I first heard about the bitcoin concept a few years ago, but sometime in January 2013, I received a call from Tim (a fictitious name) saying he started a company in the Bay Area and wanted talk to me about it.
I invited him to UC Santa Barbara for a meeting. I've known Tim for a while now but never met him in person before. He was a Stanford graduate and had an impressive resume. He had started a successful company in one of the applications of cryptography and was still running it. There was not a question in my mind that Tim would be very persuasive in his argumentation of the new technology he was working on, whatever it may be. I was excited to meet and talk to him.
He arrived after two or three days and told me that he had started a company that would mine bitcoins. He also wanted to make bitcoins more transferable, for example, one could use an Amazon-like e-commerce site to order "physical things" with bitcoins which is "virtual money." Bear in my mind, this is 2013, and only a few thousand people knew about it, as opposed to now. Today a 100 million people know about it and are considering investing in them.
Tim knew my background well; he wanted me to design high-performance hardware for bitcoin mining, some sort of bitcoin mining supercomputer. I accepted his proposal and started working on the project. In the ensuing eight months, I worked with his team either remotely from Santa Barbara or went to Palo Alto for a few days a month to design this "super-miner." The company had the hardware manufactured, installed in their site in San Francisco, and let it churn bitcoins non-stop (I presume) in the following months or years.
I have not been in touch with Tim's company since I finished the work in December 2013. The specifics of his company are not relevant to this article. The purpose of this article is to tell you about my observations on algorithms, hardware, energy consumption, and social structure of the bitcoin world. In this article, the message I want to convey is: stay away from bitcoin, as far away as possible.
Tim's company offered me either all cash or cash plus stocks or all stocks for my consulting and design work. Obviously, I could also have purchased bitcoins with my consulting fee. During the design process, I had to learn the algorithms of bitcoin to design the hardware. Moreover, the unusual properties of bitcoin also motivated me to learn economics and social aspects of this cryptocurrency.
Bitcoin on the rise
The price of one bitcoin in mid-January 2013 was about $16. A few days ago, bitcoin price exceeded $14,000. Imagine if I had taken $16,000 of my own money and bought 1,000 bitcoin in 2013, today it would be worth $14 million!
However, after carefully studying the bitcoin economics and social structure in 2013, I decided not to touch bitcoin ever. I never bought any bitcoin. The only bitcoin I ever owned and still own was given to me by one of my students as a birthday gift to buy a cup of espresso in January 2014. His gift was 0.01 bitcoin, which is presumably worth $140 now. It is still in my account and today, it could buy about 50 cups of espresso.
It looks like I made a big mistake not buying 1,000 bitcoins. Was I crazy not to buy 1,000 bitcoins in 2013 for $16,000? I argue that my decision to not buy bitcoin was wise.
Why? First, in order to invest, I had to locate an "exchange" that accepted cash and transfer other people's bitcoins to my name. After checking into what was available in January and February of 2013, I observed three big problems:
1. None of the exchanges looked professional or trustworthy to me. A lot was going on behind the scenes and some of them were completely unacceptable. Some exchanges were involved in illegal transactions, for example, drugs, prostitution, etc. In one of the exchanges, you could even (apparently) hire an assassin to have somebody killed, which perhaps was just a gossip. In any case, I could not be involved with any of such illicit-looking exchanges. As expected, in the later months and years, several of these exchanges were raided by governments around the world and were closed down. All bitcoins owned by people in these exchanges were lost or stolen (most probably an inside job).
2. The exchanges that looked somewhat trustworthy had very strange rules: You could give all your cash to them and buy 1,000 bitcoins in a few seconds. But, to sell your bitcoins and get your money back you were given only one transaction allowance (1 bitcoin) per month! This meant, they would take your money immediately, but when you want it back, they would only pay about 1 bitcoin worth of your money every month. At this rate, I could have gotten my money worth 1,000 bitcoins in 1,000 months or 83 years!
3. It was very easy to lose bitcoins, i.e., it was obvious the majority bitcoin owners were potential thieves (not an exaggeration). They were stealing passwords and digital signature keys of one another during transactions or hacking into the exchange servers to grab bitcoins or to do significant damage to the exchange. Even if an exchange was somewhat trustworthy, the social structure and anonymity allowed and rewarded straightforward thievery. This was worse than back-street gambling; its only advantage to a back-street operation being you could get robbed but not get your fingers broken. That's an advantage of the bitcoin network, I suppose.
I think you would now agree with me that my hard-earned $16,000 would definitely have been stolen by now and I would have been left with not $14 million, but zero, or minus $16,000 to be more correct. I would have lost all my money.
Does this sound incredulous to you? I just said my 0.01 bitcoin, which could buy 1 cup of espresso in 2014, could now buy 50 cups. You might be thinking that if my 0.01 bitcoins increased its total dollar value by a factor of 50, then 1,000 bitcoins would have too. If you think that way, you do not understand how scalability works. The economics of bitcoin does not scale up. True, my 0.01 bitcoins increased its value by a factor of 50, but my 1,000 bitcoins would have been stolen with a probability of 100 percent.
Buy it or not
In fact, one of the exchanges I seriously considered buying bitcoins from in 2013 was Mt. Gox, which was the largest bitcoin exchange at that time. Had I decided to invest my money in bitcoin, I would have chosen Mt. Gox in 2013. Would you like to know what happened to it only one year later? Mt. Gox declared bankruptcy in February 2014 and claimed that its 850,000 bitcoins and $27 million of cash were stolen. Its founder is currently in a Japanese prison and will not say where these bitcoins are (obviously stolen by insiders including the founder). Today, these bitcoins would have been worth $12 billion. There is no question that my 1,000 bitcoins would have been among these 850,000 bitcoins "stolen" from Mt. Gox. Let me repeat: Stay away from bitcoin.
Bitcoin is the first and the most notable cryptocurrency algorithms, but it's definitely not the only one. There are about 750 cryptocurrencies in circulation today. It would be a difficult, if not an impossible task, to study them all. Bitcoin still lives, even though thievery and insider intrusion is rampant. Many other cryptocurrencies, on the other hand, were not so lucky. Therefore, the question of "what about the other cryptocurrencies?" is easily answered: They suffer a worse fate than bitcoin. These currency algorithms are based on notoriously weak algorithms and their implementations are full of bugs which allow exploitation by hackers. Many of them are already dead and the rest are waiting to be hit.
A recent article studied the graveyard. There were 47 incidents in which the cryptocurrency failed, broke, and went kaput. The root cause of failure was server breach (16) while other factors (such as application vulnerability, cloud takeover, and protocol failures) totaled to 20, while some unknown factors (like an inside job) took out the rest.The biggest lesson is that you cannot trust these insiders. They are ready to run away with the money as soon as their morality threshold (!) is reached, which is significantly lower than you think.
Honestly, I am not bothered by other people losing money while gambling. Those who think they can multiply their money by 10 or 100, and end up losing all deserve what they get. But what bothers me is the bitcoin mining algorithm or more specifically its enormous energy consumption.
Bitcoin super-miner design
Now, I may sound very disingenuous here, since I just explained that I designed a bitcoin super-miner, and helped a company design the chip and install it in the computer that generated bitcoins.
Honestly, as soon as I started working on the design, I realized that the bitcoin mining spends way too much electrical energy. However, there were fewer bitcoin miners at that time, and due to the algorithmic aspect of the mining process, the energy per bitcoin was still low. Besides, I designed a very efficient bitcoin super-miner which spent less energy than any other bitcoin mining hardware at that time while being the fastest. Still, the company I built the super-miner for had to install new electrical wiring in order to install and run the supercomputer in San Francisco.
What is this all about? The bitcoin algorithm performs a particular cryptographic calculation called a hash function. This is a complicated mathematical function that receives 256 bits of input and produces 256 bits of output. During the process, it performs bit-level mathematical and logical functions, spending energy at each stage. The transactions (buying and selling bitcoins between people) and generation of the new bitcoins use this function over and over. Each transaction is recorded in thousands of accounting ledgers (files), and each one is scrutinized by a different observer. Each bitcoin itself is a file with a particular hash property. This file is called a blockchain since all of these processes are chained to one another.
The digital world gives the impression that everything is virtual and has no physical footprint, for example, an e-book seems weightless while a physical book is made of paper and ink which takes space and has mass. However, this impression is seriously wrong. The data storage and transmission, as well as computations (such as the hash functions performed over blockchains), cost energy. Every blockchain is a file that exists in many copies and computer resources are required for the calculation.
As the transmission and storage of the information increase so do the energy footprint. The size of the blockchain and its number of copies (stored in people's computers around the world) grew very rapidly. By mid-2016, its estimated size was 76 gigabytes. In December 2016, it exceeded 100 gigabytes and today it is nearly 150 GB. Also, we need to understand that there are millions of copies of this chain (data file) stored in computers across the world.
Furthermore, the relative measure of finding a new block (creating a new coin) grows exponentially. The difficulty factor was 40 in 2015, 100 in 2016, and is 310 now. The number of Tera (one thousand billion) Hash functions performed by people's computers in one second was 2 million in January 2017 but today it has reached 14 million.
This all means spending an incredible amount of electrical energy. How much exactly? It is estimated that today the entire bitcoin network (all miners around the world) has surpassed the annual energy usage of some 159 countries, including Serbia and Ireland, around 35 terawatt hours (TWh). The consumption increased by 30 percent in just one month. At this rate, the bitcoin electricity consumption will be more than the U.S. by July 2019 and the world by 2020.
There is something seriously wrong here. This madness cannot continue. What is being created with this much electrical energy has absolutely zero value. There is a perception of value expressed in thousands, millions or billions of dollars, but when the bitcoin network breaks down, everything will evaporate and we will be left with massive carbon footprint and huge energy bills in our hands. We will also have thousands of gullible individuals who had spent their hard-earned income on this "Ponzi scheme."
It is obvious that even if we tell everyone not to participate in this, some or most people will not listen to us. However, we need to act responsibly and not get caught in this web of self-deception.
*Currently, Koç has appointments at İstinye University (Istanbul, Turkey), Nanjing University of Aeronautics and Astronautics (Nanjing, China), and University of California, Santa Barbara.