Bitcoin & Blockchain

The excitement over bitcoin and blockchain is overblown.  Blockchain may be a relatively secure way of storing information about transactions, but it is not cost-free.  The electricity and computing power used to create blockchains is expensive.  If you are tracking something that is very valuable, it may be worthwhile. but otherwise, the expense of creating the blockchain may it unreasonable to use blockchain.

Several sources (Morgan Stanley, CNBC)   say the breakeven point for mining Bitcoin is about $8,000 to $8,600.  Currently, the price of Bitcoin would not cover the cost of mining it in most places in America.  It may still be profitable in some places where electric power is really cheap. Another Bitcoin-friendly site puts the cost at just under $5,000.  Where power is cheaper, the cost is much less; in Venezuela, it is only a little over $500.

Blockchain works by creating codes that are hard to break.  The cost comes from the amount of time and computing power needed to break the code and add a transaction as a link in the blockchain.  Presumably, a blockchain could make the code easier to solve, thus requiring less computing power and energy, but then the blockchain would be less secure.  The current Bitcoin-blockchain formula sets an upper limit of 21 million Bitcoins.  Thus, using Bitcoins as currency would be like using gold, or any other item with a finite or limited supply.  The money supply could not keep up with increased production and economic activity, creating deflation.  This was one of the main reason the US dropped the gold standard.

The blockchain concept is not necessarily linked to Bitcoin.  For example, the Litecoin network uses a blockchain formula that requires only 2.5 minutes to create a new block, versus Bitcoin’s 10 minutes.  Litecoin can accommodate up to 84 million coins, versus Bitcoin’s 21 million.

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