EarlyBird Crypto Education Series Part 4: Crypto Caveats

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As tempting as it is to be swept up by the crypto craze (are your parents asking you about NFTs yet?), enthusiasm is a dish best served... with a healthy dose of skepticism. Like any innovative technology, crypto will have to navigate some significant challenges in the years ahead.

From scams to environmental concerns, to the inevitability of government regulation, the future of digital currency and the application of blockchain technology have created some questions that do not yet have answers.

The goal of this post is to outline some of those uncertainties, how they are being addressed, and add just a touch of nuance to our current understanding of this rapidly developing space.

Scammers are everywhere

This is a fact of life and not at all unique to crypto. However, when the movement of money is written in code, with zero human intervention or review — like what might be required for a multimillion-dollar bank transfer — bugs are exploitable to the tune of millions, if not billions of dollars.

Just the other day, the Department of Justice seized $3.6 BILLION worth of Bitcoin that scammers (a Y Combinator alum and a TikTok rapper — #powercouple) had been attempting to launder following a 2016 hack of the crypto exchange Bitfinex.

In 2021, scammers stole a staggering $14 billion over the course of the year. I hear that and can’t help but think, “Wait, isn’t the blockchain super secure? These scammers must be running some technologically complex operations!”

Same Scam, Different Day (sort of)

A lot of scams involved people willingly giving up privileged information over social media (scammers build fake profiles and dupe people with the promise of huge crypto returns), or clicking a dirty link that drained their wallets of its assets. More recently, scammers have gone even bigger with pump and dump schemes and fake press releases. Then you’ve got your legitimate hackers exploiting bad code underlying DeFi platforms (we’ll talk more about DeFi in the next post). I’m excited to see what kind of ingenuity will surface in 2022. “Excited” might be the wrong word, but...

Here’s why I’m not terribly worried about this

Complex systems have more vulnerabilities than simple ones (another fact of life). Buying and holding Bitcoin and Ethereum is a pretty low-risk activity, especially through secure exchanges like Gemini (which is who we’ve partnered with to bring you EarlyBird Crypto, and can also tout the “never been hacked” accolade).

If you want to get into the more complex crypto stuff, just know that you’re taking more risk. And as always, if someone comes to you with an offer too good to be true, don’t click their link.

Alright, onto the next major criticism.

Environmental Endgame

Another major crypto caveat is the controversial impact crypto mining has on the environment.

Bitcoin is mined by millions of specialized computers across the globe in a hugely energy-intensive process. Experts estimate that they cumulatively consume more energy than small countries like Chile, Belgium, or Finland.

Consumption is one thing — emissions are the real issue

On average, Bitcoin mining generates annual emissions comparable to Las Vegas, and nearly 40% of miners across the globe rely on coal for their power source. Admittedly, this isn’t something to be super proud of. But Bitcoin’s blockchain is hands down the most secure blockchain out there. If you don’t think of Bitcoin as anything other than internet money for nerds, then I could see how this isn’t a super compelling argument.

Crypto’s impact on the environment has had major repercussions.  China recently banned Bitcoin mining because miners were contributing to the revival of coal mines.  Tech titan Elon Musk originally said Tesla would accept Bitcoin as payment for new cars, but then switched gears just days later after pointing to the harsh environmental impact of Bitcoin mining.

When it comes to crypto and the environment, the news is not all bad

New “ESG-friendly” Bitcoin-mining projects are finding alternative energy sources to power their crypto creation. Additionally, Ethereum is set to switch to a new consensus mechanism called proof-of-stake. A consensus mechanism is just a fancy way of saying, “how we all agree on what’s on the blockchain.” With proof-of-stake, instead of miners using electricity to guess special numbers (remember from the last post?) to earn the right to publish blocks to the blockchain, the miners (now called “validators”) will be at risk of losing some of their coins if they publish a bad block. I’m oversimplifying, but that’s the gist.

This is relevant to the environment because switching to Proof-of-Stake should consume 99% less energy than the current mechanism, known as “proof-of-work.” Proof-of-Work is the consensus mechanism that Bitcoin uses, and as far as I know, there are no plans to change.

A final note on the environment

I think environmental scrutiny around crypto is entirely warranted. But, if we’re gonna apply that level of scrutiny to crypto, we should probably apply it consistently across the board. For example, idle household appliances in the U.S. consume more energy than Bitcoin and you don’t see many articles written about that.

Miners will take their operation to the places where mining is the most cost-effective (the margins are tight in the mining business!). I’d love to see more mining operations move towards less pollutive energy sources — supposedly, around 40% of miners are using renewable energy sources and many are attempting to make use of “waste energy”. This is something that governments could incentivize through clean mining subsidies. But they probably won’t do that.

And at the end of the day, you kinda have to wonder: how much energy should a non-state monetary system that’s open to every person on the globe consume? I’m not sure I have an answer to that.

Regulatory Risk

Stances from governments across the globe are mixed. El Salvador has adopted Bitcoin as legal tender! In January, the Biden administration has called for crypto regulation and tougher enforcement against bad actors (plus, I think accountants across the country would love some clarity on how the IRS is going to treat this stuff).

India banned crypto transactions in 2018, but their Supreme Court struck down that ruling in 2020.

In China, the government has banned crypto mining entirely, citing its harmful impact on the environment (which is only slightly ironic coming from the world’s largest emitter of CO2). The Central Bank of China is, however, exploring its own Digital Currency Electronic Payment system... which would be a major boon to their digital surveillance efforts.

You can’t blame governments for wanting to wrangle the crypto beast — controlling the money supply is a pretty good gig.

Net-net on regulation

Blockchain technology is incredibly durable. That is rooted in the fact that it is both decentralized and globally distributed. As institutional adoption and innovation surge in the United States, there is a very low probability that crypto gets regulated out of existence (remember, other governments have tried and failed). At its best, regulation protects consumers from bad actors. At its worst, innovation is stifled.

See you in the next post where we’ll be discussing DeFi, NFTs, and DAOs.

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