the same can be said about stocks. The market isn’t perfectly rational and oftentimes, it’s anything but rational — we’ve seen this happen time and time again. But crypto is a relatively new happening, and no one is really sure just how high or low it will go.

In an ideal world, people like Musk would lose their power, and cryptocurrency, freed from such nefarious influences, would drift towards a realistic value. People would trust it more and use it more widely; it would become incorporated in humanitarian projects, where its decentralized nature can work best, and act as a viable alternative to existing currency. Alas, we don’t live in an ideal world, and who knows what Musk will tweet next?

Nobel Prize-winning economist calls Bitcoin a ‘cult’

Photo of Paul Krugman. Credit: Ed Ritger, The Commonwealth Club.

The hysteria surrounding Bitcoin and the crypto market at large is at an all-time high. You know something must be up when your uncle with a gambling problem posts on social media phrases like “bull market”, “HODL”, and “When Lambo?”.

Although Bitcoin erased all gains made in 2021 over the course of 24 hours last week, momentarily trading below $34,000 (it now trades at $40,000, more than 30% down from $60,000 in April), the crypto market’s extreme volatility hasn’t scared young investors — on the contrary, it’s made them more drawn to it than ever. As of April 2021, more than 21.2 million American adults, or about 14% of the U.S population, own cryptocurrencies such as Bitcoin or Ethereum.

According to a report released by Gemini crypto exchange, the number of people invested in crypto is set to double this year as people fear missing out on what they believe is the opportunity of a lifetime. After all, in just a couple of months in late 2020, Bitcoin surged almost 300%. Becoming a crypto billionaire in the new mantra for 2021.

But the vast majority of these new retail investors are not aware of the risks they’re facing. A recent survey found that only 16.9% of investors who have bought crypto “fully understand” the value and potential of cryptocurrency, while 33.5% of buyers have either zero knowledge about the space or would call their level of understanding “emerging.”

Aside from FOMO (fears of missing out), extra cash to spare from all those stimulus checks, and the daily rush of trading, new investors are drawn to a sense of community. But Paul Krugman, a Nobel Prize-winning economist, believes this so-called community is nothing but a “cult that can’t survive indefinitely”.

Krugman, who won the Nobel Prize in economics for his work on global trade theory in 2008, had publicly criticized Bitcoin, as well the other 10,000 ‘alt coins’ out there at the moment. In a 2018 column for the NY Times, Krugman said that compared to fiat currency (‘normal’ currency backed by the government such as USD or Euro), crypto tokens cost more to transact in and have no value “backstop”, or reinforcement, like traditional government-backed currencies.

“Their value depends entirely on self-fulfilling expectations — which means that total collapse is a real possibility. If speculators were to have a collective moment of doubt, suddenly fearing that Bitcoins were worthless, well, Bitcoins would become worthless,” Krugman wrote in 2018.

It’s not hard to see where Krugman is coming from. There is a strong sense of belonging among crypto enthusiasts, who tend to only share positive news and support each other when the market is down. There’s this strong sensation in the crypto communities that there is only one way to go from here — and that’s up. In fact, one of the most common replies to crypto content on social media, which is almost always positive and ‘game-changing’, is “to the moon”.

In a blog post, Louis Petrik wrote that there are “almost no skeptics” in the countless subreddits dedicated to cryptos and crypto trading. “The fact that there are almost no skeptics has a reason: censorship,” he wrote.

Most of today’s crypto devotees seem to be made from a different cloth than traditional investors in stocks, bonds, and other assets. They protest against Wall Street capitalism, seem to enjoy the disruptive market, and seem to see trading Bitcoin and other crypto assets as their best chance at beating the rat race.

This behavior, say economists George Akerlof and Rachel Kranton, can be explained by “identity economics” — a branch of economics that describes behaviors at odds with traditional models of rationality. Identity economics can explain why some people choose to stay in a job that pays less than they could make elsewhere, why people vote against their economic interests, or more recently why crypto traders stake their capital on the riskiest possible bets with scant regard for corresponding returns.

Whether or not these traders will come out alive when the crypto growth cycle inevitably heads south in correction territory (bear market), what seems certain now is that the “crypto cult” is a force to be reckoned with. There are hundreds of billions traded in crypto markets on a daily basis. On top of that, these investors are more irrational, injecting further volatility into an ever-fluctuating market.

Will the crypto cult collapse at the first turn for the worse or will it “HODL” as its members proudly claim? Time will tell — but for now, there are quite a few lambos.

Does cryptocurrency need governance? These researchers say so

In 2008, an enigmatic figure by the name of Satoshi Nakamoto devised a blockchain ledger, leading to the creation of what we now call Bitcoin. Satoshi claimed to have developed “an electronic payment system based on cryptographic proof instead of trust”, an alternative that relies on technology, not banks and governance.

It’s hard to emphasize just how influential Bitcoin (and cryptocurrency in general) has grown in the relatively short timespan since 2008 — but can it truly survive in the long term without any governance? Some researchers are starting to doubt it.

Several cryptocurrencies (coins and tokens) have risen and fallen since the launch of Bitcoin. Promising to revolutionize the financial world and usher in a new age in transactions, these cryptocurrencies (crypto meaning “concealed” in Greek) have mushroomed over the years, with Bitcoin towering above them all.

In the past four years alone, the value of one Bitcoin has gone from around $700 up to $14,000, down to $2,700, and as of 2021, well above $55,000. It’s one wild ride, but overall, Bitcoin has surged, making a lot of people rich in the process.

The thesis behind the idea of Bitcoin (and blockchain in general) fits with a decentralized, self-governing system. The decentralization of currency transfer offered by Bitcoin has its theoretical roots in the Austrian school of economics, and was eagerly embraced by the libertarian-heavy ranks of Silicon Valley.

Many in Silicon Valley see Bitcoin (and in the grand scheme of things, cryptocurrency in general) as a way to use computerized solutions to create a functioning society without empowering a centralized authority — the lack of transaction costs is another added benefit. But some also researchers see a surprisingly dangerous chink in Bitcoin’s armor: software updates.

Benjamin Trump (ORISE Fellow, United States Army Corps of Engineers) published a recent study analyzing the challenges of many cryptocurrencies and the challenges that threaten their long-term success. He found that a lack of governance is chief among them.

In the study, Trump looked at 800 publicly acknowledged software updates — or as they’re sometimes called in the cryptocurrency world, “hard forks” — radical changes to a network’s protocol that makes previously invalid blocks and transactions valid, or vice-versa.

These forks can disrupt the Bitcoin system, causing people to lose trust in it, and in the long-term, making it hard to survive for cryptocurrencies.

“Hard forks are a threat to maintaining a stable and predictable operating platform that is essential if cryptocurrencies are to be adopted for daily financial transactions,” says Trump, who sees such increases in hard forks as a hurdle to mainstream adoption of selected cryptocurrencies.

Since the early days of Bitcoin technology, several blockchains have emerged from the initial Bitcoin network. Many didn’t make it past a few months. A few (like Litecoin or more recently Dogecoin) not only survived but are thriving. But if Bitcoin is to maintain a global level of recognition, stability, and reliability, it needs a predictable way to deal with challenges such as hard forks — and the best way to do that would be through good governance.

A subsequent 2019 study comes up with a similar conclusion. The study starts from the world of Nobel-winning economist Elinor Ostrom, which also somewhat addresses what form this governance could take. After all, in addition to the logistics of it (which are bound to be a nightmare), direct governance would go against the very ideals of cryptocurrency. But there may be ways.

In Governing the Commons: the Evolution of Institutions for Collective Action, Ostrom developed a series of empirical studies on groundwater basins. At first glance, groundwater and cryptocurrency have little in common, but the idea is to provide a framework of management of common-pool resources. But according to the 2019 study, such a model wouldn’t be enough for Bitcoin, and external governance (and transparency) would still be required. The author concludes:

“Hashing power is concentrated in mining pools. Providers of processing services are more concentrated and less transparent than the Bitcoin-design suggests. Providers of financial services are subject to several failures. Multifarious users may game cryptocurrency ecosystems to (illegally) reap benefits. Although organizations behind peer-to-peer networks may enforce improvements on incentives and governance, regulation and supervision by external institutions are desired. Without strong external regulation, cryptocurrency may resemble Veblenian (predatory) markets.”

Ultimately, one of the things that sets Bitcoin apart from conventional currencies like the US dollar is precisely that no one manages it. It’s “free”, “transparent”, and “unregulated”, and that’s what makes it cool and desirable to many. That’s also what makes it attractive as a way to reduce corruption.

But at the very least, Bitcoin should somehow address its growing climate impact. Everything from mining Bitcoin to selling it consumes energy, and that energy is already on the scale of a small country, making some critics fear that Bitcoin is actually a climate threat. How Bitcoin could account for its negative externalities without any external regulation is hard to see. But how Bitcoin could survive being managed by external hands is just as questionable.

Bitcoin has an energy problem. Now what?

While bitcoin is poised to revamp and upend global finance, the massive power demands of its blockchain network could undermine the world’s efforts to keep global warming in check.

Credit: Quote Inspector.

In February, the bitcoin network consumed as much energy as Argentina, a country of 44 million people, according to researchers at Cambridge University. By 2024, if this trend continues, cryptocurrency mining in China alone could use as much power as Italy uses in a whole year. The resulting CO2 emissions would be equal to those of the Czech Republic.

Increasingly, the energy (and climate) impact of bitcoin is compared to that of countries. So what can be done about that?

Some analysts think this is fine. Research by ARK Investment Management, which holds a lot of crypto assets, found that the bitcoin ecosystem consumes less than 10% of the energy required by the traditional banking system.

However, billions of people use traditional banking services whereas only one million bitcoin addresses are active on a daily basis, according to CoinMetrics data. If the sector were to grow, its consumption would also grow.

It is also true that, like with any new industry, the requirements for implementing early infrastructure are particularly intense, so going forward each new bitcoin mined should use increasingly less energy and generate fewer carbon emissions — at least that’s the plan.

But in any event, the bottom line is that the bitcoin network eats up a lot of power and its appetite is only increasing. In a new study recently published in Nature, researchers at the University of Chinese Academy of Sciences in Beijing have proposed some solutions that could perhaps mitigate some of the crypto network’s massive environmental footprint.

Rather than taxing bitcoin mining, as some have proposed earlier, the Chinese researchers claim a better strategy may be encouraging miners to shift their operations to regions that are powered by ‘green’ energy.

Data from the Cambridge study indicates Chinese bitcoin mining is responsible for 65% of the network’s power. North American miners make up roughly 8% of the global hash rate, followed closely by miners in Russia, Kazakhstan, Malaysia, and Iran

A bitcoin mining rig from 2015. Credit: Wikimedia Commons.

There are a few reasons why China is dominating this space. One explanation is that the Chinese government was quick to offer subsidies for the mining industry. Chinese miners also have access to computer chips at a discount straight from the world’s most important manufacturers. Last but not least, electricity in some of the most important mining provinces, such as Xinjiang, is dirt cheap, trading at least five times cheaper than in North America. The price of bitcoin surged since 2020 after millions of first-time retail investors began purchasing crypto with their phones on apps like BitQT, as well as a result of large institutional investors moving their assets away from stocks and bonds into the burgeoning crypto space.

Much of this energy is sourced from coal, although a study estimated up to 73% of bitcoin miners use at least some renewable energy as part of their power supply, including hydropower from China’s massive dams. But overall, much of the energy still comes from dirty sources.

Shouyang Wang, one of the new report’s authors and chair professor at the Academy of Mathematics and Systems Science at the Chinese Academy of Sciences in Beijing, wanted to see if there’s any way to make bitcoin mining operations both profitable and sustainable in the future.

Wang and colleagues performed simulations finding that if bitcoin mining is allowed to grow business-as-usual, it would peak in 2024 at nearly 300 terawatt-hours of electricity, or as much as a medium-sized country, and generate nearly 130 million metric tons of carbon emissions. Since most of the mining would take place in China, this would completely derail the country’s efforts to decarbonize its energy system.

At its address to the 75th session of the UN General Assembly (UNGA 75) in February, Chinese President Xi Jinping declared that China will ‘aim to have CO2 emissions peak before 2030 and achieve carbon neutrality before 2060.’

“It is important to note that the adoption of this disruptive and promising technique without [taking into account] environmental concerns may pose a barrier to the worldwide effort on GHG emissions management in the near future,” Wang told Forbes, adding that the research team was “surprised by the energy consumption and carbon emission assessment results of bitcoin blockchain operation in China.”

The solution is moving from a punitive tax policy to a site regulation policy that motivates miners to move their operations in an area that guarantees a high rate of renewable energy.

The simulation showed that under such a policy, only 20% of miners remained in coal-intensive energy regions. Under the site regulation model, the researchers found bitcoin operations generated 100.61 million metric tons at peak, as opposed to 105.19 million tons under an additional taxation scenario.

“Site regulation should be carried out by the government, placing limitations on bitcoin mining in certain regions that use coal-based heavy energy,” Wang explained. “That being said, we think that there are enough benefits to this policy which will incentivize the miners to move their operation willingly. For example, since energy prices in clean-energy regions of China are lower than that in heavy-energy regions, the miners can effectively lower their individual energy consumption cost, which would increase their profitability.”

The supply of new bitcoin halves every four years, which also means the miners’ rewards get halved. The next time this will happen will be 2024 — this is the forecasted peak of bitcoin mining. After 2024, the authors of the new study believe that it will no longer be cost-effective to mine bitcoin. This is why competition is so fierce nowadays, with miners buying every rig they can get their hands on so they mine as much as they can before 2024.

This also means that, at least partly, the bitcoin network is self-regulating. In time, the network will use less and less energy and generate fewer carbon emissions. But until it peaks, regulators have their work cut out for them.

Why China is banning one of the world’s largest Bitcoin mining hubs

A typicalbitcoin mining farm in China. Credit: Investopedia.

Bitcoin and the nearly 8,000 other cryptocurrencies it has spawned promise to revolutionize finance but it’s doing so leaving a dirty footprint. Mining Bitcoin consumes as much electricity as entire countries like Argentina or Ukraine.

Although the recent surge in bitcoin price has driven even more mining operations across the world, mining tends to be concentrated in certain regions — regions where energy tends to be cheap.

By far, the largest bitcoin mining hub is China’s Inner Mongolia, which is responsible for 8% of all the planet’s bitcoin mining. For comparison, the entire United States is responsible for just 7.2% of global bitcoin mining. However, this is set to change after the Chinese government ordered Inner Mongolia to shut down all cryptocurrency mining operations and ban new crypto operations in a bid to crack down on fossil fuel-intensive energy consumption.

Mining bitcoin is extremely energy-intensive due to the way the network was set up, which involves complex algorithms that demand a lot of computing power to solve each time a transaction is verified or a new block is added to the blockchain (this is what bitcoin mining actually does).

It’s no coincidence that Inner Mongolia has grown into the world’s most important crypto mining hub. The Chinese region, which stretches from the Tibetan plateau’s northeast ramparts along the great bend of the Yellow River toward China’s far northeast, is also a huge industrial stronghold and a major hub for physical mining of coal and rare-Earth minerals. The concentration of coal mines and coal-fired powered plants has made Inner Mongolia’s electricity dirt cheap.

Up until not too long ago, crypto miners paid Inner Mongolia’s Electric Power Trading Center only 2.60 cents per kWh. That’s more than five times cheaper than the 13.31 cents per kWh that the average residential customer in the United States pays for electricity.

With electricity so cheap, Inner Mongolia rapidly drew bitcoin miners who found their operations increasingly profitable as the price of the crypto asset surged.

But China’s government has apparently had enough. After reviewing the region’s energy consumption and energy intensity, Beijing found that Inner Mongolia failed to meet the 2019 targets it set out. It was the only one out of China’s 30 mainland regions that had failed to meet Beijing targets, which drew a lot of criticism from the central government.

To save face and redeem itself, the local authorities of Inner Mongolia have planed a number of drastic rules in an effort to curb energy consumption. According to a draft rule issued by the region’s state planner, energy consumption growth will be capped at around 5 million tonnes of standard coal equivalent for 2021.

Part of the new orders means plants and factories that use outdated and inefficient technologies to produce steel, ferroalloy, coke, graphite electrode, and coal-powered electricity must close by the end of 2022.

The energy control measures also target bitcoin mining. All existing cryptocurrency mining projects have until April 2021 before they must shut down. The approval of any new mining projects has been banned.

Inner Mongolia has also vowed to increase its share of renewable energy by installing more than 100 gigawatts of renewable generation capacity by 2025.

But China isn’t cracking down on cryptos solely out of environmental concerns. The decentralized nature of cryptocurrencies is completely incompatible with China’s governance that requires a tight grip over virtually every aspect of its citizens’ lives.

It’s really no surprise that a communist country like China hates bitcoin. Previously, China banned initial coin offerings and shut down many businesses involved in crypto operations, including exchanges and sites like YuanPay Group. More recently, China has taken a more complex approach, with American billionaire entrepreneur and venture capitalist Peter Thiel claiming that China even uses bitcoin as a ‘financial weapon’.

What exactly is cryptocurrency anyway?

Credit: QuoteInspector.

A cryptocurrency, or crypto for short, is basically digital money with some additional potentially disruptive innovations, such as the fact that it is secured by cryptography. Perhaps the most defining feature of cryptos is that they are decentralized networks based on blockchain technology, which is an online ledger with complex cryptography behind it to secure online transactions.

There’s a lot of talk about what crypto is and what it could possibly become, which is made all the more confusing because all sorts of people value it for different reasons. There are crypto purists who are true believers in the technology and have been on board with it since day one, there are the blockchain nerds who are less interested in cryptocurrencies but more in the digital ledger, and then of course there are the speculators who are merely interested in cryptos to make a buck.

For the latter, trading cryptos is just like trading oil or silver. However, there’s clearly more to cryptos and those who have the most faith in this technology believe cryptocurrencies have the potential to completely revamp the financial sector.

Diving deep into cryptocurrencies

The first blockchain-based cryptocurrency was Bitcoin, which to this day is the most popular and most valuable crypto out of more than 8,000. On January 12th, 2009, the person or persons who invented Bitcoin, known under the pseudonym Satoshi Nakamoto, sent 10 Bitcoin to Hal Finney, a cryptographer who has since passed away, marking the first ever cryptocurrency exchange.

Since then, Bitcoin has ballooned. In 2010, someone bought two pizzas for 10,000 Bitcoin. At this article’s publishing date, one Bitcoin is worth $53,000, so the 2010 exchange would have been worth $530,000,000. Now I hope those pizzas tasted good.

Bitcoin was essentially born from crisis, as a response to the 2008 banking sector crash. The original Satoshi Nakamoto white paper from 2008 mentioned that “A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”

As the U.S. government and Federal Reserve were looking to tweak the system and strengthen financial regulations in the wake of the Lehman bankruptcy, others like the Satoshi gang were cooking up an entirely new financial system that would avoid dangerous banking dependencies by being completely decentralized. Bearing this in mind, it’s no wonder that the authoritarian communist regime of China banned the use of cryptocurrencies.

The reason why cryptocurrency markets are inherently decentralized is that they run on a network of computers. Unlike traditional currency, crypto tokens only exist as a shared digital record of ownership, stored on the blockchain.

Transactions with cryptocurrencies are performed using exchanges and digital wallets. When two parties exchange cryptocurrencies, the transaction isn’t considered final until it has been verified and added to the blockchain by solving complex mathematical equations — this is known as mining. This is also how new tokens are brought into circulation.

What’s a blockchain?

A blockchain is a growing list of records, known as ‘blocks’, that are linked using cryptography. It’s essentially a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems participating in the blockchain. Each block in the chain can contain a certain number of transactions and each time a transaction is performed, a record of that transaction is added to the ledger. But since the ledger is duplicated across the entire network, so is the transaction’s record. A blockchain file is always stored on multiple computers across the network rather than in a single location. This way of recording information makes it virtually impossible to change, hack, or cheat this system.

This decentralization means that currencies based on the blockchain cannot be controlled by one person. What I mean by that is no one can, for instance, award themselves one million Bitcoin. Because nobody is in charge, Bitcoin is actually run by the network of computers participating in the blockchain.

New blocks are verified or added to the blockchain through mining. During verification, computers make sure that the sender involved in a transaction has sufficient funds to complete the payment. New blocks are created when a computer finds a solution to a complex algorithm. When a new block is linked to the previous blocks, the new version of the blockchain file is broadcasted across the entire network.

What exactly is the difference between cryptocurrency and fiat money?

Cryptocurrencies and conventional currencies, also known as fiat currencies, share two essential features: they both enable easy payments between two parties and act as a store of value.

However, cryptos also offer features which traditional money systems like the dollar or euro cannot emulate easily or are downright impossible for them to accomplish. The first and foremost differentiator is that cryptos can be sent, received, and traded by anyone, anywhere, at any time across the world without the need for a bank, government, or third party.

Another important difference between crypto tokens and fiat money is that cryptos are not insured by the government in the way a bank deposit is. If your crypto wallet is hacked and your tokens are transferred, the government may not be able to intervene in the same way they would with money stored in a bank.

What’s the value of Bitcoin?

Fiat money (meaning money backed by a government that isn’t pegged to gold) has value due to trust in the authority that serves as an intermediary that vouches for the currency’s worth, which in the case of the dollar is the Federal Reserve. Basically, fiat money has value because a government declares it legal tender. If it wasn’t for this trust, then a dollar bill wouldn’t be worth more than the paper it’s printed on.

A crypto asset’s value is also due to trust vested by the users of the crypto network, but rather than trusting a governmental authority, the trust is vested in the blockchain technology.

Due to this trust, cryptos and fiat currencies are seen as a store of value. But aside from this feature, a safe currency must also meet qualifications related to scarcity, divisibility, utility, transportability, durability, and counterfeiting.

Scarcity is key to preserving a currency’s value. If the Federal Reserve were to crank the money printer every day, the dollar wouldn’t be worth anything. This is why bankers often walk a tightrope with their monetary policies, carefully balancing the money supply and debt in order to keep inflation under control.

Unlike fiat currency, Bitcoin has a fixed supply since it launched in 2009. The supply of Bitcoin tokens was capped at 21 million, and currently, there are around 18 million Bitcoin in supply. In order for more Bitcoin to enter circulation, tokens have to be ‘mined’ by completing “blocks” of verified transactions that are added to the blockchain. The rate at which Bitcoin is released decreases by half roughly every four years and the last bitcoin is not scheduled to be mined until around the year 2140.

Bitcoin is divisible up to 8 decimal points. While the U.S. dollar can be divided into cents, or 0.01 USD. The smallest unit for Bitcoin, equal to 0.00000001 Bitcoin, is called a “Satoshi”.

Thanks to crypto exchanges and wallets, Bitcoin and other cryptocurrencies are easily transferable between parties, regardless of the size of the transaction with very low costs.

In terms of durability, cryptocurrencies may be more durable than fiat currencies, whose physical form is vulnerable to deterioration that can render them unusable. Bitcoin cannot be destroyed in the same way a dollar bill can be torn or burned. As long as the network is alive, so too will every Bitcoin be valid.

Counterfeiting Bitcoin is virtually impossible since doing so would entail confusing all participants in the blockchain network. The only way a counterfeit Bitcoin could be introduced in circulation is through double spend, which refers to the situation where a user transfers the same Bitcoin in two or more separate settings, effectively duplicating the record. This has yet to happen in the Bitcoin network for doing so would require a concentrated attack by a group that controls more than half of all the network’s mining power. Because such an effort involves a ridiculous amount of resources (money and computing power), counterfeiting Bitcoin is extremely unlikely.

Utility is where cryptocurrencies are the most lacking. You can easily exchange fiat money like USD for goods and services. Because fiat money can also be digital, such transactions can occur effortlessly and almost instantly. Meanwhile, Bitcoin is barely accepted as payment, nevermind other less established currencies.

Tesla made headlines in February after it announced it bought $1.5-billion-worth of Bitcoin from its corporate reserves and that it would also accept Bitcoin as payment for its products. However, this kind of adoption is still in its early stages. Very few businesses accept Bitcoin and even fewer people own a cryptocurrency.

Bitcoin is also extremely volatile, which makes it challenging to adopt it for practical day-to-day use. The price of Bitcoin since the May 2020 halving has seen an increase of nearly 500%. Instead, what this volatility invites is a lot of speculation.

Of course, Bitcoin isn’t the only cryptocurrency out there. In fact, there are over 8,000, but most of them operate under similar principles. And, by far, Bitcoin is the most important crypto token in the world.

CryptocurrencyMarket Capitalization
Bitcoin$969.6 billion
Ethereum$222.3 billion
Tether$33.1 billion
Binance Coin$30.5 billion
Cardano$28.3 billion
Polkadot$28.1 billion
XRP$24.4 billion
Litecoin$15 billion
Chainlink$13.3 billion
Bitcoin Cash$13.1 billion
Data updated on Feb. 18, 2021. 

What are cryptos good for?

Cryptocurrencies are exchanged securely and provide a high degree of anonymity. Transactions cannot be faked or reversed, which is both a good thing and bad thing — depending on who you ask. For some consumers, not being able to reverse a payment, like you can with a credit or debit card, might make them more vulnerable to scams.

Although Bitcoin is more than 10 years old, adoption is still lagging and there are only a few stores that accept cryptocurrencies as payment.

While Nakamoto referred to Bitcoin as electronic cash, the slow rate of adoption suggests we’re still a long way from that goal. Instead, many see Bitcoin as a form of “digital gold”, which is a long-term store of value.

Today, perhaps the most common use of cryptocurrency is as a speculative investment. Buyers purchase and hold Bitcoins because they believe their value will increase in time, so they will be able to sell them later at a higher price. However, these speculative interests can drive prices up and cause the market to exhibit characteristics of a bubble. As such, investing in Bitcoin or any other crypto is extremely risky as the bubble may burst at any time. This has happened before in late 2017 when Bitcoin came crashing down and didn’t recover from its all-time low until late 2020.

The huge trading volumes and hyper increases in price for Bitcoin in the past year have attracted a spate of both amateur and professional investors. Some say we’re in a new bubble that’s about to burst, others claim that Bitcoin could reach $100,000 or perhaps even $200,000 by the end of the year.

Before you jump the bandwagon, be aware that Bitcoin’s greatest strength can also be its biggest weaknesses. Since they’re completely decentralized, cryptocurrencies are also entirely unregulated, which makes them liable to fraud. Speculators who buy digital tokens should also be aware that they are at risk of losing all their money. The market is so volatile that even a tweet from Elon Musk is enough to move Bitcoin by double digits. Other smaller coins are even more volatile.

And while their anonymous nature makes cryptocurrencies great for privacy, it’s also one of the reasons why they’re the preferred mode of payment for illegal digital transactions such as the purchasing of drugs or firearms on the dark web.

Cryptocurrencies are definitely promising and blockchain technology may be a fantastic tool beyond cryptocoins, such as securing medical records and preventing election fraud. However, the crypto space is very much a Wild West, so tread lightly. 

Bitcoin now consumes more energy than Argentina

Tesla, the leading electric automaker on a mission to accelerate the world’s transition away from dirty, global-warming-causing fossil fuels, made headlines this week after it announced it bought a staggering $1.5 billion worth of Bitcoin. However, it will be difficult for Tesla in the future to reconcile its environmentally-friendly branding with the fact that Bitcoin is such a polluting cryptocurrency.

According to a new study from Cambridge University, keeping Bitcoin running consumes 121 terawatt-hours a year. That’s about as much as Argentina, a country of 44 million, uses in a year.

Bitcoin has had a fantastic run so far. It quadrupled in value in 2020, experiencing a meteoric 50% growth in December alone. It now trades for upwards of $44,000, which is kind of ridiculous.

But as its traded value grows more and more with a reputation for high-flying returns, so does its energy requirements. A higher price gives miners the incentive to buy and operate expensive and energy-intensive processing units, enlarging the cryptocurrency’s carbon footprint.

There’s not much we can do about this because Bitcoin is meant by design to consume that much electricity. In order to “mine” Bitcoin, computers solve complex equations for so-called “Proof of Work” that verify transactions made by people who send or receive the cryptocurrency. Some have even invested in entire warehouses of computing machines whose sole purpose is to connect to the Bitcoin network and solve its energy-intensive puzzles — energy that most often than not comes from cheap coal power.

Many such mega-miners operate in China’s Xinjiang region, where electricity can cost as little as 0.22 yuan ($0.03) per kilowatt-hour, compared with 0.6 to 0.7 yuan in central China, according to BloombergNEF. Although there are some massive renewable energy projects in development in the region, most of this dirt-cheap energy is from coal.

And because the next Bitcoin is increasingly harder to ‘mine’ than the former, the energy requirements will only increase with time. At this rate, it won’t be long before Bitcoin gobbles up more energy than Ukraine, Sweden, Vietnam, or Poland. So, what to do?

Really, the only thing that will bring energy costs down is if the price of Bitcoin crashes. Some claim that Bitcoin is a huge bubble waiting to burst, but there are also bullish investors who have price targets upwards of $100,000 or even $500,000. Alternatively, if all Bitcoins were mined with renewable energy, no one would fault it for its environmental impact — but this scenario is far removed from the probable future.

There are some merits to adopting a decentralized financial system, but using a cryptocurrency that is literally designed to be inefficient doesn’t really sound like a good idea. Bitcoin may be a good sustainable financial investment, but it’s definitely not a sustainable environmental one.

Bitcoin’s energy consumption is the same as a small country

Cryptocurrencies promised to change the world forever, but so far, they haven’t done much to justify the big energy bill. They are contributing significantly to the world’s greenhouse gas emissions, and researchers say this should be addressed.

The technology behind Bitcoin is called blockchain, and it’s certainly intriguing. The idea is that you can verify a transaction from one user to the other without needing a third party to verify the transaction. It’s like sending money to a friend without needing a bank to do so. The transaction system is also impossible to defraud.

New cryptocurrency is “produced” by so-called “miners“, who computationally solve extremely complex puzzles to validate all transactions. This process requires huge computing power, and as a result, consumes a lot of electricity.

“This process results in immense energy consumption, which translates into a significant carbon footprint,” says Christian Stoll, a researcher at the Center for Energy Markets at the Technical University of Munich, Germany, and the MIT Center for Energy and Environmental Policy Research.

Previous research has already shown that the amount of electricity consumed by Bitcoin alone is significant at a global scale; one previous study found that Bitcoin consumes 0.5% of the entire planet’s electricity, putting it on par with a country such as Ireland. To make matters even worse, because mining Bitcoin (and other currencies) requires so much electricity, it’s often mined in countries with cheap and dirty energy — think of coal energy in Mongolia and natural gas in Kazakhstan.

The new model goes a bit further than previous estimates, using data from all major mining hardware producers to determine which machines miners are actually using and the power efficiencies of these machines. Based on the power consumption for mining Bitcoin, they devised several likely scenarios, calculating the cryptocurrency’s total carbon footprint.

Using this model, they estimated Bitcoin’s annual energy consumption at 45.8 terawatt hours, with a carbon footprint between 22.0 and 22.9 megatons of CO2 — placing Bitcoin’s emissions between Jordan and Sri Lanka in emissions rankings (the 82nd and 83rd highest emitters). However, if all other cryptocurrencies were to be considered, the energy consumption would double.

Researchers conclude by saying that this doesn’t mean we shouldn’t use cryptocurrencies — they can still have their use, but the negative side also needs to be accounted for. So far, Bitcoin has done a lot to make some people richer, but it’s failed to deliver on most of its promises.

“We do not question the efficiency gains that blockchain technology could, in certain cases, provide,” says Stoll. “However, the current debate is focused on anticipated benefits, and more attention needs to be given to costs.”

Journal Reference: Stoll et al.: “The Carbon Footprint of Bitcoin”. Joule, https://www.cell.com/joule/fulltext/S2542-4351(19)30255-7

Mining cryptocurrencies consumes as much energy as mining precious metals

Bitcoin and other cryptocurrencies are increasingly under scrutiny for their massive energy consumption, which is reaching industrial levels.

Cryptocurrencies are digital, decentralized currencies that use strong cryptography to secure financial transactions, create additional units, and verify the transfer of assets. However, all these processes consume a lot of energy — which not only costs money to produce but also generates greenhouse gas emissions.

In a recent study, Max Krause and Thabet Tolaymat, two researchers affiliated with the EPA, calculated the average energy consumed to create one US dollar’s worth of the most popular cryptocurrencies (Bitcoin, Ethereum, Litecoin, and Monero) between 1 January 2016 and 30 June 2018.

They found that the creation of one dollar’s worth of the four cryptocurrencies was 17, 7, 7, and 14 megajoules, respectively. For comparison, the energy cost (in megajoules) of the physical mining of aluminium, copper, gold and platinum, was 122, 4, 5, and 7, respectively. While aluminium is an outlier, the other 3 valuable metals cost less (dollar per dollar) than cryptocurrencies.

[panel style=”panel-info” title=”Crypto mining” footer=””]

‘Mining’ cryptocurrencies is essentially a process in which intensive calculations are run to confirm new transactions and add them to the currency’s public common ledger — the main book or computer file for recording and totaling economic transactions. This ledger is called a blockchain.

New coins (units of cryptocurrency) are awarded to the first computer(s) that successfully complete calculations. This, however, means that cryptocurrency coins have not only a real-world value that’s based on something concrete, but also a physical cost, in terms of energy used by the computers to perform the caculations.[/panel]

The comparison between cryptocurrencies and real-life minerals draws a few surprisingly similar parallels.

“Bitcoin, like a mineral in the Earth’s crust, is finite and extractable and, like conventional mining, cryptomining can be energy intensive,” researchers write. “The energy required to mine cryptocurrencies in a proof-of-work scheme is measurable in the hashrates of the network. Hashrates are the number of calculations (hash functions) performed on the network in seconds. As of August 2018, there are approximately 50 quintillion hashes performed on the Bitcoin network every second of every day.”

However, unlike the physical metals, which have established uses, Bitcoin is still struggling to prove its inherent benefits. Gold, for instance, can be used for filling cavities in teeth, and it makes excellent fine wire for electronics. Gold is very reflective, so it is used to protect spacecraft and satellites from solar radiation, while platinum’s main use is in catalytic converters for cars.

There are, of course, inherent drawbacks to this study. The study works in averages, and the energy cost of minerals in different parts of the world (and different geological conditions) can vary wildly. Cryptocurrency prices are even more volatile. However, the network hashrates for 3 of the 4 analyzed cryptocurrencies have been trending higher and higher, suggesting that the energy cost will increase.

Overall, the researchers estimate that the 4 currencies were responsible for 3-15 million tonnes of CO2 emissions, which is still more conservative than previous estimates.

The study was published in Nature.

How the cryptocurrency boom could make or break Iceland’s economy

As cryptominers are drawn to Iceland’s abundant and cheap energy, economic woes loom over the country.

Iceland is a country like no other — a true land of ice and fire, a frigid but stunningly beautiful area, who for the longest time has struggled with poverty and isolation, but is now one of the richest and safest countries on Earth. Iceland truly is a remarkable place, but it’s not without its problems.

For starters, the country is still recovering after the economic crash that left the country near-bankrupt a decade ago. Although the country is flourishing now, this was not always the case — in fact, it was never the case before. But thanks to careful planning, healthy policies, and an essentially endless supply of geothermal energy, the 330,000 inhabitants of Iceland have built an enviable economy.

Yet because the island is so small and unique, its economy is very volatile. Iceland is the world’s largest electricity producer per capita, which plays a central role in its economic status. For instance, the biggest (and pretty much only) heavy industry in the country is aluminum smelting. Because energy is so easily available in Iceland, having an energy-intensive industry makes a lot of sense, and despite having as many people as a mid-sized town, Iceland is the world’s 11th biggest aluminum producer. But more recently, the country has started to develop another energy-intensive industry: crypto mining.

Cryptocurrencies — the likes of Bitcoin and Ethereum — have already moved on from their infancy — mining them is only feasible for large-scale scale operations. The “mining” process is essentially a validation of extremely complex transactions. The miners verify these transactions (a process that requires immense amounts of computation) and for this effort, successful miners obtain new cryptocurrency as a reward. All this required computation consumes massive amounts of energy and as a result, cryptocurrency miners have flocked to areas where energy is cheapest — including Iceland.

“We receive multiple requests per week from them,” says Styrmir Hafliðason, security and quality manager at Verne Global data centre, near the country’s capital Reykjavik.

According to a recent report by KPMG, 90% of the power used for Icelandic data centers goes to cryptocurrency mining, and the figure is expected to surge even further. If the trend keeps up, it might not be long before crypto mining consumes more energy than all of Iceland’s homes, according to Johann Snorri Sigurbergsson, a spokesperson for Icelandic energy firm HS Orka.

This has proven a boon for Iceland’s energy companies, but the industry is as fragile as it gets. As cryptocurrencies get harder and harder to mine (a process that is essential to all forms of cryptocurrency), the energy per coin ratio gets higher and higher — and at one point, it’s simply not going to be worth it. Furthermore, as recent events have shown, the value of currencies like Bitcoin is anything but stable — and as a result, this newly-developed industry could collapse at any moment. The crypto threat “cannot be excluded as a risk factor”, warns the country’s finance minister Bjarni Benediktsson.

In December 2017, Bitcoin reached a record high of $19,783, after dropping by more than 50% by February, to about $8,000. As I’m writing this, the price of one Bitcoin is $6,370. Bitcoin is no exception — the price of 1 Ethereum surged to a record high of $1,417 in January, whereas now, the price has dropped to $456.

Such fluctuations are regarded as normal in the cryptocurrency world, yet for an industry that plays a significant part in a country’s economy, that’s hardly acceptable.

But is this any different from Iceland’s big industry, aluminum smelting? Iceland’s crypto mining only uses up 2-3% of the country’s overall energy consumption, whereas aluminum smelting gobbles up 70%. So in terms of overall energy consumption, crypto is still a ways away from even nearing Iceland’s heavy industry, but in terms of financial stability, you can’t really compare the two.

Iceland’s been badly burned before, and the last thing it wants is to get burned again. So for now, although several Icelandic companies welcome this new type of industry, the country’s government will treat this surging “mining” industry with a healthy dose of pragmatic skepticism.

Bitcoin to consume 0.5% of the world’s electricity — as much as Ireland

Everyone’s favorite cryptocurrency is turning out to be a massive energy sink. According to a new study, in 2018, Bitcoin will soon account for 0.5% of the planet’s electricity — more than the consumption of many sizeable countries.

Cryptocurrency promised to revolutionize how we pay and receive money, and while they haven’t really done that, they did make a few people very rich. Aside from that, the social promises made by cryptocurrencies have yet to be fulfilled, and we’re starting to see some of the downsides of cryptocurrencies — in this case, energy consumption.

Most of the Bitcoin-related energy is consumed in the “mining” process. Mining is essentially a record-keeping service done through the use of computer processing power. Miners keep the blockchain consistent, complete, and unalterable by repeatedly grouping newly broadcast transactions into a block, which consumes a massive amount of energy (the blockchain itself is a list of records linked and secured using cryptography).

The problem is that you can’t really have Bitcoin without immense computation, and this level of computation will always require vast amounts of energy. Miners are incentivized to use more and more processing power and even those who don’t get anything expend electricity.

If Bitcoin miners were a country, they’d rank somewhere between the 60th and 70th for consumed electricity — that’s more than half the countries in the world.

In a Commentary appearing on May 16 in the journal Joule, financial economist and blockchain specialist Alex de Vries analyzes this energy consumption using a new methodology.

“The electricity that is expended in the process of mining Bitcoin has become a topic of heavy debate over the past few years. It is a process that makes Bitcoin extremely energy-hungry by design, as the currency requires a huge amount of hash calculations for its ultimate goal of processing financial transactions without intermediaries(peer-to-peer). The primary fuel for each of these calculations is electricity.”

His estimate put the minimum current usage of the Bitcoin network at 2.55 gigawatts annually, though the real figure is likely much higher. That’s about as much as Ireland, and two times more than countries like Paraguay and Lithuania. A single transaction uses as much electricity as an average household in the developed world uses in a month, and to make matters even worse — things are only going to get worse as Bitcoin-related energy consumption increases.

“To me, half a percent is already quite shocking. It’s an extreme difference compared to the regular financial system, and this increasing electricity demand is definitely not going to help us reach our climate goals,” he says. If the price of Bitcoin continues to increase the way some experts have predicted, de Vries believes the network could someday consume 5% of the world’s electricity. “That would be quite bad.”

This raises two important questions. First, is Bitcoin really adding any value to society? Sure, you can speculate around it, maybe make some money, maybe lose some money. But at the end of the day, for mankind, is Bitcoin really adding anything of value — especially considering how you spend electricity (and therefore money) to generate it? Secondly, there are important externalities associated with Bitcoin. It’s not just the money, but also the emissions generated in the electricity-producing process — who will account for that? Some states are already taking the first steps towards Bitcoin regulation, and that’s really important, not just for what’s happening now, but for what will undoubtedly happen in the future.

“But you need to base your policy on something. And I think that my method is important in that regard, because it’s very forward-looking. It’s focused not on the now, but on where we’re headed. And I think that’s something you really need to know if you’re going to draft policy about it,” he says.

Mining Bitcoins gets harder and harder, so at one point, the cost of electricity will outweigh the Bitcoin revenue. But we’re still a long way from reaching that equilibrium, and it doesn’t make much sense to wait for that to happen — after all, a new currency could come up and take Bitcoin’s place, and then we’re back to square one. As de Vries concludes:

“For now, however, Bitcoin has a big problem, and it is growing fast.”

Journal Reference: Joule, de Vries: “Bitcoin’s Growing Energy Problem” http://www.cell.com/joule/fulltext/S2542-4351(18)30177-6

blockchain

Crypto mining is using almost as much power as Greece

blockchain

Credit: Pixabay.

There’s a lot of talk these days about the crash of the so-called ‘bitcoin bubble’, but a lesser-known aspect of crypto investing is the huge power drain that these novel currencies incur. According to one estimate made by Spyros Foteinis, a Greek environmental engineer, bitcoin and ethereum mining are already consuming 47 terawatt-hours per year. To put things into perspective, Greece, a country of 11 million people, consumes 57 terawatt-hours annually.

Bitcoin and ethereum together have a market cap of 88% of the total cryptocurrency market, so the whole cryptocurrency ecosystem is consuming even more power.

The reason why bitcoin and other cryptocurrencies use so much energy is rooted in the very way such networks operate. A digital currency isn’t controlled by a central bank but by the whole network of users who compile comprehensive records of payment transactions, known as “blockchain.” To compile these records, the network relies on “miners”, which are basically computers (like your own) occupied with solving complex mathematical problems in exchange for electronic coins.

Verifying transactions or “mining” becomes increasingly difficult as demand for bitcoin increases — and with it more demand for high-powered computer processing. This implies even more energy usage.

According to Foteinis, 58% of all crypto mining happens in China, where much of the power comes from coal-powered plants. Using a life-cycle assessment, Foteinis estimates bitcoin and ethereum mining emits as much greenhouse gases as 6.8 million average European inhabitants — or as much as 43.9 million tones of carbon dioxide equivalent.

By these figures, we can gather that not only are cryptocurrencies financially unstable, but also environmentally unstable as well.

“In my opinion, the cryptocurrency industry is urgently in need of reform to make it environmentally sustainable,” Foteinis wrote in a Nature editorial.

There are a couple of solutions to this problem. One would be to change the protocol of bitcoin and other cryptos to lower energy expenditure. Alternatively, users can switch entirely to new cryptos that are designed to use less power from the beginning. Ethereum, which is less decentralized than bitcoin, is working on changing its protocol to reduce energy use.

Bitcoin.

One man pushed Bitcoin from $100 to over $1,000 a pop in two months’ time, new research reports

A new paper comes to raise a lot of warning signs regarding cryptocurrencies — in short, the paper shows how one person fraudulently raised the price of Bitcoin (BTC) from $150 to more than $1,000 in two months through fake transactions run by two bots.

Bitcoin.

Image credits BTC Keychain / Flickr.

Many have hailed cryptocurrencies as a way for people to take back control of their money from incompetent or corrupt governments. Judging by all the attention Bitcoin has been getting lately, and the dizzying heights of value each ‘coin’ has peaked at, those people’s hopes would seem to have been validated.

However, not all is as it seems regarding cryptocurrencies, a new paper reports.

Ethereal money, make-believe value

“This paper identifies and analyzes the impact of suspicious trading activity on the Mt. Gox Bitcoin currency exchange, in which approximately 600,000 bitcoins (BTC) valued at $188 million were fraudulently acquired,” the researchers wrote.

“During both periods, the USD-BTC exchange rate rose by an average of four percent on days when suspicious trades took place, compared to a slight decline on days without suspicious activity. [This] activity likely caused the unprecedented spike in the USD-BTC exchange rate in late 2013, when the rate jumped from around $150 to more than $1,000 in two months.”

The authors report that most instances of price manipulation were possible simply because cryptocurrency markets were “very thin” — meaning they had few buyers and sellers. The authors explain that despite the huge increase in capitalization these markets experienced (take BTC’s soaring rise in 2013 for example), they remain very thin. Since the period of the study (2013), the number of cryptocurrencies increased from 80 up to 843 today, and the majority of markets remain thin and “subject to price manipulations”.

Mt. Gox is a prime example of how such price fluctuations can be induced in cryptocurrency markets. By 2013, the platform imposed itself as the world’s largest BTC intermediary and leading exchange hub, handling over 70% of all transactions worldwide. Based on a rigorous analysis with extensive robustness checks, the current paper shows the suspicious trading activity likely caused the unprecedented spike in USD-BTC exchange rate seen in late 2013.

Manipulation on the Mt. Gox exchange was primarily handled by two bots, Markus and Willy, which performed seemingly-valid trades but didn’t actually own the BTC they were using. During a presumed hacker attack on its servers, Mt. Gox suspended its activity in February 2014 — after 850,000 BTC (more than $450 million at the time) belonging to customers and the company were reported missing and likely stolen.

Smoke, mirrors, bots

During the hack, the team notes, the two bots were able to create fake trades that allowed them to manipulate the price of BTC and make off with millions in the process. Since the fraudulent transactions were publicly listed, they led to an apparent increase in the trading volume going on at Mt. Gox, the market at large picking up on all the activity. The paper shows that even when fraudulent exchanges aren’t factored in, all major USD-BTC exchanges saw a much higher average traded volume when the two bots were active. Mt. Gox naturally turned a profit from the transaction fees levied on all the extra activity.

As to who induced these fluctuations and why, the authors present a theory posted by an anonymous user on Reddit shortly after Mt. Gox’s collapse in 2014. The user holds that hackers stole a large number of BTC from the platforms’ servers in June 2011 (some 650,000 coins). Its owner, Mark Karpales, then used the bots to induce and cash in on these market fluctuations for several years to cover his loss.

Bubbles.

Every line on this chart represents an economic bubble — and they all burst eventually.
Image via Bloomberg.

In other words, what he did is create an economic bubble, artificially inflating the cost of a certain commodity and turning a huge profit by selling it. Eventually, the prices soar too high (the buyers want to re-sell at a profit, so the prices need to go up) for anyone to want to buy — and the ones who purchased last have to foot the bill and, effectively, pay for the profits of those before them. The whole market became a pyramid scheme.

The authors conclude that if cryptocurrencies want to become a viable alternative to money as we know it today, its markets should be more robustly insulated from attempts at price manipulations. Because, quite frankly, the whole appeal of cryptocurrency is that they are viable, stable, and above all secure carriers of value — not because they’re a way for someone else to pyramid-scheme themselves into wealth.

“As mainstream finance invests in cryptocurrency assets and as countries take steps toward legalizing bitcoin as a payment system, it is important to understand how susceptible cryptocurrency markets are to manipulation. Our study provides a first examination,” write the researchers.

The paper “Price Manipulation in the Bitcoin Ecosystem” has been published in the Journal of Monetary Economics.

People take part in a march on July 3, 2015 to demand the resignation of Honduras' President Juan Orlando Hernandez amidst $200 embezelment scandal. Image: Jorge Cabrera

How bitcoin’s blockchain could mark an end to corruption

A blockchain is a public ledger of all Bitcoin transactions that have ever been executed,  the main technological innovation of Bitcoin. Basically, since the first bitcoin was mined, every transaction using the cryptocurrency has been tracked and labeled, with note of the hands that made the exchange. A block is the ‘current’ part of a blockchain which records some or all of the recent transactions, and once completed goes into the blockchain as a permanent database. Each time a block gets completed, a new block is generated. Think of the blockchain as a history of all financial transactions and the block as a individual bank statement. What’s innovative about this is that the blockchain database is shared by all nodes participating in a system – that’s more computing power than Google has. This makes the Bitcoin ledger impossible to forge or destroy, since there are millions of other copies distributed across the whole web. Now, this remarkable financial innovation could be used to thwart corruption.

People take part in a march on July 3, 2015 to demand the resignation of Honduras' President Juan Orlando Hernandez amidst $200 embezelment scandal. Image: Jorge Cabrera

People take part in a march on July 3, 2015 to demand the resignation of Honduras’ President Juan Orlando Hernandez amidst $200m embezzlement scandal. Image: Jorge Cabrera

Epigraph and Factom, both Texas-based tech company, were hired by Honduras – one of the most corrupt country in the world – to develop the country’s land registry ledger system like blockchain. Right now, the land registry is controlled by government officials. They will continue to be so under a blockchain system too, of course, only everything will be transparent. Any ledger whose access is limited can be controlled and manipulated. The police could readily access the data on a blockchain ledger, journalists as well, common Hondurans, even Londoners. It’s all an open, global database.

“In the past, Honduras has struggled with land title fraud,” said Peter Kirby. “The country’s database was basically hacked. So bureaucrats could get in there and they could get themselves beachfront properties.”

“Distributed architecture, immutability and transparency are the three main attributes that allow blockchain-based apps to combat fraud and corruption,” says Abhi Dohal, VP of Business Development at Epigraph.

“No amount of money or threats can undo what’s been done without leaving an auditable trail,” he says.

Why stop here? Blockchain technology can be applied to virtually anything. There’s a company that adds block chain to diamonds to prevent insurance fraud. Every stone has record kept where at least 40 unique data points are stored; information like who the owner is, who was the previous owner, size, shape, security status and so on. You could make blockchain for voting records or track where a politician’s money comes from. Nike, for instance, could add a block for every sold pair of shoes – you could then track the code through the chain to see where your shoes were manufactured and whether or not they were made in ethical conditions (i.e. no child labor).

One way to see Blockchain is like the world’s biggest file cabinet. The problem with blockchain, however, is exactly this: its size. If it’s going to pick off, we’re going to need a lot more computing and storage power. Then, there are some things that have to be kept private, and rightfully so these shouldn’t be blockchained.

Counterfeiting and corruption could be very, very difficult to do and get away with it, though. Bankers might hate it. There are nearly infinite uses for blockchain technology in our everyday lives; from tracking your luggage to verifying the origin of products. Let’s wait and see.

 

bitcoin

Algorithm predicts the Price of Bitcoin – Developers Double Their Investment in 50 Days

A team at MIT has developed a prediction algorithm that allows them to determine when the price of the infamous volatile cryptocurrency, Bitcoin, will drop or rise. Using this method, the researchers managed to double their initial investment in 50 days, all through an automated process that involved more than 2,800 transactions.

Money forecast

bitcoin

An algorithm developed at MIT can predict how Bitcoin will fair in the future. Image: Bitcoin

Since the last year or so, Bitcoin has exploded on the market sitting today at nearly ten times the price it was valued only 2 years ago. Many early investors who believed in the currency and locked their investment have now become wealthy, yet because there are few places you can actually use Bitcoins, the currency is mostly regarded as a commodity. As such, most investors put money into Bitcoin to speculate and earn returns. This behavior has significant consequences on the currency’s trading patterns, with prices fluctuating heavily on a day to day basis. With this in mind, is it possible to predict future returns for Bitcoin trading? A researcher at MIT’s Computer Science and Artificial Intelligence Laboratory and the Laboratory for Information and Decision Systems recently developed a machine-learning algorithm that does just this.

Can history predict where the money will flow?

Devavrat Shah and recent graduate Kang Zhang, both at MIT, collected  price data from all major Bitcoin exchanges, every second for five months, accumulating more than 200 million data points. This step was critical – the researchers needed as many points as possible for their historical analysis to make better predictions. They then a technique called  “Bayesian regression,” to basically train the algorithm to automatically identify patterns from the data, which they used to predict prices, and trade accordingly. Thus, their automated setup predicted the price of Bitcoin every two seconds for the following ten seconds. If the price movement was higher than a certain threshold, they bought a Bitcoin; if it was lower than the opposite threshold, they sold one; and if it was in-between, they did nothing.

Over 50 days, the team’s 2,872 trades gave them an 89 percent return on investment with a Sharpe ratio (measure of return relative to the amount of risk) of 4.1.

“We developed this method of latent-source modeling, which hinges on the notion that things only happen in a few different ways,” says Shah, who previously used the approach to predict Twitter trending topics. “Instead of making subjective assumptions about the shape of patterns, we simply take the historical data and plug it into our predictive model to see what emerges.”

Next, the team plans on further scaling their data points to gain a more refined view of Bitcoin’s history and, consequently, make the algorithm more effective.

“Can we explain the price variation in terms of factors related to the human world? We have not spent a lot of time doing that,” Shah says, before adding with a laugh, “But I can show you it works. Give me your money and I’d be happy to invest it for you.”

Now, this sort of algorithms aren’t new – what’s new is that Bitcoin is involved. This sort of machine learning bits have been used extensively for decades in the stock market. Do they work? Yes and no – it depends on the market, basically. I suspect this algorithm works (for now) because there are yet just a couple of traders (compared to other currency or commodity traders) who collectively behave according to a pattern. As Bitcoin will grow, so will it’s complexity, but this is another story, for some other time. Soooo, where can you buy this algorithm? It’s not yet open to the public from what I gathered, and maybe it won’t ever be. If it were public, though, it will probably become useless after it reaches it’s critical point. Make the observer an active participant to the experiment and everything topples over.

The team’s paper was published this month at the 2014 Allerton Conference on Communication, Control, and Computing.

 

Cicada 3301: A puzzle for the brightest minds, posted by an unknown, mysterious organization

It’s perhaps the most enigmatic and intriguing thing on the internet, which promises an “epiphany” when you solve it. No one knows who sets it or what the prize is at the end, but Cicada 3301 has posted mysterious, extremely difficult puzzles for three years in a row, in an attempt to recruit and enlighten the best cryptanalysts from the public.

What is Cicada 3301

The first Internet puzzle started on January 5, 2012 and ran for approximately one month. A second round began exactly one year later on January 5, 2013, and a third round was set up in 2014 as well. Claiming to seek “highly intelligent individuals,” the Cicada 3301 puzzle challenged visitors to find a secret message hidden in the image that accompanied it.

OK, this is probably getting pretty weird by now – what exactly is Cicada 3301? Even the name is cryptic – an insect, and an apparently meaningless prime number, what does it all mean? We don’t know, and few people in the world do. They just post things like this:

“Hello. We are looking for highly intelligent individuals. To find them, we have devised a test. There is a message hidden in the image. Find it, and it will lead you on the road to finding us. We look forward to meeting the few who will make it all the way through. Good luck.”

These are not your everyday “spend an afternoon solving them” puzzles. These are highly difficult, highly cryptic puzzles.  To understand just how hard they are, you need to look at the complexity of each clue that leads to successive parts of the puzzle–all which need to be completed in order to solve the Cicada mystery. Each message leads to a puzzle, each puzzle more difficult than the last.

Maybe the first thing that comes to mind is – isn’t it all just a hoax? Couldn’t it all be just a very elaborate internet troll, having a laugh making all these people work through his puzzles? That’s highly unlikely. Throughout the testing, multiple clues have required participants to travel to various places to retrieve the next clue – the places include several locations in the US, as well as Australia, Granada (Spain), Moscow (Russia), Okinawa (Japan), Warsaw (Poland), and Paris (France). These clues appeared virtually at the same time, suggesting an organized project. Furthermore, the complexity of the puzzles, and the variety of mediums they were posted on suggests a resourceful organization, willing to spend lots of money to their end – so not an internet troll. The mentioned mediums included telephone, original music, bootable Linux CDs, digital images, physical paper signs, and pages of unpublished cryptic books.

Could it be a top notch organization, like the CIA, or MI6, or some other organization? They certainly have the resources for it, but that’s also very unlikely. While these organizations do conduct unconventional ways to recruit people from the the general population, they always make this public. They announce the competition, they announce what it’s for, it’s a very different procedure.

The other plausible is that banks working on cryptocurrency are behind Cicada, but that’s also unlikely, due to the nature of the puzzles. The puzzles are all … rebellious, advocating (more or less subtly) a right to privacy, a fight against a 1984-like controlling system, pretty much the opposite of what you’d expect from banks. Speaking of the puzzles…

The Cicada puzzles

The first puzzle was posted in 2012, initially on one of 4chan’s boards, which is arguably one of the best places you’d expect something like this to pop up. The first image said:

“Hello. We are looking for highly intelligent individuals. To find them, we have devised a test.

“There is a message hidden in this image.

“Find it, and it will lead you on the road to finding us. We look forward to meeting the few that will make it all the way through.

“Good luck.”

It was signed “3301”. Joel Eriksson, a 34-year-old cryptosecurity researcher and developer from Sweden, is one of the few known people to have almost solved it all the way through. To crack the code hidden in the first picture, he used a steganography software to extract a message encoded with a shift cipher – each letter corresponds to another letter. After he decoded the cypher, it led him to an URL with the image of a duck.

Here, another steganographic approach revealed a hidden book code of a list of two numbers separated by a colon. The book then led to a Reddit address with Mayan numerals on the top of the page. Things were starting to get trickier and trickier. He noticed that several posts published by a user seemed to consist of encoded text, which could be decoded with the code from the book. After working through this code, he was led to two different images, which also contained hidden messages, ultimately leading him to a phone number in Texas. Calling the phone number led to a voicemail that read:

“Very good. You have done well. There are three prime numbers associated with the original final.jpg image. 3301 is one of them. You will have to find the other two. Multiply all three of these numbers together and add a .com to find the next step. Good luck. Goodbye.”

After he did the math, he reached a URL which told him to come back at a certain time. When he did, the URL revealed a series of numbers, which were GPS coordinates to telephone poles in countries around the world, including in Spain, Russia, America, France, Japan, and Poland. Of course, it’s not possible to travel all around the world and look for codes, so he had to rely on the help of other people working on the Cicada puzzles. As it turns out, the GPS coordinates yielded QR codes which lead to another two images, inside of which were more hidden text, including text from what Eriksson found was the William Gibson poem Agrippa, which was only released on 3.5 inch floppies.

Using the same code from the previous book which he used on Reddit, he went through another series of puzzles (including a poem from a collection of medieval Welsh manuscripts), and he was led to a website on the Tor network – which was the last stop, the ultimate destination of the riddles. But the timing was wrong. Cicada 3301 sniffed out that people across the world were collaborating to solve the problems, and only the quickest ones to reach it were rewarded. Shortly afterwards, it was blanked, and replaced with the statement “We want the best, not the followers.” That year, Cicada was over.

Eriksson was disappointed – especially as he started working on the puzzles one week later than everybody else.

“It was quite disappointing,” Eriksson says. “Especially considering that the people who registered in time were mostly ones that had not actually solved much of the puzzles themselves. People were sharing solutions and collaborating a bit too much.”

 

However, the fact that he got to the last stage all by himself, and almost one week quicker than anybody else is remarkable; and he also learned a lot about Cicada in the process.

“Getting a phone number to call after solving one of the pieces of the puzzle was the first hint that this might not just be the work of a random Internet troll. This was definitely an unexpected turn,” Eriksson says. “The plot thickened even more when receiving a number of GPS coordinates. I also can’t help but to notice that the locations in question–USA, Poland, France, South Korea, and Australia–are all places with some of the most talented hackers and IT security researchers in the world.”

He too believes that whoever is behind the Cicada organization, it’s not something like the CIA or NSA, or any bank or financial enterprise. He too mentions that in the process of solving the riddles, he found many references and clues suggesting that the organization is extremely different in nature.

“It is most likely an underground organization, not related to any government or intelligence agency,” he says. “Based on the references in their challenges–the Agrippa poem by William Gibson, The Marriage of Heaven and Hell by William Blake, The Book of The Law by Aleister Crowley–and their constant references to prime numbers and the like, they are likely intellectual, anti-establishment, ideologically driven and they seem to be valuing logical/analytical thinking highly. They seem to share a lot of ideology with the cryptoanarchy movement, and old-school hackers.”

Most people expected it to be a one time thing, but on January 5 2013, exactly a year and a day after the first posting, a new image was uploaded onto 4chan’s /b/ message board.

“Hello again. Our search for intelligent individuals now continues,” it began.

The puzzles were different, but similar in nature, the references were different, and similar in nature, and just like the first time, the final URL was closed shortly before it was opened – deeming only the very first ones as winners. For people who had failed 2 years in a row, there was nothing left to do except for wait for the 2014 challenge – which came.

Rather than an image posted on 4chan, the 2014 Cicada puzzles started on a Twitter feed which had been involved in 2013’s hunt. Again, they shared a cryptical image, and the nature of the contest seemed to be identical. There’s a really good article in The Guardian, where one editor describes his attempt, and ultimate failure, at solving all the puzzles.

The only piece of half-reliable information we have about who or what Cicada is and what they want comes from a leaked email from one of the ‘winners’ of the 2012 challenge. It reads:

“You have all wondered who we are,” it reads in part, “and so we shall now tell you. We are an international group. We have no name. We have no symbol. We have no membership rosters. We do not have a public website and we do not advertise ourselves. We are a group of individuals who have proven ourselves, much like you have, by completing this recruitment contest, and we are drawn together by common beliefs. A careful reading of the texts used in the contest would have revealed some of these beliefs: that tyranny and oppression of any kind must end, that censorship is wrong and that privacy is an inalienable right.”

My thoughts on Cicada

If this is indeed true, then there is one organization (sort of), which seems very congruent with Cicada: Anonymous. Anonymous is a very odd phenomenon, a loosely associated international network of activist and hacktivist entities. A website nominally associated with the group describes it as “an internet gathering” with “a very loose and decentralized command structure that operates on ideas rather than directives” – but they usually like to keep a low profile, popping up only when they really want to.

They’ve done some good things, and some bad things, that’s not the point of discussion here. The thing is, they too stand for the right to privacy, fighting against tyranny and oppression; they too are an international underground organization who don’t advertise themselves, and have proven themselves through numerous actions. To say that there is any connection between Cicada and Anonymous is quite a leap, and there is nothing more than half-reliable circumstantial evidence to that, but there definitely are some similarities between the two.

So we are now left with the question: is it a good thing that a mysterious, rebellious organization who claims to protect rights and fight tyranny is gathering some of the world’s brightest minds through a series of enigmatic puzzles every year? I’m not sold here. I don’t like the way most websites handle my personal data nowadays. I dislike the fact that Facebook is using my personal data as a product, I dislike that Google shows different things based on your history, I dislike the fact that everyone is trying to shove “targeted ads” down my throat. There is no privacy on the internet, even when theoretically and legally, there should be. Whoever is doing this is obviously highly intelligent, resourceful, and is gathering more and more likewise people, so they have every chance to accomplish big things.

Do I want an underground organization protecting my privacy? Sure, why not – the “traditional” system clearly failed us on this one. Do I somewhat doubt their well intentions? Yes, for sure. I don’t know what their end game is. They imply it’s positive, but we have no reason to think one way or another. But perhaps the most important question is: Can they end up doing more wrong than right, even if they have good intentions? I don’t have an answer to that, but I have a feeling we may find out pretty soon. After all, it’s been three years since they’ve recruiting people.

The other thing which is tempting to connect Cicada with is Bitcoin. Bitcoin is a peer-to-peer payment system introduced as open source software in 2009 – you could call it a virtual currency, although it does not meet the generally recognized definition of money; the US government calls it a decentralized currency. In the past couple of years, Bitcoin has grown by a factor of over 100, in the past 2 years, fluctuating massively in short periods of time, making some people very rich, and making others lose a lot of money. It was developed by the alias Satoshi Nakamoto – whose identity is not known. Some people believe that it is actually not a man, but a group of people, due to the massive and ingenious work that was put into bitcoins (starting to see the pattern?).

Bitcoins are not backed up in gold or any other commodity, but they are created as a reward for payment processing work in which users who offer their computing power verify and record payments into a public ledger. Keeping Bitcoins free and autonomous requires a lot of top notch work, especially as they grow more and more. Him/they would need talented people to work, and would also probably like to keep the whole operation low profile, controlling it and keeping it away from the mainstream media until the time is ripe. You’d also want people of a certain psychological profile, which could be communicated and represented through the allusions in the puzzles. They would also have the resources and the motivation to do something of this scale, so it seems to fit very well.

Or maybe it’s something else – maybe it’s an evil organization, maybe it’s aliens, or a fanatical religious group, I don’t know. I’ve tried my best to come up with answers, and that’s the best I got. I guess, all we have left to do is to wait and see if Cicada 3301 will make a return next year, and keep an eye out. Many people expected Cicada 2014 to be the biggest and final one – we’ll see.