Chia (XCH) is a new cryptocurrency released this year. Rather than using raw computing power to add blocks via proof of work like Bitcoin, a process which is very energy intensive, Chia seeks a green(er) approach by utilizing hard drive space in what they call proof of space and time.
XCH started off with great price strength peaking at over $1,685 per coin on May 14th. This is somewhat arbitrary without the market cap information, which is difficult to independently verify. However, the Chia farming reward of 2 XCH meant the possibility to farm $3,370 per block added. The network difficulty accelerated upwards as people bought hard drives and created plots to farm.
Enter the summer slump in which Bitcoin fell from $63,000 on April 13 down under $30,000. Other cryptocurrencies fell as well, including Chia.
With the drop in the price of XCH down below $200, network difficulty growth has slowed noticeably. Which you can see in the chart above. Difficulty has actually fallen over the past couple of days although I do anticipate the difficulty growth will resume albeit slowly unless and until the price of XCH rises. This slowing in difficulty growth combined with pools, presents an opportunity to acquire some Chia. Another important factor is the reduction in the price of hard drives–the cost per Terabyte (TB) has dipped below $15.
Of course one has to have plots in order to farm Chia. Once a plot is created it can be used to farm for an extended period of time, possibly indefinitely. Plotting on a hard disk drive (HDD) is slow. An SSD or NVME drive is important, combined with a fast processor and memory. This is the side of Chia that isn’t as green, as a lot of energy is required to produce plots.
Another option is to buy plots. I’ve seen plots for sale at a cost of $200 for 110 plots or $1.80 per plot. You also have to pay to ship the drives to and from the company doing the plotting, which we’ll say is $40 total with insurance. Let’s also assume you already have a computer to farm on (an old computer with a quad core 1.5 Ghz processor with 2GB memory would meet the minimum requirements. I’m not adding in the cost of an internet connection, electricity or the cost of the farming computer. I assume most people considering this already have a basic computer with an internet connection. Let’s say we have a 12 TB HDD for $250, we buy 110 plots at a cost of $240. So all in, we have a cost of $490.
If network difficulty were to remain static (which it won’t) at current prices this setup would result in $16 per month. So you’d break even in about 2.3 years. I do expect network difficulty to continue to grow, and as difficulty grows the amount of Chia earned will be reduced. This means that in reality it will take more than 2.5 years to recoup that initial $490 invested. So Chia farming probably isn’t worth it if you’re starting from scratch. If you do “believe” that Chia will take off as a greener alternative to Bitcoin, simply buying Chia directly on an exchange is probably the best bet.
Now, if you already have some HDDs and a fast computer you can plot on, and if it is something you’re interested in learning and spending some time on, it might be worth it to try to farm Chia. This would pay off in particular if the price of Chia rebounds to it’s May highs.
But, starting with little to no hardware, I don’t think it makes sense to farm Chia, you’re better off just buying XCH.
Of course the above takes into account the monetary gain. If you’re just in it for the money. Personally I think the Chia Network is an interesting project and one I find enjoyable to observe and be a part of through farming.
I’ve punched a lot of keys on the ‘ole qwerty debating the merits of cryptocurrency versus gold and precious metals. But when all is said and done, gold has gone up very little while cryptocurrencies have gone to the moon. I was reminiscing on some old articles and I came across “No, Even with ETH at $2 Gazzillion, Ethereum Cloud Mining Isn’t Profitable” and I’m reminded that at one point I could have bought 62 Ether (ETH) for $561. ETH was trading at $9 per coin back then. As of writing ETH is trading at $2,455.48, so those 62 ETH would be up 27,183.1% to over $152,000 in about 4 years or so. Not bad.
I remember reading about the Ethereum network before it even launched. Based on my philosophical musings of money I thought it would important for a cryptocurrency to have non-monetary use in order to be valued over the long term and not just be a speculative fad. The ability for Ethereum to support DApps in addition to “just” being a currency checked boxes and so I chose to buy some ETH. At one point I probably owned 50-60 ETH.
EOS Is Superior to Ethereum based on Several Metrics
Of course the Ethereum network was at that time, like it is now, relatively slow as highlighted by “Cryptokitties” one of the distributed apps built on Ethereum that caused the network to grind to a proverbial halt. To date the most transactions per second processed by the Ethereum network is 19. I decided to sell ETH and instead placed my cap at EOS. EOS was labeled an Ethereum killer at one point and some people said that EOS stands for “Ethereum on Steroids.” Of course this was all before Ethereum went to “the moon.”
EOS uses proof of stake (instead of Ethereum and Bitcoin’s energy intensive and slow proof of work) and has handled up 9,565 transactions per second. In my view, assessing the EOS network and Ethereum network, EOS is superior.
However the market disagrees.
The market capitalization of EOS is $5.9 billion, the market cap of ETH is $285 billion. So clearly the market favors Ethereum.
For a long time I didn’t think this market cap was in any way justified. However, because of Ethereum 2.0 and with Ethereum down 36% from the highs, I’ve decided to buy some ETH.
The “Best” Technology Doesn’t Always Win
It is hard for me not to think that the better technology won’t win out in the medium term. However, this often isn’t the case. Good technology is important, but there is name recognition, brand, leadership and the network effect, which I’ve realized I tend to discount too much.
Apple in the 90s is a great example. Macs at that time were considered to be higher quality, more innovative and easy to use. However, a lot of people used Windows based PCs at work and wanted to use what they were familiar with at home, PCs were less expensive, and more people used Windows in general. So people chose Windows and Microsoft had a larger market share as a result. There were certainly rational reasons for choosing Microsoft Windows/PCs over Apple/Macs even though a strong case could be made for superior Apple technology.
Apple was able to overcome this in the early 2000s and onward but that is a topic for another article.
EOS Has a Likability Problem
A lot of developers are interested in and devote time to Ethereum, a lot of the cryptocurrency community was and is pro Bitcoin and pro Ethereum. Ethereum was sometimes thought of as “Silver to Bitcoin being Gold.” Ethereum entered the scene in a much more diplomatic way.
The technological founder of EOS, Dan Larimer, referred to proof of work as a technological dead end, was more abrasive and alienated more people. There were also issues, perceived and otherwise, that EOS is not in fact very decentralized. EOS had a market cap in excess of $16 billion in April of 2018 but has never recovered these highs.
That is was makes the excitement about Ethereum 2.0 so interesting. EOS can already do a lot of what Ethereum 2.0 is promising to be able to do in the future. But Ethereum has people like Mark Cuban talking about it, it has more name recognition and more development interest. The cryptocurrency community, and people outside the space know about and accept Ethereum in a way other cryptocurrencies can’t match.
Ethereum Has More DAapps
According to State of the DApps, there are 2,782DApps on Ethereum and only 328 on EOS. However, EOS has handled 353.18k in the last 24 hours (as of writing this article) compared to 201.92k for Ethereum. So despite the technological limitations in transaction count and less energy efficient consensus model, developers choose Ethereum on which to build their DApps.
Ethereum Has More Name Recognition
Most people have heard of Bitcoin by now. I doubt many people on the street will have heard of EOS or associate it with the cryptocurrency. Ethereum is much closer to Bitcoin in terms of name recognition. I decided to test my theory using google search trends as a proxy and found that searches for “ETH price” far outstrip searches for “EOS price”. This is an admittedly flawed approach as EOS could also refer to the Canon Cameras, the “Entrepreneurial Operating System” and there is even an EOS fitness. I don’t think Ethereum shares it’s name the way EOS does. But if anything this inflates the number of searches for EOS price beyond those searching for the cryptocurrency.
Ethereum 2.0 Should Address Many of the Performance Issues
Ethereum 2.0 should address many of the performance issues that caused me to favor EOS over ETH in the first place. Add that to the tailwinds it already has and it could be a great speculation. I’ve decided to buy some ETH and plan to continue to average in on pullbacks. You probably shouldn’t listen to me, this isn’t investment advice and I’ve had a bad trading track record when it comes to crypto, particularly on the sell side.
Cryptocurrencies like Bitcoin have taken quite a hit over the past few days. Bitcoin is down under $40,000 from its all time high of $63,000. A variety of factors contributed to this but one of them is recent negative statements about BTC’s poor environmental impact. Bitcoin miner’s use a lot of electricity to process transactions securely in a proof of work consensus model and some people aren’t super happy about it. Elon Musk is one such person and he recently said Tesla would no longer accept Bitcoin as payment because of its environmental impact.
Hard Drives like this Western Digital 10 Terabyte USB 3.0 have been selling like Hotcakes
Well one new cryptocurrency called Chia (XCH) is trying to put a more environmentally friendly foot forward while maintaining security. Their green paper details a new consensus algorithm called Proofs of Space and Time, “PoST”. PoST “replaces the Proof of Work which wastes massive amounts of energy and is less secure against mining centralization.”
An admittedly oversimplified explanation is that instead of using energy intensive processing power to add blocks Chia uses hard drive space. In an age where many people are concerned about energy usage, Chia could be a powerful alternative to Bitcoin and other proof of work cryptocurrencies. For that reason alone, it could easily go up to $50,000 per Chia if it were to replace Bitcoin.
Instead of “mining” Chia has “farmers,” farming requires lots of hard drive space. If you’ve tried purchasing a new hard drive recently you might have noticed the prices have increased dramatically and many are out of stock. The reason for this is because the more hard drive space one has, the more “plots” one can put on them, and the more likely one is to successfully farm chia. Chia farmers have been buying hard drives in bulk and the result has been rising prices and shortages. The number of Chia farmers continues to grow, and hard drive prices have gone up as well, so you might want to buy a hard drive now.
Some people who are anti-bitcoin will argue that the government will shut down bitcoin. Other pro-Bitcoin folks argue that is impossible. Of course these arguments could (and have been) made in a more subtle fashion, but those are the two camps when painted in broad strokes.
Governments Could Pass Legislation Making Bitcoin Illegal
The governments could easily pass legislation to make owning and mining Bitcoin illegal.
The US government has made basic things like alcohol and gold illegal in the past. Drugs like marijuana are still illegal at the Federal level in the US. So the US government has made various things it doesn’t like illegal in the past.
Making highly demanded products illegal doesn’t eliminate them. The black market steps in to supply the demand.
The war on drugs has been a colossal failure. Despite being illegal people with the limited resources and influence of your average high school student can still get marijuana. People in prison can and do still get illegal drugs. If the government can’t keep drugs out of prisons they will never keep them out of the country.
Even the most ardent statist would probably admit that alcohol prohibition was unsuccessful.
I’m not actually certain how successful the banning of gold was as a result of President FDR’s tyrannical Executive Order 6102, which attempted “Forbidding the Hoarding of Gold Coin, Gold Bullion and Gold Certificates”. It would be hard to judge because it would require people coming forward and admitting they violated an executive order for over 35 years. But I suspect there was significant non-compliance.
So prohibition of various things hasn’t worked well in the past. As long as there is demand for something a certain percentage of people who demand it will find a way to get it.
Despite the questionable efficacy of legislation governments certainly could make Bitcoin illegal. But would they?
The US Government will go after BTC if it is deemed a threat to the Dollar
The United States government could certainly pass legislation to make Bitcoin illegal. But I think they would only do this if BTC was viewed as a serious threat to the dollar.
The US government has (according to some) invaded countries and destroyed them for planning go off the petro-dollar and adopt a gold backed currency.
The ability of the US government to borrow in dollars and then create new deposits with which to pay back those dollars is a huge benefit and source of power. This is enabled (without rampant rising prices) because the US dollar is used for trade throughout the world and is held by foreign entities and governments as a reserve currency.
Bitcoin isn’t really a threat to the dollar right now. Sending BTC is slow, expensive, and Bitcoin can only handle about 20,000 transactions per hour. Unless this changes I don’t think Bitcoin will ever be used as money. If trade starts to happen in Bitcoin or oil begins to be priced in Bitcoin then the US government will likely view Bitcoin as a threat.
But right now Bitcoin has several advantages for the government. First, it is highly traceable since all Bitcoin transactions are public. I’m sure tying a person to a Bitcoin address is difficult but it can and has been done. Secondly, the meteoric rise in price and volume of trading means lots of taxable transactions and revenue for the IRS.
But if Bitcoin was a serious threat to the dollar the US government would try to stop it. The first step might be taxing and regulating it significantly. The United States is in the early stages of this first step. The next step might be making it illegal. A final step would be attacking it directly.
But making goods or actions illegal doesn’t make them go away, it just drives that activity underground. That doesn’t mean that government edicts banning something don’t have implications or impacts.
What might be the impacts of making cryptocurrencies like Bitcoin illegal?
The Impacts of Illegal Bitcoin
US Based Exchanges Would Disappear
Coinbase.com is the largest US-based cryptocurrency exchange. It would no longer exist or it would be forced to relocate to a jurisdiction where Bitcoin was legal and they would likely ban and block US customers. Current assets could be seized or forced to be turned over to the government.
Onramps and Offramps would be Reduced
There is a need for onramps and offramps between Bitcoin, government issued currency and real goods and services. Illegal Bitcoin would make it harder to convert Bitcoin and other cryptocurrencies from fiat and vice versa. Die hard Bitcoin enthusiasts might dream of a world in which transactions are conducted in Bitcoin and government fiat is not involved, but based on the current Bitcoin protocol that isn’t possible.
Additional technology like wrapped Bitcoin, which does exist, would be needed to make Bitcoin viable as money. However, this erodes some of the decentralized benefits of Bitcoin, as it requires a trusted custodian. But I digress.
Banks would refuse transfer fiat to known cryptocurrency exchanges. You wouldn’t be able to link your bank account to Coinbase for example. You wouldn’t be able to easily sell cryptocurrencies and transfer the proceeds back into your bank.
Apple and Google would ban all cryptocurrency related apps on their stores.
In order to get Bitcoin you would need to mine it, or find someone who already holds Bitcoin willing to exchange it for something you have. So there would need to be “back alley” exchanges. If one of these deals were to go south, there would be no legal recourse. Of course if you’re exchanging Bitcoin for goods and services with a friend or relative it might work out just fine.
The free market could step in to provide escrow services and some of the illegal exchanges might be trustworthy. Doubtless there would be more sketchy “pirate” exchanges but those might be the target of denial of service attacks conducted by governments. Trading on a “pirate” exchange would require trust in people willing to break the law. The number of exchanges that disappear with client funds or get hacked would likely go up.
Assembly, importing, selling and possession of Bitcoin ASIC Hardware would be Illegal
You can’t successfully mine bitcoin using a basic PC anymore. You also can’t successfully mine bitcoin using even a computer equipped with advanced graphics cards. Mining bitcoin requires ASIC (Application-specific integrated circuit) hardware and a lot of electricity. Owning or possessing this hardware would be made illegal.
People suspected of mining Bitcoins could also have their power usage monitored, similar to how law enforcement will look at the electricity consumption and temperature of houses to try to determine if marijuana is being grown indoors.
I’m sure this would not stop some people from illegally mining Bitcoin, but I do believe it would reduce the amount of miners in the US.
Larger Corporations Would Not Own Bitcoin
Tesla announced they purchased $1.5 Billion in Bitcoin back in January of 2021. This would be illegal and so a company like Tesla would almost certainly not do it. Companies found in violation would be fined, have the Bitcoins seized or would be prevented from doing business in the United States, one of the largest economies in the world. The US could also bully non-US companies into shunning bitcoin like they do with foreign companies who try to transact with countries the US has sanctioned.
ISPs Might be Required to Block Access to Bitcoin related Sites
This would be an inconvenience and would only stop more casual users. VPNs could be used to get around such censorship and so I don’t think effort to stop Bitcoin would be very effective. However, it would make it somewhat more difficult or slower to connect to nodes, or transact in Bitcoin. Barriers to entry, particularly for less tech savvy users, would be negative for Bitcoin.
Bitcoin addresses would be tracked
I know governments already track Bitcoin wallet addresses used or suspected of being used for illegal activity. Bitcoin is pseudonymous and somewhat decentralized but it isn’t anonymous. All Bitcoin transactions are available for anyone to view.
Government agencies in charge of enforcing a Bitcoin ban would no doubt spend a lot of time tracing large Bitcoin transactions on the network and attempting to determine who controls those addresses.
This is a complicated effort but given enough time and resources it could be done. This would be a challenging effort no doubt and the Bitcoin community would likely try to do coin mixing or work to make the network anonymous.
So those are some possible results I see unfolding if Bitcoin was made illegal. But just making Bitcoin illegal is only a phase 2 approach. Government could go even further and attempt to attack Bitcoin directly.
The Impacts of a Bitcoin Attack
A 51% Attack
If an entity or group controls 51% or more of the mining/hashing power of a network like Bitcoin they could prevent new transactions from taking place or being confirmed, they could mine empty blocks in which no transactions were processed or they could double spend their Bitcoins.
The US Government is willing to spend tens of billions of dollars on the war on drugs each year. They are definitely willing to spend more than that to defend US dollar hegemony if Bitcoin was a threat.
The NSA could build bitcoin mining data centers and launch a 51% attack on the Bitcoin network and they would be willing to spend Billions of dollars to do so. This would be challenging as it would require ASIC hardware and a lot of electricity.
According to this website an attack would cost $716,072 per hour. This would be about $6.2 billion per year.
The US government spent $29.4 billion on the war on drugs in 2018, so $6.2 billion is chump change. The attack would not need to be done for an entire year. They could do the attack for a few months, or a few hours each day, just to disrupt the network and cause chaos and tank the price.
A 51% Attack by the Chinese Communist Party (CCP)
Would the United States devote the money to launching a 51% attack on Bitcoin? I think so if it was a threat to the dollar. But I don’t know how likely that is.
A 51% attack on the Bitcoin network is perhaps most likely to come from the Chinese Communist Party (CCP). The hashing power and cheap electricity are already in China: 65% of Global Bitcoin Hashrate is Concentrated in China. Even if that number overestimates Chinese hashing power by 14% it is sill enough. An October 2018 study wrote, “As of June 2018, over 80% of Bitcoin mining is performed by six mining pools, and five of those six pools are managed by individuals or organizations located in China.”
A more recent estimate predicts 65% of the Bitcoin Hashrate is concentrated in China. By my own determination of country designation, in conjunction with data from https://www.blockchain.com/charts/pools, Chinese affiliated mining pools account for at least 55% but perhaps up to 62.5% of the last 587 blocks mined (as of 28 February 2021).
That doesn’t sound very decentralized.
The Chinese Communist Party (CCP) could infiltrate the Bitcoin mining organizations in their country in a more clandestine manner or they could seize the Bitcoin hashing power directly. They wouldn’t need to build a new data center or account for new electricity needs, the hashing power and electricity generation is already there.
Electricity in China is very inexpensive compared to nearly all the rest of the world.
The Chinese Communist Party has no problem using cheap, dirty coal to generate 68% of its electricity. As an aside China accounts for 30% of global CO2 emissions. However, some of the power also comes from the abundant and inexpensive hydroelectric power found in certain Chinese regions.
What would motivate the CCP to attack Bitcoin? If it was a threat to their power in some way. Perhaps if it was being used to circumvent their taxes, regulations, capital controls or is just viewed as a threat to their centralized communist ideology. If enough organizations in the west held Bitcoin it might behoove the CCP to destabilize BTC to cause economic disruption for their enemies.
I’m sure the Bitcoin community would come together to try to work around this attack, but it could be highly disruptive. Such an attack doesn’t need to destroy the Bitcoin network forever, it just needs to shake the confidence of enough Bitcoin holders to get them to sell and dissuade enough would be Bitcoin buyers and thus tank the price.
I Don’t think the Government Can Kill Bitcoin But It Can Significantly Maim It
I don’t see much motivation for the US government to make Bitcoin illegal as it isn’t a threat to the dollar. But if it did and they made BTC illegal it would probably reduce the number Bitcoin users by taking away onramps and offramps and prosecuting people found in violation of the law.
Like the war on drugs or prohibition of alcohol I don’t think the government can kill bitcoin just by making it illegal. Through an attack government could cripple Bitcoin and leave it in a semi-comatose state in an out of the way convalescent facility where only a few devoted friends come to visit.
The CCP could be in the best position to successfully attack bitcoin due to their inexpensive electricity and that the majority of hashing power already existing within their jurisdiction.
At a minimum such an attack on Bitcoin would surely result in a price collapse. Would Bitcoin be able to recover? I don’t know. Bitcoin has survived various other incidents and selloffs only to make new highs. So far the HODLers have been well rewarded. But understanding the risks posed by a high concentration of Bitcoin miners in China is important for those who own Bitcoin.
Gold isn’t money, silver isn’t money and I don’t think Bitcoin will ever be used as money. To be fair I don’t think gold and silver will ever be money again–not in a digital world.
What is money? “Money is a commonly used medium of exchange. People wishing to achieve their ends often have to trade. They can exchange their goods directly, if they have matching preferences and suitable goods, or indirectly, with the help of another good, the medium of exchange.”
They key word in the above definition is commonly used.
Bitcoin is very expensive to transfer and it is slow. For large sums of money it is comparable to a wire transfer. But for day to day transactions Bitcoin simply doesn’t deliver.
“The standard set by the Bitcoin community is six transfer confirmations before it is complete. Each confirmation can be expected to take about 10 minutes, thus getting an average of one transaction per hour.”
The fees are also not cheap. The cost is based on a variety of factors but according to this calculator a transaction would cost between $5-10 at the time of this writing.
That’s a bargain if you want to transfer large amounts (say $20,000 or more) of value outside the banking system but not great if you’re buying a coffee.
On a volume perspective Bitcoin is somewhat archaic. It can process about 20,000 transactions per hour. Compare this to Visa, which can process 65,000 transactions per second.
So unless Bitcoin becomes transactions become dramatically faster, cost less, and allow for more volume. It is difficult to see how Bitcoin would ever be used as money.
If ever there was a case study on the advantages of name recognition and first mover it is Bitcoin. There are dozens if not hundreds of altcoins technologically superior to Bitcoin, that have a market cap significantly lower than Bitcoin. Some of the major Bitcoin flaws I see are the following:
Bitcoin is slow, taking a minimum of 10 minutes per transaction but realistically at least 20 or more minutes.
Bitcoin transactions are expensive
It is energy intensive
Source: bitcoinfees.info
Let’s say you want to use Bitcoin to buy a $2 cup of coffee. You’re going to have to pay $0.36 cents, wait 10 minutes for the transaction to get picked up, and nearly all vendors require 1-2 transaction confirmations to prevent double-spending. It doesn’t work practically speaking.
And yet the Market Capitalization of Bitcoin is over $143 billion. The next closest cryptocurrency, Ethereum, doesn’t come close, having a market cap of $18.8 billion.
The price and Market Capitalization of Bitcoin peaked in December of 2017. The market cap was as high as $327.1 billion on the 16th of December.
Bitcoin was groundbreaking and truth be told I still own some Bitcoin. But I believe that if another cryptocurrency took its place as the biggest crypto by market cap it would be a good thing. I’m calling for the death of Bitcoin.
I also think this provides an investing opportunity, or perhaps more realistically, a speculative opportunity. There are a variety of other cryptocurrencies that excel far beyond Bitcoin in a variety of ways, be it speed, security, anonymity, energy efficiency, user-friendliness, the list goes on.
I think this provides a speculative opportunity. Cryptocurrencies like EOS or other projects with real-world use cases could go up dramatically in value. There are hundreds of cryptocurrencies and a lot of them will probably be worth very little in the mid to long term.
It’s worth educating yourself on the various cryptocurrencies projects apart from Bitcoin. It might be worth investing in a few if you think they could have future promise.
Coinbase has a program that allows you to learn about various cryptocurrencies and earn free crypto at the same time. My referral link for EOS can be found here coinbase.com/earn.
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