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I have never subscribed to the Bitcoin craze.
In my opinion, it is a massive pyramid scheme that is rapidly creating a dangerous bubble.
The kind of dangerous bubble we haven't seen since the subprime mortgage implosion almost a decade ago.
However, I am not here to talk about the sustainability of Bitcoin.
I'm here to talk about the massive impact it has on energy.
Regardless of my personal feelings, Bitcoin is influencing the price of energy.
In fact, the connection between Bitcoin and energy costs is one of the main reasons China has become the world's leading location for "mining" the currency.
At issue is how much each Bitcoin costs in energy terms.
This is something that cryptocurrency enthusiasts have only begun to consider.
Fact is, Bitcoin might be all the rage…
But most investors are still in the dark about how it's manufactured.
And the opportunities that's creating for energy investors…
How the Bitcoin Boom Really Works
An English study published earlier this year estimated that there are as many as 5.8 million individual users using a cryptocurrency "wallet" for transactions.
Most of them are using Bitcoin, although there have been other cryptocurrencies established.
Bitcoins comprise a decentralized digital currency having no central bank releasing them or administrator overseeing their exchange.
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Transactions occur between users directly through the use of cryptography, without an intermediary.
These transactions are verified by network nodes and recorded in an immutable public distributed ledger called a "blockchain."
Individual cryptocurrency units, such as Bitcoins, are created as a reward for a process known as mining.
It is the mining, or creation, of a Bitcoin that provides the huge profits we've witnessed lately.
Bitcoin transactions are secured by computer miners, who are competing for rewards in the form of coins from the network.
New sets of transactions (blocks) are added to the blockchain roughly every 10 minutes by the "miners."
While working on the blockchain, these miners aren't required to trust each other.
The only thing miners have to trust is the code that runs the process.
The code includes several rules to validate new transactions. For example, a transaction can only be valid if the sender actually owns the sent amount. Every miner individually confirms whether transactions adhere to these rules, eliminating the need to trust other miners.
The trick is to get all miners to agree on the same history of transactions.
Every miner in the network is constantly tasked with preparing the next batch of transactions for the blockchain.
Only one of these blocks will be randomly selected to become the latest block on the chain.
Random selection in a distributed network isn't easy, so this is where proof-of-work comes in.
Trial and Error
In proof-of-work, the next block comes from the first miner that produces a valid one.
This is easier said than done.
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.