51%: America Vs. China In The Bitcoin Mining War

Bitcoin’s success is not by chance. For those who understand the technology behind Bitcoin that makes it unique, it's easy to see why a (current)$57,000 price tag per coin isn’t completely insane. Bitcoin has created a decentralized currency that cannot be controlled by a single entity. It has no government or council. This decentralization is what gives Bitcoin, as well as other cryptocurrencies, their value. However, that value is at risk.

You may have heard of the term 'bitcoin mining' before. To ensure a secure chain of transactions, Bitcoin relies on users around the world pitching in their computing power to verify transactions. This computing power is measured by a computer's 'hashrate', a measurement of its top speed of solving mathematical problems. In return for mining, users are rewarded with new bitcoins, thus creating a stable ecosystem of new coins at a steady pace, and a secure decentralized digital currency. Right now, across the globe, there are thousands upon thousands of computers actively mining Bitcoin to keep the blockchain running, but the mining community is not equally spread out across the globe, and this creates a problem.

China has always been in the lead in terms of percentage of the total mining power running on the blockchain system. Currently, mining ‘farms’ in China make up roughly 65% of the entire network hashrate, that is, the total processing power of the entire blockchain mining system. But why does this matter? You may assume that a single country having the largest percentage of the mining power could make more coins for themselves, but that isn't the problem here. The problem is due to a hypothetical event known as a 51% attack. If a single group reaches over 50% of the total net processing power for mining a cryptocurrency, they can use that majority of power to take over the entire blockchain, allowing them to wreak havoc in the form of selfish mining, double spending, and censorship. Don’t get spooked by these technical terms, they are actually quite simple. During a 51% attack, the offensive party can produce empty blockchain blocks that reward nothing to other miners, so called selfish mining. Further tampering with the system can allow users to spend the same batch of Bitcoin twice, double spending. Most frighteningly, so called ‘censorship’ involves restricting certain users from spending Bitcoin at all. This may remind you of the response to Facebook's plan to create a cryptocurrency of their own, which sparked fears that Facebook's power over their coin would allow them to prevent certain people or entire groups from the ability to spend money in a digital world.

Having this amount of control over the blockchain would be catastrophic. So if China already owns 65% of the network hashrate, then what are they waiting for? As the age old saying goes: “just because you can, doesn't mean you actually can”. Although two 51% attacks have been performed successfully in the past on lesser known altcoins, it seems very unlikely that it could happen with Bitcoin. There is simply no reason a group of people that large would spend the time and effort to come together to ruin a system they support so much, unless, potentially, their government told them to.

The biggest concern is that this 65% network hashrate belongs to miners in China. Although it is in the hands of Chinese citizens and not the government, people across the world and in China have still expressed concern over the People's Republic’s historically volatile and unpredictable treatment of cryptocurrency. When the Wall Street Journal reported on Chinese mining farms, the operators actually requested for their locations to remain anonymous, fearing one day that the government may decide to pull the plug on their operations, or seize the power for themselves. Of course, it doesn't help to be purely skeptical, and it may even seem rude to always assume the worst of another country. So, let’s focus on our country, what is America doing besides investing money into Bitcoin? Fortunately, if capitalism is good at anything, it's raising capital. In the past years, numerous large scale mining operations have cropped up across the States, hoping to bring some of that hashpower to the other side of the world. Abandoned factories have been turned into mining facilities, most located in areas with cheap electricity costs, such as near hydroelectric dams and other energy producing facilities.

For those looking to hop onto the bandwagon, it can be dangerous to enter into a new market without understanding what exactly makes it tick. Bitcoin is powered by the people all over the world who support the blockchain system. However, it is a delicate ecosystem, with many different working parts that all rely on each other. Whether you are looking to make quick cash, or invest into the technology of the future, it's important to know all of the potential risks, aside from a price drop.