By Andy Edstrom
But serious investors who do their research tend to find that the biggest fears have an extremely low probability of coming to pass. Below, I’ll review three of my clients’ most common and biggest fears about bitcoin – prohibition, obsolescence and quantum computing – and how I address each with them.
FUD #1: Bitcoin will be eventually be prohibited
In my experience, the greatest gulf between perception and reality among bitcoin’s various risks is prohibition. The classic trope is that bitcoin is competing to be money, but governments want to issue the money. Therefore, governments will prohibit bitcoin.
But a careful examination of the facts reveals that the risk of widespread prohibition of bitcoin is nearly zero.
First, we can look to history: Prohibition in the United States and other countries has been ugly. It has caused the spread of organized crime, and ultimately has been ineffective. Just look at alcohol prohibition in the U.S. in the 1920s-30s or the War on Drugs that is going on today. Prohibition of an already widespread product that people demand doesn’t work in the long run.
Moreover, the easier it is to hide a good from the view of law enforcement, the harder it is to effectively prohibit. If you think prohibiting alcohol or drugs is difficult, imagine trying to prohibit a monetary good such as bitcoin that you can literally possess just by memorizing 12 words. And if you think people will go to great lengths to access drugs and alcohol, imagine the lengths they will go to in an effort to protect their savings from accelerating inflation.
With bitcoin mining on its way to becoming a core industry in Texas, and New York City’s new mayor, Eric Adams, announcing that he will take his first three paychecks in bitcoin, all signs point to continuing adoption in the U.S. Moreover, China’s recent prohibition of bitcoin mining and trading highlights bitcoin’s core characteristics: The world’s largest authoritarian regime seeks to contain bitcoin, while Western governments recognize it as a tool for freedom and innovation.
FUD #2: Bitcoin will lose out to competition and face obsolescence
“Bitcoin is the MySpace of digital money.”
This is another favorite reason for FUD. Bitcoin skeptics argue that bitcoin may have been the first digital hard money, but a “bitcoin-killer” either already exists among the thousands of digital assets or has yet to be invented. In my opinion, this conclusion is extremely unlikely to be correct for several reasons.
First, bitcoin is not the first digital hard money – far from it. Bitcoin predecessors like Digicash and E-gold launched and failed in the 1990s, and Bit Gold and B-money were designed and announced but not implemented. Liberty Reserve managed to transfer billions of dollars’ worth of value in the early 2000s before being taken down by law enforcement. Suffice to say that several forms of digital money gained some traction before failing, but none has come within two orders of magnitude of bitcoin’s trillion-dollar network value.
Second, despite the thousands of additional cryptocurrencies launched subsequent to bitcoin, none has approached bitcoin’s adoption level. That may be because every new feature offered by these alleged competitors makes a sacrifice in terms of decentralization or security.
Bitcoin’s design explicitly prioritizes security by not offering “Turing Complete” functionality. And it prioritizes decentralization by limiting the amount of data stored in the blockchain. Not only was this limit embedded in the original design, but the bitcoin community had a vicious fight over this characteristic. The result was bitcoin’s dramatic outperformance versus bitcoin cash, the group that forked off of the Bitcoin blockchain as a result of the conflict.
Because of the strict limitation on the size of the data structure, the total Bitcoin blockchain comfortably fits onto a standard desktop computer, which makes it easy for people to run network nodes, increasing network resilience. And if current trends continue, a standard smartphone will be able to run a node before the end of this decade. Alternative cryptocurrencies that offer greater feature functionality require larger data structures, which makes it much more difficult to run a node, resulting in weaker network decentralization.
After 13 years in the field and numerous attacks on its network, bitcoin continues to dominate digital money. No other system comes close.
How many network-effect-driven assets have reached $1 trillion in value and subsequently been replaced? Perhaps someday something will replace bitcoin, but for now, bitcoin seems unstoppable.
FUD #3: Bitcoin faces risks from quantum computing
While quantum computing is still in its infancy, some experts believe such a sufficiently powerful quantum computer (i.e., one with enough qubits to break a digital signature in the minutes between a user (1) broadcasting a transaction to the network and (2) the transaction being confirmed in the next block of transactions) could arise this decade.
Fortunately for bitcoin, there exists an enormous incentive to develop a solution. The first incentive is the trillions of dollars of bitcoin and other crypto-asset value that depends on secure digital signature algorithms. The second incentive is that the majority of internet commerce depends on these signature schemes. If they were to fail, then e-commerce as we know it would end.
Is it possible that for the first time in history the latest computational decryption technology will outclass any available encryption algorithm? Sure, but after over a century of modern encryption and decryption in which the encrypted “mouse” has evaded the decrypting “cat,” and with trillions of dollars at stake, it seems unlikely that a solution won’t be found. The world’s smartest cryptographers are working on a solution, and with trillions of dollars of value at stake, they have a huge incentive to succeed.
While the foregoing FUDs or risks are the most feared by clients, I put the cumulative probability of any of them significantly impairing the value or functioning of bitcoin within the next five years at less than 5%. And I put the cumulative probability of destroying bitcoin in that time frame at less than 1%.
Bitcoin is one of the most resilient and hard-to-kill systems on earth. It’s likely to take much more than the threats described here to pose any significant risk of failure. In the meantime, in my view, the signs point to bitcoin becoming the world’s preferred form of digital money.