The curious case of an asset losing 50 pc value in a month

From a historic peak of almost $65000, today Bitcoin, the poster child of the crypto world, hovers around $31,700. In the last one week (June 14 to June 21) alone it has crashed by almost 10 pc. Explanations are many – the Chinese crackdown on Bitcoin mining, Elon Musk’s U-turn and his criticism of Bitcoin’s massive energy consumption, FBI’s seizure of the Colonial pipeline ransom, loss of inflation hedge tag and more. But what causes an asset to lose half its value in about a month? The answer lies in the way Bitcoin was designed (and holds true for Ethereum as well).

The inventor, Satoshi Nakamoto (a pseudonym) in 2008, designed a mathematical system where transactions can happen in the digital world without the need for an intermediary. The transacting parties do not need to trust each other, and there is no need for a central authority. In normal transactions, like say money transfer between two individuals, we gothrough the banks of the sender and the receiver to build trust and to verify if the sender has enough money for the transfer. In Bitcoin world there is no bank! It is indeed a work of art (mathematical art perhaps) as to how A can send money to B when there is no bank to intermediate the transaction.

And that’s where comes the concept of ‘Proof-of-Work’ (PoW). Simply put, PoW means you need to work to earn your reward (in this case bitcoins). The work here means calculating a Hash (a hard mathematical computation) which must give a result acceptable to the Bitcoin network. One of the key health parameters of the Bitcoin network is Hashrate, which indicates the rate at which hashes get generated in the network. The higher the hashrate, the more secure is the network. Current hashrate is 100 ExaHashes (1 followed by 20 zeroes) per second. This massive computation guzzles enormous amounts of energy. One estimate puts the Bitcoin network’s energy consumption at par with that of Argentina. With over $600 bn in market cap some say it’s fully justified (after all Argentina’s GDP is only about $500 bn). However, ESG (Environment, Social & Governance) factors remain a big concern and they are the root cause of the wild hammerhead turns on the crypto roller coaster.