Bitcoin will be attacked

Not a matter of if, but when (“The Real Flippening”)

Bitcoin’s defining moment will be surviving an all-out attack.

The argument for why Bitcoin will be attacked by a group of nation-states is quite strong; it is almost inevitable, and the timing quite predictable. It won’t be for the reasons many assume: that Bitcoin facilitates criminal activity. It will happen when the current cold war exacerbates, triggering an unprecedented level of taxation and inflation.

Cold War II

Cold War II is a term used to describe an ongoing state of political and military tension between opposing geopolitical power-blocs, with one bloc typically reported as being led by Russia and/or China, and the other led by the United States, European Union, and NATO.
— Wikipedia (Cold War II)

Some of you reading this may think it is odd for me to assert there is a state of cold war beyond the academic sense. Having family roots in Tanzania, and in-laws in Lebanon and Syria, the last ten years have certainly revealed a dose of violence in this world that astonishes. Only in 2006 was Beirut bombed with significant infrastructure damage, Syria and Yemen had civil wars, to name a few. Since the American-led invasion of Iraq, over 1 million civilians have been killed. 1 million individuals.

I personally speculate that since these countries are so far away, and the people so different than us, we don’t find these statistics as jarring as we should. Most, if not all of these conflicts are catalyzed by foreign involvement from the super-nation-states (United States, Russia, China).

Before we go on though, we need to understand why Cold War II is on a path to escalation.

Nation-States and Violence

Nation-state led senseless violence isn’t a recent phenomena

And it isn’t localized to the Middle East; the Rohingya Ethnic Cleansing, past Nanjing Massacre in China, and past Armenian Genocide, Soviet Ethnic Cleansing, … (I could go on, but the point seems to be made).

A natural question is; why are these countries engaging in such destructive behavior?

Why are nation-states violent?

Alex Jones, notable conspiracy theorist.

I pondered this question for a time: Why are nation-states so violently destructive, repeatedly, in history? Is it a conspiracy theory? I think simpler minds have settled on this. Although, can one blame the conspiracy theorist? He is on the first step to enlightenment, which is understanding that something is awry and grasping for an explanation.

Is it a resource war? This argument is stronger, but doesn’t explain some of the more senseless actions.

Part of the elusive answer was revealed in The Sovereign Individual, by James Dale Davidson and William-Rees Mogg. Nation-states are an emergent phenomena, evolved by 1) the increased return on violence combined with the 2) increasing capital requirements to successfully wage war.

Return on Violence: the return on violence describes the potential gain from violence. Dependence on land for agriculture, or resources like oil, all increase the return on organized violence. It makes sense for groups to band together to protect these resources, as it also makes sense for aggressors to band together to assault and capture them.

Capital Requirements for War: In war, efficiency is less important than whoever has the biggest stick. A nation that can muster a few stealth bombers will obliterate a nation whose best aerial technology is helicopters. As technology improved, the capital requirements to successfully wage went through the roof — a group of individuals could never build a Stealth Bomber. It requires the pooled resources of millions of people to do so.

As return on violence went up, increasingly larger groups banded together and pooled resources (taxes), and in turn military technology evolved rapidly. This created a new feedback loop: the return on war rose rises, because now taxable individuals were seizable assets. As more taxes are collected, military technology reaches new level of sophistication and capital requirement. The key insight from The Sovereign Individual was that governments are not consciously formed; that social constructs evolve the same way living organisms do.

Nation-states are violent because they emerged to wage war. Asking why nations are bloodthirsty is like asking why a cat is a carnivore.

Asking why nations are bloodthirsty is like asking why a cat is a carnivore.

Psychological factors

Because nation-states are emergent, what type of dynamic would emerge between nation-state leaders and their subjects? Two relevant psychological studies are examined to answer this question.

The Milgram experiment

They measured the willingness of study participants, men from a diverse range of occupations with varying levels of education, to obey an authority figure who instructed them to perform acts conflicting with their personal conscience. Participants were led to believe that they were assisting an unrelated experiment, in which they had to administer electric shocks to a “learner.” These fake electric shocks gradually increased to levels that would have been fatal had they been real.
The experiment found, unexpectedly, that a very high proportion of men would fully obey the instructions, albeit reluctantly.
Wikipedia (The Milgram experiment)

Stanford prison experiment

The Stanford Prison Experiment (SPE) was a 1971 social psychology experiment that attempted to investigate the psychological effects of perceived power, focusing on the struggle between prisoners and prison officers …
Early reports on experimental results claimed that students quickly embraced their assigned roles, with some guards enforcing authoritarian measures and ultimately subjecting some prisoners to psychological torture, while many prisoners passively accepted psychological abuse and, by the officers’ request, actively harassed other prisoners who tried to stop it.
— Wikipedia (The Stanford prison experiment)

It doesn’t take a stretch of imagination to see how power and authority handed to the wrong person, combined with the might of modern nation-states could result in unimaginable tragedy.

I argue that because nation states are evolved to perpetrate violence on a large scale, and have continuously done so in history, Cold War II will continue to escalate.

An Anathema to nation-states: Bitcoin

The enterprising nation-state feeds on the individual in two ways.

  1. Taxation
  2. Money printing (inflation)

Bitcoin effectively stops the nation-state from shaking down the individual; inflation and forced taxation are impossible. If taxes and inflation are reasonable though, individuals will likely stomach them and move on.

Now, normally, taxes and inflation aren’t too much of a burden. It’s better for a nation to economically prosper and tax its citizens at a low rate; 10% of The United State’s productivity absolutely dwarfs 90% of Denmark’s productivity. Remember, efficiency doesn’t matter; a single stealth bomber is better than a fleet of helicopters.

When a nation-state’s dominance is strong, and their economy massive, they don’t need to tax very much. The United States has the biggest defense budget by far, yet defense spending is a single digit percentage of GDP.

United States Defense Spending — Wikipedia

Right now, the United States totally dominates global military expenditure with ~$750B (note, the actual figures may be significantly higher, I am using the stated budget for simplification). However, China is catching up and projected to surpass. When competition against other nations is fierce (seemingly versus Iran), and you need cash now with mediocre growth prospects, you have no choice but to squeeze your population (economies don’t grow overnight).

This is what happened during the spikes in “Defense spending as a percent of GDP” chart above — during times of competitive war, the government had to extract more value from the economy.

This is seemingly what is happening in Saudi Arabia. They are straining their infrastructure to the extreme; their form of taxation is imprisoning most of the royal family in a hotel (since the royal family owns most of the wealth) and the age of oil is coming to an end.

Saudi Arabia May Get $100 Billion From Jailed Princes and Officials Paying Their Way Out of Prison Time

The Catalyst: competition

We established that nation-states naturally despite Bitcoin. To them, a suitable state of affairs is the elimination of Bitcoin. However, they don’t care much for it; it is rather harmless to begin with — until a critical amount of competition forces them to extracting excess resources from their civilians, in the forms of taxes and excess inflation. This in turn, heavily incentivizes citizens to flee the fiat currency.

If nation-states have full control of currency, in times of great competition, they will just print more money. In World War I, Germany left the gold standard and hyperinflated their currency to pay for the cost of war. Leaving Bitcoin behind will not be so easy.

Piles of new banknotes awaiting distribution at the Reichsbank, during the hyperinflation. (Wikipedia)
… activation energy is the energy which must be provided to a chemical or nuclear system with potential reactants to result in: a chemical reaction, nuclear reaction, or various other physical phenomena …
— Wikipedia (Activation Energy)
A chemical catalyst lowers Activation Energy requirements

The catalyst for a nation-state attacking Bitcoin will be two superpowers competing, say China and the United States.

  1. China and United States military becomes equivalent, with one having a significantly higher GDP growth rate.
  2. One or both of the nation-states will begin squeezing their populations for more money, extracting a higher proportion of GDP for violence. They must strike before their enemy wins by sheer economic scale (remember, 10% of a massive economy is better than 90% of a small one). This will take the form of higher taxation and/or inflation (the same thing).
  3. Over-burdened individuals will increasingly flock to sound, un-taxable money.
  4. The ratio of military spending to GDP will fall due to inability to tax effectively and failing fiat valuation.
  5. The starving nation-state declares war on Bitcoin.
The real Flippening