Can Governments Stop Bitcoin?

[Ken]

Alex Gladstein’s article is pretty ambitious and so necessarily somewhat superficial. I found I agreed with most of what Alex said, but in some areas he was less convincing.

I had previously read Joe Kelly’s article, and found it very compelling. They differ on how difficult it would be to attack the miners. Alex envisions a scenario where governments commission their own mining rigs and attempts to dominate mining using legitimate means. He assumes that this will require an investment of $5G, which is nothing for a government. However he claims:

it is unlikely that they (governments) would divert the precious fabrication capacity of the world’s few semiconductor manufacturers to this very speculative purpose.

I personally find this last statement unconvincing. TSMC, the largest such chip fabrication company, had revenues of $4.55G last month. I think they would be both happy and quite capable of providing the required silicon, and could do so without severely disrupting their other customers.

On the other hand, Joe Kelly envisions a scenario where the governments simply confiscate the mining hardware. Alex dismisses this saying:

An alternative would be to seize a majority of the world’s mining equipment in a military operation. But the logistics of trying to locate and violently capture hundreds of thousands of 5-pound machines owned by often pseudonymous actors across dozens of jurisdictions would be hugely prohibitive.

Here, Alex appears to be assuming that the mining rigs are owned by individuals, which I don’t believe has been true for a while. Most mining is done in industrial-scale data centers or increasingly in containers (think shipping containers filled with mining rigs, where the rig consists of rows of bare boards immersed in tanks filled special liquids for highly efficient cooling). It is hard to imagine that governments do not know know where these facilities are and could not commandeer them if they wished.

Currently, China has most of the mining capacity and might be able to pull off the attack that Joe warns of. And this statement from Alex suggests that the attack would do less damage to their own citizens than to citizens of the west:

The vast majority of mining takes place outside of the US in China and central Asia. But the vast majority of Bitcoin holders and buyers appear to be US and EU entities, and the software’s core developers and node-runners (who host Bitcoin’s servers) are scattered throughout the world.

In a very real sense, bitcoin suffers from the mining being overly centralized. In the past people worried about this because it could lead to double-spending. It was largely dismissed as being un-economic. It would require a tremendous investment in mining equipment, and the double spend, when discovered, would destroy the value of the network and the value of the investment in mining capacity. Nobody that was interested in maximizing their investment would engage in double spending.

However, Joe points out that a government interested in destroying bitcoin would not be concerned about losing their investment in mining hardware. And once they had the majority of the hashrate, they would not double spend. Rather they would simply mine empty blocks. In this way, the value of the bitcoin network disappears because no transactions are ever processed. Once the value of the network disappears, the price of bitcoin drops to zero, and the economic incentive of the remaining miners to try to compete with the confiscated miners disappears because the block reward has no value. At this point the government can simply turn off most of their mining rigs, meaning that continuing to suppress bitcoin is quite cheap.

This attack is less expensive than the attack envisioned by Alex. In Alex’s attack a country would have to buy more hashrate than currently exists in the world, whereas in Joe’s attack the country would simply have to confiscate more than half of the existing hashrate.

I find Joe’s scenario plausible as long as a region controlled by one government or a cooperating set of governments contains a majority of the mining hardware. Currently the Bitcoin Mining Map (https://cbeci.org/mining_map) allocates 71% of the hashrate to China, so they could pull this off on their own. If countries start to add bitcoin to their reserves, then presumably they would also add mining capacity to distribute the hashrate more evenly and protect themselves from this attack

[Shiva]

Wow! Thanks Ken for a detailed reply. Yes, Joe Kelly makes a strong case while Alex Gladstein weaves a good narrative, it doesn’t come across very convincing.

Considering China can mount a 51% attack yet they haven’t bodes bad and it adds weight to Mike Green’s criticisms on Bitcoin.

I’m sure you are long Bitcoin but long-term prospect might be an uphill. What’s your personal take on this?

[Ken]

71% of the mining rigs are in China, but they are not owned by the Chinese govenment. Nor is it clear that the Chinese government is anti-Bitcoin. They may prefer it to the dollar. I’m hoping that the miner pool balances out geographically before China changes its mind.

[Shiva]

Wow! Thanks Ken for a detailed reply. Yes, Joe Kelly makes a strong case while Alex Gladstein weaves a good narrative, it doesn’t come across very convincing.

Considering China can mount a 51% attack yet they haven’t bodes bad and it adds weight to Mike Green’s criticisms on Bitcoin.

I’m sure you are long Bitcoin but long-term prospect might be an uphill. Doesn’t it worry you?

[RJS]

The answer is “no” – gov’t can not stop Bitcoin. But they can ban, outlaw it, over-regulate it. So, people conflate “stop” or “control” of Bitcoin by gov’ts with outlaw, ban, over-regulate – and there is a difference. During prohibition, alcohol was outlawed by US Gov’t and people were arrested and imprisoned for using/selling it – but that did not stop alcohol from being widely used – it just went “underground” and went behind closed doors. People wanted it and eventually, the laws were changed to make it legal again.

I know gov’t banning of Bitcoin is a legitimate concern by many people – Said and his guests have plenty to say about it – better than me. But I think in America it looks like Bitcoin will become a regulated, mainstream asset and that is exactly what we want, as Michael Saylor has already explained very well. IMO – buy Bitcoin as much as you can and HODL !!

regards

[Benjamin]

My main concern, and something I’d like to find Saifedean discussing somewhere is not the idea that the gov’t stops, bans, or even over-regulates it, but this: What if the government just buys all of it (or a large portion of it)? Current market cap of Bitcoin is ~$1 trillion. Obviously, they can’t just go buy all the Bitcoin without moving the market enormously, but I worry they can “print” enough USD to buy as much as they want, and then manipulate the market whichever way they want.

And while I agree that Bitcoin becoming a mainstream asset is what we want right now because it has done wonders for the price. But every time a member of the federal reserve system of banks makes a large purchase of Bitcoin, it worries me that eventually they will be the only hodlers, and all the sudden, the decentralized, outside-the-system nature of Bitcoin is ruined. When you have a bank charter, and are only required to hold 10% reserve (which was reduced to 0% reserve during the pandemic), why wouldn’t you just print infinite dollars to buy all the Bitcoin you think you’ll need.

Just musings I have.

I understand the analogy of alcohol during prohibition. The difference, which is part of the beauty of Bitcoin, is that you can’t go make Bitcoin in your backyard, like they could with illegal alcohol distilleries. And Bitcoin is open ledger, so ultimately, once the government has your address, they’ll know you own Bitcoin, and can enforce whatever draconian measure they’d like until you comply.

I guess it comes down to whether or not people will part with their Bitcoin for fiat currency in the long run.

[Michal]

Hallo Benjamin,

I am quite new here and also to the Austrian economics, but Saif got me interested som I am going through it.

From my point of view it would not make much sense for a government to buy all the Bitcoin with printed money as this will drive the price exorbitantly high (due to concentrated demand to buy it all as well as money devaluation due to printing) which would rather quickly draw the economy to hyperinflation and ending up with an asset that if they dont want to use it for anything will have zero value.

On the other hand you can convert your money obtained from bitcoin to other asset classes like gold or real estate and I thing that if this happened there will for sure the demand for some kind of hard money asset will create some viable alternatives.

And not to mention the fact that the gorvernment will need to buy all the newly mined bitcoin until 2140 for ever increasing price.

From this point of view it would be easier to seiz all or at least 51 percent of the mining assets.

Just my 2 cents, I might be wrong but this is simplified version of how I view it.

Thanks and take care

[Benjamin]

There’s a quote often attributed to the Rothschilds: “Permit me to issue and control the money of a nation, and I care not who makes its laws!”

Bitcoin, as it is not issued or controlled by any central agency represents a very real threat to the control that bankers have on the world. The more Bitcoin that banks own, the more I’m concerned with what happens when enough banks (who can create almost as much money as they want) buy enough bitcoin to threaten the decentralized nature of the network.

Also, almost 90% of all the bitcoin that will ever be mined has already been mined, so that would represent a very small concern if the government ever truly tried to seize the current supply.