Are you ready to see over $5.7 billion go up in a puff of smoke? Well, stay tuned. That number is the market value of all the Bitcoin in circulation today. But according to at least one Bitcoin insider, the entire Bitcoin house of cards is about to collapse.
The insider with the courage to go public about Bitcoin’s impending doom: Mike Hearn, who wrote a scathing farewell message to the Bitcoin community – as well as everyone else – just last week.
Hearn’s concerns for Bitcoin’s prospects are both technical and political. Bitcoin’s technical challenges are reasonably straightforward: the blockchain – Bitcoin’s underlying framework and associated protocols – is experiencing growing pains.
Due to rather arcane limitations in the original blockchain configuration, it’s essentially running out of capacity. If someone doesn’t fix it, then Bitcoin transactions will take longer and longer and cost more and more, until the entire kit and caboodle stops working altogether.
The obvious answer, of course, is to fix the blockchain. As it turns out, such a fix isn’t particularly difficult. In fact, there are many possible ways to get Bitcoin out of this predicament. So what’s the problem?
That’s where Hearn’s political concerns for Bitcoin’s future kick in. He calls out a handful of issues in particular: “Developers of the ‘Bitcoin Core’ software … have refused to implement the necessary changes,” Hearn says. “Another is that the miners refuse to switch to any competing product… They have chosen instead to ignore the problem and hope it goes away.”
‘Mining’ is Bitcoin-speak for the distributed transaction processing that replaces the centralized clearinghouses typical of traditional financial systems. The Bitcoin infrastructure automatically rewards miners with newly ‘minted’ Bitcoin, hence the ‘mining’ metaphor.
Hearn calls out one other concern for why the Bitcoin capacity limit hasn’t been raised: “Because the block chain is controlled by Chinese miners, just two of whom control more than 50% of the hash power.”
Peeling Away the Layers to Reveal the Rotten Core
Community-driven open source efforts at scale are now commonplace in the software world. Such communities always have their fair share of disagreements and controversies, to be sure – and most of them end up working their issues out. But Bitcoin is different.
First, we’re talking real money here. That $5.7 billion figure for all the Bitcoin in circulation is no exaggeration – and miners continue to drive the creation of new Bitcoin. Not included in that number: the hundreds of millions of dollars VCs have been pouring into Bitcoin startups over the last few years.
Second, Bitcoin is a criminal’s paradise. Professional criminals’ number one requirement is a secure, anonymous way to move and store money, and Bitcoin fits the bill perfectly. It’s no wonder Bitcoin is so popular among drug dealers, child pornographers, and extortionists. There’s also a booming business in Bitcoin theft as well.
But the real difference between Bitcoin and other open source efforts is the radically Libertarian worldview of many of the members of the ‘Bitcoin core’ – the group of developers and other enthusiasts who are now largely aligning along ‘don’t fix the blockchain’ lines.
Here’s where the flame war begins in earnest, so let me say for the record: not all folks in the Bitcoin core are radical Libertarians. There are plenty of more moderate voices, both among the core group as well as other parts of the broader Bitcoin community. But the radical ideology of the true believers has – more than any other force – led Bitcoin down the road to ruin.
Bitcoin’s Libertarian Roots
The central idea behind Bitcoin is to establish a secure currency free from any kind of central control. In other words, Bitcoin should replace the Federal Reserve as well as other centralized, governmental agencies in charge of their respective money supplies.
Abolishing the Fed, of course, is a primary Libertarian tenet, as evidenced by the book from former congressman and Libertarian father figure Ron Paul, End the Fed. The Libertarian alternative to centralized money control is to allow free market forces to automatically handle any friction in the currency markets.
Bitcoin, therefore, underlies an Ayn Randian ideology of self-reliant individuals, joining together to promote their respective self-interest when market forces drive such cooperation. Free from government tyranny, so they believe, Bitcoin is the key to a new world order.
It’s no wonder, therefore, that the ‘average’ Bitcoin community member is “a 32.1 year old libertarian male,” according to an online survey from 2013, where “Top motivators for new users are curiosity, profit, and politics.”
The same survey also reports that few respondents report using Bitcoin for illegal purposes – which doesn’t prove anything, of course, other than the fact that they are either lying (as criminals are wont to do) or simply naïve about the predominant use of Bitcoin worldwide.
The appeal to criminal enterprises, of course, is the primary flaw with any Libertarian position that advocates lawlessness.
Yes, market forces will supplant regulatory controls, but the primary market force in question is the flow of funds in exchange for illegal goods or services. Lowering the risk inherent in profitable criminal enterprises will necessarily lead to more criminal activity – a cause and effect relationship obvious to any Economics 101 student.
Do Not Pass Go, Do Not Collect $5.7 Billion
Even putting the question of illegal activity aside for a moment, there is another fundamental flaw to the Libertarian philosophy that Bitcoin is now exemplifying: any unregulated capital market will gravitate toward monopolistic behavior.
Monopolies, of course, maximize the profit of their owners to the detriment of anyone foolish enough to attempt to compete with them. Who are the fat cats in the Bitcoin community intent on this unfair but lucrative free market position? The Chinese.
Remember Hearn’s final concern about the current state of Bitcoin? A small handful of Chinese miners have come to dominate the distributed transaction processing infrastructure that runs Bitcoin.
Over time, mining becomes increasingly expensive, as miners must compete with each other to successfully mine new Bitcoin and thus get paid. As a result, mining has become a battle over who can build the fastest, least expensive mining data centers – a risky, capital-intensive investment that the Chinese are only too willing to make.
Not only does this monopolistic domination of the Bitcoin market shift all the proceeds to a small handful of participants, it also exposes another flaw in Bitcoin’s infrastructure: decisions are based on consensus.
Consensus-based decision making is commonplace among all kinds of distributed communities with common goals, of course – including most open source efforts. In Bitcoin’s case, however, the consensus approach is deeply flawed, because it’s possible for monopolistic participants to corner the market on decision-making rights.
As a result, once any party manages to control enough of the Bitcoin infrastructure, they can change the rules however they like to suit themselves at the expense of everyone else. But the Libertarian core of Bitcoin refuses to make any changes that would prevent such a spectacular failure scenario, because it would go against their individualistic, free-market philosophy.
Is there Any Hope for Bitcoin?
People have been calling for Bitcoin’s demise for years now, and perhaps this time it’s ready to collapse. On the other hand, its problems are immanently fixable. One effort at addressing the blockchain’s capacity limitations is Bitcoin XT – a fork of the Bitcoin core that patches the problems with the core release in a verifiable way.
However, Bitcoin XT has caused pandemonium in the Bitcoin community, because it’s a hard fork – that is, Bitcoin owners will have to choose either Bitcoin XT or the original, core Bitcoin software, and once enough people have jumped ship to Bitcoin XT, transactions using the core Bitcoin software will no longer be recognized as valid.
The radical Libertarians, as you might expect, are fighting Bitcoin XT tooth and nail, deleting posts, banning discussions, and even making threats. For them, any progress that Bitcoin XT and other such efforts promise is contrary to the core political mission of Bitcoin, and thus proponents of such improvements are traitors to the cause.
Yet, if Bitcoin adheres to its Libertarian roots then it is doomed to failure. All is not yet lost, but the community as a whole must now make the most important choice of its short history: ideology or survival? There are 5.7 billion reasons to choose wisely.
Intellyx advises companies on their digital transformation initiatives and helps vendors communicate their agility stories. As of the time of writing, none of the organizations mentioned in this article are Intellyx customers. Image credit: Antana and public domain.