I get it. Bitcoin is a global decentralized system of payment and value. It is not the main one though. It is a competitor for the wealth seeking these things. Currently, the main one is the good old dollar bill but that is centrally controlled. The main store of value on the globe has been our currency. What happens, if it loses that perch and Bitcoin holds more global wealth?
I am a HODL’er, NOT a crypto-denier, so let us get that out of the way right now. I am acting a bit old-fashioned here, though. I understand this is probably more about patriotism and national security than the HODL risk. This could be foolish, but I am old. Are nation states even go to be around at peak Bitcoin? Who knows, but Janet Yellen’s statements on the matter illustrate a dangerous American blind spot on the risks Bitcoin specifically might represent.
Still, as a HODL’er, I think skyrocketing valuations which are not truly sustainable represent risk, too. The more money which goes into the system the more it becomes an attractive target for geopolitical leverage. If there is the possibility of gaining geopolitical advantage by owning the Bitcoin hash rate, then someone might want to make a run at that. The Iranians have openly spoken of the advantages to be gained on this front.
I have begun to worry that Bitcoin could be leveraged as a honeypot. Is this tweet from Elon Musk signaling similar concerns? I do not mean Bitcoin necessarily started out as a “trap” in the hacking sense of the term “honeypot”. In that sense, the honeypot is a system or cache of data that appears to be SO IMPORTANT it attracts hacker attention if they breach the network. It can also be meant to simulate a breach to the hacker so they no longer dig deeper but run off with the “honey” leaving a sticky trail to follow.
Bitcoin is appearing to be too good to be true. This is always the first sign of a honey pot. I am wondering if our enemies might not be able to lure Americans through their insatiable desire for honey(money). More and more American companies have put their reserves here. This creates an underappreciated vulnerability. If more banks and other financial institutions put their eggs in this basket, the vulnerability grows.
I have begun to become concerned about Bitcoin’s valuation too. It may very well be justified but there are some unanswered questions about the digital currency. We do not really know who invented it as Satoshi remains anonymous. Coinbase calls this out as a real risk in their SEC filing. We do know the code though so thankfully there is real transparency on that front.
Nonetheless, I would like to see some further open discussion about the following risks of greater Bitcoin adoption within all of American finance.
1] Mining concentrated outside of the United States: This really concerns me. It does not matter if Americans are at each other’s throats, most people on the planet do not give a tinker’s damn about Democrats or Republicans. They make the noises of political animals just as they do on other parts of the globe is how non-Americans hear that stuff. However, what that means is there remains some nationalistic loyalty among citizens of other countries which may no longer actually exist in the United States. Additionally, there is also some greater control of citizen loyalties in other countries. By some measures, more than 50% of the miners exist in the jurisdiction of China, Russia and Belarus. What if they decide it is now in their national interest to route all US transactions to a wallet in Outer Mongolia, we will stop them, how?
2] The hard coin cap is a myth: The valuations of Bitcoin almost always mention its scarcity. It is always spoken about as if it is a law of the universe. It simply is not. Bitcoin is code and code can be changed. Again, if the “community” (mostly miners) decides it is in THEIR best interest to lift the coin cap, then the code is going to get pushed out. Again national interests could also affect how the “community” votes. Maybe they just don’t like America that day and so no more coin cap. Everything is COOL today. Everyone is making money but in times of war and REAL conflict, things change.
3] Vulnerable to quantum computing advancements. I would like a lot more transparency here from my government. We seem to be behind on the quantum computing front. The Chinese already have a quantum communications network between major cities. The United States has no such thing. Secrecy on this front does not favor us here any longer. I think we are behind in the quantum frontiers of computing and communications. If too much financial infrastructure is tied to a network largely under the control of a national entity with qubit computing power, well…the fastest will be favored.
Cryptocurrency is the future, there is no question. It is just the United States does not seem to be adapting well to this new reality. Janet Yellen’s recent criticism does not help nor demonstrate a command of the topic. Large amounts of American money are flowing into this system for many VERY GOOD reasons. It will continue and the aforementioned risks will only grow.
Mitigating now would be a good idea. American rivals see the same landscape. It would be very wise for a rival to support this network, to enhance it. They will coat the bait with honey as it were. To take advantage of the weaknesses of one’s rivals is the law of the jungle and it will happen. America does not recognize how much of a weakness greed really is. Greed makes people do and countries do foolish things, especially when they “think” they are winning! That is the honey pot’s most dangerous aspect.
There it is, the honey pot. It is tasty and tempting. When the reward is SOOOO tasty and SOOO tempting, let us be careful. A few more American miners for a start would not hurt. Americans cannot just hold here or the financial system becomes very vulnerable as adoption increases and valuations soar. Bitcoin can be decentralized, but it does not have to be decentralized. Every node can be in Beijing if we ignore the forest for the trees.
Disclaimer: The opinions in this article belong to the author alone. Nothing in this article constitutes investment advice. Please conduct your own thorough research before making any investment decisions.