In the last few weeks, we’ve been talking about Bitcoin.

Namely, why the evidence still supports long-term higher prices for the gut-punched cryptocurrency.

Today, I want to talk about Bitcoin’s biggest problem — and why it won’t stand in the way of higher prices for Bitcoin.

To do that, we need to talk a little about how Bitcoin and the blockchain actually work.

The word cryptocurrency comes from the cryptography that’s built into the design of the blockchain, the list of records that acts as a public ledger for who owns what.

Bitcoin uses SHA-256 cryptographic hashing as the “proof of work” algorithm.

Here’s what that means…

The SHA-256 hash was developed by the NSA and first published back in 2001. A hash is an algorithm that takes in an input of any size and generates an output of a fixed size. It’s a one-way function, which means that you can’t take the output and figure out what the input was.

To process Bitcoin transactions or mine new coins, miners use powerful computers to try to generate specific hashes.

Since the outcome of a hash is unpredictable, it’s incredibly resource-intensive to mine Bitcoin. Powerful computers need to constantly try a bunch of starting values in the SHA-256 hash until they get an output block with the desired characteristics for the blockchain to verify a transaction. So mining is incredibly hard to solve but once complete, solutions are very easy to verify.

This is by design.

The creators of Bitcoin wanted these problems to be hard to solve so that the number of blocks would be steady.

The side effect of the high computational difficulty generating a proof of work is power consumption. That’s Bitcoin’s Achilles’ heel right now…

By now, you’ve probably heard about the insane power it takes to process a Bitcoin transaction.

It’s pretty insane — a single Bitcoin transaction currently requires around 1,532 kWh of energy. That’s equivalent to the power consumption of a typical U.S. home for 52 days.

In total, Bitcoin’s footprint uses the same power as the entire country of Pakistan.

That energy need is getting a lot of attention right now. But it doesn’t change Bitcoin’s long-term trajectory.

For starters, one key feature of Bitcoin is its fixed supply. Only 21 million bitcoins can exist. And of those 18.7 million have already been mined. While those coins may trade hands more frequently, that fixed supply means there’s a practical cap on transactions.

There are also a couple of factors that could push energy consumption lower, including improvements in computing power and an adjustment in the difficulty of these computational problems once the full Bitcoin supply has been mined.

Some countries have also begun to use the considerable power demand of Bitcoin mining as a way to incentivize expanding renewable power capacity.

According to a white paper published in April by Square and ARK Invest, with unsubsidized renewable energy sources down 70–90% over the last decade, the increased demand driven by Bitcoin makes green generation more economical.

Even though Bitcoin power consumption is a problem that’s grabbing the headlines right now, it’s a transitory problem.

The wonderful thing about free markets is that they self-correct. Higher Bitcoin prices will likely spur big tech improvements in computing efficiency and the energy-generation mix that come with big downstream benefits.

More from this space soon…

Sincerely,

Jonas Elmerraji, CMT