Why three popular investor fears about bitcoin are overblown. Let’s explain these together.
FUD #1: Bitcoin will be eventually be prohibited
In my experience, the biggest gap between perception and reality among bitcoin’s various risks is prohibition. The classic approach is that bitcoin is competing to be money, but governments want to issue money. As a result, 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 see the history.
Prohibition in the United States and other countries has gone awry. It caused the spread of organized crime and was ultimately ineffective. Just look at the alcohol ban in America in the 1920s-30s or the War on Drugs going on today. Prohibition of an already widespread product that people demand doesn’t work in the long run.
The easier it is to hide a good from the view of law enforcement, the harder it is to effectively prohibit.
If you think that banning alcohol or drugs is hard, imagine trying to ban a monetary commodity like bitcoin that you can literally own just by memorizing 12 words. And if you think people will have to go through a long time to get access to drugs and alcohol, imagine how long it will take them in an effort to protect their savings from inflation that is increasing rapidly.
With bitcoin mining on its way to becoming a core industry in Texas and the new mayor of New York City, Eric Adams, announced that he will take his first three salaries in bitcoin, all signs show continued adoption in the US. 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 be the first digital hard currency, but the “bitcoin killer” either already exists among thousands of digital assets or has yet to be invented. In my opinion, this conclusion is unlikely to be true for a number of reasons.
First, bitcoin is not the first digital hard money.
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 in value in the early 2000s before being dealt with by law enforcement. Suffice it to say that some forms of digital currency have gained some backing before failing, but none have come close to the scale 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 could be because every new feature offered by these alleged competitors comes at 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 significant outperformance over bitcoin cash, the team that split from the Bitcoin blockchain due to a 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 the digital currency. 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 quantum computing risks
Quantum computing has always been a risk to bitcoin and the entire digital asset ecosystem. The digital signature algorithms — the elliptic curve digital signature algorithm, or ECDSA, and Schnorr — on which bitcoin transactions depend can be broken with a sufficiently powerful quantum computer.
While quantum computing is still in its infancy, some experts believe that a quantum computer is powerful enough (i.e. one with enough qubits to crack a digital signature in minutes between users (1 ) broadcasts a transaction to the network and (2) the transaction is confirmed in the next block of transactions) may arise during 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 much of internet commerce depends on these signature schemes. If they fail, then e-commerce as we know it will be over.
Is it likely that, for the first time in history, the latest computational decryption technology will outperform any existing encryption algorithms? 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.
Conclusion
While FUD or the foregoing risks are what clients fear most, I place the cumulative probability of any of those risks significantly reducing bitcoin’s value or performance within the next 5 years is less than 5%. And I set the cumulative probability to destroy bitcoin in that timeframe to be less than 1%.
Bitcoin is one of the most persistent and difficult to destroy systems on earth. It can take more than the threats described here to pose any significant risk of failure. Meanwhile, in my view, the signs are that bitcoin is becoming the preferred form of digital currency in the world.
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Disclaimer: This article is for informational purposes only, not investment advice. Investor should research carefully before making decision. We are not responsible for your investment decision
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