What can kill Bitcoin
Hello all,
Welcome to this next article.
In this article, I will focus on a topic that I have been thinking about - the topic of the death of Bitcoin.
Why this topic? Well, it is because lately I have been quite vocal about my friends adding Bitcoin to their portfolio. At the same time, I do want them to be aware of the ways in which Bitcoin can die and hence we do talk about the risks. Hence, I am writing this article.
There have been hundreds of predictions about Bitcoin’s death. You can see many of the obituaries of Bitcoin at this site. The clamor increased when Bitcoin reached $29k last week although it is back above $39k today. And yet Bitcoin continues to march along.
But let’s focus on understanding how can we kill Bitcoin? There are three ways of killing Bitcoin. These are by attacks that leverage
•Concepts of economics
•Concepts of cryptography
•Power of regulation
So what are these attacks and how successful can these be? I will look at this next.
Economics based attack
We all know that the world runs on fiat currency today. And Central Banks play a big role in this scenario where they make decisions related to the monetary policy such as the amount of money to be created, interest rates to be used for lending etc.
This can lead to several disadvantages such as inflation, lack of accountability and fiscal responsibility etc. But Central Banks believe that it is their duty to create money out of thin air to maintain “stability” in the economy. This is the case of weak money - money that can be created out of thin air, money whose value would decrease with the passage of time.
This was not always the case. Before World War I, many central banks (and governments that controlled them) would create paper or coin money proportional to the gold reserves held by the country. This money was mainly intended to address the lack of portability of gold. And citizens could exchange their money for gold. This was the case of strong money - money that could not be created out of thin air, money whose value would not decrease with the passage of time.
Bitcoins is on its way towards becoming a form of strong money. And hence to kill it, the central Banks of the world will have to go back to using strong money. In that case, the citizens of the country would have no incentive to use Bitcoin. They would prefer to use a strong currency supported by the government.
If not, regardless of government support citizens will flock to Bitcoin in smaller numbers as we see now and in larger numbers in the future. This is because of the human tendency to minimize personal loss.
Who would want to hold on to a good whose value will decrease in time while they have an alternative good to own, a good whose value will increase over time. We see instances of this already in many countries that are experiencing hyperinflation, countries such as Venezuela, Argentina, Nicaragua etc.
I would give this attack very low probability (in the low single digits) of succeeding.
This is because the Central Banks of the world are drunk on the power fiat currency provides them. With a transition to a strong currency, the Central Banks will not be able to yield the power that they do now. As a result, they will not get rid of fiat currency easily. And fiat currency being a weak currency, it is not a threat to Bitcoin at all.
Crypto based attacks
The attacks in this family leverage the cryptographic underpinnings of Bitcoin. There are two types of attacks that are possible here. They are
•Type 1 attack: This is an attack that breaks the crypto concepts used by Bitcoin
•Type 2 attack: This is an attack on Bitcoin by designing a better cryptocurrency
Type 1 attack
Bitcoin leverages cryptographic algorithms related to hashing and digital signatures. Without getting into the details of these, I would like to point out that any weakness in these algorithms could be detrimental to the security of Bitcoin.
Of course, I would like to point out that several other scenarios in regular life such as related to online banking and shopping also make use of these cryptographic algorithms. So any weakness in these algorithms will impact other aspects of our daily life.
Regardless, the way to mitigate this risk is to upgrade Bitcoin to use the latest cryptographic algorithms which do not have this weakness. And this is possible, if the Bitcoin community (miners, end users etc) decides to upgrade Bitcoin. This should be possible given that the alternative is the death of Bitcoin.
Hence, I believe the probability of this type of attack killing Bitcoin is nearly zero.
Type 2 attack
This is about the design of a new cryptocurrency that is superior to Bitcoin. There is no barrier to entry for anyone to start their own cryptocurrency. But they also need a large population to believe in this cryptocurrency. And the probability of this happening is too low.
Several attempts have been made in the past including Bitcoin Cash. But none of these have been successful in displacing the role of Bitcoin as the top crypto currency. Hence I believe that this approach of killing Bitcoin also has a very low probability of succeeding.
Regulation Based Attack
This attack on Bitcoin is in the form of the governmental regulations. These regulations can make it onerous to own Bitcoin but at least in the western democracies we believe they cannot ban the ownership of Bitcoin. Although it is possible since in the past the government has banned the ownership of gold.
This can slow the adoption of Bitcoin especially amongst the masses but given the advantages that Bitcoin provides, the probability of this way of killing Bitcoin is close to zero. In an autocratic government though, such an approach can drastically slow the adoption of Bitcoin especially if ownership of Bitcoin is associated with threats of imprisonment, death etc. This is similar to the availability of the Internet in North Korea. But a majority of nations are not in this category.
Hence this also has a low probability of killing Bitcoin.
Summary
I have enumerated different ways in which Bitcoin can be killed but at this time I strongly believe that the chance of any of these really resulting in the death of Bitcoin is negligible.