How to talk about the Bitcoin reserve dumb idea

In July Senator Cynthia Lummis proposed the so-called BITCOIN Act which would establish a "Strategic Bitcoin Reserve." Shortly after, Trump promised Bitcoin enthusiasts that he would create a "strategic national stockpile." Naturally, Bitcoin holders are rapturously elated: The USG buying Bitcoin represents massive exit liquidity at guaranteed high prices for the rest of the decade.

If it seems like this a particularly horrible idea from 21 million miles away, that's actually the most dangerous part. The idea is so irresponsible, so self-dealing and spiteful that it will provoke visceral disgust in most reasonable people. The creators of "Trump Derangement Syndrome" have delivered on a sequel: "Bitcoin Derangement Syndrome" which memeifies the seething liberal who is Very Angery about all these obnoxious deplorables becoming amazingly wealthy.

In the golden age of bad ideas, this is the magic pathway to the thing actually happening. Folks will hear about this idea and be drawn towards it for partisan reasons - these folks are converted to Bitcoin holders and then become passionate supporters. Bluesky will squirm and screech in response causing SBR proponents' conviction to increase and their recruitment to expand. Don't have pronouns in your bio? Bitcoin is the perfect investment for you! Republican lawmakers will be along for the ride, like it or not (they will definitely like it. )

But as we learned from Trump, loathsomeness on the surface is a valuable way of distracting people from things that are dysfunctional underneath. The usual name-calling, Bitcoin is "inherently worthless" or "a Ponzi" or "a scam" will be a badly misfired joke when aimed at someone who bought a bitcoin last year for $40k. Call it whatever you want, but if you have one now, you can sell it for $100k.

Two things to keep in mind. In the recent election, crypto was a winning issue. It's also clear by now that the median voter subscribes to a dollar-store-Nietzsche concept of morality: If people are screaming that this thing is immoral, this thing surely must be a winner.

Screaming "scam" is going to be exactly as effective as screaming "fascist" or "racist" was at dislodging Trump. I'm suggesting we explain how dumb the idea is directly.

Better argument: Security Death Spiral Bad

The argument against a SBR can't be laughed off be someone saying "look at the scoreboard" but also shouldn't be too wonky. Wonky arguments are great, but if folks on the right listened to the smart people on the left or right, (for example this takedown of the idea by George Selgin) we would live in a much saner world.

Fortunately a nuanced discussion of the crucial role of the US dollar in global economics is unnecessary, because there is a huge problem with Bitcoin lurking in plain sight: Bitcoin's security model has a significant chance of running head on into a death spiral in the next 20 -25 years.

The problem is fairly straightforward. The process of mining has two purposes: One is to distribute the coins in a 'fair' way, the other is to order transactions into blocks in a manner that is secure and very difficult to disrupt. The network is secured by a brute force hashing process that can be disrupted when one coalition of miners has the ability to produce hash faster than the rest of the network. Miners who write the blocks get new coins, this is their reward for keeping the network secure.

The number of coins is cut in half every 4 years. It started at 50 bitcoins per block, this year it dropped to 3.125 bitcoin per block, in 2044 it will drop to 0.09765625 bitcoins per block. So even if a bitcoin is worth $3 million in 2044, the block reward will be less than it is today, in dollars. We will have ourselves an extremely expensive bike secured by the same lock.

OG Bitcoiners used to talk about this issue all the time, and in fact the serious ones still do. The loud Bitcoiners, however, now with a possible major payout on the horizon, tend to dismiss this as something invented by the haters. But the issue is very real and every advocate who wags their strong jaw on CNBC should be challenged on this.

Earlier conversations within the Bitcoin community tended to punt on this issue, hoping that by 2050 there will a massive market for Bitcoin transactions which will provide enough additional fees to support the network. But this argument was and has always been "maybe that could work" or "people are smart, we'll figure something out by then." There is no concrete plan.

Peter Todd (who definitely understands Bitcoin at a very deep level) has proposed "tail emissions," a hard-fork that would break Bitcoin's finite total supply in order to fix the problem, but this idea is very unpopular. Paul Sztorc, another serious thinker who has been sounding the alarm for much of the last decade, has proposed "drive-chains" a significant fork in the protocol that would allow miners to capture more value from a larger set of transactions. These ideas have not gained a foothold among Bitcoin enthusiasts, not because they're bad ideas, but because many people have decided it's just better not to acknowledge the problem.

That miner fees (money paid to the miner to entice the miner to include the transaction on the blockchain) will compensate for the exponentially declining miner revenue is not impossible, but the numbers become daunting. In order to make up for the decline in newly minted coins, each Bitcoin transaction on the chain will have to average in the hundreds of dollars in fees paid out of the transaction to the miners. Now in an era where most Bitcoin is expected to be held by large institutions as a savings product, there is very little reason for anybody to spend hundreds of dollars per transaction, much less thousands of people every ten minutes. People buy ETFs in gold all the time; they don't mail themselves bricks of gold; this is stupidly expensive and pointless when you don't plan to use the gold for anything. For the same reason, unless you expect Blackrock's Bitcoin reserve to suddenly disappear, you wouldn't be spending hundreds of dollars a month to build a cost-averaged stack when you can buy IBIT on Fidelity. Even if everyday transactions are denominated in Bitcoin there is little reason to use the blockchain or any of the proposed decentralized payment layers themselves, instead of just, say, clicking "send bitcoin" on custodial apps, such as Venmo or WeChat. I'm not saying it will never be feasible that people will be willing to pay high fees, but this isn't something we want to rely on. We definitely don't want to place trillions of dollars in national wealth in the faith that one day everyone will be using Bitcoin for everyday transactions, even though we aren't right now and don't seem like we're going to anytime soon. Bitcoin transactions have never provided high fees for any sustained period of time. This would be a new development.

Just to reiterate: while a subsidy-driven security mechanism appears to work well in practice to bootstrap the Bitcoin network while the first 97% of the coins are distributed; we literally have no idea if a fee-driven security mechanism works on a network that has already been bootstrapped. We also have literally no reason to believe a high fee market will exist in the future. The theory suggests that a fee-driven security mechanism could be very chaotic, but this analysis is based on a guesswork of parameters. We have no idea.

When arguing to put national gold stockpile money into a technology that is secured by carefully tuned market incentives, the argument shouldn't be "it might work" it should be "we have good evidence that it will work." At this point we do not have such evidence.

In the discourse surrounding Bitcoin's security model, usually the certainty being questioned is on the other side. Many academics have expressed confidence that the security problems are unavoidable, while Bitcoin advocates try to pokes holes in this certainty and suggest clever ways "so you're telling me there's a chance" that issues could be side-stepped

The Death Spiral

The death spiral is easy to describe. At some point, we will look 4 to 8 years into the future and see the possibility that a rogue actor acquiring discounted mining equipment could throw the whole system into chaos. As this comes on the horizon, some will bet on this, shorting the price of bitcoin. This leads to miners (who have to sell to recover energy and cooling costs) losing revenue and becoming unprofitable. This in turn will lead to miners closing shop, selling mining equipment to the highest bidder, and at this point it becomes a feeding frenzy: The only way to go is the long long way down. Everyone you know will be getting rich by shorting Bitcoin. Miners will be spending their days in bankruptcy courts. What probably happens at this point is some centralized entity comes and takes over to save face; but what emerges won't be Bitcoin, it will be some centrally recorded ledger. Also nobody will care anymore really, it was fun on the way up.

The real psyop is the thinking we did along the way

If BSR advocates are still tracking this argument; I think we've won. There is no way to process the fact that an experimental internet currency will be entering an entirely new security phase and think "we should bet our nation's wealth on that!"

There are perhaps more complicated rebuttals for what I said above, but again, if we've forced anyone to stare deeply into the murkiness of Bitcoin Game Theory in 2045, they will see no clear answers.

From what I can tell, there has been a conflation of two different concepts that provide security: One crucial part of Bitcoin is the cryptography - this is not something that can be broken by bad market incentives. It was also around decades before Bitcoin and indeed the internet is based on cryptography. The difficult concept (and the major innovation in the 2008 whitepaper) is the Proof of Work mechanism; this is always vulnerable to misaligned incentives. My guess is that many folks have taken two facts and fused them together into some notion that Bitcoin is unbreakable 1) Elliptic Curve Cryptography is essentially unbreakable (True!) and 2) Proof of Work on Bitcoin has not been misaligned for Bitcoin in the last 16 years. (True, in the past). When you force anyone to think at any length about these things, they quickly realize that Proof of Work is always vulnerable to misalignment of incentives.

Other fun questions that every CNBC interviewee should be asked

1) Do you think a BSR would give China more incentive to invade Taiwan?

2) Is the viability of Bitcoin as an investment hurt if a 34% coalition of miners were to begin selfish mining?

3)Which Layer 2 is most likely to cause fees to trickle up to Layer 1?

4) Are you concerned about the 2106 bug?

5)OK, well here's an easy one, do you know the difference between cryptography and proof of work?

6)What happens if Satoshi returns and does a rug pull?

7) What happens if Microstrategy changes direction and does a rug pull?