I originally published this article May 2014 on Liberty.Me. I am republishing this in its unmodified form because I believe my analysis still stands on solid ground today. However, I no longer fully endorse everything in this article. The original can be found here.

For my first article here on Liberty.me, I decided to write something controversial (to encourage discussion, of course).

I would like to preface by saying that I think Bitcoin (BTC) and other CryptoCurrencies are awesome! Unfortunately, when you have something so awesome, people often get obsessive and exaggerate how great it actually is. I will admit that I chose this title mostly for shock value, however, there is considerable truth to it. My hope for this article is to bridge the intellectual gap between libertarian supporters and opponents of Bitcoin.

1. Bitcoin cannot last forever

Bitcoin relies on several different cryptographic algorithms. The first being the Elliptic Curve Digital Signal Algorithm (ECDSA), which is used to generate the public/private key pairs, and the second is the SHA-256 hashing algorithm (SHA-2) which is used for mining. I will admit, that this is a stellar choice of algorithms; Elliptic Curve Cryptography is one of our most promising frontiers of asymmetric encryption (“asymmetric” meaning that the key to decrypt data cannot be easily derived from the key to encrypt data or vice versa) and SHA-2 still is a very secure algorithm with few known problemsThere is no way that anybody could cryptographically exploit bitcoin now, in 2014.

In the future, however, this is simply not the case. Keep in mind that modern computers have only been around for 50-60 years, and the internet has only existed for 20-30 years. These technologies are still in their infancy, and to think that we have developed the end-all solution to world currency is ridiculous.

Not convinced? Allow me to explain how Bitcoin might begin to fail:

With the advent of quantum computers, ECDSA will be easily broken. This means, that people with your public key, will be able to generate your private key. Luckily for BTC users, the public keys are hashed. A hash function takes an input and then generates a seemingly random output of a fixed size. This means that there is no way to easily reverse the output of a hash function to get the original input. Furthermore, quantum computers — as far as we know — cannot pwn hashing in the same they do with asymmetric encryption. Unfortunately, although protected initially, public keys are revealed after they are used. Or in other words, in the not-so distant quantum computing era, BTC users will have to change their public keys after every transaction.

Despite this critical security flaw, all hope for BTC is not lost. There are several ways to deal with it:

  • Everyone could just remember to change their keys after every transaction
  • Companies could provide wallet services that automatically cycle addresses
  • We could change bitcoin to use quantum resistant algorithms

The first is obviously a bad idea because it is inconvenient and people will forget to do it.

Two and three lead me to my next point.

2. Bitcoin is becoming increasingly centralized

With Bitcoin’s inevitable rise in popularity, there will be a large amount of political pressure to control it. Imagine that the aforementioned public key vulnerability became exploitable due to advances in technology. All people would be forced to make a change. They could either use new wallets that rotate addresses or they could update the Bitcoin protocol to use new post-quantum encryption algorithms. Either way, they are being forced to change their software and this opens Bitcoin up to backdoors, new vulnerabilities, and it won’t change the fact that new advances in technology will perpetually require such changes to be made.

There are many examples of massive vulnerabilities going unnoticed in open source software and backdoors being discovered in critical security software. I’m not saying this is necessarily going to happen to Bitcoin, however, its continually deprecating nature as a currency (due to exponential growth in technological advancement), will make this very likely.

But let’s get back to regulation and how the government might increase its influence over Bitcoin. Currently, many people are already starting to use cloud Bitcoin wallets because they are easy and secure. It may not seem like it, but we are certainly seeing a shift (with all software, not just BTC) towards the cloud. This shift would be further exacerbated by the public key vulnerability, that would force people to either download a new protocol compliant wallet or use a cloud service. I highly doubt most people are going to spend the time to audit the source code and integrity of their new wallet while simultaneously making sure that wallet usage is distributed evenly among all potential wallets so as to prevent one group of “wallet developers” from getting too high of a market share (thereby insuring the decentralization of Bitcoin).

What is really going to happen is that most people will download an “official wallet” developed by the more or less centralized group of developers who proposed the change or they will choose one of many cloud wallets. The problem with cloud wallets is that governments can easily regulate them, just like they regulate banks. In fact, the government will most likely provide banks with exclusive cloud wallet rights. With a well engineered plot, the government could easily take control of the majority of Bitcoin wallets. This is especially bad, because unlike a 51% attack, this would allow them to make whatever changes they want to the Bitcoin protocol.

Not to mention, as the difficulty of mining and value of Bitcoin increases, so does the demand for mining equipment. We have already seen a huge increase in the cost of bitcoin mining with dedicated ASICs (application specific integrated circuits– which are essentially computer chips that are made solely for the purpose of mining BTC). Right now, you can get a return on your investment if you dish out several grand for an ASIC mining rig (GPUs don’t cut it anymore), but soon enough, there will be no way that the lay-person can mine. This is yet another chokepoint in the Bitcoin network that is almost guaranteed to occur.

(I’m not even going to mention the danger of mining pools)

What’s even worse, is that when the quantum computer finally emerges, it’s capabilities will likely surpass those of ASICs by using algorithms such as Grover’s Search. This will give even more power to the elites who already control most of the mining companies.

But this could never happen, right? Wouldn’t the people see it coming and not let the government ruin their money? It’s open source! No. Why didn’t democracy prevent the creation of the federal reserve? History repeats itself, except with different technology. I won’t even bother speculating as to the ingenious ways that the government will propagandize their control of Bitcoin. The worst part is that even if all of us decide to band together to fight this atrocious take-over of the Bitcoin network, it likely won’t be enough. Even if 49% of people oppose these changes, they will still occur.

Centralization is inevitable.

3. Bitcoin isn’t the best

Bitcoin is, technologically, one of the least advanced cryptocurrencies. There are many more sophisticated Alt Coins that surpass Bitcoin in anonymity, speed, and security. Entrepreneurs and activists are constantly innovating on top of the BTC protocol in hopes of snagging a piece of its market share. Remember that the internet has only been around for a few decades and we already have something as revolutionary as the blockchain. After 10, 20, or 100 years, Bitcoin will be to other crypto-currencies as MS-DOS is to Windows 8.1. It will be archaic and outdated.

This is the fundamental problem with a technology based currency. It’s not that it doesn’t have “real value” or “intrinsic value”, the problem is that it cannot and will not move at the same pace as other technology. Bitcoin is only valuable if the protocol is being up-kept and made relevant, otherwise, it will fail. Given enough time, it will either be corrupted or abandoned all together.

BUT……..

The downfall of Bitcoin is not going to be in the near future. It probably will not even be in our lifetimes (I’m just speculating, but I bet it would be in our children’s lifetimes). We have an incredible opportunity in this day and age to utilize this technology to overturn the government monopoly on money. The government cannot control it (yet), cannot manipulate it (yet), and cannot regulated it (well) (yet). This is sort of a call to action. We need to get as much momentum behind the alternative currency movement as we can before we lose our edge. If you use alternative currencies, such as Bitcoin, good! If you don’t, you should start! This will be an incredible tool, while it lasts, for resisting government control over economic transactions. If you are concerned about the issues that I mentioned, study computer science and cryptography and then contribute to Bitcoin. We need bright, well-intentioned people to do this, otherwise it will fail sooner than you think. If that is not an option, spread the word, and be a dedicated participant in the community.

If we can use Bitcoin to bring about a paradigm shift in the global economy and unshackle ourselves from the bondage of fiat currency, then even though it will eventually no longer be in use, it will not have failed after all. I hope that this unifying goal can bring together all libertarians, whether they like Bitcoin or not.

Please note: I know that many Bitcoin advocates acknowledge that these events will occur, and this article is not directed towards them. I wrote this article as a sanity check for bitcoin advocates who get a little carried away with their BTC-worship. Bitcoin is great, but it is not perfect! Similarly, I would like to demonstrate to its opponents that despite these setbacks, Bitcoin is an amazing tool that can change the world.

Also, I define the failure of Bitcoin to be when either it has zero purchasing power or it is controlled by the government.


Notable Comment:

“Wonderfully challenging piece.” — Jeffrey Tucker