DECRYPTING CRYPTO, PART II: Bucknell professor continues to decypher digital currency

Decrypting Decrypting

Crypto Crypto Part II Part II

Bucknell professor explains ins and outs of digital currency

Story by Inside Pennsylvania

In the Winter issue of Inside Pennsylvania, Karen McGrath, professor at Bucknell University, provided a basic primer in cryptocurrency. Because this topic is so new to many of our readers — and the “need to know” is expanding so quickly — Professor McGrath has answered a few more questions. QUESTION: Is it true that Satoshi Nakamoto, the “father” of cryptocurrency, whether “he” is a man, woman or group of people, has never accessed any of the Bitcoin wallets that were established in his name? ANSWER: It is! It seems crazy to imagine, especially given that Bitcoin has gone from essentially $0 when they were originally mined to a high of nearly $67,000 per Bitcoin. Q: Do we have any idea how much Bitcoin is in those wallets? A: Not exactly, but we have a pretty good guess. Assuming that Nakamoto mined the first block of assembled transactions, researchers used his mining pattern to identify 1.1 million Bitcoin awarded to that single rig in the first year of mining. No matter how you look at it, that’s a fortune in the billions just sitting there. Q: Is it a better plan — rather than directly buying cryptocurrency — to invest in firms with cryptocurrency holdings? A: It can be, “yes.” When you’re investing in a company with crypto holdings such as MicroStrategy and Tesla, which are No. 1 and No. 2 in corporate holdings, respectively, you’re investing in a company that is providing some kind of good or service. They just happen to view crypto as a component of how they manage their operations. MicroStrategy’s ‘product’ is business intelligence, mobile software, and cloud-based services, and we all know Tesla makes electric vehicles. Perhaps more importantly, while cryptocurrency holdings will affect the company, and investors need to take that into consideration, these investments don’t have the same level of volatility as a pure crypto play. In fact, other well-known companies like PayPal, and Nvidia are also highly invested in crypto.

Or, you could invest in a Bitcoin mining company which is riskier than a more diversified firm, but still not a direct crypto play. Q: Is Coinbase a kind of investment firm? A: No, it’s a cryptocurrency trading platform similar to Robinhood, but for cryptocurrency. The core business of Coinbase is providing people with a user-friendly platform for people to access, store, and buy cryptocurrencies. In fact, Tesla used the Coinbase platform to establish their crypto holdings. Q: Bitcoin’s value increased during the pandemic. Does this increase reflect an increase in value or an increase in buying and selling? A: Any time something goes up, we can say that it has increased in value. So, yes, the price increase in Bitcoin means that it has increased in value. But because there really isn’t anything underlying it — like sales of T-shirts or the backing of a country — the value of Bitcoin is totally dependent on what someone else is willing to pay for it. In this case, a lot more people are buying, not selling. KAREN MCGRATH Q: Is Doge the same as Bitcoin? A: Yes and no. Dogecoin is a form of cryptocurrency just like Bitcoin, but it’s also different because there are no limits to how much can be mined. One of the most interesting things about Doge is that it was actually launched as a joke, poking fun at crypto speculators with a cute dog as its logo. The joke was on the founders as it gained popularity. It is a continual Reddit favorite, and was the subject of numerous Elon Musk tweets. Because, really, who doesn’t like a cute dog? Q: Are there miners for all cryptocurrencies, not just Bitcoin? A: Yes. All cryptocurrencies are mined. Q: I’m guessing crypto miners don’t need a pick and shovel. What do they need to “mine”? A: Computer power. Lots and lots of computer power. Did I mention a lot of computing power? Currently, the majority of cryptocurrencies rely on something called “proof of work” in order to validate all of the transactions in a block, which is a digital ledger. In short, miners compete with each other to be the

first to solve a math puzzle. The winner’s reward is new, or mined, currency. The more valuable the crypto (like Bitcoin), the more people want to mine it. For miners, the problem with Bitcoin is that it is engineered to react to the presence of more computing power (miners), by making the problem more difficult to solve. More computing power increases a miner’s chances of earning currency. Q: So, a miner’s computer uses an incredible amount of electricity? Why? A: Since the odds of being the first to solve the puzzle increases with greater computer power, it then further increases the difficulty of the puzzle, which requires more electricity and the cycle continues. A single miner can get lucky, but most serious miners form consortiums, or pools, in order to combine their computing resources. This enables them to compete with each other and other companies who are dedicated solely to mining crypto. This increased scale means that more electricity is required to mine each coin. To put things into perspective, the Digiconomist Bitcoin Energy Consumption Index estimates that the energy used to mine 1 Bitcoin is equivalent to over 75 days of the average household’s power use in the U.S. At the current rate of mining, that’s enough electricity to power over 68,000 homes each day. Q: Is it true that some countries are banning mining because they don’t have the electrical power grid to support these gigantic computers? A: Yes. China just banned miners for this, and other reasons. Originally many miners established themselves in countries where the cost of electricity was cheap, such as Kazakhstan and Iran. But both countries have had to place temporary bans on mining, or ration power, because their grids became overwhelmed due to mining. Interestingly, the U.S. is now a top destination for crypto miners. States like Kentucky, New York, Texas, and Georgia are currently popular and other states, including Pennsylvania, are actively seeking to attract crypto mining operations. Q: How many miners are there in the world? A: I have no idea. Some estimates say 1 million. Just like physical mining, you can have small, individual operators and you can have large, publicly traded miners. But in general, there are so many variables: equipment availability, chip shortages, energy prices … I really have no way to answer this question. Q: If I can go to an ATM and use dollars to buy Bitcoin, can I also go to the ATM to cash in Bitcoin and get dollars out? A: Usually, yes. Though not all Bitcoin ATMs, and they are called ATMs or BTMs, have the ability to sell your crypto or

dispense cash. Just like conventional ATMs, different BTMs are operated by different companies and have different capacities. So check to make sure that the machine you’re using has the ability to sell your crypto in exchange for dollars. If it does, then all you need is the wallet address that holds the Bitcoin you want to sell and follow the instructions. Beware though, the fees for using the ATM are transaction-based and can range from 9 to 20%. Q: Probably most of our readers have seen Matt Damon, one of the world’s best-known actors and someone who seems like a really trustworthy person, speaking on behalf of a company called Crypto. What is Crypto.com? A: You are not the first person to ask this. Yes, the company is Crypto.com and it is a platform similar to Coinbase. Both companies allow users to trade cryptocurrencies and store them in a digital wallet. Coinbase appears “... REMEMBER, CRYPTO LITERALLY JUST to be a bit more user-friendly, and provides a lot of educational material on different currencies CELEBRATED ITS 13TH and their underlying uses. You BIRTHDAY. AND, LIKE MOST TEENAGERS, IT’S are able to earn coins by going through their tutorials. Crypto.com seems a bit more slick, and better GOING THROUGH THAT for someone for whom crypto OFTEN AWKWARD, AND transactions are a steady part of their life, which makes sense as it SOMETIMES PAINFUL began its life as a crypto payment PROCESS OF FIGURING OUT JUST WHAT IT’S platform. They even offer a Visa debit card! Q: Are cryptocurrency exchangeGOING TO BE WHEN IT traded funds regulated? GROWS UP.” A: They will be, but first someone has to figure out how to actually regulate them. Investors have been clamoring for these funds for what seems like forever, and it just isn’t happening. However, this year, the SEC Chairman did hire a cryptocurrencies and digital assets advisor, so that might be a good sign. Q: Do you want to remind our readers of your advice about investing in cryptocurrencies? I understand the fascination with Bitcoin and other cryptocurrencies. But, remember, crypto literally just celebrated its 13th birthday. And, like most teenagers, it’s going through that often awkward, and sometimes painful process of figuring out just what it’s going to be when it grows up. At the moment, it’s a high-risk asset, and not a place to put money that you can’t afford to lose. Investing isn’t about getting rich quick or constantly trading the next hot thing — that’s gambling or an expensive hobby, and if it really worked, then we’d all be rich. True investing is buying assets that will, on average, appreciate over time and be there when you need them. That might be crypto someday, but it’s not today. IPA ● Karen McGrath is an assistant professor of finance at the Freeman College of Management, Bucknell University. Visit dailyitem.com to read Part I of the series.

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