Government attacks

The most commonly discussed scenario for Bitcoin's death is a government attack. Anyone who's lived in the twentieth century has been conditioned to assume that anything government doesn't like will be banned, and initially there's little reason to suspect Bitcoin will be different. This was the cause for my skepticism toward Bitcoin for years since I discovered it.

The form of government attack or ban can come in many varied forms, some of which were discussed in The Bitcoin Standard, and are not the focus of this bulletin. Rather than discuss the technical feasibility of these individual attacks, I will focus on what I view as the deeper underlying economic incentives that make these attacks highly unlikely to succeed.

Bitcoin, at a functional level, is an extremely basic technological implementation that performs a very simple and easy task: the propagation of a block of transaction data usually of 1MB in size (although it can go up to 3.7MB), roughly every 10 minutes to thousands of network members worldwide. To be a peer on this peer-to-peer network, which allows you to validate your own transactions in accordance with the protocol's consensus rules, all one needs is a device capable of receiving up to 3.7MB of data every 10 minutes. To merely send or receive a transaction, without one's own node, only requires a device that can send a few hundred bytes of data.

As such, Bitcoin is a far simpler and lighter program than Amazon, Twitter, Facebook, Netflix, or many of the popular online services that involve more extensive interactions and operations. The technical requirements for sending a few megabytes of data around the world continue to get cheaper, simpler, and easier with the development of technology and the large accumulation of capital in the computer and communication industries. Currently, there are tens of billions of devices worldwide that are capable of sending and receiving data, including practically all the world's personal computers, smartphones, and tablets.

The common misconception many nocoiners have about how the internet works is that all these computers need to connect to some central server in order to access the internet, but that's simply not the case. The Internet does not have a central location that distributes content; the Internet is simply a protocol that any computer can use to connect to other computers. As long as two devices can be connected to one another physically or through various mechanisms to transmit data, then the Internet survives, and so can Bitcoin. Had the Internet been a centralized institution, then shutting it down would be straightforward, but while governments can certainly destroy or disable much of the globe's Internet infrastructure and inconvenience users, they cannot stop computers from communicating with one another. Because Bitcoin's computing requirements are as low as they are, and the value held in it is large enough to motivate people to try their best to maintain the network, it's likely that bitcoin transactions and blocks would continue to be generated through any kind of ban.

As Bitcoin continues to grow and attract more attention from the technical community, developers are innovating even further on the different ways to transmit Bitcoin data quicker and at lower costs. Mesh networks and radio waves are two of the most interesting examples, because they allow the use of the network even without a connection to the Internet. Even the absence of Internet capable devices is now not much of an impediment, as it is becoming easier to join the network with any device that can send and receive data. With the introduction of Bitcoin-specific satellites, the scale required of a government-sponsored attack continues to get exponentially larger.

Bitcoin has found a way to make access to a hard form of money globally available at a much lower cost than the previous alternative, gold. Since hard money is a hugely important and beneficial technology, people also have a strong incentive to meet the costs to be able to use this hard money. As time goes on, the liquidity and utility of bitcoin only increases, raising the incentive for people to use it and allowing them to overcome more and more serious barriers.

Ultimately, if Bitcoin provides value to its users, they will make the effort to ensure they are able to access it; that motivation, more than any technical aspect, is the real impediment to government attacks on Bitcoin. History provides many wonderful illustrations of the power of economic incentives and their ability to repeatedly overcome government regulations. A good introduction to this can be found in the great book Forty Centuries of Wage and Price Controls: How Not to Fight Inflation. History clearly shows how such attempts fail, because government edicts cannot overturn economic reality; all they can do is change the economic cost/benefit to specific actions, and cause people to adjust their behavior accordingly to still get the benefits while trying to avoid the costs. This is why price controls lead to shortages, black markets, queuing costs, and conflict, but can never lead to a reduction in prices that the government purports to intend.

Far from an effective way to destroy Bitcoin, a government clampdown would arguably strengthen it by blatantly advertising its real potential and value proposition to the world. Government attacks on Bitcoin can only happen with restrictions on individual and financial freedom, which are the best reasons to buy bitcoin. The simple statist mind assumes that reality is subject to government orders: if government bans X then X ceases to exist. In reality, it just makes the provision of X much more profitable, and increases the levels of risk that people are willing to undertake in order to provide it. For example, a government order to stop banks from allowing their clients to use their balances to buy bitcoin might hurt Bitcoin in the short run, but it would be a great advertisement; it would clearly communicate to people that the money in their bank accounts is not theirs to spend as they please, and instead is the government's money which is limited to only government approved uses. As this reality begins to sink into people's minds, more and more will want to hold on to a monetary asset whose value is independent of government preferences and whims, and so the demand for bitcoin will likely rise (along with the profitability of supplying it).

An example of the counter-productivity of bans can be found in the drug war. For almost fifty years, the US government has killed and incarcerated millions of people in the US, Mexico, Colombia, Afghanistan, and many other places in the world in a feeble attempt to stop drugs that can still be bought on the street of every US city. Drugs come from plants that need to be grown under the sun, then processed and shipped around the world through a long network of suppliers before reaching the end consumer. Drug distribution is a far more complicated and demanding task than distributing Bitcoin blocks, which don't need physical supply lines and can be transmitted over the simplest data transfer technologies available. While drugs give their users a large incentive to consume and pay for them, it is still arguably not as strong as the monetary and economic incentive to use bitcoin, which can be a matter of life and death for many people. With a stronger incentive than drugs, and an infinitely easier distribution mechanism, any government that tries to ban bitcoin has a seemingly impossible task.

Another non-trivial obstacle for a government attack to overcome is that Bitcoin has arguably become too politically ingrained to be the subject of a clampdown. I think this tipping point was reached during the bull market of 2017, when the mainstream of American society really started buying and holding bitcoin. This point was driven home to me during the testimony of CFTC Commissioner Christopher Giancarlo to US Congress, when he explained how his niece was a hodler. It is extremely unlikely that members of Congress are going to pass laws that sic law enforcement against their own family and friends. Even the bankers that viscerally and rabidly hate Bitcoin (for good reason!) are watching helplessly as their children's interest in it grows. As JP Morgan, one of the US government's largest welfare recipients, enters the world of shitcoinery, it is worth remembering the hysterical episodes their CEO had during 2017 every time he was asked about Bitcoin. In particular, it's worth remembering how clearly agitated he was when recounting that his daughter had bought bitcoin, likely at a time when its returns exceeded those of her father's own portfolio. While you would not put much past Dimon, it's safe to assume that using his political influence to have people like his own daughter thrown in jail is a stretch too far.

What this all means is that Bitcoin now has a motivated and very vocal small minority of the population interested in it. A motivated and organized minority is likely to get its way in US politics for the simple reason that it cares more than other groups about its own issue, whereas the rest of the voters and special interest groups care about other issues. While people think of democracy as the rule of the majority, it is more accurate to think of it as the rule of the organized minorities. Corn farmers, for example, are a tiny fraction of the total population of the US but still manage to get enormous subsidies. Although these subsidies are a cost to everyone else in the US, they're a small cost to everyone; conversely, the benefit to corn farmers is massive, and they have every incentive to make it their prime voting and lobbying issue. From a politician's perspective, going with the corn lobbyists will get you votes and money, but going against it will only get you enemies and no supporters, because almost no one is hurt so much from corn subsidies to base their vote on it.

Bitcoin's motivated minority is growing into this kind of force in political systems worldwide. Any politician that attempts to clampdown on Bitcoin will be faced with indifference by the vast majority of the population, and strong opposition from bitcoiners.

My personal view is that in the last few years Bitcoin is a genie that has grown beyond the ability of governments to put it back in its bottle. The secret is out, and millions of people worldwide have heard of it and are interested in using it. They are willing to invest time and effort into ensuring it continues to be available for them. Government clampdowns may inflict suffering on individual bitcoiners, but I doubt that it will be able to kill Bitcoin itself.