BTC is a sinking ship

For BTC (Bitcoin Core) to survive, the chain needs to be secure, meaning attractive towards miners who uphold the network by verifying transactions. If miners leave, the networks difficulty decreases, decentralization shrinks and it becomes vulnerable.

As BTC’s block reward reduces over time, continuously more and more miners compete for an ever decreasing slice of that cake. The other income miners gain are transaction fees: Yet these are limited for BTC as the block size is fixed. This means there is a finite maximum amount of transactions ever possible per block. While the block reward shrinks, either transaction fees need to rise or the price of BTC alltogether. It is to be expected that above a certain threshold, even at global adoption, the amount of people who are willing to pay fees that are 50,- USD per transaction or higher diminishes. It is a given, that most will transact between exchanges in another currency to avoid that at all. This keeps the potential to earn a living from BTC fee’s capped, even in times of high demand. BTC miners rely eventually on the block reward.

As this reward is halved every 210.000 Blocks, BTC’s price needs to go up to >100.000,- USD  in just a few years (Reward Era 5: 3.12 BTC/block) and rise to around 1m USD in a decade (Reward Era 7: 0.78 BTC/Block) –when most of it (~99%) has been minted- to stay attractive for miners. This is under the assumption, that in conjunction to the neccessary increase in price also more mining competition is attracted. Miners face enormous costs: They have to more than double their efficiency every four years just to uphold their status quo. At the beginning of every new Reward Era, a lot of small miners will die off and only few very large groups in specialized farms will be able to keep going.

At one point in this spiral, the incentive for honest mining will dissapear: The chain will eventually become corrupted as it’s more lucrative for the largest surviving miners to collude, take over and abuse the network. By issuing double spending attacks and reverting transactions, they profit more than by focussing on the inherent but ever smaller reward the system offers. They will salvage the chain to make ends meet and at the end of it move on to a more profitable coin. This is comparable to an armed force protecting a constantly growing Fort Knox while at the same time receiving less and less rewards for an ever increasing difficulty in the duty they perform. The incentive towards corruption grows to the point where it’s just a question of ‘when’.

Will that happen?

The scenario described, is due to the nature of BTC’s architecture, inevitable. The only question left open is: When.

When depends on the ability of BTC to attract more and more money at a constantly increasing pace. If BTC is capable to do so, the best case is that this event happens in approx 12-13 years, around the beginning of Reward Era 7. If not, the likelyhood for a worst case is roughly 5 years, meaning around the time of Reward Era 5. The average case here being around the time of Reward Era 6, being 8-9 years. In any case, BTC will unlikely grow beyond the age of 25. BTC’s ‘halvening’ is seen by the community as a desired event that will shrink supply further and therefore drive the price up – when in reality it just reduces the miner’s air to breath and the next one after 2020 might already kill the system for good.

Was this to happen by design?

No. This was not intended for Bitcoin. This happenend as BTC became ‘Bitcoin Core’. ‘Core’ can not scale. The team taking over control from Nakamoto in 2011 did not understand that the block reward was intended as a bootstrap and later on to be entirely replaced by fees. This requires the growth of the blocksize into the Gigabyte realm so miners can live off the transaction fees. Yet, they decided to keep the block size limited to 1MB for reasons they deemed important: They had the wrong assumption that the possibility to keep hobby users able to run a node would be a requirement for keeping the network decentralized. Yet Nakamoto envisoned already back then that at Bitcoins maturity, only miners that concentrate in large datacenters would be running nodes. Private node operators who helped get Bitcoin off the ground, were meant to largely dissapear later on. For him it was not neccessarily about decentralization but about having a distributed database – that is the ledger.

What’s with the Lightning Network?

The Lightning Network is not a solution to the problem of diminishing miner income, but an attempted quick-fix to two other issues of a 1MB block limit: Speed and Transaction Count. It is a proposed off-chain solution to tackle this – but it cannot work.

Why? The Answer is simple: Lightning enables Money Laundering, Terror Financing and Tax Evasion. It is a 2nd-layer tech that is based upon TOR’s onion layer principle. It doesn’t keep records and offers not pseudonymity or privacy but complete anonymity. The immutability, traceability and evidence-trail a blockchain provides, and which makes it attractive for institutional investors in the first place – is broken with Lightning. It’s not only broken but eventually leads to the point that running a Lightning Node will end you up in jail.

Lightning, like Monero and other anonymity coins, will get banned by legislators once awareness crosses a threshold. Especially Monero is already a pain to law enforcement for years in this regard and will see such actions on XMR sooner or later. Once banned, Exchanges will be forced to delist or cease their operation entirely in the respective country. You won’t be able to cash these coins out to fiat anymore. They become worthless overnight. Not even a DEX (Decentralised Exchange) can avoid this, as these lack the capability of fiat on & off ramps. The Lightning Network is not only a pseudo quick-fix to follow-up problems of the initial issue- but also one that potentially highly endangers BTC from the perspective of law.

When will it happen?

To answer the question of ‘when’ BTC will collapse in more detail, we need to find out where BTC’s value comes from and how fast it will it allow to grow. Value is not price but the underlying fundamentals that express themselves with inertia as price. For cryptocurrencies exist three sources of value: Utility, Scarcity and Perceived Value.

Utility

Due to the fixed Blocksize, BTC fee’s are enormous and the speed is slow. In its current form, BTC has crippled utility: No one can practically use it outside an exchange as the network is quickly congested with just a few tenthousand transactions. Handling smaller amounts of only a couple of dollars worth in BTC are entirely unfeasible. This shrinks BTC’s use-cases down towards only one: That of a “Greater Fools” into a Store of Value. Even when it has lost its mobility, it is still a very hard asset that promotes this fringe case. It’s main usage, that of being electronic cash, is largely disabled. Given its inevitable death in the near to mid term future, BTC’s utility can be simplified further down to its actual nature: It is that of a Ponzi under the premise of a Store of Value where buyers are simply waiting for the next person to pay a higher price- in the hopes that the asset has not yet collapsed until this happens.

Scarcity

BTC is scarce by a limit of 21m maximum coins. It’s scarcity is a hard one: It is, as long as chain & protocol are intact, impossible to fake or create Bitcoins out of thin air. Yet there are forks from BTC that offer the same. Therefore, to differentiate from “Bitcoin Gold” or “Bitcoin Diamond”, it’s scarcity value needs to be a function of its utility and perceived value as it cannot stand alone.

Perceived Value

BTC’s perceived value derives largely from it being accepted by an implicit consesus as 1) the market leader and 2) the de facto standard, translating into huge daily trading volume, the role of being the default trading pair denominator for other currencies as well as the status of ‘the’ entry currency into the entire cryptocurrency market by possessing near universal acceptance. This is derived not only from a) the name or brand “Bitcoin” in conjunction with the established b) Ticker Symbol ‘BTC’ but also from the c) first-mover advantage, that additionally expresses itself as a ‘piece of history’ by being the ‘original’ blockchain. These three pillars (a,b,c) are setting BTC apart from all other 2200+ cryptocurrencies and act, -especially for newcomers to the market-  as a ‘stable island’ in a sea of scams and uncertainty. Together with its two resulting ramifications (1,2), they make a very solid case for a perceived Store of Value, justifying BTC as the ‘digital gold standard’. This is definitely a unique characteric nowhere else to be found and therefore highly precious.

To conclude, BTC derives its price largely from its perceived value. The perceived value of BTC is high and could sustain price levels well towards Reward Era 7 (the best case), e.g. 2033, allowing it to climb towards the mythical 1m USD+ per coin prediction until it finally collapses. Owning BTC boils therefore solely down to the question of when to get out, and this is, by a very high probability not before 2024 and with even a good probability not before 2030. This was the communities silent consensus under the premise that the three pillars (a,b,c) are set in stone for all time – and here comes the problem with BSV.

Why BSV?

BSV is the abbreviation for ‘Bitcoin Satoshi Vision’. It’s a hardfork from ‘Bitcoin Cash’ which itself was a hardfork from ‘Bitcoin Core’.

Now the problem with BSV is that it is partly run by a man who claims to be the initial inventor of Bitcoin, its code and the whitepaper, the person in the past only known by the moniker Satoshi Nakamoto. Depending on your level of knowledge into this, the person claiming, an australian named Craig S. Wright, is for you either unknown, a total fraud or legit. Wright publicly stated multiple times that he despises BTC (Bitcoin Core) and the people behind it.1 For him BTC is not ‘the real Bitcoin’.2

There’s no public proof provided by Wright that he is Satoshi, yet those that have diged deeper claim to have found a fair amount of indirect evidence pointing toward him being it. The explanation by his critics, -why one would claim to be Satoshi if he’s not-, is that he’s a clown or madman and his company a scam. There’s a few things that we can spot-check if this answer can be upheld and the man dismissed: His background and the company behind BSV, nChain. Wright produced his record, including all degrees, in full, which can be found here. nChain is registered in the UK and >10 people working there can be found on LinkedIN. At the european patent office the company has roughly 90 patents registered which can be found here – some have even Wrights name to it.

After reviewing this info, the argument, that he and his company are a scam operation like most ICO’s in ’17,  is on the same shacky ground as the indirect proof brought forward by his supporters. The only conclusion to be made on the question of his identity is: We don’t know. Yet he should be taken seriously. Why?

Wright is going to court to proof his claims. The implication of him getting confirmed are grave, and we’ll look at them once we’ve evaluated an even more severe threat from him:

This screenshot from his Slack has been circulating around the internet since at least 2018.

Now, to understand how dangerous his ‘Long term advance notice’ actually is, we need to put into context that the real Satoshi has an estimated 1.1m BTC from the early days of Bitcoin, that have -until today- never been moved. That is roughly 5% of the total supply and this has been known since 2011.

In another lawsuit, Wright is getting sued over exactly this amount.3 The Bitcoins at dispute, are apparently locked away in multiple multi-signature accounts. Referred to as “Tulip Trust”, these unlock earliest January 1st 2020. This lawsuit is not proof – but it shows that there are undeniable parallels between Wright and Satoshi.

If Wright is really Satoshi he will gain control over these BTC in 2020 and is able to crash the market significantly, surely down to three digits – maybe even way lower – and hold it there for a sustained period of time. The price can be manipulated to go up or down 1.000,- USD with as little as 20t-30t BTC as we’ve seen early April 2019.4 Therefore 1.1m BTC imply overkill capacity and will not allow for the typical quick recovery.5 On top of this crash, he states that he will additionally tank the entire BTC network. Putting that into simple terms: His intention is to yank up the block difficulty6 by addding substantial hashpower right before a halvening (the next one being 05/2020) and to freeze the entire network afterwards with it:

It can be expected that many miners will naturally leave BTC at a halvening. The few remaining one’s would be put off BTC as well by the severly fallen price Wright created: The reward they receive (in US Dollars) will not justify their costs. If the price does not recover within a couple of days, they are forced to mine another coin. The consequences: Large hash power leaves BTC. The network becomes frozen for an indefinite time. Users wouldn’t be able to transfer their BTC from either Cold Wallets or Exchanges. Wrights purposely added Hashpower would solely process his own transactions and simultaneously empty out all newly introduced SegWit addresses that try to escape the collapsing network. Once done, his hash power will leave as well.

What are the implications?

  1. Due to the extremely high block difficulty but very low hashing power, the block processing time jumps from the current 10 minute average to a very high multiple of that. Transactions per second will drop from 7 to 0.x or below. BTC would switch from a crippled state to a severly disabled state with practically no chance of recovery: With so much hashpower gone and the market rate hitting rock bottom, the next difficulty adjustment to counter this would not take weeks but years. The coin would be prematurely dead. 
  2. His court appearance: IF Wright manages to convice the court that he is Satoshi, he could employ the legal angle in support of his fork. He already went into this direction by his recent copyright registration of the original 2008 Bitcoin whitepaper. This was not neccessarily a proof: Everyone can claim and register anything until challengend in court. Yet it’s forseeable where his actions are going as he has an aggressive and assertive public track record that shows he pursues his interests merciless. A court attesting him being Satoshi would have way grave ramifications than the previously granted copyright:

He could send out cease-and-desist letters with horrendous penalties attached to everyone claiming that he ‘is not Satoshi’ or that BSV ‘is not the original Bitcoin’. More than that, in subsequent cases for trademark and branding rights he could be handed the right to the simple name ‘Bitcoin’. BTC, that currently trades as ‘Bitcoin’ would need to rename on all exchanges towards ‘Bitcoin Core’. The simple term ‘Bitcoin’, without additions or variations, occupies significant value as laid out. It is doubtful that he would get the ticker symbol ‘BTC’ assigned towards BSV – that would create a mess. Yet, he could crush BTC’s core pillars a) and c) : The brand name and the historic value including the claim to be the original blockchain. Even if BSV turns out to be only an average cryptocurrency: BTC’s growth would be stalled, leading to a more early collapse as previously assumed. The question how strong this impedance would be, depends on how dangerous of an competitor BSV actually is: If it’s best case just a legal drag on BTC, reducing its life expectancy slightly, or if it is even better at the level of value, leading potentially in the worst case to something commonly refered to as ‘the flippening’: As a direct fork, BSV shares a vast majority of interfaces with BTC that allows the existing ecosystem like apps, merchants and other implementations, to (relatively) quickly jump over towards BSV if neccessary.

Also take in mind, that on top of all this, Wrights ‘Long term advance notice‘ would be a confirmed Damokles sword over BTC.

How serious is the competition?

Regarding Utility BTC gets outperformed – which is not too hard given its current state: BSV tackles BTC’s root problem, the blocksize limit where it even aims for a complete removal alltogether. nChain recently proved in its testnet to be capable to handle blocks as large as 1GB and announced to aim for the Terrabyte range in 2020. Therefore, BSV can scale, and a use case as electronic cash is upheld. The scaling is with the sole intent that miners can live off the transactions fees and are not dependent on the block reward. Therefore it is not doomed by a design flaw as BTC and derivates of it (e.g. Litecoin) are. It can be judged that this is a sound idea and also follows what Satoshi initially envisioned.

Even more than that, BSV intends not only to store cryptocurrency transactions on the blockchain but also all sorts of data, including tax and business documents. Their vision is to issue utility and identity tokens along side tokenized financial instruments and to couple that with a system of Smart Contracts on a second layer named MetaNet. In a recent paper Wright claimed to have achieved Turing Completness in Bitcoin Script, which can make those on BSV a reality. Given BSV’s scalability, the Smart Contracts use case might one day even supersede Ethereum on this, as ETH has shown over and over again that it is not only unable to scale but also incapable to sustain DApp’s with more than a couple of thousand users simultaneously. As BSV would store and absorb everything on one giant blockchain, the need for external oracles services like the one’s proposed by Chainlink7 (that currently have the best proposal to tackle the oracle problem) would disappear as well.

Tech wise BSV is effectively BTC without the known flaws and some extras added: Not only is it fast and cheap to transact, but BSV also allows for simple Email style Addresses that would help mainstream adoption. nChain states that by continuous advances in scaling fees will stay low and BSV gain in value: A miner handling transactions today will be able to process them cheaper in the future – competition creates a race for more and more efficiency. While the cost per transaction stays constant, efficiency gains would add towards BSV’s value. In other words: A company recurringly purchasing volume on the blockchain would receive less and less BSV over time but always the same amount of transactions. The value of the coin rises, but that by work and not due to speculation. 

Other then that, BSV claims to have been explicitly designed to be regulatory, compliance & auditing friendly which is a pretty rare if not unique characteristic.

This all of course stands to question if nChain can deliver on BSV or if its just a pipedream that will never be realized – as it has been with the majority of cryptocurrencies in the past. As it’s a rather new fork and not established, BSV transaction volume is low and its supporting ecosystem very small. The utility of BSV is therefore to be taken with a grain of salt, as it’s currently majorily ‘a vision’ and nothing substantial. Yet the idea that proposes one global blockchain that sustains miners and itself through an ever increasing efficiency at confirming transaction, and therefore making use of economies of scale8, seems sound and not like a technological dead end. Therefore it can be stated that BSV’s utility is higher than BTC’s with a potential to increase that even more in the future.

In terms of value, Scarcity is equal. BSV is eventually a hardfork from BTC via BCH: Both share the limit of 21m coins and the underlying technicalities that secure them, namely the SHA-256 based proof-of-work mechanism of consensus that leads to a scarce and hard asset.

IF Wright can deliver proof of identity, the Perceived Value that BTC loses would slowly transfer towards BSV: The name and the historic claim. Public perception on this would not change overnight but likely over years and it can be assumed that initially the overwhelming majority won’t care at all about this. If Wright does not deliver, nothing changes here. BSV’s perceived value would be low until BTC and all other blockchain projects that use the flawed approach of small blocks collapse.

What is the best option?

With the newly emerged threat that BSV & Wright poses, the minimum life expectancy of BTC has not only shrunk from 2033 towards the previously assumed worst case of 2024, but already towards the next halvening in mid 2020. On top of that, depending on the outcome of Wrights court cases, BTC might face serious price depreciation as early as this year. As laid out, BSV is not necessary a worthless scam and the threat it displays as well as the technical vision it has provide two arguments for mitigating risk by buying into it. BTC and BSV share a vast amount of interfaces and technical similarities: Even when it currently looks ridiculous- it is not to far off to speculate that BSV is a potential candidate to replace BTC as the de facto standard in the long term.

Author  & Responsible

Philipp Elhaus, Gepr. Techn. Betriebswirt (IHK), PMI-PMP, Scrum Master

I work as freelance IT Project Manager in Software & Web Development and have a cross-sector background in Business Administration and Engineering.

Opinions are my own. I created this site to clarify about problems Bitcoin faces.

http://www.philipp-elhaus.de | https://twitter.com/philipp_elhaus

  1. https://craigwright.net/blog/law-regulation/the-right-to-privacy/
  2. https://craigwright.net/blog/bitcoin-blockchain-tech/dont-be-fooled-bitcoin-is-not-btc/
  3. https://www.courtlistener.com/docket/6309656/1/kleiman-v-wright/ ; Page 15, #62
  4. https://micky.com.au/revealed-why-bitcoins-price-exploded-on-april-2nd/
  5. https://en.wikipedia.org/wiki/2010_Flash_Crash
  6. https://en.bitcoin.it/wiki/Difficulty
  7. https://chain.link/
  8. https://en.wikipedia.org/wiki/Economies_of_scale