MINING CRYPTO Crypto fans have borrowed metals terminology, with “Bitcoin mining” suggesting that the significant effort and energy required gives coins inherent value. Each coin requires mathematical problems are solved, and these get progressively more difficult requiring more processing and power. Bitcoins are limited to 21m, the rate of new issue decreases and costs to produce increase as the limit is approached, which helps create the impression that prices should move higher.


Cambridge researchers estimate 121 TWh/year of power is used for mining crypto currencies (equivalent to smelting about 8m Mt of primary aluminium).


Like metals mining, where deep mines are feasible for high value metals, the high price of Bitcoin justifies significant expenditure, and Bitcoin miners locate to regions with cheap power.


Bitcoin transaction costs are also high, with some estimates putting the average energy consumption for 1 Bitcoin transaction at 741 KWhr, equivalent to about 500k VISA transactions.


IS MINING HAZARDOUS? Just like the real thing, mining cryptos can be hazardous. The participants of the blockchain have to agree that a newly mined coin satisfies the existing criteria. Without a central authority, a dispute in the rules can lead to a “hard fork” creating a parallel coin, or a “soft fork” where a rule change is applied to existing coins. Forks can also result from cyber- attacks, which split Ethereum into Ethereum Classic, and these forks cause significant price volatility.


Different cryptos use different mining methods, with implications for cost and security:


“Proof of Stake” means that miners can validate blocks of transactions based on their existing holding, with the understanding that a Bitcoin miner is less likely to attack the system if they are heavily invested in that crypto.


“Proof of Work” means that miners require massive computer power to create new Bitcoin, and these systems are theoretically vulnerable to an attack if the owners of 51% of the computer power take control of the crypto.


BURIED TREASURE AND BITCOIN? In UK news, a computer engineer who mistakenly threw away a hard drive containing Bitcoins believed valued above £200m has offered the local council £50m for permission to dig up a landfill site and recover his money. In a modern day treasure hunt, he’s cross checking the date he threw away the hard drive against the map grid reference for the landfill site to narrow down his search, and says he has the backing of a hedge fund to ensure the council’s costs are covered.


Lost bitcoin passwords can also be a problem. In January 2021, it was reported that a San Francisco programmer with 7002 bitcoins (>$350m) had only two remaining attempts to remember his password.


HIDDEN WEALTH? Just as the shape of a gold tola bar allows it to be transported secretly, some early Bitcoin users may have also sought anonymity?


In November 2020, the US Department of Justice seized $1bn Bitcoin from a hacker who had stolen 70,000 Bitcoins off the Silk Road in 2012. The DoJ caught “Individual X” by tracking Bitcoin transaction history on the blockchain.


The crypto “Monero” improves anonymity, using “ring signatures” to provide multiple cryptographic signatures for each real participant.


AS GOOD AS GOLD? Whilst crypto-currencies share some features with bullion, notably the ability to move wealth outside the financial system, the extreme price volatility and lack of wider acceptance means they appear far from becoming a credible form of payment or store of wealth.


Gold and silver have proved their value over thousands of years, with ancient Egyptians using pyramids to carry gold into the after-life, and it’s probable that gold will still have life after these schemes have passed.


Rohan Ziegelaar E: metals.desk@admisi.com T: +44(0) 20 7716 8081


IN JANUARY 2021, IT WAS REPORTED THAT A SAN FRANCISCO PROGRAMMER WITH 7002 BITCOINS (>$350M) HAD ONLY TWO REMAINING ATTEMPTS TO REMEMBER HIS PASSWORD.


19 | ADMISI - The Ghost In The Machine | Q1 Edition 2021


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32