The PoW versus PoS debate

The current big question in the battle between bitcoin and Ethereum, as ETH plans to move from Proof of Work to Proof of Stake, is which works best: PoW or PoS. although it has been an ongoing argument, it has been given some fresh prominence due to the steps Ethereum is taking to speed up the move.

Simon Chandler asks: “While the Ethereum developers have decided that PoS is the best way forward for Ethereum, the question remains as to whether it might offer advantages to Bitcoin, which, as a store of value, has different aims.”

According to Chandler opinion is quite divided in the crypto community: those supporting PoW believe that it is better fro Bitcoin, because it offers greater stability and security. The PoS supporters say that PoS offers similar security, and that it provides more simplicity and scalability, which is very important.

It also has less of an impact on the environment compared with transactions on the Bitcoin blockchain. Pierre Rochard commenting on Twitter wrote, “When Ethereum switches from proof-of-work mining to proof-of-stake, they’re going to push the “green” anti-Bitcoin narrative *hard*. It’s going to be well funded and highly coordinated. If you thought the 2017 scaling debate was ugly, this is going to be much much nastier.” Needless to say, the tweet brought up a lot of differing responses.

Chandler contacted a confirmed Bitcoiner who responded by saying the PoW vs. PoS debate isn’t even worth addressing, adding, “I don’t use shitcoins.” Those who are less partisan see both Proofs as having their own strengths and weaknesses, although it would seem ther is a consensus that PoW is better for Bitcoin.

The main ‘weakness’ with the PoS model is that it is “theoretically more prone to centralization and has the inherent security issue of using the native tokens of a blockchain to decide the future of those tokens or the blockchain,” according to Mike Collyer, CEO at Foundry, a crypto mining finance company. And even those who support Ethereum acknowledge that PoW has its strengths. Lex Sokolin, co-head at Ethereum-focused major blockchain company ConsenSys said, “One of the strongest advantages of proof of work is that it has worked as the chassis for cryptographic security for over 10 years, and now secures a trillion in value. It is technically and economically complex, which plays a role in attracting specialized mining companies to the work of maintaining the network.”

However, Sokolin also said, “Proof of stake is an easier-to-understand system, which allows easier participation through the staking of capital. It is also able to achieve similar security outcomes without the electricity consumption of the proof of work mechanism, and has been proven to work through a number of smaller but functional crypto economic networks.” He also explained why PoS is better for the Ethereum network, which is aiming to provide the digital infrastructure for a future decentralized/crypto-based financial system. “The blockchain-based economic activity that we see is now far above and beyond moving one type of value around on a single protocol. Rather, we see software executed by a global network across payments, lending, banking, investing, and insurance substitutes,” Sokolin said, and stated that this is the main reason Ethereum needs to move to PoS.  But it seems that this is a debate that will rage on in the crypto community for some time to come.

Should you buy bitcoin mining stocks?

According to Fundstrat, Bitcoin mining stocks have generated far greater returns than bitcoin cryptocurrency, even though its recent bull market has shown considerable gains.

However, even as bitcoin miners rush to share in these riches, the gains in the mining market could still be “the most high-risk bitcoin bet of all,” according to Leeor Shimron, Fundstrat’s vice president of digital asset strategy.

Most mining companies are fairly young and “lack track records.” They have also been operating at a loss, Shimron says, yet have still reached over $1 billion in market cap, mostly because during the downturn in BTC’s price, they invested in the hardware and facilities that helped them to “strike it big” in the current bitcoin bull market cycle.

Shimron told investors enquiring about the mining stocks that whilst the stocks were surging, they remain a “high beta play”, given that BTC is up 900% in this last bull run, but the average return among the biggest publicly traded miners was 5,000%, according to his analysis.

We all know that mining bitcoin burns up electricity. To cover this expense, miners sell the mined bitcoin, holding onto some of the BTC on their corporate balance sheet. For example, the North American mining company, Marathon Digital Holdings, recently announced it had purchased an additional $150 million worth of BTC to hold on its balance sheet.

Shimron’s analysis of the largest publicly listed mining companies, including Marathon, showed that the beta these bitcoin mining companies exhibit generates a return of 2.5% for every 1% move in the cryptocurrency. He also said that the miners’ performance is clearly tied to the price of bitcoin, and that as its price increases, “miners spin up new rigs or upgrade their hardware with more powerful and efficient machines.” This is why they have been able to attract investor interest in places such as the WallStreetBets message board on Reddit, which fuelled the mania in shares of GameStop.

Shimron said in a CNBC interview: “For investors looking to gain exposure to miners, that beta makes it a great opportunity during the middle of a roaring bull market. …There are fits and starts and pullbacks, but we still have lots of room to grow here.”

All this interest has been encouraged by bitcoin’s own bull market, which Shimron believes will continue in 2021. Inflation fears are driving the BTC price and whilst yield pressure from the 10-year Treasury could cause a downturn, Shimron says “it is clear from Fed signalling that the central bank wants to keep its dovish policies in place until 2023,” which will help bitcoin. Younger investors are also playing a role. “You see younger people gravitate to bitcoin and other digital currencies as opposed to gold and commodities and it speaks to a demographic shift. … To them it’s not crazy to interact with money in a purely digital way,” Shimron said.

But here is his final advice on investing in bitcoin miners: he said he is “inclined to trade the bitcoin miners in a bull market run, rather than see them as investments to hold for the long-term.” Bitcoin on the other hand is for him a long-term investment.

What’s the difference between gold and Bitcoin?

The answer to that question is simply this: Bitcoin (BTC) is more of a medium of exchange than gold. It stands to become the medium of commerce on the Internet, something that gold will never be.

The Lightning protocol, built to scale transactions on the Bitcoin blockchain, makes online payments to merchants possible via the Visa network, and as I’ve written about earlier this week, Mastercard is going crypto-friendly for payments as well.

Then there is PayPal’s acquisition of Curv, the Israeli startup developing crypto asset custody technology. PayPal is already allowing its US account holders to buy crypto, and while it might be that the PayPal purchase of Curv has more to do with support for Bitcoin as an investment, it is impossible to forget that e-commerce is its main reason for existing. So, there is probably something more afoot than at PayPal, and we may have to wait a while to find out more about its next strategy for crypto.

Galen Moore at Coindesk has taken a look at Bitcoin’s place in e-commerce from two perspectives: its actual use in commerce, and a macroeconomic indicator that highlights one of the ways in which bitcoin is nothing like gold.

First, the Lightning protocol allows for faster and cheaper Bitcoin transactions, and its data is a “good proxy for interest in using bitcoin for everyday commerce,” Moore writes. At the moment, the metrics show Bitcoin’s use in commerce on the internet, remains stuck at a ceiling set in 2019 to stand at about 0.008% of bitcoin’s free-float supply (a Coin Metrics measure of bitcoin held by addresses active within the past five years).

This favours those who see Bitcoin’s use in commerce as negligible, such as U.S. Treasury Secretary Janet Yellen, who said, “I don’t think that bitcoin … is widely used as a transaction mechanism. To the extent it is used I fear it’s often for illicit finance.” That old chestnut!

Moore points out the $100 bill is hardly used in commerce either – a bit like the €500 note that is so rarely seen it was at one time referred to as a ‘Bin Laden’. The Federal Reserve says “Larger denominations such as $100 notes are often used as a store of value, which means they pass between users less frequently than lower denominations.” Indeed the estimated lifespan of the average $100 note is 22.9 years, nearly three times the lifespan of a $20 bill. Yet, the $100 bill is a popular product, with an estimated $1.42 trillion worth of $100 bills in circulation, more than seven times that of the commerce-friendly $20 bill. 

But you can’t compare Bitcoin with lower value dollar bills: it is more like the $100 note, because investors hope that Bitcoin will become like that large denomination bill, to be both a bearer instrument and a store of value. Moore says, “Like the $100 note, bitcoin isn’t valuable necessarily because it is spent, but because it could be spent.” And in this way, it is nothing like gold at all.

Our Bitcoin price obsession ignores its real value

As Bitcoin hovers around $50,000, expert thoughts have moved on to $100,000 as if this is Bitcoin’s next great milestone. But, as Tim Denning observes, this obsession with Bitcoin’s value to owners really misses the point.

Sure, if you bought Bitcoin a few years back, you’ll be delighted if it hits $100,000, but this Is not the end game of the leading crytocurrency. As Denning says: “Bitcoin isn’t an investment. Bitcoin isn’t a get-rich-quick scheme. Bitcoin is a different way of thinking.”

What we should be focusing on is mainstream adoption regardless of the daily price. Because when that happens it will signal that society has moved from a centralised model to a decentralised one. Bitcoin has no country, no government, and no office. There is no single owner of Bitcoin, and if you don’t like Bitcoin, it doesn’t care, because it’s just a algorithm that couldn’t care less about your criticisms.

Instead, Bitcoin is a quiet protest about inequality. It is above all honest. It is a true democracy.

The existing financial system excludes millions of people, and people want that to change, so they are waking up to the ways in which digital assets, such as Bitcoin and Litecoin, which are on blockchains designed for payments, are offering financial inclusion worldwide. That’s why so many people are talking about the topic and coming around to the idea of cryptocurrencies.

Let’s remember that we are still at the early evolutionary stage of Bitcoin and other cryptocurrencies. A lot of things could happen to any one of them. Denning even suggests it could get wiped out. How? Who knows, but such a thing has happened to tech companies in the past.

In a way, Bitcoin’s birth was an accident. Its mysterious creator/s were inspired as banking plunged the world into financial chaos. Nobody outside of the small community of crypto fans paid much attention to it until 2017 when it hit its first ATH. Governments could have banned it then, but didn’t, and it would be pretty much impossible for them to ban it now. The arrival of institutions in Bitcoin trading has protected the asset, besides the protest at such a move would be truly global, and probably led by Elon Musk.

The Bitcoin price barely matters at all: more importantly, Bitcoin is an idea that challenges the social view of ownership. Denning says: “When ownership changes, everything changes. Be open to the inevitable change coming. That’s the point of Bitcoin that seems to be missed.”