The leading crypto-currency’s economies of scale in mining and its transaction system’s vulnerability bitcoin price jan 2015 subversion by a dominant miner make it unsound. The author is a Reuters Breakingviews columnist.
The opinions expressed are his own. Bitcoin’s defects will hasten its demise in 2015. As seignorage declines it will become cost-uncompetitive for transactions. These flaws will cause its price to lose further altitude. As a reward, miners receive more bitcoins, distributed randomly. By combining their activities, the currency’s creators can increase their probability of receiving a bitcoin, which can be shared between them.
Assuming miners are risk-averse, the system slants toward monopoly. This theoretical tendency is validated by the current bitcoin setup, in which a single mine, GHash. IO, which pools the interests of individual participants, currently controls about 39 percent of mining activity, according to Blockchain. If mining bitcoins is profitable, big miners can use this seignorage to subsidize transaction fees. Once mining profits disappear, transaction fees must subsidize mining, since only active miners can validate transactions. This makes bitcoin uncompetitive with other electronic transaction systems in the long term. Bitcoin’s flaws are becoming more evident, which may explain why prices more than halved in 2014.