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Bitcoin has 3 flaws — and that could set the stage for other alternatives, says Cornell economist

IDBS ART GALLERY

According to a Cornell University professor, Bitcoin, the world’s most well-known cryptocurrency, has a few flaws that have prompted other digital currencies to develop more viable alternatives.

According to economics professor Eswar Prasad, bitcoin is not as anonymous as people believe, and “mining” bitcoin is bad for the environment.

It’s also ineffective as a currency, he told CNBC on Thursday.

One intriguing aspect is that other cryptocurrencies have developed solutions to some of bitcoin’s flaws, according to Prasad, who was previously the head of the International Monetary Fund’s China division.

1. Mining harms the environment

Bitcoin mining is the time-consuming and energy-intensive process of creating new coins and ensuring the payment network’s security and veracity.

The electricity used to validate transactions on the bitcoin blockchain, as well as the mining process, is “certainly not good for the environment,” according to Prasad.

Tesla CEO Elon Musk announced last month that his electric car company will no longer accept bitcoin as payment due to environmental concerns, causing the price of bitcoin to plummet by 5% in a matter of minutes.

He has since reversed his position, saying in a Sunday tweet that Tesla will accept bitcoin in transactions if it can confirm “reasonable” and “clean energy usage by miners.”

Crypto miners use custom-built computers to solve complex mathematical equations that allow a coin transaction to take place. Miners are compensated for their efforts by being paid in cryptocurrency.

According to the Cambridge Bitcoin Electricity Consumption Index, the entire process of creating a bitcoin requires a lot of energy and can consume more power than entire countries such as Finland and Switzerland.

On the other hand, Ethereum — the second-largest cryptocurrency that is sometimes viewed as an alternative to bitcoin — is developing a new method of mining that requires less energy, according to Prasad.

It is the underlying mechanism for ethereum that activates so-called “validators” on the network if they can prove that they have ether, or a “stake.” It is known as “proof of stake.”

In the end, it should eliminate the need for massive amounts of computing power to validate transactions, and the Ethereum Foundation claims it will use 99.95 percent less energy than before.

“That will be much less energy intensive, and it may provide many of the benefits that bitcoin was supposed to provide. It may also make transactions cheaper and faster “Prasad stated.

However, it’s not there yet, he added.

2. Not so anonymous after all

US law enforcement officials announced earlier this month that they were able to recover $2.3 million in bitcoin paid to a criminal cybergroup involved in the May ransomware attack on Colonial Pipeline.

According to the FBI, its agents were able to identify a virtual currency wallet used by the hackers to collect payment from Colonial Pipeline.

“The main idea behind bitcoin… was to provide pseudonymity,” Prasad explained. “However, it turns out that if you use bitcoin frequently, particularly if you use bitcoin to purchase real goods and services, it becomes possible to eventually link your address or physical identity to your digital identity.”

What’s interesting, he says, is that other cryptocurrencies are attempting to address this issue and provide greater anonymity. As examples, he mentioned Monero and Zcash.

Getty Images/Chris Ratcliffe/Bloomberg

“So bitcoin has really sparked a search for a better alternative, and people appear to be on the lookout for a medium of exchange that does not require them to go through a trusted institution like the government or a commercial bank — but it’s not quite there yet,” Prasad said.

3. Doesn’t work well as a currency

Bitcoin was supposed to provide an anonymous and efficient medium of exchange in theory, but “it hasn’t worked in that regard,” according to the economics professor.

Rather, using bitcoin to pay for goods and services is “slow and cumbersome,” and the market is extremely volatile, according to Prasad.

Bitcoin is prone to large swings in volatility, as evidenced by its 30% drop in a single day last month.

“So you could take a bitcoin to a store one day and get a cup of coffee, and the next day, you could treat yourself to a lavish meal with the same bitcoin. As a result, the medium of exchange suffers as a result “He stated.

Bitcoin has become a speculative asset for people who want to see its value rise rather than use it as a payment method, according to Prasad.

source-cnbc

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