Katie Martin, a member of the FT editorial board, has noted the massive increase in the value of cryptocurrencies since the election of Trump in her column for that paper this morning and concludes:
Those of us still waiting for a clean articulation of what bitcoin is will remain frustrated. But it's getting harder every day to fight against the crypto revolution.
I think that is an entirely fair comment.
I am musing on the same issue right now. I have these questions and would appreciate precise answers if anyone knows of them:
- Who are the so-called Bitcoin miners?
- What legal form do they take?
- Who owns them?
- Where are they?
- Is their income taxed?
- Where is it taxed?
- What obligation, after mining, do they have with regard to the currency they create?
- What is the double entry of bitcoin creation, given I have seen it seriously suggested that it is a triple entry creation?
- What is the economic status of a cryptocurrency? Is it:
- What is the economic purpose of a cryptocurrency?
- Since the history of a cryptocurrency can be traced throughout its history - which is what the supposed open ledger guarantees - what are the so-called privacy advantages of it?
- Why is a cryptocurrency to be preferred to central bank-created currency?
- Why is a cryptocurrency to be preferred to a central bank digital currency?
- Will the crypto myth end in tears one day, as it has for some already?
I am genuinely curious.
I may not answer all comments. I am seeking to understand the arguments, which, as Katie Martin says, appear to be utterly opaque at presenting.
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You asked “What is the economic purpose of a cryptocurrency?”
The better question to ask is “is it useful compared to the alternative”? , and the answer is Yes for activities where the State might confiscate your assets if you trade in dollars or pounds. In the USA you can suffer from vicious Asset Forfeiture seizures if you are travelling with several thousand dollars in your satchel to just pay cash for a car from a private seller. In the UK the list of goods which are banned (khat, and all psychoactives by Theresa May) only gets longer and continuity Starmer plans to ban even more products.
Does anyone remember the Lib Dems saying that the khat ban would lead to a £25m loss of tax revenue from the import tariffs? It’s small beer for a country as a whole but it’s still real money. Government has avoided that tax by moving the imports to the black market where trade is done by crypto.
Crypto being useful is what gives it economic purpose, not the other way round.
So, the answer is cryptocurrencies are good for law breakers
Is that it?
I believe that’s Paul Krugman’s take on it.
You’ve stimulated my interest in blockchain again, so I’ve asked ChatGTP three questions so far –
What is bitcoin? ,
How can cryptocurrencies be taxed?
Are cryptocurrencies good for lawbreakers?
The answers are extremely long and worth reading, so I suggest that as blockchain is here to stay and cryptocurrencies abound, using Chat may help to answer some of the important questions and stimulate more debate here.
I will use that option.
Thanks
…with the caveat that a law breaker under the laws of one country is not necessarily a law breaker worldwide. It does have value when living under oppressive regimes, for example
Ah, the voluntary choice of applicable law that all you libertarian idiots take such delight in had to make an appearance, I guess.
Well not really as there’s a heck of a lot of law breaking for which crypto has no usefulness.
Crypto is useful for trade between consenting humans where the government has decided on the illegality of that trade. Or in the case of Asset Forfeiture – the government presumes guilt and lets you prove your way out of it at great time and expense.
As I said the vast majority of law breaking is not an area where crypto is useful, but I suppose greater police resource would be available if so much consensual trade wasn’t banned.
So, we get back to it, crypto is about law breaking – all of which will also inbvolve tax evasion.
Does it have any other purpose?
Musk is a fan of Dogecoin and it should be no surprise that the area he will control is Dept Of Govt Efficiency. I vaguely recall Trump at a rally making an off the cuff comment about how he could vanish the budget deficit through crypto in a second. Things really could get messy very quickly.
Not to mention that Musk is arguing that the United States’ central bank (the Federal Reserve) should be abolished. Would he then press for cryptocurrencies becoming the main medium of exchange in the country? All going to end in tears!
https://www.independent.co.uk/news/world/americas/us-politics/elon-musk-federal-reserve-donald-trump-b2646101.html
https://edition.cnn.com/2024/11/12/business/elon-musk-federal-reserve/index.html
https://fortune.com/2024/11/10/elon-musk-end-the-fed-independence-donald-trump-jerome-powell-resign-early/
https://www.mountbonnell.info/elons-austin/tech-billionaire-influences-cryptocurrency-market-musk-endorses-bitcoin
I think there is a serious risk that this attempt to close the Fed might happen
Mayhem would ensue
I find this a bit on the lazy side, frankly, but will try and provide at least the main saliant point regarding this.
Most serious Bitcoiners have racked up hundreds of hours of reading around the subject.
I’s suggest that you start by buying and reading the Bitcoin Standard for more comprehensive enlightenment.
Bitcoin serves the purpose of preserving any value you have managed to obtain in the course of your life, thus creating a mechanism for generational wealth creation, as opposed to the constant theft of assets in real terms as a result of uncontrolled inflation, which in turn is a result of the powers that be from continually getting their sums wrong and robbing value from the future.
IS that meant to be an answer?
Nope – looks like a deflection and a (sort of) justification (for bitcoin) to me. & the justification could be phrased as “helping the rich (and their decendants) get richer”.
That, I agree
Michael’s obviously coming from the ‘taxation is theft’ school. I doubt you’ll get much of an argument from him on this as IME they don’t have one.
Why don’t you set up a full node on one of your PCs? I imagine you’ll find the experience broadening. Start here https://bitcoin.org/en/full-node
it will be a little time consuming but you’ll be able to make your own judgements after and that’s probably a better option than trying to work out who’s reporting accurately and fairly and who isn’t.
Why would I want to do that?
Do I really want to be associated with something that seems to me to be fundamentally dangerous?
And if I wanted to investigate central banking why would I open an account with Barclays? What woud it tell me?
@Bill Kruse
IME = ??????
Who knows?
Here’s my simplistic overview, whilst not addressing specific questions
I think that everyone who has invented or reinvented money in any sort has always sought to facilitate trade but also to ensure that their own wealth accumulated.
The history of simple English coinage from King Offa onwards to the present day illustrates just how complicated the systems for controlling these financial arrangements have become as trade and taxation get more complicated.
Using conventional currency, the role of the state in infrastructure creation has required more state expenditure whilst the wealthy have sought to maximise the accumulation of assets whilst regulation lags behind.
I suggest that the invention of cryptocurrencies will result in wealth accumulation as states failed to keep up with the advances of this technology in order to extract adequate taxation.
There is no attempt to facilitate trade or liberate added value here
So wealth accumulation it is
But if there is no added value this is purely by wealth redistribution
BTB, IME= in my experience.
@ Michael,
Whatever “value you have managed to obtain in the course of your life” didn’t happen in a vacuum. It can’t be done, in any meaningful way, without using publicly funded infrastructure.
You want the opportunity to accumulate wealth, but want to evade (not avoid) the cost.
Reading between the lines here, it is obvious to me that people who want and support this simply want to avoid the rules that comes with state produced money.
Maybe we should let them set up their alternative system, and then from that they can fund their own legal and regulatory system to support it so if something goes wrong it can be sorted among themselves, leaving the rest of us – insulated from bitcoin – to carry on unaffected?
Those that want to replace fiat currency with bitcoin should be resisted and their motives severely tested. It usually is the usual ‘rule breakers’ who are not ‘rule takers’ and whose secret lust is just to appropriate state power for themselves.
If bitcoin has a place, then let it have a place. What I object to is those who advocating it as a replacement without giving the rest of us a choice.
What I find peculiar about bitcoin as well is that it s proponents are obsessed with its sitting value; its never about what the currency can do, what currency actually exists for – bitcoin is all about wealth accumulation to me and not about investment in things that we need.
At the end of the day, for all its faults, give me a state backed currency any day of the week.
The trouble is, the fallout will hit the real economy. Of that you can be sure.
So a means of avoiding paying tax then?
@ Michael
Your comment is trite nonsense! You talk about “uncontrolled inflation” but no mention of “uncontrolled deflation” both of which are the hallmark of cryptocurrencies! You need to go away and do a great deal more reading on the topic of controlling both inflation and deflation in the use of money!
Bitcoin is not a currency, but a commodity, an object of speculation. The storytelling “Bitcoin protects against inflation” is misleading.
crypto tokens are not at all suitable for portfolio diversification; the correlation to some equity indices is strong.
Bitcoin is not digital gold, rather digital copper, b/c it’s cyclical just like oil – Bitcoin can’t live outside of blockchain infrastructure.
crypto is about privatizing money, a decentralized #techno – utopia to break free of the “tyranny” of the fiat money.
PS: with the CO2 emission of a Bitcoin (“fake asset”) transaction, almost 1.9 million VISA transactions can be carried out.
Thank you, Richard.
When interviewing potential recruits or asked what I do, I have noticed youngsters and / or people of (south and east) Asian origin ask me about cryptocurrencies. I get the impression that the latter see it as an alternative to cash under the mattress and jewellery. With regard to young people, one gets the impression that some see a future of competing, private and electronic only currencies.
But do they know what cryptocurrencies are?
That is the questioin to which I need an answer
Thank you, Richard. In short, no.
Some answers:
Bitcoin miners are people who run an algorithm on powerful computers to validate new transactions on the blockchain. In the very early days it was possible to do it on a home computer, but nowadays miners typically use custom setups in huge server farms to run the algorithm as fast as possible (with consequently huge energy demands). Each miner is in competition with all the others to be the first to get an answer from their algorithm, and in return are rewarded with an amount of Bitcoins. That amount halves periodically as computer power goes up, with the idea of making the algorithm take about 10 minutes whatever computer power you use.
The blockchain is globally shared across all participating computers – the argument is that to subvert the blockchain requires more than half the total amount of compute power used to reliably inject bogus information into the blockchain and have it accepted by everyone.
Bitcoin enthusiasts believe that because the blockchain is encrypted and globally shared, it can’t be subverted by state governments and have their “money” taken away.
Bitcoin only has value because people believe/want it to have value, but it is very ephemeral. If the Internet stops working or no electricity, Bitcoin disappears. Of course that is true for the vast majority of money in the world, as it is mostly held as numbers in computers, but Gold for example, doesn’t have this realness problem, and if you have notes and coins in your pocket, they can’t suddenly go offline.
Lots of people have looked at the open source code behind Bitcoin, and one hopes that any attempts at subverting the software are caught, but there are plenty of examples in other open source software, equally well studied, where potential backdoors have been successfully inserted for a time. Still – unless you are a coder and prepared to study the Bitcoin code in depth, you then have to trust that the code you download to use to mange your Bitcoins.
Bitcoiners make a big play about trust – they don’t trust Governments and fiat currencies, but they claim Bitcoin and similar cryptocurrencies, are designed to be trusted. This is of course naive. At the end of the day, you can’t trust any computer or any software. For example, even if you write the code yourself, you will almost certainly use a compiler that someone else has written. You also will not have designed and manufactured all the components in your computer, each of which could have secret Government backdoors. Witness the recent Israeli coup with the pagers.
You don’t know who the miners are, you don’t know who you are transacting with, and you don’t know who runs the exchanges that you need to use if you want to convert Bitcoin into some fiat currency. At least with Sterling, issued by the Bank of England under command of the elected Government, you know actual people that you can petition and hold to account.
In saying all this though (obviously I doubt the utility of Bitcoin), I did own 1 Bitcoin back when it cost me about £500 (about 2016). I then sold it for around the same amount as it wasn’t much use to me. Of course, in hindsight now that 1 Bitcoin could today be turned into about £72,000 I slightly regret getting rid of it.
An important point RE the privacy argument is that the Bitcoin is not owned by a person so much as it is owned by a Bitcoin wallet. The ledger records the trades between the wallets.
A wallet is only owned by a person because they have the password, they have no assertable ownership of the wallet’s contents if they don’t have the password.
This is why a lot of people lose everything to hackers, because all the hackers need to do is change the password on the wallet and then the former owner has absolutely no recourse for compensation. Whoever owns the password owns the wallet owns the contents
So your argument is?
I don’t think you have one
Don’t call again
I didn’t take it that Tom was necessarily supporting `Bitcoin but pointing out one of its flaws and potential high risk of losing everything.
Why would you ask a left leaning message board where the average age is over 60 about bitcoin? What are you hoping to achieve? If you are serious about learning about bitcoin there are a vast array of sources of information out there but you have to be committed..the fact you chose this board as a source of learning suggests you are looking for no more than sound bites.
And as with everyone else of your sort, you give no clue to the answers
What is it with you trolls?
@David,
“Why would you ask a left leaning message board where the average age is over 60 about bitcoin?”
Because I would TRUST the answers I received from a left leaning message board where the average age is over 60!
I would also spend time investigating and researching the sources and/or references given by the many regulars posting here on Bitcoin?
I just wonder if you’re trying to put the cryptocurrency paradigm into a central currency paradigm. The two are (currently) completely different.
I don’t profess to understand crypto or have invested in any so my understanding is not deep but from what I can see the crypto community want a currency they can trade without
– central bank interference (devaluation etc)
– Gov interference (tax, sanctions etc)
– FEX fluctuations
Who mines it is not important to them. What’s important is
– that there is a finite amount that can be created (therefore devaluation by “money printing ” is not possible). The mathematical algorithm ensures this.
– Transactions cannot be doctored. Blockchain ensures this.
– Sufficient people believe in it and trade in it. The antics of the western “rules based order” (do as I say not as I do) has pushed this one along quite a bit. As has the belief that “money printing ” devalues your cash.
Essentially the questions you ask, pertinent as they may be, don’t apply in the crypto paradigm – yet. Enough people believe it. The transactions are open in the sense they are traceable (but not identified to who the transactors are) and crucially the currency is finite not printable.
As long as this currency is traded on the sidelines in its own paradigm it will grow. As soon as if it moves towards a defacto currency your questions start to become answerable.
Would be interested to see responses to these thoughts.
I think you have made totally relevant comments but my questions remain relevant because what matters is the interaction between the misplaced faith in it and fiat currencies, plus how Bitcoin actually functions, legal factors being considered in that.
I am by no means an expert, but I will give my interpretation:
Who? Anyone can be a cryptocurrency miner. As time goes on it becomes harder to ‘mine’ (computer guesses random numbers, and every so often ‘wins’), so there are likely very few people doing so independently. It will be either individuals with huge cash reserves to pay for electricity (or with the ability to move to where electricity is cheap), and who can purchase the computer hardware to make it work, which at this point is a huge investment. There may be some individuals taking part in ‘pooled’ mining, where people share their ‘wins’, but these are very loosely organised so it’s unlikely you will find any useful info on who owns these.
Tax? I’m not sure anyone is taxing it, other than tariffs on importing the hardware and taxes on energy use.
Obligations? A new win is reported and a new block is added to the network that records who won. that’s the only reporting needed. If a win takes place in a ‘pool’ then in theory the winner ought to split the finds with the other members of the pool.
Double entry? The way cryptocurrencies work is they have a distributed leger of transactions(each credit/debit entry is shared globally to everyone on the network), so I suspect it is double entry, but not organised in a very efficient way.
What is it? this question made me laugh a bit. It is obfuscated and unclear by design. While you’re making money, it can be anything you want it to be, and when the government comes asking, it’s nothing, so no need to regulate or tax. It certainly isn’t useful as a cash currency, because it is far too slow and cumbersome, but there’s nothing stopping you from using it that way.
Privacy? It is not anonymous, compared to what some people think. It is pseudonymous. e.g. instead of ‘Jane paid Tesco £5’, the leger says ‘abcdef paid wxyz £5’. So if you can figure out who one of the address belongs to you can investigate and reverse engineer the transactions. If you had access to one of the endpoints that converts crypto into real money, you could attach an address to a real person. I think initially this design was borne out of a mistrust of central banking, if everyone is accountable, fraud cannot take place. Some people don’t like this so they use ‘tumblers’, which is a way to allow fraud to take place. This undermines the traceability of the leger, though some techniques like ‘taint analysis’ can be used to continue tracking the flow of currency.
Why is it preferred? I don’t know. Lack of trust in government? Libertarian DIY mindset? Desire to avoid regulation? Sunk investment cost?
Will it end in tears? Difficult to say. I point back to the ‘what is it’ question. It’s not really anything, and what it is is entirely subjective. Maybe some people will offer insurance for it. Maybe some people will take securities or mortgages for it. Maybe some people have all their money in it, and make megabucks as people speculate on it. Maybe it crashes tomorrow and everyone loses everything. Maybe countries do what china did and ban it, making it worthless overnight. I fear that so many people are invested in it that at this point no-one wants to even think about that bubble bursting, so they’re just letting it grow and grow.
If any of this seems difficult to understand, that is exactly the point. It has taken on a cult mentality. YouTuber Dan Olson has done a lot of (very long) monologues attempting to explain many of the different tech cults of late, and on every level it is some sort of grift or scam.
Tyhanks
Appreciated
Why did China ban it?
Caveat: I’m not an expert nor a true believer by any means, but I made a good amount of money (enough for a small deposit on a house) speculating on various cryptocurrencies.
From the beginning I approached it as gambling on gullibility and hype cycles, and always tried to be careful by using a tiny amount of capital I was willing to lose. I took my initial investment back as soon as possible, and used the growth of remaining crypto assets into projects that would get a lot of attention and push within the weirdly messianic crypto community. During periods of hype bubbles it was impossible to lose money as long as you didn’t get greedy, and took out actual pound sterling. Some of my more clued up friends got involved with various projects and you could get the heads up on things that would be an immediate return if you got in early and left early. Braver, more risk tolerant people made an insane amount of money. The long crashes wiped a lot of people out; as soon as I saw television advertisements for various crypto exchanges I knew it was going to another dip. What has surprised me is how resilient the hype cycles are, the fact that they keep coming back stronger than ever.
I don’t thnk it has any positive practical purpose, other than perhaps sending remittances to poorly served countries (some of my Georgian friends send money back home through this mechanism), or bypassing sanctions. There are too many rug pulls, too much fraud, too many ‘market makers’ able to manipulate prices through short term pumping huge amounts of cash or access to popular media in the crypto space. The more governance you put in place to deal with the negative outcomes the closer you get to recreating the already existing financial and global payments system.
Thanks
Richard,
All the answers to your questions can be found with a modicum of research.
However it is a pleasant surprise that to find a subject that you are not yet a self proclaimed expert in.
I note you do not say where
I think it reasonable to conclude you have no idea what the answers are
I’m finding it interesting to note that even those who imply they know more than thee or me are avoiding the early questions you posed.
Answering the first question, for example, would open up further questions – for want of a better expression – on “a carbon tax”, on possible energy rationing, on server maintenance costs.
And my favourite question is one you haven’t posed: are cryptocurrencies (plural, note) limited in quantity, or limitless?
Good questions
Thank you
Bitcoin is supposedly limited
A crypto-currency is supposedly limited to ensure that it doesn’t go up and down like a yo-yo in large amounts – yet it does! So what lies behind the argument for cryptocurrencies? Hype would be the best answer!
‘Regular’ money is weird enough.
Bitcoin is off the scale……………
I will stay well away
Richard,
I could answer everyone of your questions, and I’m no expert (although my holdings have risen by 6 figures from the trump bounce)
Here is a starting answer to your first question found by a simple google search
https://www.bitcoinmagazinepro.com/blog/top-10-bitcoin-mining-companies-how-they-rank-by-hashrate/
But as they say in crypto DYOR (do your own research)
I think it reasonable to conclude that this is a transparent attempt of your at gaining clicks from the recent extra interest in crypto, masquerading as faux academic interest.
No doubt you will be an expert by Monday
Thank you
That answers precisely nine of my questions
I did not expect it to
Now, would you like to do so, or are the answers unknown to you? Let me know.
This ECB paper is worth reading despite controversy around it https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4985877
Abstract
The original promise of Nakamoto (2008) to provide the world with a better global means of payment has not materialized. Instead, the focus has increasingly shifted to Bitcoin as an investment asset promising high capital gains. Promoters of this investment vision put little effort relating Bitcoin to an economic function which would justify its valuation. While most economists argue that the Bitcoin boom is a speculative bubble that will eventually burst, we analyse in this paper the impact of a Bitcoin-positive scenario in which its price continues to rise in the foreseeable future. What sounds intuitively promising or at least not harmful is problematic: Since Bitcoin does not increase the productive potential of the economy, the consequences of the assumed continued increase in value are essentially redistributive, i.e. the wealth effects on consumption of early Bitcoin holders can only come at the expense of consumption of the rest of society. If the price of Bitcoin rises for good, the existence of Bitcoin impoverishes both non-holders and latecomers. While previous discussions on the redistributive effects of Bitcoin assumed that badly timed trading was a necessary condition for losses, this paper shows that neither poor timing of trades nor holding Bitcoin at all are necessary for impoverishment under a Bitcoin-positive scenario.
Thank you
An invaluable contribution
I’m new to crypto but my understanding is that it is taxed as CGT in the UK. And apparently Coinbase (large platform for crypto trading) report to HMRC.
That’s about as much help as I can be currently but good questions that I’m going to try and find the answers to myself.
I know how Bitcoin once in use is taxed
It is the creation that I do not know about
Sorry, that’s me not linking things up in your questions.
Apparently cryptocurrency is treated as property by HMRC. When it’s mined it’s subject to income tax, so there are different rules depending on whether you are an individual, company etc.
Try this link – you’ll be able to tell better than me whether or not it seems reliable.
https://www.blockpit.io/en-gb/tax-guides/crypto-mining-taxation#:~:text=Mining%20rewards%20are%20tax%2Dfree,depending%20on%20the%20income%20range.
Thank you
Appreciated
Richard
What part of DYOR do you not understand?
If you cannot do that then I am available for consultancy if you can afford my rates
Your arrogance assures me that you have nothing useful whatsoever to impart
I’ve done hardly any research, but to this economist’s mind (not boasting, just stating my profession) it seems that Bitcoin is simply another derivative/derived product to be gambled on via the markets.
The actual usage as a means of exchange would seem to only occur on the black/unregulated market – which has a significant whiff of illegality.
Much to agree with.
There is something that I’ve just remembered after my earlier comment (not sure if you’ve seen that yet). In regards to currency creation, There is one facet that differs wildly from traditional money. There is a concept of something called a ‘fork’. This is when someone wants to issue some variation of a cryptocurrency (e.g. they want to make a ‘newcoin 2.0’ that differs in some way from ‘bitcoin 1.0). They create their new cryptocurrency, and re-use the whole blockchain up until that point, which they can do because it is just data. Theoretically, they’ve just duplicated all the wallets that store currencies. All the users that had one bitcoin now has one bitcoin and one newcoin, and can use them as they see fit.
It would be a bit as if Scotland decided one day to make a new currency by asking banks to duplicate everyone’s accounts but mark the denomination as Scottish pounds, but letting them still have access to their old accounts in pounds sterling. Which to me seems like an insane way to run an economy, but apparently it works for cryptocurrency. I don’t know how they avoid massive deflation.
Misinformation and hype lets peopole think this is added valoue, not detraction
Thanks
to paraphrase Gary Stevenson: The people that create and sell crypto currency are incredibly rich people who use the real money you pay them to buy your mum’s house. https://www.youtube.com/watch?v=Llrs7herILg
Crypto in my opinion is essentially either gambling or a way to conceal money.
Anyone claiming they’re buying crypto as an alternative to pounds is likely not being truthful. In betting terms, it attracts the same crowd who use tech or workplace resources to buy concert or sports tickets and then resell them quickly for profit.
Thanks
There is another way to think about the issue, when you ask if it is “good of law breakers”. It is implied in Hiromi Taniguchi’s justification “where the State might confiscate your assets”; “confiscate”, suggests illegitimate, but it is not illegitimate for a State (examples offered – Pound Sterling, US Dollar) to tax or otherwise place restrictions on the sovereign currency it issues, and is entitled to redeem. The implication of cryptocurrency, it seems to me is to establish the idea of a private currency (all tax or control is illegitimate confiscation). It’s purpose seems to be to provide a currency that, in opposition to all State currencies is owned; i.e., is simply a form of private property. I have made the point before (nobody is ever interested!), that you do not own the money in your bank. It is an IOU. It can be redeemed (or taxed) by the Sovereign issuer; the State (the BoE and Treasury). The redemption is theoretical, but the principle is that the ultimate owner of the IOU (the currency) is the State, not the individual. Cryptocurrency seems to me to be the attempt to privatise currency. It follows that it effectively undermines the real foundational principle of the modern State; which is built on its fiat currency.
There appears to be something deeply flawed in cryptocurrency, for several reasons. Since the ownership is private to the individual, there is nobody to guarantee or underwrite it. The State currency is secure, only because the state alone can guarantee it, and that means only the State will redeem the IOU, no matter what; because the State is the sovereign (sole) issuer of the currency. Trust in currency is built on that foundation of sovereign issue, taxation, redemption and guarantee.
Cryptocurrency is not a sovereign issuer, but a private owner of essentially (in principle) a private currency; a direct extension of the Lockean theory of property to the last vestige of individual ownership even Locke did not propose – to replace the State. It is not clear that it can even be a coherent idea. The idea of a private currency is a little like a private language. The philosophical problem of a private language still circulates around Wittgenstein’s exegesis of the proposition, first drafted over seventy years ago. The philosophical issues are so deeply unresolved, so trapped in Pyrrhonian hyper-scepticism, paradox or confusion as to be intractable for any philosophical mind wise enough to avoid it.
John
I agree with you on fiat currency – completely
And I agree that you highlight correctly the inherent philosophical and so political economic conflict in this
I much appreciate this
Richard
Most interesting post and threads. as an economics dunce I would add just one word: Tulips
Agreed
Bitcoin mining essentially involves solving a cryptographic puzzle based on a hash function. The hash function used in Bitcoin is SHA-256 (Secure Hash Algorithm 256-bit). A hash function takes an input and produces a fixed-size string of numbers and letters, which appears random. The challenge for miners is to find a specific output, known as a hash, that meets certain criteria.
The puzzles are a combination of non-linear equations and complex bitwise operations that exhibit chaotic behaviour but are deterministic in behaviour so each unique piece of data gives the same result. So, the SHA-256 hash function always produces a 256-bit (64-character) hash and if you use “Hello World” as your data input, you will always get the identical 64 digit answer. Change the input to “Hello world” and the output will be completely different in an unpredictable way.
The nature of the algorithms means it is not possible to work out the input when given the output.
To find a bit coin you have to hit a target number with a significant number of leading zeros, in binary representation, which is determined by the networks difficulty target. This takes
When a miner finds a valid hash, they broadcast the new block to the network and other miners verify the solution.
Worldwide the number of hashes calculated per second is just short of 700 x 10^18 which requires an enormous amount of computing power using an enormous amount of electricity and producing an enormous amount of waste heat!
The spanner in the works, so to speak, is the advent of quantum computers which may limit the lifetime of cryptocurrencies as the security required would be too easy to breach. Oh the joys of quantum entanglement!
I get the hash requirement
I also like the idea of the hash code being breakable
But the real question is, who sets the question the miner has to answer, and what gives them the authority to do so? Do you know?
The question the miner has to answer is built into the design of the crypto algorithm. Anyone can attempt to solve the problem, and the faster you can do it the more currency you obtain for yourself. Hence the arms race of ever more powerful computers to solve the algorithm. It is all a catastrophic waste of valuable resources.
Wrong
Someone sets the question
Who?
As a computer engineer I understand the concepts of how cryptocurrencies work, but I’m not going to try to expound here. But if I were to offer an analogue, I would suggest c17 tulips. The only reason anyone buys is that they hope to sell in future at a higher price.
Note this implies that the value of crypto is always measured in terms of a fiat currency. Crypto currencies carry no intrinsic value, only a speculative one.
As an example, I believe there are car dealers who will accept crypto as payment for a vehicle. But I guarantee they will not publish a Bitcoin price list, because it has no stable intrinsic value. They will convert the fiat price to Bitcoin at the moment of the transaction. These conversion rates change minute-by-minute.
But as a general means of exchange for transactions, as has already been pointed out, the energy use is off the scale, and increases with time, by design. It’s therefore economically unfeasible.
I don’t see it ever being a replacement for fiat currency.
Much to agree with
That’s my take as well. The supposed ‘value’ of bitcoin is measured in dollars, just like gold. I do have a friend who bought in at about $15 and yes he is now a millionaire – Provided he sells! This same friend tried mining as well a few year ago, but stopped after he got his first electricity bill
Rick – The complexity of this technology and it’s ramifications are difficult for me to comprehend, so I’m relying on Chat for answers to some of Richards questions and others arising here, so –
Bitcoin’s network, which relies on proof-of-work (PoW), is the largest energy consumer among blockchains. As of 2023, Bitcoin mining consumes an estimated 80–120 terawatt-hours (TWh) per year, equivalent to the energy usage of some mid-sized countries
Ethereum switched to a proof-of-stake (PoS) system in 2022, reducing its energy consumption by over 99.95%. PoS relies on staking rather than energy-intensive mining, and thus Ethereum’s current energy footprint is drastically lower than Bitcoin’s—estimated at under 0.01 TWh per year.
If all the world’s countries developed blockchain Central Bank Digital Currencies (CBDCs) the best estimate of the energy required to run the global economy, in a realistic, energy-efficient implementation, the energy required to run blockchain CBDCs worldwide could be around 10–30 TWh per year. This would require careful design choices emphasizing Proof-of-Stake consensus, Layer 2 scaling, and selective use of private or permissioned chains. If done optimally, the global economy could incorporate CBDCs without a significant impact on overall energy consumption, especially when compared to today’s digital banking and transaction infrastructure.
Firstly, how can I know that Chat is correct? And as with all new scientific & technological advances we will never know the unintended consequences until too late.
I would prefer to see all this intellectual effort and energy consumption being used to resolve child poverty and climate change….
I agree with your conclusion
I’m very old-fashioned: my current thoughts:
Lack of trust in the global financial system is one reason why cryptocurrencies have become popular. In 2024 there were 23,000 different currencies, with a value of $2.3 trillion, equivalent to 2% of global GDP.
Their big attraction is that they are free from regulation and taxation, which attracts people who don’t want the government to know what they are doing. They are not a useful contribution to the economics of kindness. They are a Ponzi scheme, and they have hurt millions. They are like the Dutch speculative tulip craze of 1634, when the best bulbs traded for $750,000 in today’s money before prices collapsed, leaving people bankrupt and broken.
They are also a climate disaster – a single Bitcoin transaction uses more than power than the average American household uses in ten weeks, and the cooling fans in crypto-mining stations are very noisy and distressing for neighbors. If digital crypto-tulips were ever to displace real money in any significant quantity the stability of the entire economy would be at risk, since there are no controls over their creation or value.
A digital currency produced and regulated by the central bank might increase technological efficiency, reduce the risk of fraud, and increase trust in the monetary system, but it might also be used to end the use of cash and create a digital dictatorship, which is clearly an undesirable outcome.
Thanks, Guy
I don’t understand the topic one “bit”, but:…
I did wonder myself about quantum computing undoing the whole thing as it will undo current concepts of computer security and encryption because it can crack encryption so easily. I’m sure the Tony Blair Foundation has a plan…
Secondly, on digital dictatorship, 2000 years ago, a Hebrew-Christian prisoner of conscience, from the Roman province of Palestine, held in exile on the Isle of Patmos, by the Roman occupying power, wrote (ironically using a v popular form of coded language called apocalyptic to beat the Roman papyrus-surveillance tech of their day), about the evil financial potential of digital dictatorship.
https://www.biblegateway.com/passage/?search=Revelation%2013%3A15%2D17&version=CEV
He was talking about total power over trade, buying and selling, and how it could be used for malicious control, something that the digital age has now made possible, and which in certain ways is already happening (try donating money for Gaza or Lebanon and remitting it via HBOS Mastercard or from an HBOS group personal bank account account, something I struggled with for 12 months).
Good luck with your questions Richard.
I have one too.
This hash problem solving task that underlies the whole enterprise – why?
Who needs to know the answer to whatever the mysterious question is (in the real world)? It must be a damned important question, like the meaning of life, the universe and everything or how to feed the word or sort the climate emergency? I thought Douglas Adams had already done that one, and the answer was 42?
What 21st century real world question IS the hash-task answering?
Couldn’t I just say, “Guess how many times I had kippers for breakfast in 2022? 1 “Kippercoin” per correct answer? (The process could be called “smoking” Kippercoin, and use sustainable quantities of renewable woodchips).
🙂
I don’t know a great deal about cryptocurrencies. As a software engineer I did take a look at them some time ago to see what all the fuss was about. I’ll share my thoughts for what it’s worth and try to answer some of your questions.
The first thing to note is that you should separate blockchain and cryptocurrencies. They are separate technologies. Cryptocurrencies use blockchain technology. A blockchain has legitimate and potentially groundbreaking uses. (Cryptocurrencies is NOT one of them) As an example (and I forget the details) a few years ago a private blockchain was used to facilitate a shipment of goods between countries with all the documentation etc held on the blockchain reducing friction between customers, shipping agents, customs agents, lawyers etc.
• Who are the so-called Bitcoin miners?
Anyone can be a be a miner. You should view them as a distributed central bank creating the currency. They are beholden to no one
• What legal form do they take?
Individuals, groups, corporations etc they really don’t necessarily have a legal form
• Who owns them?
Again as they can be individuals etc No one owns them no one controls them as such although the big Bit coin miners
• Where are they?
Distributed around the world. There are some major “server farms” in Russsia, China and other places.
• Is their income taxed?
Don’t know but probably not. There “income” is the creation of the currency. If it is taxed at all it will probably be when converting it to a fiat currency. If it remains as a cryptocurrency it probably won’t be taxed.
• Where is it taxed?
Don’t know but possibly in the users jurisdiction. If it is taxed at all.
• What obligation, after mining, do they have with regard to the currency they create?
Don’t really understand the question. Sorry.
• What is the double entry of bitcoin creation, given I have seen it seriously suggested that it is a triple entry creation?
Not qualified to comment. As I said earlier it seems to me that you should view the creation as a distributed central bank.
• What is the economic status of a cryptocurrency? Is it:
o Currency?
o Another asset?
o Just a piece of code?
o A chimera?
o Something else?
As a currency it is in my view a reversion to a kind of gold standard as the creation of currency is not done “at will” It can only be created a rate which is governed by computing power and the resources necessary to provide that. Similar to having to physically mine Gold to add to worldwide currency under the gold standard ( I might be displaying my ignorance here but it’s my understanding of the gold standard)
It can also be viewed as an asset traded on and an exchange and this is one of its major downsides. I will come back to that point
• What is the economic purpose of a cryptocurrency?
To hide your transactions either for nefarious purposes or for privacy concerns. Also as I mentioned earlier to restrict the creation of currency and prevent devaluation.
• Since the history of a cryptocurrency can be traced throughout its history – which is what the supposed open ledger guarantees – what are the so-called privacy advantages of it?
Whilst every transaction can be tracked all the way through the ledger. The identity of the transactee is not easily available because it is the Public Crytographic Key that is stored in the ledger. The individual retains the Private Crytographic Key. This provides anonymity. This may be come a vulnerability which I will come back to.
• Why is a cryptocurrency to be preferred to central bank-created currency?
See above about privacy etc
• Why is a cryptocurrency to be preferred to a central bank digital currency?
I really don’t see why central banks are interested in this. As You have pointed out many times 97% of money is just a record in a digital ledger at the bank. A backdoor to going back to the Gold Standard maybe?
• Will the crypto myth end in tears one day, as it has for some already?
I believe it will end in tears. I regard these exchanges trading the currencies as Ponzi schemes. They rely on somebody else being a willing buyer of something that produces nothing. Even a Gilt produces interest. Conspiracy theories abound that exchanges are subject to price manipulation by major holders of the cryptocurrency. I have no knowledge whether or not that is true but I wouldn’t be surprised.
The main reason that I think it will end in tears, is advances in computing. Creation is dependent on a time consuming solution to a cryptographic problem, with its privacy maintained by cryptographic keys. Advances in quantum computing will trash that. Solving the cryptographic problem will be instantaneous as will be the breaking of the encryption of the cryptographic keys. This may be some time away but quantum computing is happening in the lab. How long will it take to become commercially available remains to be seen.
People have expressed concern over energy consumption. That will fall with quantum computing. That will be in the future. In the meantime, the planet burns. Then the limited creation of currency will also disappear. We could well do without the nonsense of cryptocurrencies. Blockchain technology, on the other hand, may, and I repeat may, have some legitimate uses. Again it is hard to see how that would survive quantum computing.
I note a further question you have asked in response to comments “Who sets the problem to be solved and what gives them the authority to do so” I don’t know but that is an excellent critical question!!
All of this should not be taken as gospel. Just trying to answer your questions with my best but limited understanding. Hope it helps.
Thank you
I suspect the unspoken appeal for central banks is facilitating covert dedollarisation. Developing CBDCs give them the chance to prepare to dump the dollar without making that too obvious. So much for America then. The buck stops here… or hereabouts.
I think that is pure speculation
Bitcoin can be used for crime, just as cash and indeed any currency can.
It’s original purpose was to create a peer-to-peer digital currency independent of any bank or central authority.
The gist ever ‘blocj’ in the Blockchain that is Bitcoin contains a quote from the Times
“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”
Clearly a dig at the failure of the banking system.
Ultimately bitcoin, and the other cryptocurrecies are a digital ledger that records all transactions of the currency on multiple identical and tamper-proof files on multiple computers. It is de-centralised, not owned by anybody.
Sadly the lofty ideals if a currency for all has been subverted by greed and fraud of many actors in the space.
Like all money it is only valuable if many people say it is.
If we stick to bitcoin the question is purely a mathmtical one. It is a hash of the currently agreed head of the block chain.
The algorithm runs on consensus. So in essence a majority of bitcoin miners need to agree on what the new head is and who gets the fee. If there is a disagreement then it can cause a fork
This used to be a lot more democratic, but now huge conglomerates do most mining and can keep decisions in their own interests.
As an example, at one point bitcoin was being mooted as usable currency. You could buy beer or pizza with it. Some problems would need to be solved to make this scalable and they make mining bitcoin less attractive so didn’t happen. It became more of an asset class investment. Slower transactions with higher charges.
I’m by no means an expert but I’m happy to answer specific questions.
OK, please tell me who sets the question that miners have to answer, and then awards the bitcoin?
From reading the questions and some of the responses it’s clear that you should perhaps go and spend some time finding out about BTC and crypto in general. To answer the questions you have raised fully and meaningfully would take a lot of time. Your question about the bitcoin miners being an example – many bitcoin miners are publicly traded companies ie Marathon, Cleanspark and Bitdear to name but 3. I have a small mining rig which I’ve bought as an experiment and to find out how this all works. Similarly I also host a bitcoin node, ie a small computer that holds a record of the Blockchain transactions as they are recorded and all previous transactions back to day 0. There are loads of resources out there on bitcoin and no shortage of proponents either on YouTube etc. The bitcoin white paper would be 1st. One book worth reading is The Price of Tomorrow by Jeff Booth and whilst it’s not about BTC per se it is relevant as to why digital currencies will become the norm. The other thing to consider is the rise in AI that we are experiencing and will continue to experience. The AI will need and use digital currency for transacting in the future. It’s going to happen whether we like it or not so worth researching.
I love the fact that people with supposed Bitcoin knowledge are so patronising and simultaneously never answer a question in any meanigful way.
Why is that?
This is part of the cult mentality they are trapped in. They don’t want you to (as they would say) ‘beg’ for info, and will often repeat the phrase ‘do your own research’. (Though a few enterprising individuals will offer to sell just enough advice to hook vulnerable people into buying more advice). People stuck in crypto do not want anyone to be critically analysing crypto, as you are attempting to do, because peeking behind the curtain reveals just how nonsensical the whole thing is. The obfuscation and confusion is a central part of the scam.
I am already inclined to agree
“Why is that?”
Because people are not essentially rational about purposes (the ‘why’ question). I have argued before; we are not masters of our technology, but we are the servants of the dominant technology of the age in which we live. Politics is not a leader, but a follower. Humans fall quickly into the thought processes required of the ‘machine minder’ (which they readily do because they fear they will be left behind, and are persuaded that by becoming the unconscious servant of the technology, it is serving them – when they are serving it). The questions people ask of the dominant technology, the understanding they seek is not determined for them, by whether they are in any real sense the masters of what THEY are doing with the technology (a question they invariably never ask); but rather, at best they seek to understand how the technology works, or what it does, so that they can fit in with what the technology offers, and perhaps gain from it (the thread is replete with examples). They presuppose the technology is for them, when in fact its main purpose of the technology is to use and exploit them (the extent depending on how much commitment the exploited apply in order to extract something out of it for themselves). It is all second or third order rationalism. The technology is their master. So out of touch or relevance is politics, that the public never seeks politics to challenge or ensure anything; until the conditions are so bad for so many; that there is a backlash from those exploited most – but always the backlash is too late. Politics itself has succumbed to the power of the technology. It is inescapable. Real reform is impossible; until it is replaced ay a technological revolution: never a political one.
That is a very pessimistic view John
I admit to being more optimistic
My response is not even remotely patronising. You have asked a number of questions and you clearly state that you want “precise answers” the answers to many of your questions are long and technical depending on how far you want to get into it.
You say you want “precise answers” so if you really want “precise answers” to your questions my response is suggesting that you get off your butt and go do some research. If all you want are glib responses and opinions then you’re getting several of them on here. You’re providing many of them yourself.
As I thought, you are a troll.
Who are the so-called Bitcoin miners?
The largest bitcoin miners can be seen here: https://companiesmarketcap.com/gbp/bitcoin-mining/largest-bitcoin-mining-companies-by-marketcap/
What legal form do they take?
From the list it would appear they have typical company structures.
Who owns them?
Riot Blockchain, for example is listed in Canada, so shareholder analysis would be needed. Simple research can identify who owns these companies.
Where are they?
As above
Is their income taxed?
They appear to be standard company structures, so presumably theyre taxed just like any other company is.
Where is it taxed?
As per jurisdiction.
What obligation, after mining, do they have with regard to the currency they create?
I dont know.
What is the double entry of bitcoin creation, given I have seen it seriously suggested that it is a triple entry creation?
I dont know.
What is the economic status of a cryptocurrency? Is it:
Currency?
Another asset?
Just a piece of code?
A chimera?
Something else?
Oof. This is basic and you need to understand what the blockchain is first. Or read the Bitcoin whitepaper by Satashi Nakamoto to understand it. In its most basic terms, it IS code, but its distributed across a ledger and cannot be tampered with. Every blockchain has a record of every transaction recorded so it cannot be tampered with or altered. It is undeniable truth. That you made a transaction on the 3rd November 2022 for £678 (for example) will remain there forever and it will never change. The ‘currency’ or ‘digital asset’ is what you use to transact on a blockchain. Bitcoin isnt very good for currency or trade. It was the first one essentially, and is used as a store of value, like gold.
There are different blockchains for different purposes. VEChain is a blockchain that tracks assets through the supply chain. XRP is a digital asset that enables international cross border transfers without the huge fees.
What is the economic purpose of a cryptocurrency?
AS above
Since the history of a cryptocurrency can be traced throughout its history – which is what the supposed open ledger guarantees – what are the so-called privacy advantages of it?
Everything is public!
Why is a cryptocurrency to be preferred to central bank-created currency?
There are many discussions among central banks to adopt a cryptocurrency for CBDCs. XRP is at the forefront of these discussions and has already implemented a CBDC in Palau.
Why is a cryptocurrency to be preferred to a central bank digital currency?
Will the crypto myth end in tears one day, as it has for some already?
Crypto is not going away. It will change the world. There are so many examples of how it will improve and revolutionise industries. You can run contracts on the blockchain. e.g. Colombia has put its ‘land registry’ data on a blockchain. Any asset can be put onto a blockchain. Imagine pay as you go insurance contracts each time you drive. Read more here: https://builtin.com/blockchain/blockchain-applications
Thank you, but this feels like you are selling the line or have fallen for it.
The idea that everything about Bitcoin and other cyprtocurrencies is laughable, for example.
Totally opaque to me, but reminds me of Milk Quotas, which were part of my work environment once.
I know some people who cashed in their milk quotas, the most valuable part of their small family farm, and retired on it.
Eventually they disappeared, because govt emptied the milk lake. No, that doesn’t make any sense. They used to be REALLY important once. Now they are a quirk of EU history.
Agreed
I remember them
I’ve been waiting on your take on Crypto for a while. Here is my take from my point of view.
I am a Bitcoin Miner and additionally heat my home and provide hot water with the waste heat. I mine in a pool for a share of the mining proceeds as mining on on my own is statistically very very much against me.
The legal form for me is both in my Gemini Account (FCA Regulated Exchange) they hold my pay-outs from the mining pool. At this point my mined BTC is now no longer anonymous.
And secondly when enough has accumulated I transfer the BTC to an offline “Cold Wallet” in my case a Leger Nano. This is for security reasons as now my BTC cannot be moved unless I sign the transaction or the Exchange goes bust (Think FTX). IN ALL cases my BTC remains on the Block Chain for everyone to see.
I own the keys either in conjunction with an exchange or solely via a cold wallet. I own no BTC I can only move/send it by putting a transaction on the block chain by signing it with my private keys. The recipient gets the control of this BTC after it has been verified by other miners and the winner of that mined block gets to put the new ledger into the chain. The winning Pool receives currently 3.125 BTC and Transaction fees as a reward.
The BTC is on the block chain but I have the Private keys to authorise a payment or a sub to you if you had a wallet address.
I pay income tax as Miscellaneous Income on the mining proceeds and if I keep the BTC it is subject to capital gains tax.
I’m not clear about or understand the next two points ” What obligation, after mining, do they have with regard to the currency they create? ” Miners have no obligations after mining. Other than the Hash rate contributing to keeping the Ledger accurate and protected
AND…….
“What is the double entry of bitcoin creation, given I have seen it seriously suggested that it is a triple entry creation?” I don’t understand what you mean here.
I regard BTC primarily as an Asset, but also to a degree as a currency as I can and do spend it in my local shops using my Pre-Loaded Mastercard who convert to local currency on the fly. Very handy on tour in Europe due to it’s low costs.
I find the “no need for permission” the most compelling reason for using it
I think this also answers your point on preference to a CBDC. It’s not anonymous if criminals think that is what its provides they are dead wrong.
Gambling and speculation is just that. BTC is the least corruptible of the cryptos out there and so long as enough of us mine pretty hack proof even by bas state actors. I hold i as a mix of assets.
I think the current chancellor Rachel Reeves may come into a few Billions of BTC in the near future.
https://www.telegraph.co.uk/money/investing/stocks-shares/rachel-reeves-3bn-bitcoin-make-same-mistakes-gordon-brown/
My two Sats worth hope that helps?
Ray
Thanks
And how do you know what problem you have to solve as a miner?
And who issues you with the Bitcoin if you succeed? At what price is this recognised?
“Richard Murphy says:
November 15 2024 at 7:20 pm
Thanks
And how do you know what problem you have to solve as a miner?
And who issues you with the Bitcoin if you succeed? At what price is this recognised?”
I don’t need to know this as it is assigned/fetched to my machines by the pool.
The mining pool issues the reward in my case this is to a bitcoin address held by Gemini.
By the by there are different was to calculate the profit of the pools out there I like FPPS (Also called Full Pay Per Share) as it evens out payments. In addition I pay the bool a 2% fee on my gross pay-out.
Not sure about the price recognition as it’s all in BTC so not sure what you mean here.
I thought my questions were incredibly straightforward
Why does nowhere near Bitcoin answer simple questions about it?
“Richard Murphy says:
November 15 2024 at 7:20 pm
Thanks
And how do you know what problem you have to solve as a miner?
And who issues you with the Bitcoin if you succeed? At what price is this recognised?”
I don’t the Pool allocates this to each ASIC MINER This is very simplified version as to what happens but that is the principle. I only have to configure a specialised address called a Stratum for each individual miner. eg stratum2+tcp://v2.eu.stratum.braiins.com/xxxxxx……….
The pool issues me a reward in BTC so is a simple share of the BTC won by the whole pool calculated by the FPPS method. I get paid for the hash power contributed not for actually finding the solution to the problem.
Hope I’ve understood what you meant to ask correctly.
I don’t think you have got near answering a very simple question. Why not?
Going back over other comments I think you asked who sets the problem to be solved? The person signing their transaction does. This is a one way hash. These can only be reversed i.e. verified by brute force.
Eventually, the pending transaction will be added to a new block.
That makes precisely no sense
Of course the people confirming the hack did not set it or they would have known the answer in advance
“Richard Murphy says:
November 15 2024 at 8:19 pm
I don’t think you have got near answering a very simple question. Why not?”
Not sure why that is sorry .
My mining rigs only solve one type of problem SHA256 and these units of work are fetched off of the mining pool so I don’t get to decide
The pool if it finds a winning block shares it to us all minus pools fees . The pool issuers this btc to an address I have given them ie My address on Gemini.
I don’t understand the “At what price” this is meaningless to me.
109 comments, and counting………
And all of its as pellucid as mud.
Agreed
There seems to be a collision of perceptions going on here. The problem with cryptography is that it is an arcane branch of mathematics that’s very hard to explain in everyday terms. I’m no expert myself, despite being a software engineer. Where I’ve needed to use cryptographic functions I’ve simply relied on libraries of code – normal practice. But I do appreciate some of the oddities. It makes as much sense in terms of normal maths and logic as quantum mechanics does in terms of grade 6 maths.
A cryptographic algorithm typically takes two inputs – a piece of data, and a key (which digitally are just numbers), applies a complex mathematical transformation to them, and produces an output – another number. Since there are essentially an infinite number of possible inputs, there are an infinite number of possible outputs, all using the same algorithm. Also, the more complex the input (i.e. the larger the numbers), the more complex the output, and the longer it takes to compute.
This is a description of mining taken from https://www.gemini.com/cryptopedia/what-is-block-in-blockchain-bitcoin-block-size, and provides a reasonably compact and accessible description:
—–
Bitcoin miners compete to solve a computationally-intensive Proof-of-Work (PoW) puzzle. The puzzle requires taking all of the network’s transactions as well as information from the previous block (i.e. its block header), and “hashing” them using the SHA-256 algorithm. The first miner to complete this puzzle is allowed to create a new block, and receives a reward of newly minted BTC in return.
—–
This puzzle is pre-defined in the specification and code of Bitcoin. Because the input changes every time, the puzzle has to be re-computed each time. Because the blockchain keeps growing (it is currently over 600GB), the input gets ever more complex, so the computation gets harder. So the answer to “who sets the question” is “no-one”. The “question” is the cryptographic puzzle, which is intrinsic to the design of Bitcoin, and is not a single puzzle but an ever-changing one because of the changing data.
Bitcoin works for the same reason the Internet works. Everyone who partakes agrees on the same published specification and code. There is no one person or organisation in control.
I repeat, I get all that. I know how miners worked.
But, someone set the process rolling and still keeps it rolling. That cryptography was originally created, and somewhere it is still maintained. Why by? For what gain? And, fur example, why is the number of bitcoin limited ifvthe process you describe is perpetuated? Someone created the notional stock of coins, and still ensures they are controlled? Who is doing that? How, and why, and for what gain? And I do not believe the answer is the code does that. Someone created that code. Someone maintains it. That takes power. Who pays the bills?
Group, can anyone suggest a simple way for Richard to start mining himself from home so he finally gets that it’s a different space from anything he’s used to? I think he needs to learn through experience here. Now Nicehash has quit the UK I’m at a loss to know who to suggest.
Thanks for being so patronising Bill.
Trust me, your logic is so crass that your time here is over. I really don’t need to murder someone to know it is wrong. Nor do I need to mine Bitcoin to understand it.
“But the real question is, who sets the question the miner has to answer, and what gives them the authority to do so? Do you know?”
I’ve discussed this with my brother who understands computers in a way most of us never will, so I can’t claim to fully understand but here is my lay person attempt:
The protocol itself sets the questions. The analogy my brother used was that it is similar to how online security works for banks (so https, ssl and all that). The difference is that with online security you share part of the solution as a challenge and only a trusted party can efficiently complete the result given prior knowledge of a shared key.
With crypto there are no ‘trusted parties’. Just a mass of miners competing to solve. The nature of the problem is engineered by the original developer/s, the exact details randomly assigned.
The security of the system is guaranteed, the theory goes, because no one miner / entity could be large enough to be ‘in control’. Enough people have convinced themselves of this to trust the system.
I hope that is close to precise answer!? It is as close as I can get to understanding it unless I spend an awful lot more time trying. For now I need a cuppa. All mistakes of reasoning and or explaining are my own 🙂
That is a tech answer, but it is also obviously wrong. That’s like saying no one need connect me to the number I dial in my phone – tech does it. But someone designed tech to do it, keeps the system maintained to make sure it does do it, and profits from it. Who is that in Bitcoin question setting?
Raymond said: “Going back over other comments I think you asked who sets the problem to be solved? The person signing their transaction does.”
This is sort of correct. But as he also said it is a one way hash. “Signing the transaction” is just which computer solved the cryptography first. So, the whole thing is dependent on starting a chain of blocks (geddit?) with a cryptographic hash. There is no ‘question’. It really is just a chain of environmentally and socially destructive math problems.
And, the hash they use was designed by the United States National Security Agency, of course.
Again, your answer makes no sense.
Who set that ball rolling and now constrains it?
Why?
The person who started bitcoin is pseudonymous, so it is hard to say why they started it. But probably the usual Silicon Valley techno-utopian libertarian nonsense. As far as I know, the only things constraining it are the increasing difficulty of solving the cryptography and the absolute limit on the number of ‘coins’ that the pseudonymous person coded into the bitcoin software. But basically anyone can ‘fork’ an existing block chain or write a new program and call the blocks in the ledger ‘currency’. All you need are some suckers or co-conspirators to agree that transactions in the distributed ledger represent some value, e.g., 10,000 BTC = one pizza or 5 BTC will buy you the Washington Post. It’s only integration with fiat currency that gives ‘BTC’ or any ‘cryptocurrency’ a market determined price. And that is a whole separate set of grifters.
I don’t believe this is all down to the original creator.
For the rest, thank you.
As I don’t understand any of the answers, and Richard isn’t getting the answers he is looking for, I’m going to try different questions to try and break the logjam.
WHEN (and it will happen, so please don’t pretend it won’t, the only unknown is how soon), a quantum computer in Cambridge University physics department, or Beijing or MIT, or N Korea or on a billionaire ranch starts mining Bitcoin, and doing it VERY easily and very FAST…
1.WHO will be worrying about that?
2.WHY will they be worried?
3.Who will DO something to stop it or minimise any percived damage/disadvantages/financial loss?
4.WHAT will they do?
5.HOW will they do it?
(I think these last 2 questions are the only ones that need high level cryptography maths in the answer).
I am not worried about the cryptography
To further answer Richard’s questions in https://www.taxresearch.org.uk/Blog/2024/11/14/bitcoin-questions-needing-answers/#comment-994512, in the case of Bitcoin the ball was set rolling in late 2008 in a white paper published under the name Satoshi Nakomoto, widely believed to be a pseudonym – no-one to this day knows who he actually is. He then published the code as open source in Jan 2009, and mined the first block on Jan 3rd (then a computationally simple task performed on a PC). That created the base of the blockchain. Why? Who knows, maybe just to prove a point. Programmers are an altruistic lot, and do a lot of things simply because they just enjoy making things work. I identify with that mindset myself. Most of the code that runs the Internet was developed on that basis.
In the early days, no-one attached much value to each Bitcoin, and enthusiasts ran it largely for fun. According to Wikipedia (I recommend reading the Bitcoin page), the first commercial transaction was the purchase of 2 pizzas for Bt10,000!
Subsequently, Nakomoto “disappeared”, and there is now a Bitcoin Foundation which maintains control of the code repository. Again, people maintain open source repositories of all kinds of stuff for largely altruistic reasons, the cost is trivial, and it’s rarely done for gain per-se. If you use such software then you have a vested interest in it working properly, so it’s worth your while contributing to its upkeep even for no direct reward.
The built-in limit of 21 million Bitcoin is arbitrary, and Nakamoto is quoted as “I wanted to pick something that would make prices similar to existing currencies, but without knowing the future, that’s very hard. I ended up picking something in the middle.” I don’t think he anticipated for a moment the current astronomic valuations that have occurred.
There is no “notional stock of coins”, coins come into existence as they are mined.
No-one “controls” the system. The Foundation manages the code, but doesn’t control what happens to it. Anyone is free to run the code, enabling them to hold copies of the blockchain, run the mining algorithm, and validate trades – which consist of requests to add records to the blockchain. The code ensures that the multiple computers doing this validate each other, which is one of the cleverer aspects. The fact these operations generate coins provides the reward to the miners, and enables them to pay the bills for running their servers. That’s the only place where there are significant costs (and rewards).
Again, I return to the analogy of the Internet. Anyone can participate by running open source code (or at least code that conforms to public specifications), and it works because all computers conform to the same standard. The specifications are managed by the Internet Engineering Task Force (IETF), various organisations manage open source repositories, registrars manage domain names, but nobody controls the operation of the Internet itself.
Thank you
Let me muse on that (it is Saturday evening)