Welcome to this week’s The Bitcoin Espresso! Whether you’re interested in Bitcoin, have just bought your first fractions of Bitcoin, or want to dive deeper into the space — this newsletter is for you. Find out more about the motivation behind this newsletter in the introduction post. Want more news? Follow @thebitcoinespresso on Twitter to stay on top of things between newsletters.

Weekly Summary: Amongst a flourish of bullish news, Bitcoins price nevertheless joined the markets with a significant price drop. The general sentiment seems to be a risk-off move because of an anticipated price hike by the Federal Reserve. If you followed ‟Keeping an eye on Bitcoin with TradingView″ from The Bitcoin Espresso #4, you observed similar movements on the S&P 500 and NASDAQ. The correlation to stocks is so apparent that even the IMF acknowledges it. For today’s news, Twitter has turned on NFT verification, Rio de Janeiro plans to invest in Bitcoin, and Intel is suspected of entering the Bitcoin mining market. This edition’s focus topic covers Bitcoin’s Energy Use and the Difficulty Adjustment Mechanism.

A quick tip: There’s an explanation of words and abbreviations in the Fundamentals Glossary at the bottom.

📰 Essential News

• Twitter has turned on NFT verification: If you’re wondering why you’re reading about NFTs (Non-Fungible Tokens) in this newsletter, check out why I consider Bitcoin an innovation that will cause disruptions across sectors. NFTs, in their essence, are digital proofs of ownership. But that ownership is of questionable worth if it is not checked and verified. Twitter has now enabled the verification of NFT profile pictures, spearheading this part of the ecosystem. Take a look at a video of the user experience here. Especially if you’re new to the topic, focus on the underlying opportunities of the technology and where it could be going rather than getting hung up on current implementations.

• Rio de Janeiro investing in Bitcoin: Mayor Eduardo Paes intends to invest 1% of the city’s treasury in cryptocurrency. They are further looking into discounting property tax if they are paid in Bitcoin. We can observe more and more countries, cities, and organizations putting their trust in the long-term positive development of Bitcoin.

• Intel could be entering Bitcoin Mining Market: Intel, by revenue the world’s largest semiconductor chip manufacturer, is unveiling a cryptocurrency mining chip in February according to the agenda of an upcoming conference. The ultra-low-voltage chip is expected to be highly energy-efficient. This is sometimes understood as an effort to improve the sustainability of Bitcoin mining, but read on to find out why I consider it more in line with Intel wanting a piece of the market.

🎯Focus: Bitcoin’s Energy Use and the Difficulty Adjustment Mechanism

The most controversial topic surrounding Bitcoin is its energy use. Contrary to most articles, I do not endeavor to convince you of a particular opinion. Instead, this article will inform you about a fundamental mechanism built into Bitcoin that is crucial to understand discussions about the topic and form your own opinion — Bitcoin mining difficulty adjustment.

Systems in our day-to-day life often consume more energy to increase their performance. Older bicycle dynamos would shine brighter or longer the faster you pedaled your bike (= provided energy). Cars use more fuel if driven at higher speeds. Bitcoin is not a system with this property.

If most of the global Bitcoin mining network would shut down, the network would still process as many transactions at the same intervals it does now by running on a few regular laptops, hardly using any energy. This is precisely how it worked at Bitcoin’s creation in 2009. You might be perplexed now. Don’t you read everywhere that Bitcoin requires enormous amounts of energy? Phrasing energy use as a requirement could be reasonably condemned as an intentional media bias. Bitcoin adjusts to the energy it is given. Its speed is independent of the energy used. I believe the confusion arises from a general lack of knowledge about mining difficulty adjustment. 

Bitcoin’s blocks, which contain the transactions, are generated every 10 minutes on average. Every 2,016 blocks, the network decides how hard it should be to create a block to achieve the desired 10-minute average timespan. The Bitcoin network adjusts to the currently available computing power. You can confirm this behavior in the publicly available Bitcoin source code. Therefore, the computing power and the electricity provided to Bitcoin are independent of the number of transactions processed. Mining is a mechanism to keep Bitcoin working without a central authority and defend against attacks (read more about this in The Bitcoin Espresso #6). It doesn’t meaningfully affect transaction size or speed.

In that sense, the commonly presented metric of energy use per transaction is more akin to a sample of the energy humanity decides to provide to Bitcoin rather than a consideration of scalability or speed. This is why I consider it highly misleading.

If you want to dive deeper, read this chapter from Mastering Bitcoin. Even if you skip the source code samples, it’s a great source to gain a solid understanding of the topic. Furthermore, if you want to see Bitcoin mining in action, check out @mononauticals visualization here. It shows incoming transactions on the blockchain trickling down before being collected and executed by the latest block.

I hope this introduction gave you a new perspective on this complicated topic and contributed to more informed Bitcoin energy-use discussions.

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💡 Fundamentals Glossary

Blockchain … the digital ledger that the Bitcoin network collectively manages as a shared database of transactions

Cryptocurrency … A digital currency that uses cryptography to prevent counterfeiting and fraudulent transactions. There are other cryptocurrencies besides Bitcoin.

Fed (Fed) … The Federal Reserve System is the central banking system of the US.

International Monetary Fund (IMF) … an institution of the United Nations looking to secure financial stability amongst other goals.

Mining (Bitcoin) … The CPU (processing power) intense activity to process transactions in the Bitcoin network to get rewarded in Bitcoin.

NFT (Non-Fungible Token) … digital proofs of ownership of unique items.

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The Bitcoin Espresso does not constitute financial-, tax- or investment- advice, nor is it an offer or invitation to purchase any digital assets. You are solely responsible for your own investment decisions.

The Bitcoin Espresso is for general purposes of information only and no representation or warranty, either expressed or implied, is made as to, and no reliance should be placed on, the fairness, accuracy, completeness, or correctness of this article or opinions contained herein. 

Some statements contained in this article may be of future expectations that are based on our current views and assumptions and involve uncertainties that could cause actual results, performance, or events that differ from those statements.