CHAPTER 6

A Look at Common Counterarguments

In my several conversations and writings about Bitcoin, I come across many of the same arguments and concerns. This chapter aims at addressing counterarguments against investing in Bitcoin that the reader may have or never knew existed. Though many are warranted and require technical understanding of concepts such as forking and even quantum computing, others stem from a lack of due diligence. I hope this chapter addresses any final concerns before an investor decides to place at least a small percentage of his or her capital into the asset. I also hope to take a fair view and acknowledge that not all counterarguments can be immediately discounted, though most are overstated. As long as existential threats to the Bitcoin network exist, an investor is taking immense risk in adopting the Bitcoin Standard or investing money that he or she cannot lose. Like any asset, investors must conduct an internal cost–benefit analysis and determine the appropriate allocation accordingly.

“Bitcoin is scarce, but cryptocurrencies are not”

This argument takes two forms. First, it begins with the belief that because Bitcoin is open source, anyone can create another decentralized ledger protocol to dilute the value of Bitcoin. It is based on the idea that one hundred different coins that serve a similar purpose will make Bitcoin worthless. Additionally, someone can fork Bitcoin or make an improvement to the open-source protocol to launch a better coin that will surely surpass Bitcoin in market capitalization. This is verifiably false due to network effects and the fact that most cryptocurrencies are neither anonymous nor decentralized. Litecoin and Bitcoin Cash serve as two examples of proposed Bitcoin upgrades that never reached prominence.

Altcoins oftentimes sell themselves as better versions of Bitcoin or complement cryptocurrencies. Litecoin was created in 2011 by MIT programmer Charlie Lee. The Litecoin network contains 84 million coins to Bitcoin’s 21 million. This allows Litecoin to transact more in whole units than fractions and allows for a lower value per coin, which is psychologically more appealing to some investors. Litecoin also runs on a different mining protocol and has greater transaction speed. It takes the Bitcoin network an average of nine minutes for a block to be verified and posted on the blockchain, initially giving it limited use for transactions and scalability. For Litecoin, the transaction time is 2.5 minutes. Litecoin posited itself as the transactional cryptocurrency, while Bitcoin’s slow processing time made it the store of value cryptocurrency.

Bitcoin Cash also attempted to supplant Bitcoin. It is the result of a 2017 fork in the Bitcoin network also aimed at improving processing time for transactions and scalability. A hard fork occurs when there is a massive change to the protocol and nodes on the new version no longer accept the old version. The old network continues as usual but a new network, or coin, gets created in the process. Bitcoin Cash is a hard fork of the Bitcoin network that increased the block size from 1MB to 8 MB. As the Bitcoin network grew, it faced issues of processing time and fees to settle transactions when it faced large volumes. Bitcoin Cash could process more transactions per block, thereby freeing the network. Litecoin and Bitcoin Cash were both improvements on the Bitcoin network that made for faster processing so users could make micropayments without slowing the network. Both also retained absolute scarcity. Bitcoin Cash even made the claim that its network met the original intent of Bitcoin’s pseudonymous creator, Satoshi Nakamoto, as a digital currency and not a store of value.

If both are clear improvements to the network, why is Bitcoin’s market capitalization over 31 times that of Bitcoin Cash and over 49 times that of Litecoin? Why are these two challengers the number 8 and 12 cryptocurrencies respectively, without a realistic avenue to surpass Bitcoin? The answer lies in network effects. Bitcoin won the cryptocurrency race because users agreed that it best met their needs for a digital store of value and medium of exchange. In order for another cryptocurrency to surpass Bitcoin, a majority of users would have to agree that it is better. Not only that, but they would have to collectively leave the Bitcoin network by selling their coins and join the new network by buying those coins.

The cryptocurrency industry has no shortage of talented programmers. There is no hiring or vetting process. Instead, anyone with talent and interest can propose an upgrade. This makes it infinitely more innovative than closed, hierarchical companies. As opposed to collectively joining a new network, Bitcoin solved the scalability problem by adding a layer-two protocol called the lightning network. The lightning network settles transactions instantly off the blockchain, leading to less congestion on the Bitcoin network that allows for more small-scale transactions. Transactions are only updated on the main blockchain after a channel is closed between those transacting. Investors should know that it is far more costly for everyone on the network to simultaneously jump ship to a different network than it is to innovate through a layer-two solution or soft fork. The second incarnation of the previous argument sounds akin to this: “Bitcoin is the Pets.com of blockchain technology. Another, superior coin will enter the market and replace it.” Litecoin and Bitcoin Cash prove that the dominant network will find solutions to survive before it relinquishes dominance as it is in the best interest of all users on the network. Before the lightning network, many investors thought Bitcoin would fail due to its scaling and transactional flaws. Though a finished product in itself, Bitcoin’s innovative nature allows it to overcome obstacles and constantly improve through soft forks and layer-two solutions such as the lightning network. Those waiting for a superior digital currency do not understand this.

Secondly, some coins have a team of programmers that can alter the code if they deem necessary. Ethereum fits this mold and developers purposefully forked the protocol in 2016 to overcome a hack in a decentralized organization that owned a large percentage of tokens. Many coins, especially those of the Initial Coin Offering (ICO) boom of 2017 have marketing teams, a board of directors, and flexible issuances as determined by its creators. These cryptocurrencies are neither decentralized nor autonomous and make no sense as a Bitcoin substitute. For one, a team of coders controlling one’s currency issuance is perhaps a worse substitution than a Central Bank. Secondly, creating a monetary system around a nonmonetary utility token makes as much sense as making Chuck E. Cheese tokens a national currency.

As the next chapter examines, Ethereum and many coins of the ICO boom were never designed to function as mediums of exchange nor stores of value. Much of the verbiage surrounding cryptocurrencies leads to misinterpretations that this book attempts to resolve. Only a fraction of cryptocurrencies fulfills the purpose of a currency—with the Bitcoin network reigning as the dominant one. The process for achieving network effects for digital assets is more satisficing and innovating around roadblocks than optimizing. Most investors lack the technical knowledge to care about the internal processes of each token, and only care if it best meets their investment criteria.

“It costs too much to buy a coin”

Some investors face a mental barrier when the price per coin reaches several thousands of dollars. Bitcoin is expensive or inexpensive based on the valuation metrics in Chapter 4, not because of its price per coin. Bitcoins are infinitely divisible. The idea that investors must purchase whole coins at a time is simply not accurate. One can invest in Bitcoin with only cents on the dollar, but they will only own a small fraction of a coin. The smallest unit of measure in the Bitcoin space is called the satoshi, or sat. A satoshi is 0.00000001 Bitcoin. In the event that Bitcoin ever reaches reserve currency status, the satoshi will certainly be the unit of measurement due to the astronomical price of an entire coin.

Investors must know that the coin price does not equate to a share price. For example, if the share price of Amazon reaches $4,000, that means $4,000 is the minimum investment to become a shareholder unless a stock split occurs or the investor uses a brokerage account that allows for investing in partial shares. If an investor ever uses this as an argument against investing, he or she is likely facing a mental barrier from an equity-based framework.

“Bitcoin is used by criminals”

The perception of Bitcoin as a tool for money laundering is inextricably linked to its early use case as a pseudonymous currency for illicit online activity. In 2011, Ross Ulbricht created the Silk Road, an anonymous online e-commerce website on the dark web for buying and selling illegal drugs. A former physics major and himself a psychedelic mushroom dealer, Ross’s grand vision of Jeff Bezos meets Pablo Escobar ultimately ended in double life imprisonment and 40 years without parole. The Silk Road used Tor software, designed by U.S. Naval Intelligence to obscure an individual’s identity when surfing the web. Though potential customers could anonymously surf the Silk Road using Tor, they could not make purchases with a credit or debit card without being traced. Bitcoin’s use of a public address posted on the blockchain, as opposed to personally identifiable information through a credit card company or service such as PayPal, created the full anonymity that Ross desired. By the end of 2012, the Silk Road was averaging $1.2 million Bitcoin transactions per month.1

The issue Ross faced was that Bitcoin is not anonymous. The blockchain publishes a public, pseudonymous key for every transaction, and authorities have the ability to trace those transactions back to the individual with enough time and effort. For those who hold wallets on centralized exchanges, the exchange can link public keys to individual accounts. Even in the early days of Bitcoin, the United States Federal Bureau of Investigation (FBI) made Silk Road related arrests on a monthly basis.2 Bitcoin’s use as a perfectly anonymous currency for criminals is highly exaggerated. For legal activities where anonymity is desired, such as online gambling, Bitcoin surely has its use case. However, for illicit activities such as terrorist financing, ransomware, and drug dealing, having every transaction posted on the blockchain with a public key serves as a major disadvantage. Blockchain monitoring companies such as ComplyAdvantage and Elliptic work hand-in-hand with authorities to monitor cryptocurrency transactions and link them to criminal activity.

The ultimate irony behind the claim that Bitcoin is used for money laundering is the fact criminals use cash and megabanks far more often than Bitcoin. Meanwhile, governments and Wall Street are usually among the first to claim that Bitcoin is for criminals. According to a crypto crime report by Chainalysis that oversaw roughly $1 trillion worth of Bitcoin transactions each year since 2017, only 0.34 percent of transactions in 2020 were associated with illicit activity.3 The majority of illicit activities involve scams, ransomware, or darknet matters similar to the old Silk Road in spite of crackdowns. That equates to $5 billion of illicit cryptorelated activities a year. Meanwhile, according to the United Nations Office on Drugs and Crime, criminals use cash to launder between $800 billion and $2 trillion annually—which equates between 2 and 5 percent of global GDP. Cash and cash businesses will always be the primary method for criminals to launder money. Meanwhile, big money international criminals prefer using Wall Street banks. A study conducted by the International Consortium of Investigative Journalists (ICIJ) concluded that JPMorgan, HSBC, Standard Chartered Bank, Deutsche Bank, and Bank of New York Mellon all continued laundering funds for high-net worth criminals even after fines and warnings from the U.S. Department of Justice. A short list of clients includes a corrupt vice-president of the Democratic Republic of Congo, a Venezuelan energy mogul whose embezzlement contributed to nationwide blackouts, and an Iranian gold trader evading sanctions.4

The early use case of Bitcoin as a pseudonymous currency used in online drug trafficking will always give it a negative perception. Statistically, cash is used far more often for money laundering because it is more anonymous. Bitcoin publishes a public key to the blockchain that can help authorities trace funds back to individuals. While the world focuses on the narrative of Bitcoin as a money laundering device, megabanks benefit from toothless Treasury officials and willfully ignorant internal compliance departments. In 2011, JP Morgan Chase faced an $88.3 million fine to settle a case of knowingly violating economic sanctions against Iran. In 2014, it made $500 million in fees and interest from Bernie Madoff alone.

“I believe in blockchain, just not Bitcoin”

I believe this stems from a lack of understanding of both blockchain and Bitcoin. Blockchain itself is much slower and expensive than centralized solutions. The only advantage of using blockchain is to eliminate a third party between transactions, whether monetary or otherwise. It can only do this through a decentralized token native to the blockchain and a consensus mechanism such as proof-of-work to validate authenticity and prevent double spending. For Bitcoin, a distributed ledger based on proof-of-work is energy- and time-intensive. A centralized database such as Visa can process 65,000 transactions per second. The Bitcoin network is only capable of processing four transactions per second, hence the need for layer-two solutions such as the lightning network.

Additionally, Bitcoin mining and transactions currently consume over 120 terawatt-hours of electricity per year. This equates to 0.28 percent of all global electricity and more than medium-sized countries such as Switzerland, Ireland, and Israel. A single Bitcoin transaction consumes 741 kilowatt-hours of electricity. By comparison, 100,000 Visa transactions consumes 149 kilowatt-hours. Though some projects use proof-ofstake to minimize electricity use, the benefits of decentralization must far outweigh the costs in time and energy in order to create a successful blockchain project. Detractors commonly use the argument of migrating all information such as medical records or personal records onto the blockchain for security purposes. If the bank or hospital is the trusted third party that owns the records regardless, migrating to the blockchain is just an extra, inefficient step in most cases. They would be much better off bolstering their current database security measures.

The only truly successful use cases of blockchain technology are Bitcoin and Ethereum. Ethereum is a programmable blockchain that uses self-executing smart contracts. Think of this as an IF, THEN statement in basic code. When the IF event occurs, the contract executes the THEN portion of the statement. It requires no legal, financial, or medical intermediary. Though the premise seems simple, individuals can build entire subnetworks on the Ethereum platform. In fact, roughly 90 percent of Altcoins are built on the Ethereum protocol. Ethereum allows for peer-topeer borrowing and lending, fundraising, gaming, stablecoins, fractional real estate ownership, insurance payments, supply chain management, and more. It is the application token of blockchain technology. The Ethereum blockchain is a solution still seeking problems to solve and has taken a life of its own in recent years.

Bitcoin, meanwhile, serves the fundamental purpose of transferring value on the blockchain. Why would someone want to transfer value in a peer-to-peer manner? Banks, payment companies such as Visa, money transfer companies such as Western Union, and even title companies charge time and fees by being the third party between value transactions. These companies also have the ability to deny transactions. Additionally, Bitcoin’s sound and immutable monetary policy makes it a safe haven from capital controls, hyperinflating currencies, or steadily inflating currencies. It is the only transactional currency that cannot possibly be debased. Lastly, because it is peer-to-peer and not connected to the legacy financial system, any Bitcoin held in cold storage is sovereign. In 2018, Greek officials seized over 105,000 bank accounts for alleged tax evasion. Though the owners of these accounts committed a crime, the fact that governments have the ability to seize your assets concerns some. A market always existed for a decentralized hard currency and blockchain enabled it by disintermediating banks and governments from money. As governments around the world continue to debase their currencies to stimulate in a low-rate environment, that market for Bitcoin will grow. Immutable money warrants the additional processing time and energy required.

Anyone who states that they believe in blockchain technology but not Bitcoin understands neither. Blockchain is a disintermediary technology with limited applications. It eliminates central authority but adds slower processing time and high energy costs because it requires a verification mechanism—proof-of-work algorithm for Bitcoin and the less energy-intensive proof-of-stake for Ethereum. Transferring value without a bank or government constitutes the best possible application of blockchain. Second would be executing contracts without a central authority to mediate the contract, though it has diverse implications and use cases. The financial infrastructure has seen little technological innovation in recent decades. Individuals can conduct a frictionless, face-to-face call from different continents, but sending value via international wire transfer takes several business days. The system was ripe for innovation. Bitcoin and Ethereum exposed inefficiencies that most individuals did not know existed.

“Bitcoin consumes too much energy”

Bitcoin mining is an energy-intensive business. Ethereum began transitioning from proof-of-work to proof-of-stake with Ethereum 2.0 to decrease energy consumption, though at a cost that will be explored later in this book. The high energy consumption from Bitcoin mining derives from the processing power used by miners in solving the computational puzzle to verify blocks. Miners would have to sell Bitcoin in order to cover operating costs from electricity usage and equipment. Proof-of-stake attributes mining power in direct proportion to the number of coins held, not by computational power and energy. If one agrees to stake coins for an indeterminable amount of time, one is rewarded with additional coins. Ethereum is a much more experimental and fluid project than Bitcoin with disparate applications and constant upgrades. Arguably, proof-ofstake makes Ethereum much less egalitarian. Despite proof-of-stake’s proposed advantages in terms of energy, proof-of-work is proven to correctly mix the incentives between miners and investors.

As an energy-intensive business, some detractors will claim that Bitcoin harms the environment by releasing carbon emissions from its energy usage. They will also claim that such high energy usage is not warranted for a speculative financial asset. First, Bitcoin mining operations are only profitable in areas with low energy costs. In Sichuan, China, home to the second largest Bitcoin mining operation in the world, an overcapacity of hydropower provides roughly 75 GW of power annually, which is double the requirement of the city’s power grid.5 This readily available excess energy supply made Sichuan a perfect candidate for a Bitcoin mining operation. Entrepreneurs can also repurpose failing energy sources for Bitcoin mining, such as the Alcoa aluminum smelting factory in upstate New York.

Bitcoin mining tends to occur in areas with excess capacity of energy because it provides miners with a competitive advantage through less operating costs. Bitcoin will not drive-up energy costs in the average city or town because it remains relegated to rural, energy-efficient areas such as Sichuan and upstate New York. Additionally, 39 percent of all Bitcoin mining operations rely on renewable energy according to a 2020 report, with 74 percent of mining operations using renewables as part of their energy mix.6 According to the International Energy Agency (IEA), 28 percent of the world’s energy usage relies on renewable sources. Bitcoin mining operations are much greener than the global average.

More importantly, at 120 terawatt-hours compared to global annual production of 160,000 terawatt-hours of energy, the Bitcoin network currently consumes 0.075 percent of global energy at the time of this writing. As Microstrategy’s Michael Saylor points out, 50,000 terawatt-hours of the 160,000 is considered waste. Bitcoin consumes 0.25 percent of wasted energy. These figures make complaints of Bitcoin’s energy consumption silly by comparison. The truth is, any amount of electricity will be too much for most Bitcoin detractors. For those who use Bitcoin for remittance payments to their families or for monetary sovereignty in the face of capital controls, hyperinflating currencies, or surreptitious taxation through a policy of inflation, this energy consumption is well worth it.

Additionally, as energy sources such as solar and hydropower become more efficient and coal plants more expensive, renewable energy will undoubtedly grow in relative market size. According to a study by Carbon Tracker in 2018, 42 percent of the world’s coal plants are operating at a loss. Meanwhile, Swanson’s Law states that the price of solar energy drops roughly 20 percent when the shipped volume of solar cells doubles, equating to a price drop of 75 percent every 10 years. In the near future, renewable energy sources such as solar and wind will be more efficient and less expensive than coal, which has high exploration and maintenance costs. I do not worry about the carbon emission argument from detractors because Bitcoin is relegated to energy-efficient areas, relies heavily on green energy, and the shift to renewable energy is economically and politically inevitable. Solar power is set to be more cost efficient than coal by the year 2030.

The second claim is that energy usage to power a speculative financial asset is wasteful and unproductive. Bitcoin and cryptocurrencies are not just financial assets, but an entire fledgling alternative financial industry that employs miners, investors, lawmakers, and more. Repurposing the Alcoa mine in New York alone created 150 jobs.7 A 2020 search query study conducted by Bitcoin.com found roughly 8,000 crypto- and blockchain-related job openings. Common positions include software engineers, program managers, community managers, and compliance officers. Energy is not being funneled to a speculative asset, but a fledgling industry that continues to grow.

In the ultimate sign of an industry being born, college students are demanding Bitcoin- and blockchain-related curriculum. The MBA to crypto pipeline is only in its infancy with MBA programs recently rolling out crypto-related curriculum. Stanford’s first cryptocurrency class in 2018 was a grass roots movement led by student Itamar Orr and a group of classmates noticing Silicon Valley’s interest. Additionally, trends in MBA employment demonstrates a shifting nexus of hiring from Wall Street to Silicon Valley and crypto. For example, 2007 graduates of Stanford went on to begin finance careers 38 percent of the time compared to 12 percent for technology-related careers. In 2017, those figures changed to 24 percent finance and 25 percent technology.8 This trend itself foretold of the rise of big tech and FAANG stocks. As large Silicon Valley venture capital firms continue plowing into crypto, such as Andreessen Horowitz’s $865 million worth of investments in crypto funds, and continue being more attractive to MBA graduates over traditional finance, crypto will see more institutional buy-in and will become mainstream in even MBA education. Educational involvement gives more credence to the idea that this is a fledgling industry, not just a singular asset.

Both Wall Street and Silicon Valley are competing for market share in the ongoing crypto boom, with other cities such as the San Francisco, Wyoming, and Miami all vying for the business that it brings. The city of Miami even uploaded the Bitcoin white paper to its municipal website in 2021, with Mayor Francis Suarez promising to turn the city into a hub for crypto innovation. Bitcoin investing, mining, lending, and blockchain applications are all part of a greater industry. Hysteria regarding Bitcoin’s energy consumption is overblown—especially when compared to its societal benefits. Furthermore, Bitcoin’s energy consumption takes advantage of low-cost energy sources, relies largely in large part on green energy, and will continue to do so as it inevitably becomes more economically advantageous. Lastly, that energy is not just powering a speculative asset, but an entire industry that cities and traditional universities around the world are trying to co-opt.

“Bitcoin has no intrinsic value”

I hope that Chapter 4 settled this counterargument, but it bears repeating. Bitcoin’s value derives from demand in the face of scarcity. A 2016 report commissioned by Art Basel and UBS Global estimated the value of the global collectible art market to be $56.6 billion.9 Original paintings contain scarcity even though they can be replicated indefinitely online and in print. I liken this aspect to Bitcoin versus Altcoins. Bitcoin replicas exist, but users agree that Bitcoin is the best autonomous and decentralized monetary network. The only utility of art involves looking at it as a decoration—though no one would claim that it has no value despite its lack of utility. Collectible art, cars, baseball cards, and the like, derive most of their value from scarcity. However, due to the subjectivity and changing tastes of collectors, even collectible items have a regular flow of recently determined collectibles. At 21 million, Bitcoin is the only asset as scarce as time. It is programmed scarcity. Scarce items that hold value have a great premium with today’s monetary economics.

Bitcoin also has utility value as a peer-to-peer payment mechanism that avoids the negative effects of sending money via trusted third parties. Bitcoin sees significant demand from this direction as well. Shares in Visa stock involve ownership in that corporation. Owning Bitcoin makes you a partial owner of the most dominant decentralized monetary network. Similar to commodities and dissimilar to financial assets, value is based solely on supply and demand. Consistent demand and a four-year halving cycle leads to increasing price. In a reflexive loop, increasing price brings more attention and demand. My response to the question of intrinsic value usually involves follow-on questions. Why does an original Van Gogh painting have value? Why do shares in Visa have value? Why has gold outperformed Berkshire Hathaway since 2001? Investors who use a financial asset valuation framework to a commodity will remain in the dark.

“Governments will ban Bitcoin if it becomes too successful”

I saved what I believe to be the most legitimate Bitcoin counterarguments for last. First, governments cannot ban Bitcoin because it is completely decentralized. Bitcoin will exist as long as one server in the world runs a full node and as long as the Internet exists. Even then, one can send Bitcoins via radio waves. However, an argument exists for governments denying Bitcoin transactions and purchases on major exchanges or by private companies. This will undoubtedly affect the price though the network will continue to exist. Bitcoin’s market capitalization is much too small for governments to concern themselves over at the current moment. However, current trends such Bitcoin-populism will lead to more government scrutiny while trends such as institutional entrenchment will lead to less.

At a macro scale, printing and injecting money to alleviate economic woes creates moral hazard and maintains inefficient companies at the expense of innovation. Keeping borrowing costs below their free market levels also provides advantages to those large institutions with access to capital. In a free market, the marginal product of capital determines interest rates. In a neo-Keynesian economy, central planners determine the appropriate level of interest to meet their goals of increasing economic activity and employment. Pushing the cost of capital downward to alleviate economic weakness is a short-sighted solution to a structural problem. Liquidity injections even more so. Following the 2008 financial crisis, Citigroup, Bank of America, JP Morgan Chase, Goldman Sachs, and Morgan Stanley received a combined $135 billion in bailouts.10 This book does not intend to make normative statements about bailouts but only points it out as a public example of how policy choices have fueled national discontent. In fact, for the sake of argument, I will assume the best-case scenario. Policy makers’ quick action averted large-scale human suffering in 2008 and the nation and economy are better off for it.

The moral hazard of the bailouts involves using public funds to cushion the balance sheets of banks at the epicenter of the subprime mortgage crisis. The average individual who took excess risk was forced to reap what they sow. Today’s liquidity injections and policy of inflation bolster financial assets and alleviate debtors at a time when wages have remained stagnant since the 1970s. It benefits asset holders and debtors while taxing wage earners and savers. In essence, it makes the rich, richer and the poor, poorer. Much of the developed world has this same policy. Rates at the zero bound lead to accelerated money printing, which widens the wealth gap. I believe this is the source of 21st-century global populism. Black Lives Matter protests, storming the Capitol building, and antilockdown protests are all symptoms of a greater discontent. Though the average person lays blame to an institution, race, culture, country, or political party, I believe the seed of their discontent is a financial system that provides exorbitant privilege to banks, corporations, and governments because they have access to both cheap capital and public funds.

Since 1983, this system has led to a halving of the middle class in terms of their share in U.S. aggregate wealth, and a 19 percent rise of those considered upper income according to Pew Research.11 Bitcoin markets itself as a parallel financial system outside the control of governments and banks. In fact, nearly every technological breakthrough in mankind has marketed itself as a cure for societies’ cultural and moral woes. In 1922, the director of the Radio Corporation of America had this to say about radio: “whatever he most desires… the radio telephone will supply it. We can be certain that a national cultural appreciation will result… the people’s University of the Air will have a greater student body than all of our universities put together.”12 Advocates will oftentimes use a moralistic argument and offer Bitcoin as a way to “opt out” of the current financial system. Though the merits of that argument are up for discussion, it proves salient during eras of discontent.

The Wall Street versus Main Street debate of 2008 was reopened in 2021 when users of a Reddit subforum, noting that short interest in GameStop had exceeded 100 percent of available shares, piled into the stock to create a massive short squeeze that sent the price from $2.57 a share to nearly $500. The popular retail brokerage app Robinhood, responded by halting buy orders on the stock, citing it needed to “protect our firm and our customers,” not liquidity issues in posting collateral at clearing houses as many suspected. Many believe that it halted buy orders so that hedge funds could get out of their short positions and lick their wounds. Robinhood disclosures show that it sells customers’ trading information to hedge funds such as Citadel owned by Ken Griffin. Melvin Capital, the short-selling hedge fund that lost billions in the short squeeze, is owned by Citadel. Along with Steve Cohen’s Point72 hedge fund, Citadel was forced to infuse Melvin with $3 billion to shore up finances following the events.

Again, whether Robinhood’s decision truly was a liquidity issue that the CEO did not wish to disclose, or if they halted buying to help their Wall Street clients is beside the point. Personally, I believe that inability to post collateral with prime brokers certainly played a role in the events that ensued. However, perception is reality. These events added fuel to the fire behind the idea that the financial system is corrupt and favors the few at the expense of the many. For Bitcoin traditionalists, this is what Bitcoin was made for. I believe these disgruntled traders are one step away from angrily ditching traditional finance entirely and migrating to decentralized digital assets.

As previously stated, Bitcoin’s market capitalization is much too small for most regulators to concern themselves over. However, recent events demonstrate that Bitcoin strikes a populist chord. Actions in El Salvador prove that entire countries can now choose to “opt out” of the dollar centric international order. What if Bitcoin becomes the outlet for current global populist sentiment? What if citizens vote with their wallets by joining a parallel financial system and leaving the traditional financial system of debt, inflation, dollars, stocks, and bonds? Marketing Bitcoin as outside of government control is one thing, marketing it as antiestablishment is another. One invites a co-opt from traditional finance that can lead to its adoption as an institutional asset. The other invites heavy handed regulation. Bitcoin’s future most likely lies in the middle with institutional adoption accompanied by increased regulation.

Despite the concerning covenant being made between Bitcoin and disgruntled populists, I still believe that governments are more likely to co-opt than combat Bitcoin because we are currently seeing massive traditional financial entrenchment. As more powerful individuals and institutions allocate a portion of their portfolios to Bitcoin, governments will become less combative. Additionally, a ban is complicated by the fact that Bitcoin is legal tender in one country and will become legal tender in more. Due to the western world’s acceptance thus far, examples of institutional interest grow on a monthly basis. Some current examples include Fidelity Digital Assets for institutional investors, Visa offering a Bitcoin rewards card, PayPal and CashApp allowing Bitcoin transactions, Microsoft Identity on the Bitcoin network, MassMutual Insurance portfolio adding Bitcoin, Goldman Sachs and JP Morgan creating cryptocurrency trading desks and providing banking services to major exchanges, hedge funds such as Skybridge Capital adding Bitcoin, and municipal governments inviting the industry to their jurisdictions for the economic benefits. The list goes on. Additionally, cryptocurrency exchanges such as Coinbase and Gemini, crypto-insurance companies such as Evertas, Bitcoin lending options such as BlockFi, and rewards credit cards such as the Fold Card all show that crypto companies also have significant financial power already. Making the industry illegal or highly regulated in one fell swoop will upset both legacy finance and the new finance crowd at this point. It will also lead to a migration of capital as the Chinese mining example will illustrate later in this chapter. The time to ban Bitcoin was in its infancy. With such institutional and international entrenchment, I believe a complete ban is off the table.

Contrary to the idea that governments would be combative to a technology that challenges their monopoly on money, the opposite seems to be occurring with the international rollout of Central Bank Digital Currencies (CBDCs). Governments and traditional finance are actually embracing decentralized currencies despite their preferential treatment with populists and anarcho-capitalists because they make money in doing so and co-opting it is less costly than stopping it from a game theory perspective. As mentioned in previous chapters, a ban would require international coordination because one country’s loss is another country’s gain. The country’s crypto-economy will shift to whichever country has the more friendly regulation. We are currently witnessing this at the Federal level in the United States with states such as Florida and Texas attracting those in the cryptoindustry with friendlier policies. Not only does entrenchment make a ban unlikely, but a ban is simply too difficult to execute.

“Quantum computing will hack the Bitcoin network”

Quantum computers use the concepts of superposition and entanglement to create exponentially larger processing power compared to regular computing systems. Superposition allows quantum computers to be in multiple states simultaneously. While regular systems compute and store information in binary bits of 0 or 1, quantum systems use quibits that can be both states at the same time. Additionally, because quibits can be in the same state through entanglement, adding extra bits to a quantum computer leads to exponentially greater processing power. With a regular system, doubling the bits equals doubling processing power. With exponentially larger processing power, seemingly impossible problems become solvable. One of which, hypothetically, includes Bitcoin cryptography.

Bitcoin uses cryptography in both the proof-of-work algorithm and in creating public keys. The Secure Hash Algorithm 256 (SHA-256) is the cryptographic function that must be solved by miners to create Bitcoin. Quantum computing threatens the mining industry because it has exponentially greater processing power that can solve the algorithm faster and mine all future available Bitcoin before regular competitors. More importantly, sufficiently high quantum computing could derive a private key from its corresponding public key, thus falsifying any digital signatures and stealing coins. A Bitcoin private key is a randomly generated 256-bit alphanumerical combination used in digital signatures to verify transactions. When a private key is put through the Elliptic Curve Digital Signature Algorithm (ECDSA), it creates a corresponding public key. There is a mathematical relationship between public and private keys, though only the public key gets posted on the blockchain while the private key validates transactions. Though technically possible, reverse engineering a public key to derive a private key takes an astronomical amount of computing power that current computers cannot achieve.

Quantum supercomputers are nowhere near proficient enough to hack either algorithm. Estimates show that cracking Bitcoin cryptography would require at least 1,500 quibits according to most sources. The closest computer in existence today is Google’s 53 quibit supercomputer. However, the supercomputer checks outputs from a quantum random number generator. It has no applications and poses no threat to the network. It took nearly 50 years since the introduction of quantum computing to achieve this feat. Creating a 1,500 quibit supercomputer capable of reverse engineering cryptography would be a massive undertaking and is in all probability a century or more away. Quantum computing is unlikely to threaten the Bitcoin network in my lifetime. Even when it does, solutions still exist to keep the network alive.

Soft forks and layer-two solutions can both prevent quantum computers from hacking the Bitcoin network. As opposed to a hard fork that creates two different protocols and thus an entirely new coin, a soft fork constitutes a minor upgrade to the network that old nodes accept as legitimate. Hard forks constitute major, noncompatible changes to the protocol. Nine hard forks have occurred from the original Bitcoin protocol. Most have become obsolete and none have come close to surpassing the original protocol in market capitalization. Meanwhile, the Bitcoin network has accepted 26 soft-forks from different developers. Anyone can propose a “Bitcoin Improvement Proposal” on the Bitcoin GitHub site—a website for community software projects. It first gets screened and approved by an editor. Then, 95 percent of the last 2,016 miners must approve the upgrade as legitimate. Lastly, all miners must update their software. The supermajority required in Bitcoin governance means that upgrading the network is difficult but not impossible. One example of a soft fork involved adopting the segregated witness (SegWit) update in 2017, which increased the block limit from one to four in order to improve transaction processing time.

Quantum computing threatens the security of any system that uses cryptography. Most online systems that involve transactions, such as online banking and e-commerce, rely on public key cryptography that is less secure than Bitcoin. Therefore, quantum computing could first hack login information from a bank or credit card information from an e-commerce website before taking one’s Bitcoin. A quantum-resistant public key cryptography system will be developed in due time because a failure to do so will compromise every piece of secure information on the Internet. Bitcoin will adopt it through a soft fork or through a second layer security solution. Additionally, Bitcoin is already quantum-resistant if one takes the proper measures—and not just through cold storage. In order for a hacker to access your Bitcoin, they must have your private key and public key. The public key also serves as the address. A hacker will only see your public address as it becomes posted to the blockchain after a transaction. If you move your Bitcoin to a new address after a transaction, a hacker cannot access them, even with a quantum supercomputer.

In summation, quantum computing is in all likelihood a century or more away before threatening the Bitcoin network. Even then, it equally threatens traditional banking and e-commerce. We will have cybersecurity upgrades before allowing quantum computing to break the Internet. Bitcoin could easily adopt these through a soft fork or layer-two solution. Though a legitimate threat given the current state of the network, Bitcoin developers and global cybersecurity experts have decades to react. The technology to protect these networks does not exist yet because the technology to attack them has yet to reach any meaningful milestones.

“Derivatives markets will keep Bitcoin’s price suppressed”

A derivative is a financial contract whose price is anchored to a specific asset. Traders oftentimes use derivatives to hedge risk exposure or gain access to otherwise unavailable assets. Types of financial derivatives include futures, options, swaps, and forward contracts. Traders can use derivatives to get exposure to stocks, bonds, currencies, commodities, and interest rates. Because the derivatives user does not own the underlying asset, derivatives is a popular strategy among traders and hedge funds, not long-term investors.

On October 31, 2017, the Chicago Board Options Exchange (CBOE) launched a futures contract based on Bitcoin. This occurred three years after the decision by the Commodity Futures Trading Commission (CFTC) to define Bitcoin as a commodity according to the Commodity Exchange Act. District courts upheld the CFTC’s decision to treat cryptocurrencies as commodities in multiple public lawsuits, lending credence to its legitimacy and providing enough regulation for more commodities exchanges to get involved. After increased pressure from institutional funds, the Chicago Mercantile Exchange (CME), the largest options and futures contracts exchange in the world, announced that it too would begin Bitcoin futures trading in December 2017. In another milestone, the CFTC approved physical delivery of Bitcoin as opposed to cash-settled contracts for the LedgerX derivatives exchange and clearinghouse in June 2019, making it the first fully collateralized futures exchange. Most investors see futures trading as the first of several institutional floodgates that will lead to upward price action. The largest and most liquid oil futures contracts, West Texas Intermediate Crude, trades 1.2 million contracts per day. Additionally, those with high Bitcoin exposure such as miners can purchase long-term put options to hedge their exposure, giving it practical application to the industry.

While most see the introduction of Bitcoin derivatives as a positive, others claim that the ability to short an asset without owning a claim to the underlying in a process called naked short selling means large institutions can keep the price of Bitcoin perpetually suppressed. Critics blame derivatives for the housing market collapse in 2008, as mortgage-backed securities are in fact a derivative on an underlying mortgage bundle. A popular belief among gold investors is that the gold market is manipulated downward through derivative contracts in a way reminiscent of the 1960s London Gold Pool, where global Central Banks collectively bought and sold gold on the open market to maintain the $35/oz dollar for gold convertibility. In the 1960s, the incentives lay in maintaining the Bretton Woods system of dollar convertibility and preventing runs on the gold reserves of the United States. Today, some gold investors claim that governments and banks have the incentive of preventing runs on the dollar and keeping investable assets within the financial system as opposed to a monetary asset. I believe the claims are false, but not entirely unwarranted.

The first method of suppressing price involves naked short selling, arguably witnessed in the 2021 events involving GameStop. Naked shorting is the illegal practice of short selling without ever having the asset, or short selling an asset that does not exist. Hedge funds and individual traders were able to get 140 percent short on GameStop. In other words, there was more short pressure than available shares. While those with options expertise will claim that lending out borrowed shares more than once can lead to this dynamic, the fact that traders shorted more than the available float remains. The second method involves “spoofing,” the act of placing large trade orders with the intent of canceling them before execution. Algorithmic trading platforms will buy or sell in advance of the fake trade, ultimately playing into the hands of the original trader with a preexisting trade. The CFTC forced J.P. Morgan to pay $920 million in fines and restitution after it determined that “between 2008 and 2016, JPMorgan engaged in a pattern of manipulation in the precious metals futures and U.S. Treasury futures market.”13

Precious metals manipulation occurs, but to what extent? I believe cries of foul play are overstated. Short interest is publicly available data. Similar to GameStop in 2021, high short interest met with more demand creates short squeezes that lead to skyrocketing price action. Any high volume naked short squeezing will likely be short-lived. Additionally, spoofing may work for short-term price action but I do not believe that headfaking algorithmic traders can lead to sustained bull and bear markets. Meanwhile, cries of Central Bank and investment bank collusion to suppress gold prices lie in the realm of conspiracy theory. Since 2000, gold has outperformed the S&P 500 by over 359 percent due to a huge rally at the turn of the millennia. Since 2010, it has underperformed by 194 percent and performed on par in the last two years. If global Central Banks and investment banks are colluding to keep the price of gold suppressed, my contention is that they are doing a terrible job of it. Investors worried that financialization of Bitcoin will lead to manipulation through derivatives usually believe in an overstated gold manipulation narrative.

“China owns too much of the Bitcoin network”

At the time of this writing, sixty-five percent of the Bitcoin mining pool, as measured by the hash rate, exists in China.14 This causes some detractors to argue against Bitcoin on a geostrategic basis. In addition to China’s high hash rate, Russia owns 6.9 percent compared to 7.2 percent in the United States. The argument goes that nefarious global actors use Bitcoin as a means to acquire dollars on the open market. In addition to financing rogue nations, miners can ban together to successfully complete a 51 percent attack on the Bitcoin network and come away with multiple hundreds of billions—largely from U.S. traders and investors. While most of the mining capacity lies in China, most of the trading volume comes from the United States at 38 percent compared to China’s 4.95 percent.15 I believe this argument assumes that Bitcoin mining rigs in China are state-owned enterprises or that China has an interest in subverting the dollar’s hegemony through Bitcoin. In fact, China’s hostility toward Bitcoin mining has led to a flight of capital to cheap energy sources without antagonistic policies. A continued hostile stance will lead to continued capital flight. This counterargument also does not take into account the game theory that explains why the successful orchestrators of a 51 percent attack would essentially come away with less than that if they continued their business as usual.

Why does Bitcoin investing take place primarily in the United States while Bitcoin mining is primarily done in China, with Russia behind the United States as the third largest Bitcoin miner in the world? Bitcoin is a global phenomenon and a masterclass in free market economics. China has an overcapacity of energy and the United States an overcapacity of capital. Bitcoin mining and investing serves as an outlet for both. As previously mentioned, the competitive advantage in terms of mining goes to those with cheap energy costs. Russia’s income from natural resources such as oil and natural gas are 15 percent of GDP. For the United States, that number is 0.71 percent. China achieved a GDP growth rate above 7 percent between 1991 and 2015 largely on a sleight of hand of credit and infrastructure expansion that led to vast energy overcapacity. In addition to largely unnecessary power infrastructure projects such as Sichuan’s hydroelectric plant, China’s coal-powered plants ran at less than 50 percent capacity on average in 2019. China was forced to cancel three renewable energy projects in 2019 “amid concerns of overcapacity and a $20 billion payment backlog.”16 In a global free market, China’s energy overcapacity from mismanaged growth projects made it an ideal candidate for Bitcoin mining. As the wealthiest nation in the world, the United States has the capital to invest in Bitcoin.

The idea that nefarious states mine Bitcoin in their jurisdictions and trade them for dollars is simply not true because these mining operations are not state-owned enterprises. In fact, China is one of the least Bitcoin-friendly nations in the world. Initial Coin Offerings, accepting Bitcoin as legal tender, and local Chinese Bitcoin exchanges have been banned since 2017. In April of 2019, the National Development and Reform Commission (NDRC) submitted a draft to illegalize “virtual currency mining, such as the production process of Bitcoin.”17 Though never approved, Bitcoin hash rates in China decreased by 10 percent in the year and a half since the legislation proposal. It has decreased 15 percent from its high of 80 percent of the total hash rate in 2018. To account for the drop in China, shares of the mining pool have increased by 4.75 percent in Kazakhstan, 3.18 percent in the United States, and 1.12 percent in Malaysia since Q3 2019. China’s share of the mining pool continues decreasing on a quarterly basis as its haphazard and hostile regulatory measures causes global miners to find cheap energy elsewhere.

Bitcoin follows the same dynamics as goods in China or Mexico being produced cheaply due to low labor costs and sold to western consumers due to high demand, only substituting labor with energy costs. Treating it as a Chinese conspiracy to generate dollars through mining is undoubtedly false. Additionally, it should be clear by now that the United States is not financing the Chinese Communist Party (CCP) by purchasing Bitcoin on the open market because the CCP has nothing to do with these miners. Investors do not have to take my word for it. The greatest evidence lies in the 15 percent drop in China’s hash rate since its initial hard stance on crypto. The CCP is completely antagonistic toward Bitcoin to its own detriment. Losing a profitable industry that provides an outlet to its excess energy capacity is perhaps one of the greatest own goals in economic history. Even while nations with cheap energy profit by mining Bitcoin, the U.S. profits by purchasing and owning most of it though companies such as Grayscale Investment Trust, Coinbase, CashApp, Microstrategies, crypto hedge funds, and the like. Its growing interest in the asset also leads to a growing share of the mining pool.

The second contention to China’s role in the mining industry is the idea that independent Chinese miners could band together to conduct a 51 percent attack on the network. A 51 percent attack can occur when one actor has 51 percent or more of the hash rate. This actor could spend a Bitcoin while simultaneously mining a fraudulent fork of the blockchain with another transaction of the same Bitcoin. A 51 percent attack gives the actor the ability to double spend coins, not steal coins or manipulate certain immutable aspects of the blockchain. I believe using a lens of game theory to assess possibilities such as these demonstrates their unlikeliness. First, mining is a profitable industry because one achieves cash flows in an appreciating currency that easily covers operating costs in a depreciating currency. The status quo is to remain a benevolent actor and remain very profitable. Banding together for a 51 percent attack is difficult to achieve in the first place. Even if it occurs because miners decided to or because the CCP had a change of heart and nationalized all mining operations, allowing one actor to double spend their coins destroys the integrity of the network and the purpose behind Bitcoin. A malevolent actor attacks the network for economic gain in the ability to double spend coins, but destroys the network in the process and crashes the price. The actor gains the ability to double spend a coin that it made worthless. I borrowed this colorful analogy from Sam Harris, a popular podcast host and neuroscientist. If being harsh on Bitcoin to the detriment of your economy constitutes an own goal, attacking the network for economic gain only to destroy it and leave your coins worthless is a Lionel Messi-style bicycle kick into your own goal. All actors involved in the network have more incentive to maintain the network than to attack it. Additionally, given that China’s share in the mining pool continues to decrease year-over-year, the CCP nationalizing Chinese miner’s argument becomes weaker by the day.

The China model demonstrates what not to do when threatened by a decentralized, sovereign currency. All attempts to illegalize or overregulate its Bitcoin mining operations have caused miners to leave for Kazakhstan and Malaysia. Meanwhile, treating it as any other industry or asset would have solved its issues of excess energy capacity and benefited the government through taxation. Lastly and very importantly, investors should know that 88 percent of Bitcoin are already mined and in circulation. By the time quantum computing threatens to break the SHA-56 algorithm or coerced miners join forces to conduct a 51 percent attack, there will likely be little to no Bitcoin left to mine. Additionally, any competitive advantage in mining will be short-lived as much of the profits have been made. The true advantage lies in the industries surrounding the asset itself which, unlike mining, have no shelf life. In developing these industries, the competitive advantage lies in capital-intensive geographies such as the west.

Conclusion

Counterarguments against Bitcoin lie on the spectrum of completely erroneous to legitimate threats. An investor who claims that the price of a Bitcoin is too high simply does not understand the asset. While concerns regarding quantum computing or China’s geostrategic role in mining have more credence, I hope to have provided ample evidence to prove that they pose an overstated existential threat to the network. Regardless, investors must understand the different risks that exist.

By this point, investors should have a far more in-depth understanding of Bitcoin as an asset, its role in portfolio management, its role in international economics, and even methods to determine objective and subjective value. It is a truly macro asset that has technological, geopolitical, and even social implications. The rest of the book focuses on the rest of the cryptocurrency ecosystem—beginning with Ethereum. It uses an abbreviated version of the Bitcoin framework that answers what they are, how they fit into a portfolio, and how to value them—all the while uncovering important technical aspects that every potential crypto investor should know.

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