This Is What’s Really Going To Happen To Bitcoin

By: 08.09.12

Every time I bring up Bitcoin, it tends to draw ire for how dismissive I am of it. So I thought I’d take a moment to explain why Bitcoin is a fad. And it is a fad.

Here is what will happen, and sooner rather than later, to Bitcoin:

  • Law enforcement will figure out a way to track it.
  • And, more importantly, somebody will breach the program in some fashion.

And this will completely destroy Bitcoin’s value.

Anybody who thinks otherwise needs to consider the economics of the situation. There is the potential to make a lot of money, or at least steal a lot of drugs. So there are a lot of people working on compromising Bitcoin and eventually somebody’s going to pull it off.

I should note here I’m not questioning the basic principles or technology behind Bitcoin. In fact I think it’ll be pretty useful and even more common as time goes on. You’ll never get a paycheck in Bitcoins, but there’s simply too much market incentive for a semi-anonymous digital currency to not exist. That said, Bitcoin won’t be it. This future currency, whatever it is, is going to thrive on a total lack of publicity. It might even be centrally administrated by someone. But Bitcoin itself is a target.

Most governments, even nominally free ones, don’t want an untraceable digital currency. It’s not because of drugs, it’s because of taxes. Tax enforcement is going to start getting weird over the next few decades, with GPS trackers in your car to enforce road taxes, more taxes shifting over to physical property, and God only knows what else. They don’t want to make it worse.

So there’s a powerful incentive to figure out who has these Bitcoins, where they’re spending them, and why while this is still a minor trend than absolutely everywhere. The FBI has already filed a concerned memo over who might be using Bitcoin and this is just what we see publicly.

The main problem is that the assumption that Bitcoins are anonymous is just that — an assumption. And it turns out not to be the truth: All law enforcement has to do is figure out what addresses are generated by your wallet and they know all of your transactions. Is that hard? Sure. Then again, these tend to be highly motivated people. There’s a reason Silk Road is built around Tor. And it’s not like they can’t just simply monitor sites that exchange Bitcoins for other currencies and see who gets cash for what.

This is the first way Bitcoin will suddenly be worthless. Once some drug dealer trading it in Bitcoins is tracked down, it’s going to make other drug dealers skittish. Demand will drop… and Bitcoins, already pretty volatile, will drop with it. It may not kill Bitcoin entirely but it will kill a large part of the appeal.

The second one is really pretty obvious. Bitcoin is built on cryptography, and there is no infallible cryptographic system. Add to that that there’s the potential to make a lot of money before anybody catches on. And on top of that, there’s a human involved. There’s a way in. It may have even been found already. It might involve a program that just sits and records your wallet addresses, it might be something that grabs your key, hell, it might even be a brute-force attack.

Don’t think there aren’t organized crime networks and governments, forget black hats, working on this. But once it happens, Bitcoin advocates are going to discover there’s something a government backed currency has that Bitcoins don’t. If you commit wire fraud in the US, the FBI goes after you. If you forge currency, the Secret Service is coming for your ass. You forge or steal Bitcoins and… uh… a few Redditors will start a Scumbag Bitcoin Counterfeiter meme.

That’s the problem. Legally speaking, Bitcoin are the same thing as a stack of gift certificates to governments. It’s technically theft, but if somebody steals your Bitcoins, you have no liability protection, you have no FDIC protecting your deposit, there is literally nothing in place to protect the consumer. All the self-proclaimed libertarians who whine about this stuff will change their tune pretty fast once they’re out a few hundred bucks.

All it will take for Bitcoin to be worthless is one breach. Once the community realizes that it could lose all their coins in an instant, the value will drop like a rock. And make no mistake. It may not happen tomorrow, it may not happen next week, but it will happen. And once it happens, that’s the end of Bitcoin.

Not the end of digital currency, or even the software itself: I’m pretty sure some sort of digital currency will evolve out of Bitcoin. But in order to learn the problems, they first have to be found, and they have to be found the hard way.

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