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The Real Price Of Bitcoin
We all — crypto’s critics, as well as the supporters — have been debating the wrong things for decades: as long as people have a reasonable chance of a material gain from participating in something, they will do it, and none of the bigger financial, political, regulatory, technical or environmental concerns will stop them. This is why crypto is here to stay. But crypto’s biggest strength as an asset is also its biggest problem: its incentive structure.
Some of cryptocurrency supporters are idealists, and believe that cryptocurrencies will lead us into a better future by avoiding the middlemen, government regulation, and the current banking system. Some believe it will reduce the energy consumption by eliminating the physical banking and eliminating real-world gold-mining infrastructure. Its critics believe that it is evil because it undermines the government’s ability for regulation and taxation, pollutes the environment, or is a political tool to push neoliberalism. Yet others see it as a purely financial instrument akin to the stock market or financial trading tools, something mostly detached from reality but with a possibility to make a buck. All those camps are missing the point.
Unfortunately, I have to briefly get a little technical to describe the basis of the problem. I will try to keep it accessible for everybody, because it is important to understand what crypto incentivizes, exactly.
Most cryptocurrencies, including Bitcoin and old Ethereum, use an algorithm called “proof of work” (PoW) to maintain the…
