Legal Seminar, Denver, CO

071018 Discussion Draft

b. Based on a 3% comparable fee, a transaction of less than $107.66 will currently be more expensive to conduct through Bitcoin, but larger transactions may be cheaper than using a credit card. c. Undisclosed charges are also built into the system. Since miners profit not only through the transaction fees, but also through additional Bitcoin awarded to incentivize their mining activity, this means that there is a slow process of dilution applied to all Bitcoin holders. While the total supply will not expand beyond a limit of approximately 21 million units (and we are currently at around 17 million), there is room for some depreciation in value due to increases in supply. (But note: fiat currencies are also affected by increased supplies. Between 2008 and 2018, M2 grew from about 8 trillion to about 14 trillion – more than 75%.) d. Miners may not profit after all, as they have to bear the costs of running their computers, which has increasingly become a target for scrutiny. Recent estimates indicate that bitcoin mining worldwide involves electricity usage that approaches that of the entire country of Chile. See Digiconomist, Bitcoin Energy Consumption Index, https://digiconomist.net/bitcoin-energy-consumption o This energy cost is hundreds of times greater than that required to process a Visa transactions. o But some dispute whether this is significant, given that there are also significant energy costs supporting traditional card networks. See Aleksander Berentsen & Fabian Schar, A Short Introduction to the World of Cryptocurrencies, 100(1) Federal Reserve Bank of St. Louis Review 14 (2018), https://files.stlouisfed.org/files/htdocs/publications/review/2018/01/10/a-short- introduction-to-the-world-of-cryptocurrencies.pdf e. Energy cost variation plus regulatory burdens makes the cost of mining significantly different depending on location. See generally Aaron Hankin, Here’s how much it costs to mine a single bitcoin in your country (May 11, 2018), https://www.marketwatch.com/story/heres-how-much-it-costs-to-mine-a-single- bitcoin-in-your-country-2018-03-06 (ranging from $531 in Venezuela to over $26K in South Korea). Good luck mining in Venezuela. f. Trust has a cost. Avoiding the need to trust people and institutions through using a software-based system will also have a cost. But note, you are not really avoiding trust altogether: you are substituting software as the object of your trust. 6. Volatility/Acceptance. Valid currencies have widespread acceptance and they function reasonably well as a store of value during reasonable time cycles of earning and spending. Volatility has been a problem in cryptocurrencies. On the way up, people are reluctant to spend them for ordinary purchases. (Would you use a Morgan silver dollar or other collectable for everyday items?) On the way down, merchants have to deal with that volatility, too. (Do you want to accept Venezuelan dollars for your goods or services?) Exchanges like Coinbase have programs to allow conversion into dollars, thereby mitigating the volatility. But this is a real dampening effect on acceptance and growth of cryptocurrencies as a viable alternative payment system on a consumer basis.

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