Weaponizing Switzerland: Bitcoin’s Use in Economic Warfare
Heads up in case you missed this: Bitcoin is on the move again. What’s different this time is there are some clearer reasons for the movement.
Bitcoin is a safe haven asset during times of economic turmoil — or at least we think it probably is… there hasn’t been a major downturn or recession since Bitcoin was created, so we can’t know for sure. What we do know is that Bitcoin’s creator, Satoshi Nakamoto, intended for the asset to be independent of the global financial system — an idealistic, “power to the people” type project.
Fast forward a decade and change and Bitcoin has some serious momentum. It’s not exactly independent of the global financial system, as we saw yesterday with China devaluing the Yuan, causing a pump in alternatives including Bitcoin. It’s intertwined with our existing systems rather than replacing them. One could even argue that Bitcoin is currently being used for economic warfare. Let’s dig a little bit deeper into that statement, shall we?
It’s not just about the fact that these assets look like they are inversely correlated to a great degree, it’s also about control. In the world of Bitcoin, there are users, miners, and nodes. Users could be anyone, including you and me. When users initiate a transaction, that transaction is broadcasted to all of the nodes, which are basically a full history of all Bitcoin transactions. Nodes also work in unison to enforce the rules of Bitcoin, which is why it’s so difficult to hack or cheat the Bitcoin network. There are lots of nodes located all over the world. In fact, the greatest density of nodes are located within the United States, as you can see below.
Just looking at the node distribution, it looks like the U.S. is in pretty good shape, right? Unfortunately, in order for the network to function it needs miners. Miners pick up new transactions from the nodes, perform specific calculations (hashing) on specialized hardware (ASICs) to chain any new transactions that follow the rules of the network (consensus across nodes) to the existing history, creating a cryptographic signature that summarizes the new state of the network. That signature is then in turn used by the nodes to enforce new transactions.
As you can see, nodes are great at enforcing the rules but without miners the network would come to a screeching halt. What would that mean? Well, all of the value stored on the Bitcoin blockchain would be frozen in place. Bitcoin isn’t like gold where you could just ship it to someone else — Bitcoin is valuable because value can be passed, and ownership secured, digitally. If the Bitcoin was suddenly unable to transfer ownership, the perceived value of the asset would plummet until the network was able to resume processing and confirming transactions. The Bitcoin network’s processing power (or hashrate) is the highest it has ever been, so why worry about a lack of mining resources? Let’s take a look at Bitcoin’s mining pool distribution.
On the left we see a breakdown of all of the major pools that mine Bitcoin. There are two ways to mine in a pool. The first method involves funneling your compute resources into the pool, effectively teaming up to increase collective returns for everyone involved. A second method requires you to enter into a contract to front the cost of new mining equipment in exchange for specific returns over the contract term.
It’s no surprise that mining is common in China, mainly because electricity is so cheap there compared to the vast majority of other nations. One of the primary sources of electricity, coal, is cheap, abundant and essentially unrestricted. Given the affordability of coal-sourced and hydroelectric power, it should also be obvious that the majority of mining occurs in China. According to blockchain.com, the percentage of Chinese mining is at least 53.5%, not accounting for unknown contributors that comprise 13.9% of total resources.
Why does it matter that Bitcoin mining is centralized to China? Well, the devaluation of a currency such as the Yuan will cause mass exodus from traditional markets into alternatives, such as Bitcoin. We’ve already seen this phenomenon, as illustrated earlier in this post. The worrisome aspect of our current situation is the possibility of a global scale “pump and dump” scheme. These schemes are typically used to redistribute wealth by preying on the uninformed. Essentially, the informed parties coordinate to increase the price of an asset, inflating its attractiveness and triggering a fear of missing out in the general population.
If China continues to stoke fears of recession, fueling the price growth of Bitcoin, they will be in a unique position to weaponize the hashing power of Chinese companies. If the government were to purchase large amounts of competing cryptocurrencies that leverage the same hashing algorithm as Bitcoin (Bitcoin Cash is a favorite of Chinese mining giant, Bitmain) and suddenly redirect the full hashing power operating out of their country, Bitcoin would collapse while the other asset immediately, and dramatically, soared. Bitcoin is the Switzerland of money; it’s neutral to every regulation, geography, political ideology and much more — it only requires internet.
Currency wars have been around for quite some time, but now we are beginning to see some unique interactions between traditional currency markets and digital currencies. As global innovations, digital currencies like Bitcoin are consistent around the globe with respect to price and ability to participate. We may very well be on the precipice of potentially the largest redistribution of wealth in the history of the world, so buckle up and remember to maintain a diverse portfolio.
