The Real Value of Bitcoin: Between Hype and Utility

We are in a bear market and bitcoin has disappeared from the news. In my post about the gathering storm clouds on the Bitcoin horizon, I had little good to say about the state of the markets. The market is down now and good investors know to buy when there’s blood on the streets and sell when there’s music in the air. So I suggest we now use the bloody streets to our advantage. The market-shaking brutality can be emotionally exhausting. That’s why it’s elementary for investors to be convinced about their investment. So: what are we actually buying? Or, put another way, what is the real value of Bitcoin?

The entry into the bear market was marked by the collapse of various lending platforms and protocols such as Celsius, Anchor, and Genesis, culminating in a crescendo of the trading platform FTX. There will likely be more to come. Who wants to talk about the real value of cryptocurrencies now, right? «It’s all just a scam and ripoff!» These thought patterns reflect the mass psychology that drives the eternal cycle of bull and bear markets. However, I can already say the following: There is a real value to Bitcoin. Yes, a value that solves real problems, both psychological and practical.

To understand this potential intrinsic value of Bitcoin, it’s important to first consider its advantages and then put them into the context of history.

Advantages of bitcoin: How the cryptocurrency is changing the future

As I already mentioned in my article Bitcoin Collapse – When Is This Bubble Going to Pop?, in the chapter «What is the Fundamental Value of Bitcoin?», the cryptocurrency offers the following advantages at first glance.

• The underlying blockchain is decentralized and independent of banks and governments.
• Past transactions are tamper-proof and cannot be altered retroactively.
• The algorithm of the Bitcoin blockchain is democratically elected.
• Only a limit number of Bitcoins can ever exist.
• The currency is neutral.
• Layer 2 solutions of the blockchain reduce transaction fees to a minimum.

Anatomy of Bitcoin in a few sentences

The Bitcoin blockchain is a ledger system. It’s similar to a notebook where transactions are recorded. If there is only one notebook, it is a central system. In the case of the blockchain, however, one can imagine that thousands of notebooks exist, all containing a copy of all transactions. The holders of the notebooks check each other. This ensures that everyone has recorded the same transactions correctly. The network’s programming logic is designed so that the mutual verification of transactions is not complicated and thus costs the operator little electricity.

The individuals holding the described notebooks are referred to as «full nodes» or «light nodes» in the context of the blockchain. In addition to these nodes, there are also so-called miners who are the power-hungry entities featured in the news, competing to add new transactions. A dataset of such transactions is referred to as a block. If a miner succeeds in adding such a block, they receive a reward in Bitcoin. All nodes (notebooks) then synchronize the new transactions.

Therefore, it is a decentralized system in which it is very difficult to record new transactions and not difficult at all to verify the added information. Every incorrect transaction is therefore immediately noticeable. And since adding new records costs a lot of money and electricity, it is in the interest of every miner to record correct transactions.

The power of decentralization: How independence is enabled through blockchain technology

Due to its decentralized architecture, it is not possible for any institution or government to stop or modify the Bitcoin blockchain in any way. The Bitcoin network has grown to the point where nodes and miners are located all over the world. (From an economic perspective, however, there are probably more miners located in places with cheap electricity.)

What exactly happens when a government bans Bitcoin in their country and forces the shutdown of all mining machines? Or when there is a widespread power outage?

The Bitcoin blockchain just keeps running.

The blockchain doesn’t just continue running, but rather, it results in the rest of the world taking the place of the depleted miners. With decreasing competition, mining becomes profitable again in other locations since the revenue has to be shared among fewer parties.

In 2021, China issued such a ban and the Bitcoin price plummeted immediately. However, it quickly recovered as citizens of the USA, Kazakhstan, and Russia recognized the opportunity and increased their mining activity.

The screenshot shows that in 2021, both the Total Hash Rate and the value of Bitcoin decrease rapidly and then recover. Thereafter, the Hash Rate even surpasses the previous value from around the end of 2022.

The democratic election in the Bitcoin blockchain

The decentralized aspect is fundamental to establishing a democracy. A vote can only take place if multiple parties have the right to cast their vote.

The Bitcoin algorithm is developed as open source, which means that anyone can view the programming code and contribute to its development. Of course, any changes must be approved by the community, which already makes it impossible to corrupt the code in the first step.

Once the community has made changes, a new version of the code is created, which is referred to as a «Release». Versioning helps track the changes that have been made, and the release is then rolled out to miners and nodes. Each participant has the option to install the new version on their node, which is essentially a democratic vote. And since every person in society is free to mine Bitcoin or run full and light nodes, this means that every person can indirectly influence the future of digital currency.

Versioning through hard and soft forks

Without going into too much detail, it is worth noting that changes to the code are made through so-called soft and hard forks. With soft forks, the new code is backwards compatible, whereas with hard forks, it is not. Installing this code inevitably creates a new cryptocurrency. Bitcoin Gold or Bitcoin Cash, for example, are the result of such hard forks.

Some changes that will likely be necessary in the future will require such a hard fork. But more on that later.

How Bitcoin’s scarcity ensures protection against inflation

Satoshi Nakamoto, the enigmatic inventor of Bitcoin, defined the limit of 21 million Bitcoin in the code. Although it is not mentioned in his whitepaper (https://bitcoin.org/bitcoin.pdf), the defined limit has now become firmly established in society’s minds. In theory, it would be possible to increase this limit through the democratic approach, but this is highly unlikely from a purely psychological standpoint. To illustrate this, I would like to present the following scenario.

Let’s assume that in a new version of the Bitcoin code, the developers set a new upper limit on the maximum number of bitcoins. The majority of miners and nodes install the new code and approve the new version. As a result of more bitcoins being available, miners receive more bitcoins for successfully adding a new block. This may seem tempting at first, but it leads to a devaluation of the digital currency. This devaluation inevitably causes the price of bitcoin to fall, which in turn means that miners earn less. In addition to the inflationary cause of the price drop, there is also an ideological cause. The maximum number of 21 million bitcoins is a cornerstone of the digital currency. An increase in this limit would inevitably lead to a huge drop in price and would fundamentally equate bitcoin with fiat money.

For purely ideological reasons, it is highly unlikely that miners and node operators would agree to such an increase.

Out of pure curiosity, I once downloaded the programming code of the Bitcoin blockchain. As I expected, the maximum number of bitcoins is only defined as a single variable. It is fascinating that on the one hand, this variable could be adjusted so easily, but on the other hand, implementing this change is close to impossible.

Goodbye Bitcoins

The current supply of mined bitcoins is approximately 18.5 million. According to an article by blockzeit.com from October 2022 (How Much Bitcoin Has Been Lost Forever?), around 20 percent of them are lost forever. This includes bitcoins that are in wallets that their owners no longer have access to, as well as bitcoins that are sent to a non-existent address. Due to human fallibility, the digital currency has thus acquired a slightly deflationary character.

The neutrality of Bitcoin: Why the cryptocurrency is independent of political or economic interests

Conceived by an unknown person named Satoshi Nakamoto, Bitcoin was born as a digital currency. The name is a Japanese pseudonym, and nobody knows who the phantom is. That the nationality of the inventor is not even clear, is a fact that contributes to the neutral character of Bitcoin, thus increasing its real value.

Since Bitcoin was developed by the public rather than a government or an institution, it created the possibility for the cryptocurrency to establish itself across borders. Fiat currency is always directly linked to a nation or a group of nations and is therefore tied to certain ideologies and cultures. Bitcoin, on the other hand, is completely free from political and cultural ideologies.

Imagine that at this time, various wars are happening around the world. In most of these countries, there are Bitcoin enthusiasts who are convinced of its technology and value. Even in two opposing sides of a war, there is no reservation for one country to abhor Bitcoin because it can be associated with the enemy in any way.

Bitcoin is independent of country, culture, and ethnicity because its idea and technology could spread independently and organically.

The development of the internet closely resembles the rise of Bitcoin. Although the then-called Arpanet was established at universities in the US, the neutrality of the technology allowed it to spread across the entire planet.

Note: The technology of the Bitcoin blockchain has led to various projects that will most likely revolutionize the internet. This vision is referred to as Web3.

Very low transaction fees thanks to layer 2 solution

When it comes to speaking about cheap transactions in relation to Bitcoin, it is rather controversial. However, for the sake of completeness, I would not like to forego explaining the background of Bitcoin transaction fees.

As globalization continues to progress day by day, international trade is one of its aspects. And where there is trade, payment is necessary. To simplify trade and payment, the European Union and the Single Euro Payments Area (SEPA) were introduced in Europe. (Of course, this is not the only reason why the EU was founded.) A SEPA transaction costs €1 at my bank, which is not much. In many parts of the world, countries also use SWIFT (Society for Worldwide Interbank Financial Telecommunication) founded in 1973. However, now looking at Bitcoin’s transaction fees, the cryptocurrency often has much higher costs.

The transaction fees represent a bid to get a place in a block. Therefore, this bid can skyrocket during times of high activity. The Bitcoin algorithm is designed so that approximately every 10 minutes a miner is allowed to add a block of transactions to the blockchain. Such a block contains about 2,000 transactions. Considering that it is a global booking system, 2,000 transactions every 10 minutes is very little. In comparison, Visa processes 24,000 transactions per second. This illustrates even more the bottleneck of the Bitcoin blockchain.

As a result, transaction fees exploded in April 2021, with a transfer costing up to 64 USD. On average, fees ranged from 50 cents to 4.5 USD over the past year.

Bitcoin as national currency in El Salvador

In the fall of 2021, El Salvador introduced Bitcoin as its national currency. Assuming that a Bitcoin transaction costs around 4 USD, it makes no sense whatsoever to use the currency for everyday transactions. The transaction fee for buying a piece of gum would be many times the value of the item being traded.

Therefore, El Salvador is using a so-called Layer 2 solution. This is an application that executes a large number of transactions and then writes them bundled to the blockchain. The Layer 2 solution that El Salvador is using is called the Lightning Network. It can process up to 1 million transactions per second and thereby reduces transaction fees to the cent range.

By introducing this additional layer, transactions are of course not as secure as if they were directly processed on the blockchain. This means that the second layer must provide security within its own programming logic, which the Bitcoin blockchain already provides to a large extent.

The above representation is highly simplified. In reality, it is not just a single strand of transactions, but many parallel strands within the Layer 2 network. These are then periodically written to the Bitcoin blockchain.

The changing world order: Why nations succeed and fail

The benefits outlined so far are already known to most people. In this chapter, however, I will show a rarely discussed benefit of Bitcoin, for which I have to go into some detail.

This advantage is rarely discussed because it only comes into play in the event of a so-called Black Swan. The term was coined by the financial mathematician Nassim Taleb in his book «Black Swan – The Impact of the Highly Improbable». In this (more or less) hate-filled writing about the incompetence of statisticians and philosophers, he points out that events such as September 11 or various financial crises occur completely unexpectedly for humanity because the probability is so low and we are not aware of them. Although the probability is so low, it is precisely these events that occur again and again and thus shape history.

Ray Dalio illustrates such a Black Swan in his latest book «Principles for Dealing with the Changing World Order». It is considered a Black Swan because it is a blind spot in the neocortex of the general public.

Ray Dalio is one of my role models, not so much because of his financial success, but because of how he analyzes the world and learns from past situations, as he impressively describes in his book «Principles for Success». While this book deals little with the world economy, it plays a central role in his latest book, «Principles for Dealing with the Changing World Order». The processes presented therein, which inevitably lead to the fall of a rising empire, sound absolutely logical but are equally alarming. The cycles on which these processes are based demonstrate how humanity is incapable of learning from its distant past.

From rise to decadence: The grand cycle of empires

Ray Dalio has studied and analyzed in detail the history of great empires, identifying what constituted their success and subsequent downfall. The following illustration from his book shows the power positions of countries that were once in possession of relative strength in the past.

Dalio determines the power of an empire based on the following measurable indicators:

• Education
• Competitiveness
• Innovation and technology
• Share of world trade
• Military strength
• Strength as a financial center
• Reserve currency status

The chart clearly shows that China, the Netherlands, the United Kingdom and the United States went through such a rise and fall or are already still in one of the phases of this cycle. Based on the measurable indicators mentioned, the curves on the right-hand side indicate that China is moving towards becoming the leading world empire. Conversely, the USA is on a downward trend.

The entire sequence of three phases – rise, peak, and decline – is consciously called a cycle by Ray Dalio because the phases are inevitable due to human psychology and therefore repeat themselves. Countries that experience the strongest relative increase compared to their competing countries rise to become world powers.

Rise, peak, and decline

The transition to a new world order usually happens through a war, as the leading world power is not willing to give up its position without resistance. If the leading world power loses this conflict, which is often terrible and causes global suffering, the rising power takes over world leadership. Due to the misery, the global population is willing to do anything to end the suffering. Countries sign peace treaties and work together productively. In this phase, the population is poor and feels poor.

A country that has been plagued by misery but whose leadership is strong and capable can turn that suffering into a productive system. In this system, education, innovation, openness, and work ethic are promoted. Smooth cooperation among the population leads to prosperity, the country reaches a peak, and work is outsourced to countries with cheap labor. In this phase, the population is wealthy but still feels poor due to the past.

The rising country begins to challenge the currently leading world power and in most cases succeeds in defeating it. It is extremely difficult for the declining world power to turn the tide, as humans are creatures of habit and have become accustomed to their prosperity. Saving the situation would inevitably require a ramping up of production and work ethic.

The new world power gradually gets accustomed to its position and the established prosperity. As a result, the population begins to relax. Productivity is reduced, and loans are taken out to finance the prevailing prosperity. In this phase, the population becomes poor but still feels rich. A new country establishes a productive system, and the cycle starts anew.

Those who do not want to read Ray Dalio’s entire book can watch the most important points in his YouTube video (45 minutes).

What the future will bring

Since such a cycle lasts between 100 and 400 years, humanity is not aware of its existence. It would therefore be extremely naive to believe that the fall of the leading world power could not happen again. To prevent this decline, the leading power would need to realize the current phase of the cycle and begin to take action. Holding on to the current status quo and taking on more debt for goods that do not contribute to productivity is no longer an option. In this phase, the loans taken out are increasingly used only to maintain wealth.

Debts are extremely useful if they are made for productivity-enhancing investments. However, taking out a loan to buy a new TV or for a country to introduce a four-day workweek is extremely risky. Note: there are studies that show that a four-day workweek can contribute to an increase in productivity, and in some respects, I do not doubt that. Whether this measure is healthy at the national level, in my opinion, is a different matter.

What about USA and China?

No one can predict how the conflict between China and the US will continue. However, it is important that we become aware that this is a classic conflict between the leading world powers and that we must take it seriously. I doubt that it is the best option to plunge into a mental crisis now. Moreover, Ray Dalio expresses it best in his interviews.

If you’re worried, you don’t have to worry.
If you’re not worried, you have to worry.

Ray Dalio

One could argue that humanity learned from World War II. My parents’ generation learned from it, maybe partially my generation too. But all subsequent generations certainly did not, because they did not experience it themselves or did not receive enough serious education about it. Humans forget. And that is the condition, the starting point, that enables and drives such a cycle. Therefore, I would like to end this subchapter with a well-known quote.

Hard times create strong men. Strong men create good times. Good times create weak men. And, weak men create hard times.

The real value of bitcoin in the changing world order

In the grand cycle of the rise and fall of empires, foreign policy turmoil is accompanied by domestic unrest. The gap between the rich and poor continues to widen. Misunderstanding about who should bear the burden of accumulated debt further fuels the conflict. The wealthy part of the population insists that their wealth be recognized as their rightful possession because according to their worldview, they are entitled to it. On the other hand, the poor part doesn’t understand why the rich don’t share their wealth to solve the problem. Furthermore, The population no longer works together productively, and it becomes more selfish.

The above illustration from Ray Dalio’s book exemplifies how politics in the USA has become polarized in the last 50 years.

Internal unrest often ends in civil wars and revolutions, and the confiscation of assets is not uncommon but rather the rule. And so this entire main chapter boils down to the following statement – the advantage of Bitcoin, which is still completely underestimated.

No one can ever take Bitcoin away from you.

It’s that simple. Some might now think, «Wow, what does that do for me? We’re doing fine, confiscation won’t happen to us». And that’s precisely why there are so-called negative Black Swans: Ignoring the highly improbable.

It doesn’t have to happen in our country and it doesn’t have to happen now. But there will be expropriations again sometime and somewhere in the world. Then Bitcoin will provide a refuge for the affected population. This will strengthen the foundation of the currency and further contribute to its real value.

Why your Bitcoin ownership is secure: An explanation of Bitcoin’s expropriation resistance

It is logical that fiat currency is most susceptible to expropriation. Inflation alone is a form of expropriation. If I hide a $10 note under my pillow, someone doesn’t have to physically rip it out of my hands to take it away from me.

I am not one to say that inflation is entirely evil. It is quite certain that we will never do away with a currency that is not inflationary. This is also due to human psychology, which is why the small and large cycles in Ray Dalio’s book occur in the first place. For this reason, I also don’t think that Bitcoin will become a currency for everyday use, but that’s another topic. Nevertheless, Bitcoin is precisely not susceptible to inflation, and that is an advantage that is slowly establishing itself among the general population.

Bitcoin is often compared to gold. There is only a limited amount of it, and it is globally considered a valuable asset. Therefore, one could argue that gold offers the same advantage. Gold also cannot be taken away from you if it is in your physical possession. The major drawback, however, is that it is impractical and therefore harder to trade. Finding a buyer and transferring gold bars quickly prove to be a challenge.

And what about FTX?

In November 2022, the collapse of Binance competitor FTX made headlines. It was reported that most users lost all of their capital deposited on the exchange, including their purchased Bitcoin. This demonstrates that Bitcoin can still be taken away from someone if it is not truly in their possession. As long as the purchased assets remain on an exchange, one is not their true owner. If the bitcoins are only held on the platform, it is nothing more than a promise of the exchange that the owner can withdraw the bitcoins at any time. Of course, this is only possible as long as the trading platform does not go bankrupt.

Not your keys, not your coins.

The statement widely spread in the crypto community describes precisely the need for cryptocurrency owners to ensure that they are truly protected from their loss. It means nothing else but that cryptocurrencies are only really owned when they are in one’s own wallet, with access to its so-called «keys». The keys are «passwords» used, among other things, by the blockchain for the encryption and release of transactions.

Investing in Bitcoin: Why it is the safest option compared to other cryptocurrencies

This article only writes about Bitcoin, although there are now thousands of cryptocurrencies out there. And that’s for a reason. When people hear the word cryptocurrency, they think of Bitcoin. The number two according to market capitalization, Ethereum, is also well-known to most people. But after that, it gets difficult.

Even in the news, you generally only hear about Bitcoin and not about cryptocurrencies in general. It would take a lot of time for another cryptocurrency to take away this status from Bitcoin, even if it offered more advantages than Bitcoin.

Moreover, cryptocurrencies often have different purposes. They often function like stocks, as they are also used to finance companies. It is not uncommon for initiators to establish new projects with cryptocurrencies in a foundation (often based in Zug, Switzerland). This, of course, clouds the independence of these projects. A good overview of why there are so many cryptocurrencies and for what functions they can be used is provided in the book «Token Economy» (amazon.com). However, when reading, one has to overlook the many spelling mistakes.

Additionally, many of the other digital currencies operate with different consensus algorithms to prevent significant power consumption. However, this often results in the blockchain of the new cryptocurrency being less decentralized, with fewer than a few hundred parties having decision-making power.

Furthermore, many of the other cryptocurrencies deliberately have an inflationary nature, causing them to lose value over time.

Why does the price of Bitcoin correlate so strongly with the NASDAQ?

If it is true that Bitcoin is so different from other cryptocurrencies, tokens, and stocks, it is surprising that the price of Bitcoin correlates so strongly with the NASDAQ index and thus with tech stocks. However, when the general public hears «Bitcoin», they associate it with a technological innovation and automatically mentally place it in the tech industry. The real value of Bitcoin has not yet reached the broader population.

I assume that over time, the differences of Bitcoin will become more apparent in the minds of the global population. And I dare to predict that there will come a moment when the NASDAQ corrects downwards, and Bitcoin holds its price or even increases in value. When that happens, then Bitcoin will have achieved gold status, or even better: the Bitcoin status.

Technological challenges and their impacts: What influences the real value?

Despite its reputation as a problem solver, even the revered Bitcoin has its share of risks. In this article, I will also discuss the energy consumption frequently brought up by opponents.

Bitcoin mining and its impact on global energy consumption

The electricity consumption of the Bitcoin blockchain is a topic that is very controversially discussed. And especially in the current situation, where climate change seems to endanger the population globally, it seems completely senseless to tolerate such a threat. The second largest cryptocurrency by market capitalization, Ethereum, has responded to this and has changed its consensus algorithm from Proof-of-Work (PoW) to Proof-of-Stake (PoS). The consensus algorithm determines who is allowed to add the next block to the blockchain and then collect the reward. With PoW, the one with the highest computing power has the best chance of adding the next block. With PoS, on the other hand, it is the person with the most tokens. In the case of Ethereum, it is therefore the party that owns the most tokens of the Ethereum blockchain.

At first glance, it seems absolutely logical to move the Bitcoin blockchain to such a transition in order to protect the climate. (This is almost impossible, however, as PoW is a cornerstone of the Bitcoin blockchain and such a change would never be accepted by the population through the democratic approach described above.) Although PoS is massively more climate-friendly, it brings the capitalist disadvantage that the parties with the most money have the most say. Looking at the distribution of assets in the world, the richest 1% own almost 50% of the total wealth. Thus, an uneven distribution of available tokens of a cryptocurrency is not far-fetched. From this perspective, it makes sense to stay with Proof-of-Work alone for the security and distribution of power of the Bitcoin blockchain. Cryptocurrencies are particularly valued for their decentralized approach, making it most logical to stay with Proof-of-Work.

The comparison with the electricity consumption of banks

The argument that the entire banking system consumes much more energy than the Bitcoin blockchain is often heard from Bitcoin advocates. However, the comparison is flawed. It is logical that all banks together consume many times more energy than Bitcoin. The production and destruction of coins and notes, the office spaces, safes, and money transporters are some aspects of the traditional monetary system that leave an ecological footprint. However, bank employees offer services such as financial advice and investment guidance, which Bitcoin cannot provide.

It is reasonable to assume that more and more of the traditional banking system will be digitized in the future. However, it is unlikely that Bitcoin will manifest this digitalization. As I mentioned earlier, I do not believe that Bitcoin will really establish itself as a means of payment in the future. It is much more likely to follow the status of gold as an investment asset. It appears that the so-called Central Bank Digital Currency (CBDC) will win the race as electronic money. From my perspective, this is extremely dangerous as it could potentially allow for total surveillance of the population, but that is a topic for another discussion.

Mining efficiency and green energy: Bitcoin is driving technology forward

It is clear that with measures against climate change, the electricity used for Bitcoin mining is becoming greener. An article from bitcoinmagazine.com (Why Proof-Of-Work Is A Superior Consensus Mechanism For Bitcoin) describes that mining efficiency has increased by almost 5% over the past seven years. In Q3 of 2021 alone, the share of renewable energy used for mining increased by 3%. It can be assumed that this share will drastically increase in the future.

Bitcoin mining is driving the development of energy-efficient systems.

The reward paid out in Bitcoin to miners decreases every four years, a process known as halving. From this perspective, it is in the interest of operators to keep their machines energy-efficient enough to remain profitable. Specifically, this means that, assuming constant electricity prices, machines must consume half as much energy every four years to remain equally profitable. (I am aware that this example does not take into account various other factors that can also have an impact on profitability.)

Saving electricity through bans: Is that a good idea?

Of course, it is possible that countries like Switzerland, the United States, or Germany may decide to ban Bitcoin – countries that are aware of climate change and want to ban the culprit. I strongly doubt that this would accomplish much. It is more likely that these countries would shoot themselves in the foot by doing so. Financial centers like Switzerland or the United States, countries with reserve currency status, must inevitably dance the tango with new digital assets. Only in this way can they try to maintain their status over the next decade. According to statistics from statista.com (Distribution of Bitcoin mining hashrate from September 2019 to January 2022, by country) most Bitcoin miners are located in the United States and a ban would have massive repercussions. A ban in Switzerland, on the other hand would have very little effect on electricity consumption.

What happens when the Bitcoin mine is depleted?

It is well known that there will only ever be 21 million of these digital coins in the history of Bitcoin. The whole blockchain only works because miners compete to add a block and thus earn a reward. Since the number of newly generated bitcoins is limited, it will inevitably lead to a significant drop in the reward for mining. With the goal of pushing the time of the last newly generated coin as far into the future as possible, the block rewards are halved every four years. The blockchain generated 6.25 new bitcoins every 10 minutes as a reward in 2021. By 2024, the reward will be reduced to 3.125 bitcoins.

In the year 2140, there will be no more new Bitcoins.

As there will be no more miner rewards for recording transactions at some point, one could conclude that the Bitcoin blockchain will no longer be maintained, or that malicious miners will surpass benevolent ones. With 51% computing power of the malicious miners, they would have control over the blockchain. However, the bad actors must first overcome the following possible measures.

Transaction fees become profitable for miners

However, in addition to the miner reward, transaction fees are also paid out to the miners. Therefore, it is now believed that transaction fees will be sufficient incentive for well-intentioned miners. Moreover, energy efficiency will increase enormously in the future. This inevitably leads to lower costs for operating the miner machines. If the miners pay less for the maintenance of their machines, smaller rewards are sufficient to continue operating the business with the Bitcoin blockchain.

During my research, I came across some more or less absurd possibilities for saving the Bitcoin blockchain from a possible collapse. These should be enjoyed with caution. In general, it should be noted that Bitcoin has only existed for 14 years and the scenario of all bitcoins being mined will not occur for over 100 years. We are all aware of how the world and its technology have developed in the last century. Accordingly, the world will not be the same in 100 years.

Migration to the Ethereum blockchain

In addition to the native cryptocurrency BTC, there is also the so-called «Wrapped BTC». Wrapped BTC is a cryptocurrency (token) on the Ethereum blockchain that represents Bitcoin. There are theories that in the event of an exit by the miners, all Bitcoins would then fully migrate to the Ethereum blockchain. In such a scenario, Bitcoin (i.e., Wrapped Bitcoin) would continue to operate with the Proof-of-Stake consensus algorithm.

Personally, I find such an idea absurd, as it would result in a major advantage of Bitcoin being lost through such a migration. As described above, it is precisely the Proof-of-Work algorithm that makes the cryptocurrency so decentralized. A migration to the Ethereum blockchain would result in a loss of some of this decentralization. However, Wrapped BTC is still traded at the same price as BTC, sometimes even slightly higher. From my point of view, this is not understandable, as it is precisely Proof-of-Work and the resulting high decentralization that contributes to the real value of Bitcoin.

Fun fact: When native BTC is transferred to the Ethereum blockchain, they cannot be converted back to their original form in the future. From my perspective, this is equivalent to a destruction of the transferred Bitcoin, as they would then only exist as an ETH token and no longer as native Bitcoins.

Governments take over the miner’s dirty work

Other theories suggest that in this scenario, governments will step in and start mining in the interest of the population to maintain the digital currency. After all, banks are also regularly bailed out because they are «too big to fail», right?

I see things differently when it comes to Bitcoin. The main argument for Bitcoin is that the currency is independent, and it should remain so. If the choice is between governments controlling Bitcoin by owning the majority of the mining, or the downfall of Bitcoin, then it should go down. Bitcoin should remain independent forever, otherwise, the cryptocurrency will have no reason to exist.

Also, it’s important to keep in mind that such a scenario will occur in over 100 years. I assume that by then, we will still have many other problems to deal with.

How quantum computers could threaten the fundamental value of Bitcoin: Weaknesses and challenges of the cryptocurrency in the quantum era

Quantum computing is on the rise. The new type of computers use quantum mechanical phenomena such as superposition and entanglement to perform operations. Conventional computers can only represent two states, 0 and 1. Quantum computers, on the other hand, use quantum bits, or qubits, which can represent a superposition of both states. This superposition allows the new computers to solve certain problems in parallel, making them incredibly efficient.

Currently, existing quantum computers are still in their infancy, and maintaining the state of atoms for calculations is very challenging. Therefore, the novel computers have not yet revolutionized computer science. However, experts believe that this will be the case within 5 to 20 years.

In connection with Bitcoin, however, this revolution poses a serious problem. The most widely used encryption technologies cannot be cracked even by the best traditional computers. It is estimated that the world’s best computer would require several hundred or thousand years to decrypt a value. Bitcoin uses the so-called SHA-256 hashing function, which ensures that all transactions cannot be altered retroactively. It is assumed that in the future, quantum computers will be able to crack these values in a matter of hours and thus manipulate the blockchain.

Post-quantum encryption: a way out

In addition to the SHA-256 encryption algorithm used by Bitcoin, there are now also post-quantum encryption algorithms that cannot be cracked by quantum computers later on. I believe that it is only a matter of time before quantum computers become mainstream and spread around the globe. Therefore, it will be necessary to migrate the Bitcoin blockchain to a post-quantum encryption algorithm, which as I described above, is not very easy. The fact that such a change is not backwards compatible and therefore a hard fork will be necessary does not make the situation any easier. Inevitably, Bitcoin would continue to exist as a new cryptocurrency. The old Bitcoin SHA-256 blockchain would probably be doomed as it would no longer provide security.

Conclusion on the real value of Bitcoin

Bitcoin is here to stay. It is obvious that the digital currency offers advantages that no asset has been able to offer until now. These advantages form the real value of Bitcoin and they will be indispensable in the future. In the unfortunately recurring political tensions, the currency also offers a secure investment. With the high volatility of the cryptocurrency, many people get nervous when they hear the words «security» or «secure investment» in connection with it. However, the increasingly established acceptance of Bitcoin will reduce its volatility. I believe that in the future, Bitcoin itself will no longer be subjected to such extreme bubbles when the general population better understands its value. I described the last bubble in my article Bitcoin Collapse – When Is This Bubble Going to Pop? before it burst. It was simply too obvious that something was wrong with the markets.

Besides the advantages, there are also risks and disadvantages such as high energy consumption, the threat from quantum computers, or the depletion of mining resources. As global technology continues to evolve at a rapid pace, it is only a matter of time before solutions are found and measures are taken. Humanity has already demonstrated this more than once in the past.