The 5 Scenarios of Bitcoin Collapse (There is no solution yet)
Hi, I'm Manabu.
Today's topic is Bitcoin Collapse Scenarios.
The credibility of this article
I wrote this article based on the opinions below:
- MicroStrategy CEO: Michael Saylor
- Investor and Entrepreneur: Elad Gil
- Columbia Univ (Ph.D.): Saifedean Ammous
*Resources: Bitcoin Network Effects, The Bitcoin Standard, Bitcoin, Inflation, and the Future of Money
Table of the Contents
- 1. Scenarios of Bitcoin Collapse
- 2. Bitcoin's Credibility (2 Reasons)
Okay, Let's start learning.
1. Scenarios of Bitcoin Collapse
First of all, here are the scenarios:
- (1) 😕 Nobody use it / Slow Innovation
- (2) 🦠 Crypto-mining malware
- (3) 🏢 Monopoly in Bitcoin mining
- (4) 🧮 Someone broke SHA-256
- (5) 🤡 Unknowns (Black Swan Theory)
Okay, let's see them one by one.
(1) 😕 Nobody use it / Slow Innovation
There are three people involved in Bitcoin:
- 🙋♂️ Holder
- 👨💻 Programmer
- 👷 Miner
As for the holders, a person like me thinks Bitcoin is reliable. So I exchange my legal tender for Bitcoin and also expect the price increase. In addition, I use Bitcoin as a store of value.
Bitcoin is "Programmable Money," which means it was created by a computer program. As a result, programmers can update the Bitcoin system. Consider the iPhone to be a "Programmable Phone" that can be updated. On the other hand, the phone cannot be updated.
Finally, the miners are someone who maintains the Bitcoin's security. They solve the difficult math by using computing power, which we call Mining. It costs money, so they receive some Bitcoin in exchange for Mining.
The value of Bitcoin = Network
The fundamental value of Bitcoin is the network.
It's the same with, for example, the Japanese Yen🇯🇵. I'm from Japan and have some JPY that has value because I can buy something or make a living in Japan.
However, what if no one believes the value of JPY or Bitcoin?
Which, of course, triggers the plunge of the value. So the result is like, "JPY = just a paper" and "BTC = Internet garbage."
There's more. We have another scenario of the Bitcoin plunge.
Slow Innovation is another Risk
Bitcoin has functions like the below:
- Store value / Transfer value
- Robust Security (=Blockchain)
But what if the United States🇺🇸 invents the Digital Dollar that has the functions above? That is not that surprising that we will see the Digital Dollar after a year because each country has begun to develop CBDC (=Central Bank Digital Currency).
That said, there is a difference between them. Bitcoin has a hard cap of 21 million. On the other hand, legal tender does not.
So,,, is the future of Bitcoin OK?
We don't know the future, but I guess it's ok because of the following reasons:
- Reason1. Public companies have Bitcoin (ex: Tesla, Inc.)
- Reason2. Public companies are developing Bitcoin apps
- Reason3. Some countries adopted BTC as a legal tender
- Reason4. Some countries accepted BTC as a payment
- Reason5. Trust for the nation / leal tender is decreasing
The above is the reason. Mass adoption is already happening, so I suppose we can't stop it. I will go over it in the second chapter of this article (2. Bitcoin's Credibility).
(2) 🦠 Crypto-mining malware
The next problem that I explain is related to malware.
We need specialized hardware to mine Bitcoin, known as ASICs, but the companies which sell it are limited. So we can bribe the worker and drop the malware.
If that happens, severe damage to Bitcoin. For example, it can happen like, "Mining the Bitcoin → Trigger the malware → Bitcoin has been stolen" or "Runaway the mining machine → Stop the Bitcoin network."
Can we prevent the Attacks?
The underlying issue is that the number of companies producing mining hardware is limited. That's why someone can attack by bribing the workers👷
So the solution is a growth of the industries. The more companies enter into the industry, the more diversity of the machine increase. Therefore, the bar of the attack raises. That said, there is no doubt that the current situation is problematic.
(3) 🏢 Monopoly in Bitcoin mining
Vitalik Buterin, a co-founder of Ethereum, periodically indicates this problem. As I said earlier, specific hardware is required to mine Bitcoin.
However, what if an average person asks me like, "Can I buy it and start mining?". Then, the answer is, "Yes, but you probably can't get any profit." Because you can't win the large companies. Even public companies mine the Bitcoin today.
So, let's say if the Bitcoin price becomes 1 million USD💰, then the mining companies will be extremely rich, right? So, in this scenario, these companies might scoop up the specific mining hardware.
Therefore, monopoly or oligopoly might happen.
Blockchain is optimistic because the miners believe that the longest chain has correct information. However, if a few companies mine Bitcoin, they can alter the information in their favor. We call it a "51% Attack."
Can we prevent the Problem?
Today, our society is "the rich get richer." So the problem might happen.
That said, the mining companies don't have an incentive to do that because the monopoly/oligopoly of the Bitcoin network will reduce the credibility of Bitcoin. But we do not know what the future holds.
*Note: Ethereum will switch to Proof of Stake to reduce the risk of monopoly and environmental damage (Proof of Work, a consensus mechanism used by Bitcoin, uses so much electricity).
(4) 🧮 Someone broke SHA-256
Bitcoin uses SHA-256(Secure Hashing Algorithm) for security. For example, you can experience that using SHA256 Generator. Below is an example:
- Use SHA-256 to encrypt "Hello 1":
- Use SHA-256 to encrypt "Hello 2":
The two words "Hello 1" and "Hello 2" is similar, but the results are completely different, right? SHA-256 can create unpredictable strings.
Let's say like, "Please find the strings that start with 0000," what are you gonna do? The answer is that you have to try every word one by one. This system creates robust Bitcoin security. *If you want to learn more, please visit: Why Blockchains Need Tokens.
What if I can predict the String?
If possible, I can be a millionaire in a moment because I can solve it earlier than anybody and get the Bitcoin as a reward. That said, that situation breaks the structure of Bitcoin. Therefore, the Bitcoin price will plunge for sure.
*What if it happened?: The answer is Hard Fork, meaning that we have to change the underlying structure of Bitcoin. The Hard Fork might solve the problem, but the credibility of Bitcoin will drop.
(5) 🤡 Unknowns (Black Swan Theory)
Finally, here is the Black Swan:
The meaning of Black Swan Theory is as follows:
The black swan theory events is a metaphor that describes an event that comes as a surprise and has a major effect. The term is based on an ancient saying that presumed black swans did not exist.
Black Swan Theory of Bitcoin
Of course, we don't know the future, but here is a story.
For example, If United States dollar hyperinflation happens, it becomes a situation like, "What is the value of money?"
US inflation rate slows at 8.3%📈, but some critics say that the real inflation rate is more than 10%⚡️. Most people think USD is safe, but if it's not leading into the Black Swan.
Bitcoin was born in 2009, meaning 13 years old as of now. The future is still uncertain, so it's better to presuppose the possibility of up-and-down.
Okay. That's it for the first half. We will see the possibilities of Bitcoin in the following chapter.
2. Bitcoin's Credibility (2 Reasons)
The following contents are based on the opinion of prominent figures such as Michael Saylor (MicroStrategy CEO) and Saifedean Ammous (Columbia Univ Ph.D.), but also include an opinion of mine.
The reasons for investing in Bitcoin
- 🏢 Reason1. Decreased trust in Government
- 🧑💻 Reason2. Digital Transformation of our Society
These are the answers. Let's dig in one by one.
🏢 Reason1. Decreased trust in Government
People often talk about Crypto these days because there is an underlying problem: decreased trust in government. For example, the government printed a massive amount of money in response to the Covid-19 crisis.
The Federal Reserve has stopped publishing the M1 & M2 Money Supply.— CryptoWhale (@CryptoWhale) March 22, 2021
For the first time in over 40 years, they’ve decided to NOT tell people how much they’re printing. This is terrifying. pic.twitter.com/EEPMV1jjLF
Needless to say, inflation is happening around the world. As I said earlier, the US inflation rate slows at 8.3%, but there are some critics that the real inflation rate is more than 10%.
In a nutshell, the following is happening:
- 🦠 STEP1. The recession started with Covid-19
- 🤑 STEP2. Print money to save the citizens(?)
- 🤤 STEP3. Relieve the frustration in the short term
- ⚡ STEP4. Trigger the inflation around the world
- 🏢 STEP5. Citizens' assets transferred to the Gov
An additional explanation of STEP5: the value of money dilutes, meaning that the assets owned by citizens decrease, and the people become poor. On the other hand, the government becomes rich because they can print the money.
As a result, housing prices are increasing. In other words: Inflation happens → The rich buy real assets to hedge the inflation → housing prices rise → Average people can't buy a house.
What's more, the rich people buy their house by debt, meaning that they borrow money against their real property/stocks and then buy a house. In that case, they can compress their tax. The rich get richer.
Freedom Convoy is the turning point in History
Canada's 'Freedom Convoy' occurred in 2022:
The Freedom Convoy demonstrations initially focused on Canada's vaccine requirement for truckers entering the country but soon morphed into a broad attack on COVID-19 precautions and Trudeau's government.
The demonstration itself is unproblematic, but the government's response is problematic:
The government freezes the protestant's account.
What's worse, the protesters' families are also suffering:
Freeze the accounts of anyone directly or "indirectly" supporting the protests.
The above was an order from the Canadian🇨🇦 government. And here is an additional miserable story.
A crowdfunding website was hacked after fundraising from the supporters of Freedom Convoy, and personal information was leaked. The result of the incident is like so:
It is probably worth noting all of these people, from the donors to the hacker to the press, are now getting death threats.
If we use Crypto to raise funds, personal information would have been protected.
What's your thought on that?
We can't protest the government again if they freeze our accounts. To make matters worse, the family's account is also frozen🏦
These incidents accelerate the mass adoption of Crypto, I guess. Most of the problems I mentioned can avoid using Crypto. If you want to learn more about the incident of Freedom Convoy, please visit: Freedom Convoy is a Good Incident for Bitcoin.
A Problem of Bank Business Model
Here is additional information related to a bank:
Banking is an industry that seemingly only grows these days, and banks cannot go out of business. Due to the systemic risks involved in running a bank, any bank's failure can be viewed as a liquidity problem and will very likely get the support of the central bank. No other ostensibly private industry enjoys such an exorbitant privilege.
I know that's a difficult problem, but we experienced the reality in 2018: Bankruptcy of Lehman Brothers.
You know that productivity is one of the most important parts of creating a profitable business, right?
In my case, I am constantly trying to enhance my productivity by using/experimenting with new technologies, and I eliminate any operations that are not productive.
However, every time I work with a bank, their productivity is appallingly low(*I know they have their reasons). Crypto tries to fix that.
🧑💻 Reason2. Digital Transformation of our Society
Digitization is the second reason to invest in Bitcoin.
First of all: Remote Work
I think this trend won't stop. Some people might think like so:
- 🇺🇸 Why on earth do I live in the United States?
- 🇪🇺 I can reduce my rent by 20% by living in Europe
- 🇹🇭 I can reduce my rent by 20% by living in South East Asia
It really depends, but I chose Thailand to live in as a Japanese.
Along with that, they will have a problem with international money transfer💰, which is expensive/slow, and sometimes they decline for some reason.
But using Crypto, it will be like so:
#Bitcoin Payment is Awesome🤯— Manabu (@manabubannai) April 17, 2022
This is Lightning Network⚡️, a payment tool built on top of the bitcoin blockchain.
You can send money all over the world🌎 in less than a second. Much better experience than the bank🏦 pic.twitter.com/5NqF7joe7p
The above video is Lightning Network by Bitcoin. You can transfer your money around the world within a second. Besides, the fee is almost nothing(Less than 1 cent).
Given the situation, more and more people are willing to choose Crypto transfer over the bank as the Crypto industry grows. So it's just a matter of time.
Online world > Offline World
The digital world is becoming more and more important. For example, which option do you choose from the below?
- 🧑💻 50% restriction in 'Online' time
- 👨👩👦 50% restriction in 'Offline' time
I guess most people abandon offline time. Spending time on, for example, Social Media is becoming more important than offline communication. People might choose the opposite 10 years ago.
Digitalization is an essential part of our society, but we still don't have "internet cash." We need a centralized entity to transfer our money on the internet. But using Crypto, we can send our money peer to peer without any banks and fees.
Here is another aspect of the benefit of Crypto:
✍️ How to remove Bots on the internet— Manabu (@manabubannai) May 26, 2022
There are so many Bots🤖 on the internet, including Twitter. It's a problem.
For example, if I tweet "Metamask," then I will receive replies from Bots. Elon Musk tries to solve it.
Also, the DoS attack is another huge problem.— Manabu (@manabubannai) May 26, 2022
An attack technique sends massive requests⚡️ to a company's website and overloads the servers. The companies spend their money to deal with it.
We can solve this problem with Crypto. Let me explain:
How to solve it?— Manabu (@manabubannai) May 26, 2022
The answer is "friction" on the internet.
You can browse the website for free today, but in the near future, you won't be able to browse the website unless you have a dollar💰 in your wallet. Crypto wallets enable this.
This will reduce the Bots on the internet because creating bots will not pay off if you need a dollar in your wallet.— Manabu (@manabubannai) May 26, 2022
The market cap that has the problem is large so we will see the services like that soon😌
My tweets are based on below:https://t.co/Acclw1e8cr
Again, it's just a matter of time for the mass adaption of Crypto. People who realize this trend tends to change their jobs to Web3/Crypto.
Why on earth,,, Bitcoin?
There are many cryptocurrencies around the world:
- Bitcoin (BTC)
- Ethereum (ETH)
- Solana (SOL)
- Binance Coin (BNB)
- Avalanche (AVAX)
Let's consider why on earth Bitcoin is important or has any differentiation. The answer is "Bitcoin = Property."
Bitcoin = Property / Others = Security
The idea is based on Michael Saylor.
There is no one at the center of the Bitcoin ecosystem. So we can consider that the only property around the world with scarcity. Bitcoin has a hard caped of 21 million. It's similar to Gold, but it can mine from the earth.
On the other hand, Ethereum is similar to security/stock. There is a centralized team (Ethereum foundation), and they create their roadmap. Some other coins are backed by venture capital, meaning that they are analogous to the company.
We can not copy Bitcoin
Some people might say like, "We can copy Bitcoin easily," but it's not true.
For example, can you copy Twitter and invite the users? It's impossible, right? You can copy Twitter's code, but you can not copy the user flow. We call it "network effects," and it results in "winner takes all." situations.
It's the same with Bitcoin. You can copy Bitcoin's code, but you can not copy the network effects of Bitcoin. Bitcoin was born in 2009👶, and the most historical cryptocurrency, which has never been hacked by anyone, meaning that the most robust network globally.
What's the role of the Banks?
You can send your Bitcoin without a bank. Also, you can send any other cryptocurrency as well. In this context, we don't need the banks in the future, but there is a role for the banks, according to Michael Saylor, who said, "Banks will be the Layer 3 network."
- Layer 1: Bitcoin network
- Layer 2: Lightning Network
- Layer 3: Banking Network
You can imagine the meaning like so:
- Layer 1: Bitcoin network → Savings Account
- Layer 2: Lightning Network → Checking Account
- Layer 3: Banking Network → Wallet for daily use
Let me explain the basics. When you use the Bitcoin network or Lightning Network, you need to keep your secret phrase. But the problem is that it's difficult for ordinary people to remember and securely keep it. Besides, people have to pay a small number of fees for their transactions.
On the other hand, if you use Banking Network🏦 for Bitcoin, the bank will securely keep your secret phrase. Also, they use their database, meaning that the fee will be almost nothing. I guess most average people will choose the bank.
*FYI: if you don't understand the above, it's better to learn the basics of the blockchain. Here is the article: A Brief Explain: Why Blockchains Need Tokens (How it Works).
Finally: The Future is unclear
Okay, the article is ending soon. Thanks for reading the article.
I wrote that Bitcoin has a future, but, of course, we don't know the future. So I don't recommend you to put your large amount of money into Bitcoin expecting the price spike.
In my case, I put a fairly large amount of my money, but it totally separated my living expenses. So I'm mentally stable.
I think it is a waste of life to wear out of your mind in investing.
Instead, I recommend you learn the basics of technology and create some value for society. I guess you also can earn money along with it. In my case, I love learning about Crypto, so I actually learn the most myself through sharing my knowledge through my blog.
Lastly, here is the book I recommend. I quoted many times in this article. If you have any interest, give it a try:
My Goal: This website is my life log. I take action in my life and learn from my experiences. And by sharing my learnings, I can deepen my learnings. I will only write articles that the readers will be maximally satisfied with.