The first time I heard about Bitcoin was in the summer of 2018 during a casual conversation with a Russian professor of economics. The price action was around $8k per coin.
At that time, I was unemployed, looking for a job, and wanted to help my parents and one of their friends improve their financial situation while I improved mine. My parents’ friend was an 80-year-old guy with his life savings and investments in one of the region’s top banks that managed two of his portfolios.
He managed to save and invest since 1955. Still, for some inexplicable reason, his wealth was approximately €350k, which is incredibly low for living in one of the top 5 countries of the European Union and having the most minimalistic lifestyle I have ever seen.
So how did decades of traditional saving lead to €350k? Did Bitcoin change his life?
This story will walk you through the complexity of Bitcoin as a technology (network) and financial asset (coin) using conversational language, comparisons, and examples to explain topics that several professionals with master’s or Ph.D. degrees in Economics, Finance, or Computer Science don’t understand or aren’t interested in understanding.
This isn’t another crypto success story. It’s a critical examination of what happens when traditional finance meets digital disruption. Sometimes, the most important lessons come from questioning both sides of the equation.
WHAT IS BITCOIN: BEHIND THE IMPORTANCE OF THE “RAT POISON” ARCHITECTURE
Is Bitcoin worth it? Is it safe? How could an asset grow by more than 10k times in less than 10 years? If it’s too good to be true, it should be a Ponzi or a scam, right?
Bitcoin is more of a technology than a financial asset, but at some point, both concepts merged since they became interdependent to cover the network’s sustainability.
First, let’s explore the complexity of the Bitcoin network, its characteristics, components, and flaws to know how “safe” it is as an infrastructure.
THE BITCOIN NETWORK: WHY DOUBLE-SPENDING CAN DESTROY A DECENTRALIZED BLOCKCHAIN
The network is where everything starts and could potentially end. According to Satoshi Nakamoto’s white paper, Bitcoin was created as a purely peer-to-peer version of electronic cash and a solution to double-spending. A system that would allow payments without relying 100% on a third party which for marketers means decentralization even if this word isn’t mentioned in the Bitcoin white paper.
The double-spending dilemma could also exist in banking or other types of centralized systems but in this environment, it is easily “solved” by implementing TTP (Trusted Third Party) models which are used by entities that facilitate interactions between two parties. The problem here is that these parties have to be fully trusted to act on behalf of their client’s interests. The concept of trust here also means there is no way to verify if the system is operating in your interests, hence the need to trust it.
Is The Banking System Secure?
When you use the traditional banking system to send money or make a payment, you’re not actually doing it yourself; instead, you’re giving an order to your bank to handle it for you. They maintain the ledger and check that you have enough funds to complete the transaction. The issue here is that you depend entirely on them to fulfill this task, which operates within a system that lacks transparency and has a central point of failure susceptible to hacking, corruption, or mismanagement.
You should know that banks aren’t obligated to disclose hacks publicly. Therefore, while major bank hacks do occur, the specifics are often kept confidential. News reports may emerge about a bank experiencing “IT issues” or “service disruptions,” which could be a sign of a cyberattack, but the bank may not confirm the details except for communicating the news to people directly impacted or when the hack is too big to be hidden. Hacks in traditional banking are more common than you think and, in some cases, clients aren’t protected by law.
The problem here is so big that it is expected that by 2025 cybercrime could cost $10.5 trillion. Cyberattacks are particularly devastating because, according to IBM, it takes on average 212 days to detect a breach and 75 extra days to contain it. This means hackers count for approximately more than 9 months to infect computers, servers, and networks.
The financial sector is the second preferred target of hacks after the healthcare industry.
Here are some cybercrime numbers:
- Europe: Nearly four out of five (78%) of the 240 largest banking institutions suffered a cyberattack in the past year.
- Australia: A major financial services provider experienced a data breach, exposing the personal identification and passport information of 8 million customers.
- India: Data security incidents affecting banking institutions have risen sharply (50%) in 2023, indicating a significant escalation of cybercriminal activity.
This unveils a silent security problem that is hidden by banks and legacy media and taken in most cases as if it isn’t something serious due to the lack of transparency to report the crime to clients.
Where Does Blockchain Security Rely?
The initial goal of the Bitcoin network creation was to solve the double-spending problem under a PoW (Proof-of-Work) mechanism and without relying on a third party as in the case of banks or any centralized authority. Double-spending happens when someone tries to spend the same digital asset more than once. In a decentralized blockchain like the Bitcoin network, a series of participants are involved during a transaction to prevent this type of fraud.
Bitcoin prevents double-spending by combining:
- Blockchain Ledger: A transparent, tamper-proof record of all transactions.
- Decentralized Verification: Thousands of computers (nodes) ensure every transaction is unique and valid.
- Miners’ Role: Miners solve cryptographic puzzles to validate transactions, making them irreversible and secure.
Despite the blockchain consensus mechanism to guarantee network security, every blockchain faces vulnerability attacks. These attack strategies come in different forms. The most popular and severe is the 51% attack.
What Are 51% Attacks?
A 51% attack occurs when a single entity or group gains control of more than 50% of a blockchain network’s mining or computational power. This majority control allows the attacker to disrupt the network’s operations and manipulate the blockchain ledger.
How Does A 51% Attack Happen?
Gaining Majority Control: In Proof-of-Work (PoW) blockchain networks, miners compete to solve complex mathematical puzzles to validate transactions and add new blocks to the blockchain. If an individual or group manages to control over 50% of the network’s total computational power (hash rate), they can dominate this process.
Potential Actions By The Attacker
- Double-Spending: The attacker can spend the same cryptocurrency units more than once by reversing transactions they made while in control. This is achieved by creating a separate, longer version of the blockchain (a fork) where the attacker’s transactions are excluded, effectively invalidating them on the original chain.
- Blocking Transactions: They can prevent other miners from completing valid blocks, thereby halting transaction confirmations and freezing the network.
- Preventing New Transactions: The attacker can refuse to include new transactions in blocks, effectively censoring participants.
Limitations Of A 51% Attack
- Inability to Alter Historical Blocks: The attacker cannot change transactions confirmed in older blocks, as altering these would require rewriting the entire blockchain history, which is computationally infeasible.
- No Creation of New Coins: They cannot create new coins out of thin air or alter the total supply of the cryptocurrency.
- Limited to Recent Transactions: The attack primarily affects recent transactions and the ability to confirm new ones.
Consequences Of A 51% Attack
- Loss of Trust: Such an attack undermines confidence in the cryptocurrency’s reliability and security.
- Market Impact: The perceived vulnerability can lead to a decline in the cryptocurrency’s value.
- Economic Costs: Executing a 51% attack, especially on large networks like Bitcoin, requires immense computational resources and energy, making it economically unfeasible for most attackers.
In August 2020, the Ethereum Classic blockchain experienced multiple 51% attacks. They occurred due to the low network hash rate, the viable economic costs, the poor mining pool distribution, and the scarce number of members in the dev community. However, they solved the issue approximately 48 hours later and proposed changes to their initial POW mechanism to reduce the possibilities of new attacks.
Even if a 51% attack didn’t end with the Ethereum Classic network, it immediately damaged trust in the network which was reflected in the dev community’s growth in the long term.
How Realistic Is A 51% Attack On The Bitcoin Network?
We must analyze both networks’ (Bitcoin and Ethereum Classic) hash rates, economic incentives, and developers’ numbers to estimate the chances of a potential attack.
A) Hash Rate Comparison (Network Security)
The higher the hash rate is, the more decentralized the network becomes due to better-distributed mining power among miners or mining pools which is reflected in energy consumption.
Bitcoin (BTC)
- Current Hash Rate: ~825.7 exahashes per second (EH/s)
- 1 EH = 1,000,000 terahashes per second (TH/s)
- Equivalent:~825,700,000 terahashes per second (TH/s)
Ethereum Classic (ETC)
- Current Hash Rate: ~245.73 terahashes per second (TH/s)
This indicates that Bitcoin’s hash rate is about 3M times greater than that of Ethereum Classic.
Comparison with Banking Systems and Countries
- Banking System: Estimates suggest that the traditional banking system consumes about twice as much energy as the Bitcoin network.
- Countries: Bitcoin’s energy consumption is comparable to that of medium-sized countries. For instance, its annual consumption of 175.87 TWh is similar to that of Poland.
This means that if a group or entity wants to attack the Bitcoin network, they will have to invest as much as the annual energy consumption of Poland, which is considered a mid-sized energy consumer globally.
This security comes at a cost – both financial and environmental. Is this trade-off worth it for the average investor?
High energy costs could be seen as something positive and negative at the same time. It will depend on who you ask.
According to Vitalik Buterin, Ethereum Co-founder, “Bitcoin’s security model is revolutionary, but its energy consumption is a legitimate concern.” On the other side, Michael Saylor, MicroStrategy CEO, thinks “The cost of securing the network is justified by the value it protects.”
Bitcoin Network Security takeaway
- Bitcoin’s security relies on massive computational power: comparable to Poland’s annual energy consumption
- Traditional banking hacks are cheaper but potentially more profitable
- The network has never been successfully 51% attacked even if minor bugs have been reported and solved
- Success attack probability: Questionable
- Economic incentive for hackers: Likely negative ROI
- Question: Does mining power (high hash rate) cost represent a form of centralization?
According to some analysts and some of the most popular criticism, Bitcoin mining could be considered a form of centralization due to its difficulty and cost. However, Bitcoin mining companies are derivating part of their revenue in R&D to make mining activity more cost-efficient. This enables them to find cheaper energy sources and at the same time set partnerships with communities around the globe.
These are some examples:
- Malawi (Africa): A Bitcoin mining company called Gridless is working with local hydroelectric plants to monetize excess energy capacity, helping to fund rural electrification projects.
- Texas: The state has become a hub for Bitcoin mining using excess natural gas that would otherwise be flared, reducing methane emissions while creating value.
Last year, I wrote an article that was a review of a YouTube video where I debunked James Jani’s point of view about Bitcoin. To explain the decentralized nature of the Bitcoin network I explained how mining activity is becoming more decentralized and sustainable thanks to the Bitcoin Mining Council (BMC), mining companies, and countries like Paraguay which are working together to make mining more sustainable even if they are still facing some environmental and social issues.
Additionally, Bitcoin mining companies are currently exploring operations on AI activities which sets a positive challenge to the industry since they are diversifying energy usage. This may lower their participation in the hash rate growth reducing competitive pressure on the Bitcoin network but at the same time giving opportunities to new companies to participate in Bitcoin mining activities.
B) Economic Incentives and Attack Feasibility
The cost of controlling 51% mining power becomes more expensive.
Estimated 51% Attack Cost for 1 Hour (in Blockchain Networks)
- Bitcoin: ~$1.3 million per hour
- Ethereum Classic: ~$4,200 per hour
As I mentioned before, the 51% attack in the Ethereum Classic network was solved in approximately 48 hours which is a fast reaction time if we compare it to the banking system that typically needs several months to solve the hack.
In 2016, the Central Bank of Bangladesh was targeted to exploit vulnerabilities in the SWIFT payment system. The attackers attempted to fraudulently transfer nearly $1 billion from the bank’s account at the Federal Reserve Bank of New York. While most transactions were blocked, approximately $101 million was successfully transferred, with about $63-$81 million remaining unrecovered (direct losses).
The hackers’ investment to attack the Central Bank of Bangladesh oscillated around $50k. However, it took the Central Bank of Bangladesh 48 hours to detect the attack, meaning the attackers had spent around $1k per hour to execute the hack.
Central Bank of Bangladesh (2016 SWIFT attack) estimated hack investment
- The hack was detected after 48 hours
- Estimated total investment by the hacker(s): $50k
This is an estimation since the Central Bank of Bangladesh never disclosed the potential investment attackers could have made to hack the system. The hack cost estimation includes exploitation of SWIFT System vulnerabilities, phishing or social engineering tactics, insider collaboration (if any), and infrastructure and operational costs.
C) Developers
When an attack happens they are in partial charge of the system defense since they should build security measures to stop the attack using technical and hardware resources to defend the network.
Bitcoin (BTC)
- The Bitcoin Core project had around 40-50 regular core developers who frequently contributed code.
- The broader Bitcoin ecosystem (including Lightning Network, wallets, and other Bitcoin-related projects) had several hundred active developers.
- Electric Capital’s Developer Report from 2023 indicated that Bitcoin had approximately 900-1,000 monthly active developers across all Bitcoin-related projects.
Ethereum Classic (ETC)
- The development activity was significantly smaller compared to Bitcoin.
- ETC had around 10-15 core developers working on the main client implementations.
- The total ecosystem had roughly 50-100 active developers across all ETC-related projects.
51% Attack And Other Types Of Vulnerabilities In The Bitcoin Network
The 51% attack isn’t the only potential vulnerability the Bitcoin network has. There are other types of minor attacks the network has gone through or could potentially experience.
|
Attack Type |
Cost Resources Needed |
Ease Of Execution |
Potential Damage |
|---|---|---|---|
|
51% Attack |
Extremely high hash rate, very expensive |
Low |
Severe (double spending, reorgs) |
|
Transaction Malleability |
Exploits software vulnerabilities, low cost |
Moderate |
Exchange-level disruptions |
|
Routing Attack |
Exploits internet routing vulnerabilities, low cost |
Moderate |
Delays, possible network partitions |
|
Sybil Attack |
Many nodes, moderate costs |
Moderate |
Node-level disruptions |
|
Timejacking |
Low resources, mitigated in Bitcoin Core |
Low |
Transaction delays |
|
Eclipse Attack |
Many nodes, moderate costs |
Moderate |
Node isolation, transaction issues |
|
Dusting Attack |
Very low cost |
High |
Privacy breaches |
|
Miner Attacks |
A high hash rate required |
Low |
Forks, delays, or inefficiency |
|
Cryptographic Exploit |
Immense computational power (e.g., quantum) |
Low |
Severe, network-wide compromise |
|
Fee Sniping |
Moderate hash rate |
Low |
Transaction delays |
|
Wallet Exploits |
Software bugs or social engineering, low cost |
High |
Loss of funds |
This time we aren’t going through the specifics of each vulnerability because this section of the article is a technical overview that aims to help you understand Bitcoin from a technological perspective and measure the potential risks of Bitcoin as an investment.
However, it was important to examine the 51% attack since it is the most severe and real example of an attack registered until today.
The other hypothetical big threat to any blockchain network and cryptographic system is quantum computing. However, according to Vitalik Buterin, quantum computing cannot break all forms of cryptographic algorithms. He has added that developers have been working on unbreakable cryptographic algorithm replacements for those that quantum computing can break.
The topic has been studied by different groups like QBT, IDQ, BTQ, and others committed to quantum blockchain technologies. Bitcoin Optech, a non-profit research company that aims to help Bitcoin-based businesses, has published some research articles on the topic since 2018.
While we’ve explored Bitcoin’s technological foundation and security mechanisms in detail, this is only half the story. The network’s non-perfect but robust architecture laid the groundwork for Bitcoin’s emergence as a unique financial asset – one that would challenge traditional investment paradigms and catch the attention of both institutional and retail investors worldwide as it did with me and my friend who struggled to understand it but highlighted its transparency and resilience in comparison to the one of the banking system.
IS BITCOIN A GOOD LONG-TERM INVESTMENT?: PART 2 INCOMING
We’ve dissected Bitcoin’s technological foundation but it is still too soon to know if a robust technology automatically makes for a good investment.
In Part 2, we’ll confront the uncomfortable truths about Bitcoin as an investment:
- How an average traditional portfolio could perform against Bitcoin
- The real impact of market manipulation on small investors
- Why institutional adoption might not be what you think
- The hidden costs of “being your own bank”
Stay tuned as we challenge both the critics and supporters of Bitcoin investment. After all, sometimes the most valuable insights come from questioning our own assumptions.
Sources:
https://www.cnbc.com/2020/02/24/warren-buffett-cryptocurrency-has-no-value.html
https://en.wikipedia.org/wiki/Warren_Buffett
https://www.coingecko.com/learn/crypto-pumpamentals
https://bitcoin.org/bitcoin.pdf
https://www.bitpanda.com/academy/en/lessons/what-is-double-spending-and-why-is-it-such-a-problem/
https://www.investopedia.com/terms/1/51-attack.asp#
https://en.wikipedia.org/wiki/Double-spending
https://en.wikipedia.org/wiki/Trusted_third_party
https://markryan.eu/research/papers/pdf/07-esas.pdf
https://en.wikipedia.org/wiki/European_countries_by_electricity_consumption_per_person
https://decrypt.co/295891/can-quantum-computers-break-bitcoin-googles-latest-chip-sparks-fresh-debate
https://decrypt.co/10786/vitalik-buterin-google-quantum-supremacy-no-problem-for-crypto
https://bitcoinops.org/en/topics/quantum-resistance/
https://www.darkreading.com/cyber-risk/when-banking-laws-don-t-protect-consumers-from-cybertheft
https://www.forbes.com/sites/tedknutson/2018/02/16/no-requirement-for-banks-to-tell-customers-their-info-was-hacked-in-new-breach-notification-bill/
https://www.btq.com/
https://unherd.com/2024/01/the-african-village-mining-bitcoin/
https://www.cnbc.com/2022/02/12/23-year-old-texans-made-4-million-mining-bitcoin-off-flared-natural-gas.html
https://www.innio.com/en/news-media/magazine/article/using-mined-gas-to-mine-cryptocurrency/
https://www.galaxy.com/insights/research/bitcoin-mining-ai-revolution/
