Why I now believe that Bitcoin introduces catastrophic systemic risk rather than mitigating it

I have been a very strong believer in Bitcoin. First for transactions. I even sold a robomop to someone on Craigslist back in 2014 and got paid in Bitcoin for it. I used the first Bitcoin ATMs in Belgium and Amsterdam to withdraw my BTC in Euros in 2015 and really believed BTC was going to take off soon.

I tried to convinced everyone I knew back them to buy just one bitcoin (it was $250 then) and then just sit on it.

But then as it started to take off the transaction cost was so high that it couldn’t be used for regular transactions.

So the new thesis then was that it was a good store of value – occasional transactions on the main blockchain for transfer of large value. It seemed like a good idea. It’s obviously lighter than gold, can be moved faster than gold, protected in more sophisticated ways than gold and is really finite by pure math so is a verifiable constrained resource. The expectation was that in times of volatility it would be seen as a stable asset and be a hedge against it.

There was also development of 2nd chains that work of the main blockchain but reduce the cost of transactions down to nothing. Of course the transaction is not “settled” until it’s batched with others and then registered on the main blockchain. So there’s always now a layer of deep, unavoidable risk if you transact on these second chains. Which can be mitigated by adding systems that then start to resemble ways we already do with credit card transactions and ACH transactions. If we don’t care about fraud than even credit cards and bank transactions can be blazing fast.

So a lot of the shine in Bitcoin’s armor has faded lately. People who observe this closely, however, would correctly point out that governments have exerted heavy control that significantly limits its potential. That a lot of opportunists have created such an aura of fraud around it that it unfairly drags bitcoin down.

I agree with all of that. But knowing the reasons why BTC isn’t working doesn’t solve those issues. And I don’t see anything that will eliminate those issues so it’s a systemic, long term risk to it that as of now doesn’t seem to have any solution.

Bitcoin’s key strength is that it’s truly decentralized and the person who created it is unknown. Satoshi Nakamoto could be a person, a group we will never know. 1 million BTC are in Satoshi’s wallet (5% of all BTC). That is known.

But we don’t know how much of other BTC is also in wallets that Satoshi controls. For all we know, 51% of all BTC is controlled by the group that created it. And effectively it could be the most elaborate Ponzi scheme when institutional investors all over the world buy into BTC and then this group of anonymous people this we don’t know control 51% of all wealth in the world.

It’s also truly decentralized in the sense that mining is done by several different entities so no one entity controls the hashrate. This is important as it makes it resilient to bad things happening.

But we now have proof that all it takes is a secret group chat on Signal for these mining entities to collude. There’s no way to protect against that. And there’s a very very very very strong incentive for these entities to collude to benefit themselves. And the incentive to interfere is so strong that all it would take is a state actor to blow up a few mining operations to now control the hashrate.

These two things – not knowing who actually controls most BTC and not being able to guarantee that nodes can’t collude or be severely compromised means uncertainty is intrinsic to BTC.

I really really loved the idea that we can create an algorithmic entity that can exist forever. But we have yet to create software without bugs. It’s a myth. Even private keys can be reverse engineered by “listening” to RF signals around a chip. So I now think it creates huge systemic risk if the world adopts a decentralized store of value that is at the mercy of private keys and algorithms only.

And yet we have been unable to, so far, hack gold. We can’t yet create gold molecules cheaply.

I feel like the long term solution will not look much different from what we have now. Different networks with an agreed upon value within their trust graphs (fiat currency) and the abilty to transfer value across trust graphs (currency exchange). The mechanisms can be modernized for sure. But if you want to bet on crypto – fine companies that are solving problems that actual customers are willing to pay for with fiat. That’s real value being created.

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