Here at Exodus we write a lot about everything that’s right with Bitcoin, however, Bitcoin isn’t perfect and it’s important to consider the good with the bad. In this article we’ll look at what’s wrong with Bitcoin, especially as it concerns the long term security of the network.
The Satoshi Coins
Satoshi Nakamoto invented Bitcoin and when he/she/they released the protocol, Satoshi was one of the first Bitcoin miners. At the time the Bitcoin block reward was 50 BTC so Satoshi quickly accumulated a significant number of coins. The exact figures vary, but most people in the Bitcoin community believe that there are about 1 million “Satoshi coins.”
These Satoshi coins are sitting in a wallet and have not been accessed since Satoshi left the Bitcoin community in 2011. Given that the market value at time of writing of this BTC is over $40 billion, the fact that they’ve never been spent is pretty incredible. They would make Satoshi one of the wealthiest people in the world, and that’s the problem. While the most likely case is that Satoshi will never access these coins, we cannot say with absolute 100% certainty that the coins will never be moved.
If someone were to access the Satoshi coins it could create some economic chaos in the Bitcoin ecosystem.
The first problem would be the selling pressure. At this point the market is assuming that the Satoshi coins are gone for good, which means that 5% of the Bitcoins that will ever exist are lost.*
*More than 5% of BTC is lost, however, it’s difficult to quantify this number. The 1 million Satoshi coins are easy to identify.
So if Satoshi came back and the coins moved, there would be concerns that Satoshi might want to sell these coins. This could, at least temporarily, crash the price of BTC.
There would be other concerns as well. What would happen if Satoshi tried to exert control over the Bitcoin network? For example, what if Satoshi said that he supported raising the block size of Bitcoin? That could lead to chaos and infighting in the Bitcoin ecosystem.
A resurgence of Satoshi could also attract renewed attention from governments. If Satoshi came back and identified him or herself, it’s theoretically possible that a few governments might want to prosecute him or her for inventing Bitcoin. Could the revealing of Satoshi’s identity change the legal status of Bitcoin?
Satoshi coming back and accessing his or her coins would create chaos in the Bitcoin ecosystem. It wouldn’t be the end of Bitcoin, and eventually the market would calm down, but most people agree that it would be better if Satoshi never accessed his or her coins.
Bitcoin Mining is Centralized in China
The centralization of mining in China is one of the most valid critiques of Bitcoin. Although it’s difficult to say for sure, it’s estimated that about 65% of Bitcoin’s hashrate comes from Chinese miners.
Anyone who is familiar with Bitcoin will know about a 51% attack, an attack in which a majority of the miners collude to exploit the network. The amount of hashing power in China is quite a bit more than 51% which is what’s so worrisome.
The theoretical threat is that the Chinese government could force all of the Bitcoin miners to execute a 51% attack on the network. Such an attack would seriously damage Bitcoin’s reputation and possibly end its chance of ever becoming a major international currency.
The Chinese government hasn’t given any signal that they would try to force miners to execute a 51% attack. Even by Chinese standards this would be a pretty bold move. If it was going to happen it seems like we might see a few signs first, such as,
- A full outlawing of Bitcoin and tough criminal prosecutions
- Bitcoin mining being made illegal
- Propaganda statements about crippling the Bitcoin network
We haven’t seen any of this happen yet which suggests that Bitcoin is safe for now.
Another factor is that the Bitcoin mining network is slowly decentralizing in terms of physical location. A few years ago a greater percentage of Bitcoin was being mined in China versus what’s being mined there now. In a few more years we’ll probably even reach the point where less than 50% of Bitcoin’s hashpower is coming from China.
Bitcoin Mining Uses as Much Energy as Denmark
It’s estimated that there are currently more than 1 million ASIC machines that are mining Bitcoin. Each ASIC miner uses about as much energy as a hair dryer and to maximize profitability most miners run 24/7. All of this mining requires a lot of energy, such that researchers have estimated that Bitcoin mining uses as much energy as the country of Denmark.
This energy usage has drawn some criticism. Critics outside of the cryptocurrency industry argue that Bitcoin is environmentally destructive and they’ve expressed a certain pleasure at seeing Bitcoin apparently start to fail (the 2018 bear market, when BTC’s price crashed).
One of the key factors that Bitcoin critics fail to appreciate is that renewable energy powers a lot of Bitcoin mining. For example, the reason Bitcoin mining is centralized in China is that there’s an abundance of inexpensive hydro power. This hydro power is cheap because there’s too much of it, and if Bitcoin miners were not using the electricity it would be wasted.
So while it’s true that Bitcoin does use a lot of energy, what mining critics usually fail to point out is how much of that electricity comes from renewable sources.
Can Quantum Computers Break Bitcoin?
Of all of the concerns in this article, quantum computing is probably the least serious.
The concern is that at some point in the future, an ultra-powerful quantum computer could break Bitcoin’s encryption and reverse engineer a private key. This would allow the owner of a quantum computer to steal Bitcoin at will, much like an expert safe-cracker can open a safe and take what’s inside.
Quantum computers are still in the early development phase and are years away from being fully viable. Their development timeline isn’t clear, with some people saying quantum computers are 5 years away and others saying it could be 20 years or more.
Even if/when quantum computers arrive, crypto developers already have plans to make Bitcoin quantum proof by upgrading its encryption mechanism.
Quantum computers breaking the Bitcoin network is pretty weak FUD. These advanced computers will not be ready for commercial use for years or even decades. By the time that they are commercially available the Bitcoin network will have already been updated such that it can’t be broken by a quantum computer.
Bitcoin isn’t Perfect…
Bitcoin isn’t perfect, but it’s pretty damn good… Furthermore, it just keeps getting better. Mining is decentralizing throughout the world and there are a lot of plans to power even more of the Bitcoin network with renewable energy.
Quantum computers won’t be here for years and there just aren’t that many people who think Satoshi is ever going to move his or her coins.
While every investor should understand what could go wrong with Bitcoin, at this point Bitcoin has proven itself quite resilient and it appears like the world’s most popular cryptocurrency is going to be around for years to come.