What is the real value of cryptocurrency? We know the stories about perfect ledgers and solving complex puzzles. Somehow this does not FEEL right. Is there a real story hiding behind the buzz? What determines the bitcoin price? And what is the position of the regulators on the subject?
The story we are told
Let us start with the official story. In 2008 an unknown entity used the name Satoshi Nakamoto to outline an idea of a decentralized digital currency. In 2009 the currency was implemented and started to circulate, released as open-source software. The currency is mined by solving a puzzle, and a distributed ledger called blockchain ensures that all the mined coins are accounted for.
Mining bitcoin is progressively harder, and the circulating supply is limited. As the coin is used more, its price goes up. There is no real way to determine the value of the coin. The conversion rate is extremely volatile. So as it can go up very fast, it can go down often faster.
Approximately here the common knowledge ends. Some people have some sort of understanding of USDT, crypto exchanges, and alternative coins. Many heard the word ICO. Still fewer people invested through all of these channels. And due to regulatory interest, even fewer people are willing to admit what they did.
I wish I invested in 2010
Due to a number of articles on TechCrunch and similar publications, many people in tech, finance, and poker communities knew about bitcoin as early as 2010. Most of us did nothing at all. I am included in this list. Some out of boredom generated several bitcoins, worth several cents back then. And they were amazed to see the price of bitcoin going up faster than anything we knew.
Still, most of us thought it was a folly. The main use of bitcoins in the early days was buying pizza and grass, occasionally weapons. The transactions were made via dark web website Silk Road. Things changed in 2013 with the introduction of bitcoin exchanges. A lot of money was made, with bitcoin worth growing from 13 to as much as 1000 dollars within a year but most of it was lost during one perfect cybercrime. The biggest exchange called Mt Gox was robbed, and most of the bitcoins in circulation disappeared during that single event.
During 2013 I began to follow cryptocurrency more closely. I noticed that the regulators in American, Russia, and China are also closely following the new developments of the currency. Recently some researchers explained that the entire x5 price rise in 2013 was generated by a single entity that had control of a huge amount of cryptocurrency. Rumors of 2013 blamed one of the big Chinese companies generating mining ASIC. Rumors claim that the ASIC were used to mine the currency for at least 6 month before the mining machines were sold to ordinary people.
In any case, in 2014 the bitcoin price was around 300USD. I considered buying a large number of bitcoins, but did not execute the idea. I still feel so dumb!
The dark web coin
I did not invest in the bitcoins simply because this was dirty money. In 2014 rumors say that it was used primarily by drug and terror organizations to settle large deals. During that time, a lot of dark money was operated by ISIS, and I felt that bitcoins are used to transfer money bypassing international borders.
My education and my job focus on finding patterns. So quite possibly I find patterns where there are none. Yet… In 2020 DOJ seized a lot of bitcoins that used to belong to ISIS. Some say that this is the way ISIS funded Paris attacks in November 2015.
While working on this article I discovered a source that roughly says the things I suspected back then. There are no proofs here. Just rumors…
The Russian crypto
In 2017 the crypto prices went up again, with bitcoin prices going from 1000USD to almost 20000USD in one year. Some of it was fueled by Etherium, a new coin introduced by a Russian guy Vitalik Buterin as early as 2013. Etherium allowed filing an ICO: an equivalent of IPO entirely financed by cryptocurrency.
A lot of companies were financed. The large exchanges financed through ICO generated healthy and highly valued coins. All other sectors followed a certain pattern. The pre-ICO investment often doubled during ICO, then the prices went up for a couple of weeks, and then they decayed rapidly as the companies raising ICOs did not deliver revenues.
This was a new technology, a new way of thinking, and a very new level of cryptocurrency vitality.
Why did Russians allegedly invest in cryptocurrency?
Is that simply a coincidence that the largest success of the Russian intelligence dates roughly to 2016? Russians successfully infiltrated in American infrastructures. Two intelligence agencies, let us call them “fancy bear” and “cozy bear” infiltrated via two different channels the American infrastructures, possibly stole Hillary Clinton’s letters, and heavily influenced the US elections in 2017.
Since the next elections closed in 2020, the expected result was rising prices of bitcoin in the first half of 2021. Which indeed happen. Why?
One plausible explanation is the Russian purchase of cyberweapons, allegedly including superweapons like SolarWind. Cyberweapons are purchased from private entities piece by piece, integrated into large projects, and deployed via corrupt individuals. Each of these steps can be easily done using cryptocurrency.
How do I know?
I do not work with any hidden sources, so I rely almost entirely on what is published online, my speedreading, and my research skills. I ask the right questions and put them into the search engines from time to time. Then I wait several years until finally, all the answers appear in front of me. Through the web.
Why do I think that this particular theory is justified? Because it is later partially admitted by US government agencies and partially by the independent press.
Do I think this is the only possible explanation? Hell no.
Financial manipulations of cryptocurrency
Some of the richest people in the world manipulate cryptocurrency. We know that in 2021 approximately coinciding with the short squeeze of the American hedge funds, Elan Musk invested a lot of money in cryptocurrency. Was he using the money to buy something shady, or was it an honest interest in new payment technology? Maybe a bit of both?
Elan Musk is definitely not the first serious entrepreneur to invest in cryptocurrency. One of the biggest owners of cryptocurrency are Winkelvoss brothers. If you do not know the name, these are the people who paid Zuckerberg some money to develop their social network idea back in Harward. They own Gemino Trust, which holds billions of dollars in bitcoins. Did they use their Facebook IPO money to manipulate bitcoin prices? Who knows…
In June 2019, Facebook saw an opportunity in cryptocurrency and proposed Libra currency. This proposal revived then sleepy bitcoin, with support from many industry leaders.
While possibly tech and financial investors manipulate the cryptocurrency price and anger SEC, they are using the cryptocurrency for new kinds of transactions. Which is probably a good thing.
Silicon-controlled price theory
Another possible theory for bitcoin prices is the control of mining manufacturers. Large companies like Bitmain generate several generations of advanced mining ASICs for multiple crypto coins. Each time silicon FABs introduce new energy-efficient processes, the mining equipment companies are among the first users.
It is an open argument whether Nvidia can be considered a crypto mining company. Several technological nodes of Nvidia corresponded to a sharp rise in cryptocurrency prices and global shortage of laptops. Correlation or causation? In 2017, probably causation. In 2021? Hard to tell…
All owners of cryptocurrency await a new generation of quantum computers capable of solving the crypto puzzles at a fraction of the current cost. They have the potential to drive current manufacturers of crypto mining companies out of business.
How does that work? Suppose each tech node is 50% more energy efficient than the previous one. Energy is the main cost of bitcoin mining. ASIC manufacturers need to test their equipment to ensure quality. Under the quality insurance claim, they organize large mining operations and mine a lot of coins. Then they release the mined coins, driving up the hardness level and associated cost of existing coins. Only then they release the new mining devices.
The environmental costs
The crypto mining activities have a huge environmental cost. A lot of energy is used for solving a meaningless crypto puzzle, which is actually mining. Mining activities are tuned for large operations: not every day a mining ASIC finds something useful, but if many machines are used this happens more often. For many machines, it is easy to optimize the energy costs and maintenance personal.
The investment in good equipment and location often pays off within a year. Good locations are locations with low energy costs and low environmental awareness. About 65% of mining currently happens in China. US, Russia, and Kazakhstan are responsible for 6-7% of mining each. Then Malaysia and Iran with 3-4%, and the rest of the countries below 1%. Bitcoins consume more energy than Argentina and Netherlands, and almost as much as Egypt or Ukraine.
The anti-efficiency of bitcoin mining is a part of the concept and algorithm. No tech can help it. Moreover, as we use more bitcoins the environmental effect will grow. This is a subject of global concern…
The bottom line
Dark web purchases, terror, cyberweapons, financial manipulators, environmental disasters… I did not even mention huge government corruption, scams and pyramid schemes, and SEC litigation issues, money laundering and tax evasion.
Cryptocurrency is definitely not something rosy. The technology itself is not evil. The way we use it… I guess we need to wait and see. Currently, the costs of lost opportunity not investing in cryptocurrency overweigh the risks of investment. It is a risky and highly speculative yet smart investment. But is it ethical?
Not sure. Deeply in the gray area I guess….