Investors in gold need not fear that bitcoin will replace it as the preeminent global store of value.
That is the implication of a recent study by Eric Budish, a professor of economics at the University of Chicago. The National Bureau of Economic Research published the paper—“The Economic Limits of Bitcoin and the Blockchain”—in June.
Budish, in effect, argues that bitcoin is destined to play no more than a “bit” role in the global monetary system because, if it were to grow ever more significant, it would become increasingly vulnerable to an attack that could destroy much if not all of its value.
Whether or not the fear of such an attack has played any role, however, there is no doubt that bitcoin is in a severe bear market. From a high near $20,000 late last year, the cryptocurrency fell to below $6,000 in late June—a drop of nearly 70%. Though bitcoin has recovered over the past month and now trades for more than $8,000, it is still nearly 60% below its all-time high.
Nevertheless, bitcoin devotees continue to enthusiastically predict that it will someday replace gold to become the global store of nongovernmental monetary value. That would represent a huge growth in the bitcoin market, since the total global stock of gold—around $7.5 trillion, according to the World Gold Council—is more than 50 times greater than bitcoin’s total market value.
Why would a much larger bitcoin be more vulnerable? Budish, in an interview, answered that the incentives that currently protect bitcoin from an attack assume that the costs of maintaining the network are greater than the value of attacking it. If the relationship is reversed—if an attack is worth more and maintenance costs fall—bitcoin would be vulnerable.
It’s helpful to review the costs required to maintain the bitcoin network. Its integrity depends on a large, anonymous, and decentralized collection of participants verifying all transactions, which in turn depends on those people having a huge amount of computing power and ample electricity (currently 0.3% of total global supply, by one estimate). Budish estimates it now costs $100,000 every 10 minutes to maintain the bitcoin network.
What is the value of attacking bitcoin? It depends on who is doing it. To a speculator with a large short position in bitcoin futures, the value of attacking is the profit he would realize if bitcoin’s price were to plunge. In such a case, calculating whether bitcoin is vulnerable to attack is relatively straightforward.
To a saboteur aiming at monetary havoc—think North Korea or Iran—the value of attacking bitcoin is harder to quantify. A good estimate might be bitcoin’s total market value, but even that might underestimate what an attack would be worth. Budish half-jokingly points out that the substantial cost of an attack would be “a lot cheaper than nukes.”
So long as the cost of mounting an attack is bigger than the benefit someone would get from doing so, bitcoin should remain viable. This has been the case so far…