With Bitcoin going over US$9000, I figure it was time for me to ask some burning questions I had for the Bitcoin community which trouble me greatly. Some of those questions can apply to other crypto currencies, but I am interested in Bitcoin specifically.

Centralisation

What about the massive centralisation of mining power ?

Bitcoin should be the perfect cyber punk’s dream: an apolitical, decentralised currency that’s not bound to the regular monetary system. Tying the value of the currency to a Proof of Work is genius. Everybody could join, start mining and earn money by finding the next block in the blockchain, confirming transactions in the process. An immutable, distributed, public ledger that’s backed by mathematics is indeed an amazing primitive.

From the start, however, not everybody was equal. Because the whole system is based on a proof of work, if you have twice the resources to do said work, you have twice the power in the system. That means one can buy power in the Bitcoin currency by investing in mining hardware. Mining hardware that is bought with real money. Therefore, mining soon became something only the rich could do (wether they were rich before or via Bitcoin). Soon, miners started mutualising power and assemble into mining pools, sharing resources and rewards.

70% of the hash rate is controlled by 5 entities

The end result is that over 70% of the mining is controlled by only 5 entities, and approximately 80% of the capacity is based in China. Sure, anybody can join the network no matter their hashing capacity and could well find a block, in theory. The odds of this happening are so low one might just play the lottery instead.

Deflation and value

Is there a reason to spend Bitcoins ?

There will not be more than 21 million Bitcoins. Therefore, should it have a value, it is expected to always increase as the resources needed to create them become harder and harder. Some people argue that it is like any other physical real-world resource which have less volatile values (gold or oil, for instance).

However, gold for instance has other uses than just “storing value”. It has physical properties that makes it very useful for anything related to electricity (computers use quite a bit of gold internally). But let’s say it didn’t, one could always argue that it is decorative when used in jewellery, giving it value.

We could make the case that it has value because people want it (supply/demand), but ultimately if nobody has no use to it, one could expect that value to drop at some point.

Bitcoin being a currency, it does store value for transactions. If I sell a service to somebody, I can store the value I provided in a currency and use it for later in whatever I choose as long as the other party accepts it too. This is very practical and could be argued as having value in itself.

The Dollar and the Euro are subject to inflation. A Euro today is worth more than a Euro tomorrow. This incentivises people who hold that currency to spend it today, or else they will loose that value to inflation. In the case of Bitcoin, because there is a finite supply, Bitcoin as a currency is subject to deflation. Therefore, a Bitcoin now is worth less than a Bitcoin tomorrow. In that case, it is better to hold on Bitcoins than to spend them.