Bitcoin’s problems run deeper than its volatility
> Hold on for life. It’s an oft-heard rallying cry for the inhabitants of the ultra-volatile cryptocurrency market.
This “HODL” sentiment took on special urgency this week after bitcoin fell to new lows. The digital coin fell as low as $ 30,000 on Wednesday, reversing many of the gains it has made in recent months, before recovering slightly to just over $ 37,000 as of this writing.
The drop, which followed reports of the Chinese government’s crackdown on the use of digital coins, only accelerated a sale that had started earlier in the month. Several other cryptocurrencies also fell.
I knew we were in another crypto bust when friends in one of my WhatsApp groups – some of whom had never owned crypto before – started asking me to make investments in dogecoin, an extremely digital token. overvalued based on the Shiba Inu meme. When everyone wants to come in, it’s time to go out.
Experienced crypto investors have good reason to be bullish on Bitcoin’s latest drop. Despite the volatility, blockchain-based startups have attracted a lot of long-term capital. Venture capital investments in hit crypto startups a record high in the first quarter of this year, with $ 3 billion invested in 239 transactions, according to data from PitchBook. Certainly, these investors are not only supporting crypto, but also the underlying technology – blockchain – which is an integral part of the distributed ledger concept and the broader ambitions surrounding decentralized finance.
However, not all blockchains are created the same. Some of the most popular cryptocurrencies are based on the early iterations of blockchain technology, which arguably weren’t designed for the market as it exists today.
For example, Bitcoin, Dogecoin, Ethereum, and many major cryptocurrencies operate on the blockchain using what’s called a proof of work protocol. Essentially, this means that a lot of computing power must be supplied to a network of “miners” who calculate the numbers and perform transactions. It requires a lot of electricity to be used. Earlier this year, a University of Cambridge study estimated that the Bitcoin network – which includes all the mining power needed to validate transactions – uses more electricity each year than Argentina as a whole.
One of the causes of the fall in bitcoin is that Tesla said last week that it would no longer accept bitcoin for “environmental concerns.” The electric car company, which prides itself on being a green transportation solution, was talking about proof-of-work electricity consumption. It’s somewhat ironic, since Tesla founder Elon Musk was instrumental in promoting currencies like dogecoin that work on proof of work protocols. Nonetheless, Tesla is right.
Proof of work protocols present challenges when it comes to sustainability and scalability, and not just because of the electricity they use. They can also be costly for users, depending on the size of the transaction being processed.
There are durable alternative protocols such as proof of stake or delegated proof of stake. (These approaches do not lend themselves to succinct explanations, but suffice it to say that they are less resource intensive.)
For this reason, the recent hype around unsustainable and obsolete cryptocurrencies like bitcoin, or worse, dogecoin, seems a bit backward. There is no doubt that bitcoin will recover, but it will be fueled more by memes and the desire to get rich quick than anything else.
Venture capitalists know that blockchain technology has a bright future ahead of it, but only if it is sustainable. One can’t help but feel that the bitcoin side-show has become a distraction, especially when its lack of sustainability, and therefore scalability, means its potential is likely to be limited.
Illustration photo by Mara Potter / photo via Getty Images