Random Thoughts – Randocity!

In writing this blog, I encounter a lot of different spam comments every single day. None of this spam reaches the comment area of any blog article because of moderation and spam filtering. However, every once in a while I see a spam message that catches my eye and I feel the need to write about such traps. Let’s explore.

Today’s Spam

Today, I found this spam message and it spurred me to write this blog article:

Invest $ 5,000 in Bitcoin mining once and get $ 7,000 passive income per month

This sounds like a great deal, doesn’t it? Of course, this spam message arrived complete with a link to a website. I’ve redacted that part of this spam. The text is the most important part (or rather, the sleaziest part) and what I intend to discuss in this article.

Let’s dispel this one right away. You cannot invest $5,000 into a Bitcoin mining rig and get $7,000 a month in passive income. This is not possible. First off, Bitcoin is entirely volatile so values vary every minute. Second, you have to place your mined Bitcoin into a wallet somewhere. Third, a compute rig requires electric power, air conditioning and internet services requiring you to pay bills every month. Fourth, the maximum you could mine per month is a fraction of a Bitcoin.

Most mining rigs are lucky to make any money at all considering the electric bill cost alone. You must also pay your Internet service as Bitcoin mining requires regular check-ins with its sites to transfer the data processed during mining and download new data. Both the electric and internet bills are not at all inexpensive to own and will substantially reduce the value of any Bitcoin you might mine. There are also exchange fees to convert your Bitcoin into US Dollars (or vice versa), which will eat into the profits of your mined Bitcoin.

Mining

Bitcoin mining seems like a great thing. In reality, it is far from it. As I mentioned above, you need to not only invest in a specialty computer rig designed for Bitcoin mining, you also need to supply it with electrical power, heat dissipation (A/C or a fan) and internet service. In exchange for “mining”, you will occasionally receive tiny fractions of Bitcoin (when the bits align just right). When Bitcoin first began, the amount and frequency of Bitcoin given during mining was much higher than it is today. Worse, mining of Bitcoin will see less and less Bitcoin issued as time progresses. Why?

Bitcoin is a finite currency with a limit on the maximum number of coins ever. Once the coins are gone, the only way to get a coin is by getting it from someone who already has one. Even then, there’s a problem with that. That problem is called ‘end of life’ and, yes, even Bitcoin has an expiration date.

But… what exactly is “mining” and why is it a problem for Bitcoin? Mining is not what you think it is. This word imparts an image of men in hardhats with pickaxes. In reality, mining isn’t mining at all. It is a collective of computers designed to compute the general ledger of transactions for Bitcoin. Basically, each “mining” computer takes a small amount of potential ledger data given to it by an “authority” and then solves for the equations given. This information is handed back to the “authority”. The “authority” then compares that against all other results from other computers given the same data. If a consensus is reached, then the transaction is considered “valid” and it goes into the ledger as legitimate. This is the way the currency ferrets out legitimate transactions from someone trying to inject fake transactions.

There’s a lot more to it, but this is gist of how “mining” works. In effect, when you set up a mining computer (or rig), your computer is actually performing transaction validation for Bitcoin’s general ledger. In return for this calculation work, your computer is “paid” a very tiny fraction of Bitcoin… but not nearly enough to cover the real world money needed for the 24/7 constant computing. A Bitcoin payment is only issued during mining IF the calculation solves to a very specific (and rare) answer. And so begins Bitcoin’s dilemma…

Basically, if you take all of the fractions of Bitcoin you receive over a year’s worth of 24/7 general ledger computing, you might be lucky to break even once you take your electric and internet bills into account. However, you are more likely to lose money due to the rare incidence of solving the equation for payment.

Additionally, to store those fractions of Bitcoin from your mining activities, you’re going to need a wallet. If your wallet is stolen, well that’s a whole separate problem.

Bitcoin Logistics

Unless you’ve been living under a rock, many crypto wallets and companies that store wallets are entirely insecure. They “think” they are secure, but they’re not. They’re simply living on borrowed time. Too many wallet companies (and wallet technologies) have been hacked and have lost Bitcoin for many people. Because of the almost trivial vulnerability nature of a crypto wallet, owning Bitcoin is almost not even worth the risk. We’re not talking small amounts of Bitcoin lost. We’re talking tens of thousands of dollars “worth” of Bitcoin gone *poof* because the companies / wallets were hacked and Bitcoin emptied.

While there might be some reputable and secure wallet storage companies, you have no idea how secure they really are. Because it’s cryptocurrency, once the Bitcoin has left the wallet, there’s no way to get it back. It’s the same as if someone stole your wallet out of your pocket or purse. Once it’s gone, it’s gone.

Further, because Bitcoin’s wallet technologies are so hackable and because it holds real world value into convertible fiat currencies, like the US Dollar (and other currencies), there’s a real and solid motivation for hackers to find ways to get into and pilfer Bitcoin wallets from unsuspecting owners.

The Downsides of Bitcoin

As a miner, you’re paid in Bitcoin. Bitcoin has limited uses in the real world. There are some places that accept Bitcoin, but they’re few and far apart. Most places still only accept the local currency, such as the US Dollar in the United States. For Bitcoin to become a functional currency, it would need to be heavily adopted by stores and businesses. Instead, today most places require you to convert Bitcoin into the local currency. This is called exchanging currency and usually incurs fees for the exchange. You can’t put Bitcoin into a traditional bank. You can’t use it to pay most bills. Any business wanting to remain in business would need to convert any Bitcoin received into USD or similar. The conversion fee could be 1%, 2% or up to 10% of the transaction. There might even be a separate fixed transaction fee. These fees begin to add up.

All of this reduces the value of Bitcoin. If one Bitcoin is worth $1000 (simply used as illustration), you could lose up to $100 of converting that single Bitcoin to $1000… making it worth $900. Because Bitcoin is entirely volatile, a Bitcoin worth $1000 today could be worth $100 tomorrow. For this volatility reason and because of electric and internet bills, the idea of making $7000 in passive income in a month is not even a reality. If you could receive one Bitcoin per month via mining (hint: you can’t), you might clear $7000 (assuming one Bitcoin is worth $7000 when you go to convert). Chances are, you’re likely to get far, far less than one Bitcoin per month. More likely, you’ll get maybe 1/10th (or less) of a Bitcoin in a month’s worth of computing … barely enough to cover the cost of your electric bill… assuming you immediately cash out of your Bitcoin and use that money to pay your bills.

Insurance and Fraud

The US government insures bank and savings accounts from loss via the FDIC (Federal Deposit Insurance Corporation). No such governmental insurance programs cover Bitcoin (or any other cryptocurrency). Until or unless the US government issues its own digital currency and extends similar protections of the FDIC to banks storing those digital currencies, today’s decentralized cryptocurrencies are simply the “Wild West” of currency.

What “Wild West” means is that anyone who owns cryptocurrency is at risk of loss no matter what means is used to store your Bitcoin. Your coins are as secure as the weakest link… and the weakest link (among many) appears to be the wallet.

Cryptography and Security

Many crypto “banks” (though I hesitate to even call them a bank) claim high levels of security over your Bitcoin wallet. Unfortunately, your wallet is always at risk no matter where you store it. If it’s on a self-contained card on your person, that can be hacked. If it’s at a currency exchange service, like Coinbase, it can still be hacked (in a number of ways).

The problem with crypto “anything” is that (and this is the key bit of information that everyone needs to take away from cryptography) is that cryptography was designed and intended to offer transient “short term” security.

What I mean by “short term” is that it was designed to secure data for only as long as a transaction requires (usually a few seconds). An example is using an app on your phone to perform a transaction with your bank. Your logged-in session might last 5-10 minutes at most. Even then, a single communication might last only a few seconds. Cryptography is designed to protect your short burst transmissions. It would take a hacker well longer than that short transmission period to hack the security of your connection. By the time a hacker had gained access, your transaction is long over and you’re gone. There’s no way they could change or alter what you’re asking your bank to do (unless, of course, your device is compromised… a completely separate problem).

Bitcoin, on the other hand, is required to be secured in a wallet for months, years or potentially even decades. Cryptography is not designed for that duration of storage and protection. In fact, cryptographic algorithms become weaker every single day. As computers and phones and devices get faster and can compute more data, these algorithms lose their protections slowly. It’s like when rains erode soil on a mountain. Inevitably, with enough soil eroded, you’ll have a landslide.

With crypto, eventually the computers will become fast enough so as to be able to decrypt Bitcoin’s security in a matter of weeks, then days, then hours, then minutes and finally in real-time. Once computers are fast enough to hack through a wallet’s security in real-time, nothing can protect Bitcoin.

This is the vulnerability of Bitcoin and other cryptocurrencies. Once computers hit the threshold to instantly decrypt Bitcoin’s security (or, more likely, Bitcoin’s wallet security), then Bitcoin is all over. You can’t store something when computers can gain unauthorized access in a few minutes. This law of diminishing cryptography returns is the security fallacy of Bitcoin.

Of course, Bitcoin developers will say, “Well, we’ll upgrade the Bitcoin cryptography to last longer than the then-current processing power”. It is possible for developers to say and potentially do this. But, that could still leave YOUR wallet vulnerable. If your wallet happens to be stored in an older cryptographic format that is vulnerable, then what? You may not even know your wallet is being stored in this vulnerable way if it’s stored at an exchange like Coinbase. That could leave yours and many other’s wallets hanging out to dry. Unless the currency exchange shows you exactly the format your wallet is being stored in and exactly the strength of cryptography being used, your wallet could very well be vulnerable.

Note that even the strongest encryption available today could still contain vulnerabilities that allow it to be decrypted unintentionally.

Bitcoin Uses

Probably the only single use of Bitcoin is as part of a balanced portfolio of assets. Diversifying your portfolio among different investment strategies is the only real way to ensure your portfolio will continue to grow at a reasonable rate. This is probably one of the only reasons to legitimately invest in Bitcoin. However, you don’t need to outlay for a mining rig to do it. Some investment firms today now allow for investment into cryptocurrencies as part of its investment portfolio offerings.

Still, you’ll have to be careful with investing in cryptocurrencies because there can be hidden transaction fees and conversion fees involved. These are called “loads” in the investing world. This means that you might invest $50, but only receive $40 in Bitcoin. That $10 lost represents the “load”. If you sell out of Bitcoin, you may also receive yet another “load” and again lose some of your money in the exchange. You have to take into account these “loads” when you choose to invest in certain funds. “Load” funds are not limited to Bitcoin. These exist when investing in all sorts of funds including mutual funds and ETFs.

However, Bitcoin (and other cryptocurrencies) can be valuable as part of a balanced portfolio. Of course, Bitcoin would be considered a Risky type of investment because of its volatility. Depending on how your portfolio is balanced, you may not want to invest in something as risky as Bitcoin. Not all portfolio management companies (i.e., Schwab, E*Trade, Ameritrade, etc) may offer cryptocurrency as an investment strategy. You’ll need to check with your specific company to determine if Bitcoin is available.

End of Bitcoin

Because Bitcoin is finite in total numbers of coins, eventually computing the general ledger will no longer pay dividends. What I mean is, once the Bitcoins run out, there will be no way to pay the miners. Bitcoin currently pays miners from the remaining ever diminishing pool of Bitcoin. Once there’s no more Bitcoins in the pool, there’s no more payments to the miners. This means that Bitcoin is dead. No one is going to continue to spend their expensive electric and internet bills on computing a general ledger that offers no dividends. No general ledger computations, no transactions.

This means that eventually, miners will stop mining. Once a critical mass of general ledger computation stops, computing Bitcoin transactions may become impossible. This will be the death of Bitcoin (and any other cryptocurrencies that adopt the same mining payment model). You can’t spend a Bitcoin as liquid currency if there’s no way to validate a transaction.

Some people think that it might require Bitcoin to completely hit zero, but it doesn’t. Once the remaining pool gets small enough, the algorithm gives out ever smaller amounts of payment in return for computing. At some point, spending thousands of dollars on a rig to gain a few pennies worth of Bitcoin every month won’t be worth it. Miners will shut off their mining activities. As more and more miners realize the futility of their mining efforts, fewer and fewer will mine.

When a compute (or lack thereof) critical mass is reached, Bitcoin will be in a crisis. This is the point at which the value of Bitcoin will plummet, taking with it many “paper Bitcoin millionaires”.

If you own Bitcoin, you need to watch and listen carefully to this part of the Bitcoin world. In fact, we are likely already on the downward slope of the bell curve for Bitcoin computing. How far down the bell curve is unknown. Unfortunately, as with most investment products, many people hold on far too long and get wiped out. It’s best to sell out while you know the currency holds value. Don’t wait and hold thinking it will infinitely go up. It won’t.

Eventually, Bitcoin will die because of its finite number of coins and its heavy reliance on “mining”… which “mining” relies on offering dividends. When the dividends stop being of value, so will end the mining and, by extension, so Bitcoin will end.

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