In this second instalment of the E in ESG series from Monochrome Research, we explain Bitcoin’s Proof-of-Work consensus mechanism, the source of its power consumption. An explanation of both endogenous and exogenous incentives for Bitcoin miners will also be given, and a breakdown of the Bitcoin mining industry’s position as a near-perfectly competitive market will be analysed.
It is often claimed that Bitcoin offers little use to a society that traditionally operates using fiat currency. Others maintain the perspective that Bitcoin is solely an investment tool used to generate capital gains or diversify a portfolio. Whilst the latter perspective may be valid, it is limited. Bitcoin can be viewed as a highly disruptive technology which may have the potential to evolve our financial system.
In this five-part series on Bitcoin and the environment, we aim to deliver a thorough overview and context of Bitcoin’s energy use and environmental impact. First, one must understand what drives Bitcoin’s energy use. From there we provide an overview of the current state of the Bitcoin Network from an energy consumption point of view, alongside important industry trends and metrics.
In this piece, we look at some of the risks of investing in Bitcoin that are beyond mitigation or are impracticable to mitigate, which we define as uncontrollable risks. Furthermore, conclusions will be drawn to determine whether or not these uncontrollable risks may become controllable in the future.
Despite first being launched on January 3rd, 2009, Bitcoin had no market value until over a year and a half later, first trading for around 5 US cents in July 2010. Just over 13 years later, a single bitcoin was worth approximately US$39,000 - a growth of just under 80 million percent (80,000,000%) since its inception.
It can be difficult to comprehend the concept of Bitcoin. Its nature is often shrouded in speculation, especially regarding its purpose and ramifications on the global financial system and society as a whole. This speculation breeds uncertainty about Bitcoin’s risks and the tools necessary to protect oneself against them.
As Bitcoin enters its second decade, it is opportune to reflect on its transformation from a monetary thought experiment, the first recorded transactional use being to buy pizza, into a fully-fledged financial ecosystem that has garnered significant interest, both from retail and institutional investors.
In a canonical July 2010 Bitcointalk.org forum post by Satoshi Nakamoto, Bitcoin’s creator, they said “Sorry for being a wet blanket. Writing a description for this thing for general audiences is bloody hard. There’s nothing to relate it to.” Because Bitcoin is so hard to describe, define or contextualise, people can barely agree on what Bitcoin is, let alone how to value it.
The unprecedented influx of demand for digital-asset investments has exposed limitations in Australia’s existing regulatory framework. As ASIC, AUSTRAC and the ATO work to implement an appropriate regulatory framework for these new assets, rapid investment continues into a space which is absent of significant regulatory oversight.