Is Crypto Currency a Ponzi Scheme?
December 14th, 2021 By Christopher Shilts
On Monday, December 6th, I began a serious study of cryptocurrencies, hoping I would be able to break into the market somehow and generate some passive income. This study lasted about a week, and the findings are rather disheartening.
I started this study with my favorite crypto, Dogecoin. As you may know, this currency started out as a joke, and its’ intended use was for fun, not profit. I bought into it a number of months back, at around 7 cents a coin- a figure thousands of times higher than its creator ever thought would happen. It since went as high as 70 cents, and is currently around 19 cents. I was going to try to support the DOGE network by mining the coin, but I found out it would actually cost me more in electricity (not to mention wear on my computer), than I’d get out of it- unless I bought specialized (and very expensive) equipment.
I’m sure most of you by now know the basics of how cryptocurrencies work. For those of you who don’t, investopedia has an in depth article on the progenitor of cryptocurrencies- Bitcoin. The primary way units of cryptocurrencies are brought into existence is by mining. The short explanation is that people are rewarded for running the blockchain network on their hardware. There are two major systems used for determining who gets these rewards- the Proof of Work, and Proof of Stake, which you can read about here.
I’ve found that it’s extremely difficult for new people to get into mining cryptocurrencies. In the early days, people could mine profitably with their CPU’s. Later it was no longer profitable to use CPU’s, with GPU’s (video cards) replacing them in mining. Later still, GPU’s where surpassed by Application Specific Integrated Circuit mining rigs, which are currently the most profitable mining technology for most proof of work coins. Due to market forces, the price of ASIC mining rigs has gone up enormously. Depending on what you’re mining, it currently takes between two to four years to return ones’ investment on a new mining rig. And the equipment often isn’t under warranty for more than a year- so if it burns out from running at full capacity 24/7, you’ll loose a good chunk of your investment. Furthermore, the break even estimates assume the networks hash rate doesn’t go up (in which case your share of processing power is diminished), and the value of the coins you’re mining doesn’t go down. If there’s been one sure winner of this digital gold rush, it’s the manufacturers of mining hardware.
I also wanted to report a rather disturbing discovery I’ve made about Bitcoin in particular. The network which Bitcoin runs on demands an enormous amount of electricity- current estimates put that at something near 200 terra-watt hours per year- that’s roughly 4.7% of the United States energy demand. And the electronic waste produced is roughly 28 kilotons a year. You can read more about bitcoin’s resource consumption here
I don’t believe Proof of Work cryptocurrencies are sustainable in the long run. As demand for them goes up, so do the resources required to keep the networks operational. These things have become an enormous drain on resources which could have been put to other uses. And unlike precious metals, these “coins” only exist so long as the networks are kept operational. If for any reason the Bitcoin network went down, the supposed value created would likely evaporate. In my opinion, cryptocurrencies are a fad- one that has made many people rich, and will make many others poor when the whole thing comes crashing down.
The only way I see of saving Bitcoin in the long run, is for the network’s operators to agree to switch from the current Proof of Work, to a Proof of Stake system. But that presents a host of problems, and could fundamentally alter Bitcoin's value proposition.
Regardless of what protocols are used for mining crypto, many currencies have failed in their original stated goal of being decentralized. While it’s true they are not as centralized as the Federal Reserve Note system, cryptocurrency mining power often ends up concentrated by a few companies. In the world of precious metal mining this isn’t a huge problem- once a metal has been mined and refined, it generally stays in circulation (and can change hands without an internet connection). But with cryptocurrencies like Bitcoin, if any entity managed to get control over 51% of the mining hashrate, they basically control the currency. And according to Fortune Magazine, just 0.1% of Bitcoin miners control 50% of the mining capacity. This is also a problem with Proof of Stake systems, where instead of acquiring a controlling interest in the hashrate, one acquires a controlling share of the coins themselves.
In closing, I recommend caution when investing in cryptocurrencies. They can make enormous profits if you get in early. However, they are also a relatively new technology with various risks- undoubtedly many of which time will yet reveal. The age old wisdom of “not investing more than you’re willing to loose” would seem to apply here.
This article has been the product of a weeks’ worth of research. I hope it has proven educational. If you would like me to write future articles about crypto currency, or the financial world in general, please leave a post on the forums, or shoot me an email via the contact form.
Editor in Chief, Manistee Speaks