BitInstant - a look at an old idea from the Bitcoin space

Every now and then, an interesting service will appear in the Bitcoin space, then get shut down at some point and we won't see the idea behind it come back. Often that might be because the idea in itself was bad (like, lending out your BTC to strangers), but sometimes you find an old idea that could be feasible still. One such idea I would like to talk about today is BitInstant, or at least one notable part of it.

BitInstant

BitInstant was a service started in 2011 by Gareth Nelson and Charlie Shrem aiming to help make faster fiat deposits into a few Bitcoin exchanges, such as MtGox, BitStamp or VirVox. At some point you could also convert the deposits directly into BTC. BitInstant would handle cash deposits from places like Walmart and credit you appropriately.

Overall, it seemed like an approachable way to get some bitcoins back in the day when a lot of the Bitcoin exchanges were struggling with accepting funds in the US.

It seems there was a lot of demand for this service in 2013, but unfortunately the site was shut down after its CEO got arrested in early 2014.

Now, what I just described doesn't sound all that interesting in 2018 - we currently have a lot more payment options available now that fewer banks are afraid of Bitcoin. However, BitInstant had one more underappreciated feature I wanted to talk about...

Inter-exchange transfers

BitInstant not only did normal cash deposits, but it also allowed you to redeem coupons from MtGox, VouchX or BTC-e and use those as a deposit methods into the above mentioned exchanges. In other words, you could use it to transfer money from BTC-e into BitStamp, or from MtGox into VirVox. This would allow you to handle arbitrage between the exchanges much more easily.

It seems these days there aren't as many options for that. Last time I checked I could find about three exchanges that would take BTC-e coupons as a deposit method and you can use Tether across a number of exchanges as a substitute for USD, but there isn't a neat way of transferring fiat between exchanges in a really fast manner.

I suppose you soon won't need a service for transferring bitcoins between exchanges if the Lightning Network can deliver its instant transfers on mainnet. Some other alts might benefit from something like voting pools though.

A service that would allow you to transfer fiat between any exchanges might make for a more efficient market - imagine being able to take advantage of some of the more recent arbitrate opportunities. The prices would be more uniform around the world and everyone would be getting a more fair deal.

The solution wouldn't even be that hard to implement - the major complexity would come from having to handle the large, international capital transfers to balance the books every now and then. So once again, it comes down to the inefficiencies of the traditional banking system...

Conclusions

BitInstant was an interesting "old" service in the Bitcoin space that helped people deposit their money onto a few crypto exchanges. It also provided a way to move funds between crypto exchanges, providing some way of cashing in on some arbitrage opportunities. Unfortunately, there aren't that many ways of transferring fiat efficiently between the major exchanges these days.

On Bitcoin power consumption

A few weeks ago, there were some articles making the rounds claiming that "in 2020 Bitcoin will consume more power than the world does today", that it creates a lot of pollution, etc. It seems that Bitcoin will be blamed for cheap, dirty power plants opening up again and so on. Well, let's break it down and see where this whole situation might be really headed...

Rate of growth

It seems that the origin of the claim that Bitcoin will consume all of world's electricity came from this site. The misconception probably stemmed from these two bullet points:

"

• In the past month alone, Bitcoin mining electricity consumption is estimated to have increased by 29.98%
• If it keeps increasing at this rate, Bitcoin mining will consume all the world’s electricity by February 2020.

"

As usual, there is a relevant XKCD comic on this:

Extrapolation

The obvious crux here is the phrase "if it keeps increasing at this rate" - which can be very unlikely to happen. It's basically exponential growth, which can be really hard to match on scale - you would have to produce more mining hardware, which would also require you to at some point start creating more electronics factories and more chip fabrication facilities and so on. All of those can take a lot of time to get going.

Even if you could fabricate all of those chips, at some point you will run into some limits imposed by the economics of Bitcoin mining.

Economics of Bitcoin mining

The Proof of Work algorithm Bitcoin uses is self-balancing - it doesn't really care how much or how little mining power there is in the network, it will still try to maintain the 1-block-per-10-minutes mining schedule. With the block reward being inflexible and the transaction fees being finite, the only factor that can have a large impact on the Bitcoin mining rate is the price of a single bitcoin. If the price doubles, you can expect the difficulty to double (with some time delay) due to more miners coming onto the network. If the price goes down, some miners will be priced out of the market and the difficulty will go down.

In an ideal world, the cost of mining 1 bitcoin would be about 1 bitcoin. In real world, you have some inefficiencies and opportunity cost, so you should see some small profit margin at the least.

To figure out how much electricity Bitcoin will consume in the future, you have to break things down into basics.

First - what is a miner really? It's a computer that converts electricity into Bitcoin and produces some heat. In a perfect scenario, every dollar of electricity you would pump into the machine would give you about a dollar worth of coins.

The total amount of power produced in the world in 2013 was 23'322TWh. The average electricity price ranges from 0.08 to 0.42 USD / kWh. Taking the cheapest cost, we know that in 2013 we generated about 1.865T USD.

Every year we have about 52'596 Bitcoin blocks generated. Assuming 12.5 BTC block reward and 2.5 BTC in transaction fees, we should expect to give the miners a net gain of 788'940 BTC in a year.

Assuming the miners converted 100% of the value of electricity into mining BTC, we would expect 1 BTC to be worth about 2.36M USD. At the time of writing, one bitcoin is "only" worth 13.5k USD, or about 200 times less. For some perspective - 1/200 of the current price would be 67.5 USD / BTC, a price range from about early 2013 - 5 years ago.

Since the Bitcoin mining rewards halve every 4 years, the price per BTC would have to increase by further factors to keep up with the global power generation revenue.

Taking a more realistic look

A lot of the numbers here assumed perfect scenarios - no money being lost while converting from electricity to bitcoins, no cost of manufacturing and maintaining the miners, etc. In reality, you can expect noticeable losses from those factors, as well as things like taxes, transfer fees, internet cost, etc.

It's very unlikely Bitcoin will ever become a large enough factor in the global energy production to have an impact on the electricity prices. It's more likely to be used close to some renewable power plants that have excess of electricity to get rid of from time to time, possibly some places that can re-use the heat generated from the miners that can't rely on more efficient heat pumps, or simply pooling around places that have really cheap electricity.

At the very least, Bitcoin mining is a universal "overflow valve" - it's a simple place to push excess electricity production capacity (and to some extend - electronics production as well) and turn it into tangible money. The mining process will gladly take any amount of excess and give some returns. If the returns are better than the savings from spinning the operation down and then back up again - it's worthwhile.

Conclusions

Bitcoin is very unlikely to be a major consumer of the global energy production. On the other hand, it's a good sink for excess power generated from renewable sources, always allowing one to convert spare electricity into cash.

What crypto projects I'm looking looking forward to in 2018

2017 has been an important day for both Bitcoin and cryptocurrencies in general. While hopefully not as tumultuous, 2018 is looking like it will bring us a lot of interesting innovation in the space. Here are some of the things I'm personally looking forward to seeing unfold in the new year.

ICO Securities

After the SEC's investigative report on The DAO, we have seen a number of companies (mine included) start looking into ICO Securities. This might be a start of a new wave of ICOs that will be bigger than the entirety of the current market.

If a lot of sentiments I've heard so far are to be believed, we might see such ICOs replace traditional VC funding, bring in more traditional investment industry into the market, and get a number of people from various governments to watch closely where this trend will unfold. If properly harnessed, Security ICOs could also drive real-world innovation while providing more sustainable, long-term growth than the current trend of "sell vaporware with hype and turn 100x profit in a few months".

I'm certainly the most excited to see where this trend will go and whether my guesses will turn out to be correct or not...

Lightning Network adoption

In 2017 we got SegWit activated on Bitcoin and a few other currencies. So far it has alleviated a bit of the transaction traffic, but it's nowhere near useful enough to solve the Bitcoin scaling problem on its own. Hence why I'm excited to see if the Lightning Network will be able to deliver on its promises and go mainstream allowing Bitcoin to once more be used for everyday purchases. Betting on SegWit without blocksize increase has certainly been a large gamble that has allowed a number of alts to grow into their own prominence. Hopefully we'll see this year if this bet pays off, or Bitcoin might lose its luster...

Ethereum POS change

The anticipation of Ethereum changing from POW to mostly POS has been heard many times through 2017. We've seen the technology delayed to (hopefully) later this year. If successful, it would make Ethereum the most prominent POS coin out there, possibly driving some people to invest in it for the staking returns. While I'm not sharing the paranoia surrounding Bitcoin's POW (claiming that its energy consumption will continue to grow at a massive rate eating a significant chunk of world's energy production in a few years), it's still a worthwhile experiment to see undertaken.

Interledger, Codius, etc.

Ripple is another company / crypto to look out for in 2018. While I might have my reservations about XRP the currency, I have strong respect for Ripple the network and its creators.

Other than the growth of the Ripple network itself, there are two interesting projects from Ripple Labs that might become more prominent in 2018. The first one is the Interledger Protocol, a protocol aiming to help facilitate payments across different ledgers / blockchains / etc. The second one I was surprised to see the light of day again was Codius (which has been shelved for some time in 2015) - a universal hosting standard for smart oracles.

Ripple Labs is definitely a company that will be doing interesting projects for years to come. It will be interesting to see what they will cook up for us in 2018...

Tether and other fiat IOUs

Tether has been an interesting fiat IOU these past few years. The space itself has been a bit paradoxical honestly - there have been a lot of fiat IOUs on Ripple, but only one prominent IOU on the Omni network and so far not all that much on the Ethereum network. Tether as a currency has been rather unremarkable until it started having some banking problems and despite that its market cap has increased to almost 1.5B USD at the time of writing. This has sparked at least one very prominent Twitter user to start calling it out on every given opportunity.

There are two ways I could see this play out in 2018. On one hand, we might see fiat IOUs to appear more prominently on the Ethereum blockchain (Tether has apparently already made that leap), possibly to compliment the above mentioned ICO Securities. On the other hand if some more paranoid people are to be believed, Tether might turn into another MtGox and implode with such a force as to crash the crypto prices by a lot.

One way or another 2018 is looking like a year where fiat IOUs might become more important in the crypto space.

Government-backed cryptos

For years a lot of Bitcoiners have been stating that some governments should adopt Bitcoin as a national currency. A few years back we saw Canada looking into doing the opposite - adopting its fiat currency into a crypto form with MintChip. Unfortunately, that project went nowhere, but it's looking like this year we might have the next serious contender - Venezuela aiming to launch its Petro.

Petro is designed to be "backed by oil, gas, gold and diamond reserves", making it a bit more of a commodity IOU than a fiat IOU. It might be an interesting experiment, especially if this creates an alternative to the hyper-inflating bolivar accessible to the people of Venezuela. It will remain to be seen whether the government will be able to keep the value of the new currency stable and keep it backed by the natural resources, or will we one day see the currency stop being backed by anything.

If successful, this might be the first time a government-created currency will have to complete on somewhat equal footing to private currencies and digital cats.

Conclusions

2018 is looking like another exciting year in crypto space. We will see how the echos of the prior year will play out, as well as get to experience entirely new developments shape the space. There is never a dull moment in this industry...