What would it take for Bitcoin to fail?
Serious question.
It has been called dead so many times, but I am beginning to think that due to the network effect, switching costs and increasing rate of adoption it would take a black swan event to take it down.
45 comments
[ 0.21 ms ] story [ 58.4 ms ] threadFor example, Chrome is already enabling post-quantum key exchange
https://security.googleblog.com/2024/09/a-new-path-for-kyber...
If the problem is found in time, the network could be forked back to before the problem was exploited?
A broad attack on EC DLOG or on the secpk curve would hopefully be preceded by academic community incrementally making it weaker with easier attacks which would give time to fork to something with better margin of safety in advance.
If it was truly a full on zero day and someone disclosed it to core devs or miners it would probably be bumpy getting the network aligned to fork but people would do it. But idk the details of how bitcoin developers and miners coordinate.
In more likely event nation state is the zero day holder I have little idea how they'd use it. Network could always be forked after enough people believed an attack was going on but it would be a confidence shaking disaster. Forking back in time before most people believe the attack started is always possible but has its own serious downsides.
And it's no surprise tech stocks are correlated to said liquidity/rates too.
That's how I explain it to myself, at least. I do believe a large tech selloff would most likely result in BTC selloff too. But chances are these sort of things may trigger a broader selloff too. e.g check gold correlation to tech stocks recently
Another "failure mode" is it being made illegal in the dominant economies such that demand largely disappears. This seems less likely as wallstreet has put money in and they also buy politicians
By failure I personally meant the monetary value being erased. e.g going from $100k to $10k, staying there for a few years trading sideways, then going down to $0 (or close, whatever)
That part feels extremely unlikely to me. I would give it in the range of 10-25% chance of occurring, given the history, momentum and human behavior.
The 3 factors in the OP would apply, including the effect of selling large blocks of shares. I don't know the concentration/distribution among owners.
We can only speculate on black swans. A worldwide scandal? (bribes, blackmail on a global scale) Or maybe AI grabs all the electrical energy? Just wild guesses.
[0] https://decrypt.co/47566/is-bitcoin-an-asset-a-commodity-or-...
Your reasoning doesn’t sound correct to me - it reasons by analogy. Yes stocks are subject to swings in value and some have collapsed. But gold is subject to swings in value too and hasn’t collapsed.
There is one very key difference between stocks and monetary assets like gold and bitcoin.
The former have an underlying revenue stream you’re buying with each share, and that puts both a floor and a ceiling on their value. (You’re unlikely to buy a stock at 1000x revenue)
The latter have no underlying stream and are valued purely based off each humans read on how widely accepted and how widely desired the monetary assets is. This means these assets have no ceiling until every human on the planet adopts them. Gold may go to $10,000/oz tomorrow, some people will feel it’s overvalued temporarily, but in due time it’ll become the new normal price. Of course, this also means these assets have no floor - they could go to literal zero.
But it’s hard to do, because you somehow need to change the mind of every individual person to believe that the asset has no value. This is impossible to do instantly and more probably to happen on a prolonged period of some negative feedback cycle
so far it's failed to produce anything of actual value, but has been tremendously successful in consuming enormous quantities of electricity, suckers' money, and crypto-bro brain cells
Species emerge and survive where there is a unfilled niche in the environment. Bitcoin fills such niches the financial system doesn't serve. Such as black/gray markets, tax evaders, money launderers etc. All being as ancient as organized economies. When you ask why we haven't got rid of them, you start hitting deeper issues of human behavior, social and economic systems, that will take their own sweet time to deal with due to the level of complexity of the problems.
Other side to the story of why bitcoin survives is peoples reaction to loss of anonymity, bail outs of the "too big to fail" bunch etc.
Basically different groups are using the tool for their own reasons. Its pure luck they are in alignment. Which leads to more investments and innovation. If these groups find different tools to solve their problems then the story changes.
The survival strategy works.
I think for us to really know what would it take to fail, would require really knowing what use cases it is fulfilling as a tool. We can then reason how sticky and how deep of a moat it has in those use cases.
I believe the main use case it serves is as a borderless permissionless bearer asset store of value that’s a good diversifier from the system - like gold.
If we agree that use case powers eg 80% of its market cap value, then we can reason that it’s unlikely to go away because the value network effect is incredibly hard to build again - it’s time dependent and path dependent
If we, for whatever reason I disagree with, say that 80% of its value comes from the ability to evade taxes and launder money - then some 10x better alternative like Monero would very quickly take over as the preferred tool of choice and therefore kill Bitcoin
Also, I don't know what it would cost to perform a 51% hack but at some point an US adversary might deem it worth it if the US holds a substantial amount and wishes to sabotage the system.
It has already failed at the goal of being a currency. It lacks the attributes of a good currency, and shows no sign of gaining them.
It has already succeeded as a financial system for illegal transactions. That success won't go away, until bitcoin / $ exchanges go away. (Which will likely be never.)
Speaking of crypto in general, it is successful in parting fools from their money. Between the inevitable boom / bust investment cycle, and the high-profile exchange scams, there is no lack of bigger-fools willing to lose money.
It is successful at illegal transactions because its physically safer than cash. It is successful at speculation because people are greedy. Neither of those conditions are changing anytime soon.
I didn't mean to imply that it was. I don't think I said that, but I can see how it might be interpreted that way. Sure, it's a (terrible) financial system for legal transactions as well. (Terrible defined as slow, expensive, and volatile - pick any 3.)
Cash works for things that are grey enough that Visa and Mastercard (or more accurately, banks, won't get involved in.) So yeah, there's a niche for bitcoin use there as well (although I'd argue that if your business requires something like bitcoin, or cash, to succeed, then it's not much of a business...)
Of course, sure, if you're anti-establishment then it's a good option as well. Again so is cash, or apparently gold.
The traditional financial system is formed of many layers. At a high level, it is: central banks, commercial banks, then card processors.
You have to change your view to see Bitcoin as the settlement layer of this new anti-establishment currency, similar to how central banks settle today. That doesn't need to be fast, it needs to be secure.
Bitcoin is pretty fast in settling relatively speaking, at least compared to other currencies.[1] It's important to look at the amount of value (electricity, power, money) that backs the block, instead of the raw block speed. People mistakenly compare block-time - look at Litecoin, it doesn’t matter if it has 4x faster blocks when 4 Litecoin blocks are worth many many times less than one Bitcoin block. The cost to reverse (51% attack) a transaction is much lower.
If you agree with that view, then the Lightning Network[2] can be a promising solution to the slow and expensive argument. It isn't a 1:1 replacement to Bitcoin (someone else will likely need custody your coins if this scales to a global level), but it does solve the problem.
As for the volatility, I think it's entirely expected to have extreme volatility as a currency is monetizing[3]. There's no real way for it to get from $0 to $2T of market cap in less than two decades (and perhaps go toward $20T) without large price appreciation and subsequent busts. Look at Apple stock as comparison. And it's not a fair comparison, because a stock has an underlying revenue stream that puts an implicit floor and ceiling to its price, whereas a monetary asset like Bitcoin doesn't.
In essence, I believe it's premature to declare it "already failed" at being a currency. Although I agree that the signs of becoming a currency aren't strong.
1 - https://medium.com/@nic__carter/its-the-settlement-assurance... 2 - https://www.lynalden.com/lightning-network/ 3 - https://www.2minutebitcoin.org/blog/i-love-bitcoins-volatili...
Of course, you would still need to be able to either pay for stuff with Bitcoin or convert it into fiat currency to realize the claimed gains.
So if it went from $100k to $10k in the next year, stayed at $10k for a few years and then trended toward $0. I think I would define that as failure.
What do you think then?
I guess that happens when there are no longer fools willing to play. That could happen tomorrow, or in 10 years.
It probably doesn't go to zero (it still has value other than speculation) but getting price stability would actually make it more successful (as a currency) than it is now.
I could imagine it happening over the course of years. But the question then is - what would it take to change the public's minds?
Usually this happens when the money runs out - when it's no longer possible to find the next "greater fool".
That might take a while - there's a LOT of money in the world, and a lot of greedy people willing to be convinced that there's gold in them thar hills.
Also, a major, gaping technological flaw in its design and security that cannot be fixed. The longer Bitcoin is around, the lower the chance of this being a possibility.
Failing that, a few reasons why Bitcoin will always have value > 0:
1. Decentralised, open-source software cannot be stopped. No amount of laws is going to stop people running a piece of software.
2. Legal tender has restrictions, and governments tend to restrict freedom over time. You cannot buy drugs with a credit card. Cash will soon be illegal. CBDC are the future. Crime, drugs and black market are businesses like any other, that need currency to trade. Given the totalitarian future of our governments, we will find more and more legitimate uses for Bitcoin, things that are legal today but not tomorrow.
3. In our future deglobalised, autarkic economies, with Internet-connected citizens that want to send money across borders, crypto is the only way unless you love paying fees. Also, sending money across frontlines is a major "business" (i.e. EU <-> Russia)
Now, any cryptocurrency can do any of the above, so the last, and most important point:
4. Bitcoin has the first mover advantage, and greater capitalisation. It's what everybody uses, so that legitimises it and makes it more secure than any alternative. No new cryptocurrency will ever be able to change this fact.
Disclaimer: I am a Bitcoin maximalist, and bullish about it for purely political reasons: Bitcoin is the only software antidote to totalitarianism, to pervasive surveillance and to any sort of economic border. Bitcoin, with all its faults, encapsulates the spirit of anarchism. Its usefulness is directly proportional to the greed and corruption of our governments. How anyone is still surprised it has only increased in value over the past ~20 years?
A fifth point I would add is that it's basically your best best at a global, portable, unconfiscatable diversifier of a portfolio. I think it is a braindead decision for every investment portfolio to have some small (miniscule?) allocation to it.
Have you ever thought about what sort of flaw could not be fixed? I find it hard to imagine.
But in terms of the network itself failing there is really not much you can do.
Fight club / Mr robot style terrorist attacks are pretty much out. Maybe a major nation state would have some success but I doubt it. States might have success sowing confusion by compromising core developers and pushing software updates to nodes that do damaging things. I don't see this totally killing the network though.
Banning through legislation needs to be done across all or large majority of nation states which I don't see as being realistic. Though maybe as the environment faces increasing catastrophe this will become more possible.
Quantum computer attacks can be defended by relatively trivial forks that everyone involved has a reason to support. I think you can even do Lamport signature stuff today with the pay-to-script-hash stack machine language.
Maybe someone finds an exploit in sha2 and launches a surprise attack. That would cause significant damage. I would guess the network would fork itself onto a secure hash function quickly enough.
If someone takes out the internet for good that would probably kill the network.
In all of these scenarios there is the possibility of restart if the conditions killing the network revert.
I was thinking that in the event of some damage being done by a {bug,attack}, the network effect and vested interest of every party will have them act in saving the network.
The value of bitcoin is the collective belief of every human brain that believes it has value. So it’s trivial to redirect that belief in a new fork or something - similar to how Ethereum did with their DAO hack.
I think by that time, if the network effect has grown further and more parties have invested large money in it - they’ll just find a way to fix that.
For example, they may move to proof of stake.
It would ruin the decentralisation imo, but it doesn’t matter because it would save their value (money) and that’s what every participant will want first and foremost
It goes to show that because it’s software that holds money, when push comes to shove, people will just agree on a new version to save their money
I know some people who own bitcoin, but I have never met anyone who has used bitcoin, except perhaps once as a party trick.
But anyway. By failure I meant go to $0 (or close to it)
If that is your only criteria, then beanie babies have not failed.
Almost everything has some value to somebody. Some coins and stamps have inflated values compared to their intrinsic worth. Same with any collectible item. I think that if bitcoin remains basically a unique form of collectible, then its original intent has failed regardless of how much money someone can get by selling one.
I believe I read somewhere, possibly from Musk and Starlink, that "they've" designed a fallback for crypto so that it will continue to run even in a total grid-down situation. (If anyone recalls where this was, please point me to it, so I can save the article)
Personally, I think Bitcoin was likely created by a government and will be used as a "freedom!!!!," anti-CBDC digital currency, essentially tricking gullible people into the now pervasive surveillance state.
Can you expand on the rules enacting new markets & taxes?
But the main historic example I was thinking of, is cited in Graeber's Debt: the First 5,000 years. In the late 1800s, France invaded Madagascar, declaring it a French colony. New, heavy taxes were imposed because France demanded their colonies be self-supporting. France then enforced the building of new rail, roads, plantations, etc. It's an imperfect book but a good read.
Another example might be the destruction of Europe in WW2, which allowed the American Empire to rebuild and form NATO, which the US then enforced (and still enforces) Europe to buy US-built arms and weapons as a percentage of European GDP. It would be misleading to call this a direct "tax," but there are parallels here.
Finally, part of the reason the US went to war in the early 2000s is likely to generate economic activity due in part to the precarious relationship it has with the dollar being the reserve global currency. Bush even said on live TV in 2001 that the best thing we could all do was go to the mall and buy junk, foreign-made stuff which is akin to countries paying tribute to the American Empire. Again, not a direct tax, but there is certainly a parallel here.
I have friends with BTC, but no one I know with any have actually used it for purchasing anything. From what I can tell it’s just a speculative commodity that - due to its constant rise in value - no one wants to just exchange it for a pizza (for example) since tomorrow it might be worth more.
This is why the Fed works hard to always keep a steady inflation. Without it, no one would spend the money they have and the economy would grind to a halt.
BTC is basically a fiat currency with rampant deflation.
Combine that with the knowledge that BTC are limited in quantity, and it’s basically a guessing game as to what happens when the last one is mined. My guess is a lot of speculators (ahead of that moment) start trying to cash out.
Maybe not the answer you were looking for, and certainly you'll get more any crypto perspectives on this site than ones like mine. I like bitcoin. But incentives are outcome.