Simply put, Bitcoin and similar cryptocurrencies are “mined” by fast computers (or servers) that run algorithms 24/7. When an algorithm successfully solves a given mathematical puzzle, a new Bitcoin is unlocked, and the value is credited to the miner. These “mines” can be massive enterprises. One analysis found that a firm called Bitfarms was generating over $300,000 in gross profit daily from such an operation.
Bitcoin’s Energy Consumption
While profits may be high for certain companies and people (nearly all of the cryptocurrency wealth is held by a relatively small number of people— most of whom got in on the bottom floor), the industry is not without high levels of risk and controversy. On a global basis, this mining activity is eating up enough electricity to power an entire nation of modest population size. It’s ironic that many young consumers who lean towards green products and sustainability are, at the same time, big boosters of and investors in power-hungry cryptocurrencies.
In fact, this mining of cryptocurrencies like Bitcoin is extremely dubious from an ecological point of view, despite the fact that mine owners are attempting to locate in areas with low energy costs and reduced-emission generation infrastructure. Servers guzzle electricity.
Until 2019, China was the world’s largest operator of crypto mines by far—one analysis found that China was, at one time, generating 75% of all Bitcoins. However, China’s government shut down all mining in response to this immense power drain in a nation that is still generating much of its electricity from plants that are burning coal under very dirty, undesirable conditions. (Much, but not all, of China’s crypto mining was done in regions with significant levels of clean, hydroelectric power).
Cryptocurrency Hacking Risks
Cryptocurrency fans often consider crypto and blockchain technologies to be revolutionary. In fact, the nickname DeFi, a popular nickname for this sector, (which stands for decentralized finance) sounds a lot like “defiance.” Crypto can be universal in nature (not controlled by any one institution), cross-border (not controlled by any one nation) and theoretically transparent in operation.
At the same time, however, crypto is unfortunately subject to vast losses to hacking and account takeover. Recent hacks of cryptocurrency accounts include incidents such as the 2022 Ronin Network heist totaling $614 million, the Coincheck hack of 2018 totaling $547 million and the 2021 Poly Network hack totaling $611 million. Funds are sometimes recovered—and sometimes not. A single hack may enable a thief to access the assets of thousands of users at once.
Since cryptocurrencies are virtual—exist only in the cloud, they are accessed and controlled only by the account owner’s username and password. The true identity of the account owner is generally not recorded or known, and the password or key to an account is vital for accessing its assets. There have been multiple stories of users who have lost their account information and therefore their assets, sometimes in the millions of dollars.
Links to Crime Networks
Cryptocurrencies are not only popular with millennials and people looking for alternative investments. They are also wildly popular with thieves, crooks and scammers. For example, they are the preferred method of payment for perpetrators of computer network ransomware—the practice whereby thieves, often located in Russia or North Korea, remotely lockup (encrypt) computer operations, even those of massive enterprises like hospitals and electric utilities, and hand over the decryption keys only after they have been paid off— sometimes to the tune of multiple millions of dollars in cryptocurrency.
Blockchain Technology Enables Crypto
Blockchain software makes it possible for groups to share, track and store data. Blockchain tracks and links transactions in “chains,” which are verified cryptographically into lists (known as “blocks”). The result is a consistently verifiable record of when and how transactions occurred, and thereby which account holds what assets as of a certain date. Blockchain is the technology that records ownership of Bitcoin and similar cryptocurrencies.
Assuming that the system or network hosting the blockchain is secure (which is not always the case), there is potential here to increase efficiencies. An open-source collaborative known as Hyperledger (associated with the Linux Foundation) encourages the use of blockchain in a wide variety of industries beyond the financial sector, such as manufacturing and distribution. Hyperledger envisions blockchain used in advanced industrial and information systems in order to create “smart contracts and other assistive technologies.”
Where to Learn More
This article is an excerpt from a newly published report Plunkett’s FinTech, Cryptocurrency & Electronic Payments Industry Almanac 2022.
This feature-rich report covers competitive intelligence, market research and business analysis—everything you need to know about the FinTech, Cryptocurrency & Electronic Payments Industry. Use this report to quickly understand major industry trends, access key industry statistics, and gain an understanding of top competitors in this space.
Visit the report page using the link above to learn more.
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