Bitcoin’s defects will hasten its demise in 2015

December 26, 2014

By Martin Hutchinson

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Bitcoin’s defects will hasten its demise in 2015. The leading crypto-currency’s economies of scale in mining and its transaction system’s vulnerability to subversion by a dominant miner make it unsound. As seignorage declines it will become cost-uncompetitive for transactions. These flaws will cause its price to lose further altitude.

The digital currency is controlled not by a state but by an underlying algorithm by which participants can “mine” bitcoins through solving mathematical problems. The universe of miners can then validate “blockchains” of bitcoin transactions by majority vote, weighted by their mining effort. As a reward, miners receive more bitcoins, distributed randomly.

By combining their activities, the currency’s creators can increase their probability of receiving a bitcoin, which can be shared between them. Assuming miners are risk-averse, the system slants toward monopoly. This theoretical tendency is validated by the current bitcoin setup, in which a single mine, GHash.IO, which pools the interests of individual participants, currently controls about 39 percent of mining activity, according to

If a miner came to control more than half of bitcoin creation, it could choose which blockchains to validate; the participants would then depend upon its integrity, no differently than they depend on trust in a government in a fiat money system.

Over time, the rate of bitcoin production declines and the amount of “work” required to produce one increases. By early October, 2014, the “hash rate” per bitcoin had increased 60 billion-fold since January 2010. Moore’s Law, defining the increasing power of processors, counteracts this but not sufficiently; a July 2014 study by Australian researcher Hass McCook calculated that the cost of bitcoin production including equipment was about $600 per coin and the marginal cost of power was about $57 per coin. These figures compare with the current bitcoin price of around $325, suggesting that capacity will decline over time unless the price rises sharply.

If mining bitcoins is profitable, big miners can use this seignorage to subsidize transaction fees. Once mining profits disappear, transaction fees must subsidize mining, since only active miners can validate transactions. This makes bitcoin uncompetitive with other electronic transaction systems in the long term.

Bitcoin’s flaws are becoming more evident, which may explain why prices more than halved in 2014. That trend should continue.


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“This theoretical tendency is validated by the current bitcoin setup, in which a single mine, GHash.IO, which pools the interests of individual participants, currently controls about 39 percent of mining activity, according to”

What is your source for this? has at 11%.

More generally, the Bitcoin mining market is so intensely competitive that one pool/company can rapidly go from significant to marginal. Your opinion that ” the system slants toward monopoly” is obviously false, the system clearly slants toward fragmentation and intense competition.

Posted by Pierre_Rochard | Report as abusive

Not as far as I understand. Mined bitcoin are just a small % of what is in issue. Bitcoin will stay healthy trading using existing bitcoins until a better digital currency comes along.

Posted by BidnisMan | Report as abusive

The author is pretty far behind the Times on this topic. This problem is well understood and is being addressed. This looks like an article from early 2013.

Posted by Jtjathomps | Report as abusive

“Over time, the rate of bitcoin production declines and the amount of “work” required to produce one increases.”

Usually correct, but not always so you are basically wrong.

Lately the amount of work required to produce one bitcoin has decreased.

Posted by MichaelRt | Report as abusive

If any pool promises more return to the miners, that pool could take over completely, I wonder why this has not happened already.

Posted by bitcoinnovice | Report as abusive

I think the author forgets that if any amount of miners stop mining the difficulty also go down proportionately, actually the difficulty of mining is part of the algorith that releases a set amount of bitcoins every 10 minutes halving every 4 years. The network will always continue to process transactions.

A bigger problem will be that a number of transactions in the thousands per second will made any regular user that want to install the client to have to download hundreds of megabytes every 10 minutes, but this can be solved by using services that connects you to the bitcoin network and offline/off-blochain transaction services.

Services like xapo that let’s you spend bitcoins with a debit card or circle that let you buy bitcoins with a credit card will spread adoption.

Posted by gjey | Report as abusive

Once a miner gains 51% control the Bitcoin Blockchain will rely on human trust to “do the right thing” not math. A malicious party could sink the entire system t/

Posted by smaulgld | Report as abusive

If bitcoin had a number of transaction equal to VISA, a common 100Mbit/s would be enough to download the blockchain.
It is also interesting the experiment in Finland where the blockchain and transactions will be broadcasted using DVB-T.
It is not improbable a channel with enough bandwidth will be available everywhere in the world to broadcast the blockchain if demand is there for such a (public) service.

Posted by painlord2k | Report as abusive

The bitcoin price depends on people’s demand for holding bitcoins. When that goes up the price will go up. You’re completely ignoring that component of price formation.

Posted by EconomicsJunkie | Report as abusive

We must be getting close… right? It’s DEC 29th… tomorrow, you think??

Posted by NickReil | Report as abusive

You might have more luck if you made predictions about something you actually know something about. Bitcoin turned out to be the best performing currency in the world in 2015. You couldn’t have been more wrong.

Posted by jzcjca00 | Report as abusive