In recent months there has been a lot of talk about cryptocurrencies, especially bitcoin, that if prices are a bubble or that if, like gold, cryptocurrencies are a financial instrument to accumulate value.
But what is bitcoin?
It is an attempt to create a decentralized digital currency which, like any other currency, has to be scarce and have universal agreement that it is something that can be transacted with. The way in which bitcoin decentralizes the creation of the currency and the control of the transactions for which it is going to be used, is by allowing a group of entities to create monetary units (bitcoins) and determine if the transactions for which they are used are valid. , that is, if they have sufficient funds.
In general, a cryptocurrency is made up of two main components: the Proof of Work or PoW (Proof of Work) algorithm and the structure called Blockchain.
What is each element for?
The PoW algorithm poses a mathematical problem that takes time to solve and the creation of bitcoins depends on the solution. When the processing power destined to solve the PoW increases the difficulty of the problem is automatically increased, this keeps the production of bitcoins almost constant over time. Additionally, by design, bitcoin production is capped at 21 million coins, creating the required shortage.
The miners, machines dedicated to solving the problem posed by the PoW in exchange for bitcoins, need computing power to find the solution before the other participants; this gives them the right to create bitcoins. They are also the ones who keep the records of creation and transactions with bitcoins.
The Blockchain is a database where all the records of the operations made with the cryptocurrency are stored, that is: the creation of a bitcoin, to whom it belongs and the operations of buying and selling fractions of bitcoin. The grace of this database is that the records that modify a bitcoin contain a digital summary that is very difficult to alter from the previous record, which makes it computationally very demanding that previous records can be modified and allows multiple copies to be generated. When carrying out a transaction all copies are updated making it almost impossible to record fraudulent funds because all copies of the database would have to be updated.
The processing power of the bitcoin network uses enormous amounts of energy, so much so that professional miners are congregated in physical locations, such as Sichuan, in China, where electricity is cheap. The amount of electricity per year that the bitcoin network uses is almost the same as the Netherlands, if the bitcoin network were a country it would be in 33rd place according to its electricity consumption.
Currently, the most popular use of cryptocurrencies is speculative, followed by use in drug trafficking and ransom payments for data hijacking (ransomware). As has been expressed by both Christine Lagarde of the European Central Bank and Andrew Bailey, Governor of the Bank of England, bitcoin is a highly speculative asset and there is still no cryptocurrency that can be used as a widespread means of payment. From an energy point of view, creating bitcoins will consume even more energy by increasing competition among miners. Could it be that the new generations do not mind using bitcoin knowing that it consumes energy absurdly and that its support is totally speculative?