Bitcoin may not be dead, but it needs a new hook

Bitcoin is dead!
Okay, that’s an April Fool’s Day joke.* Or a prediction that’s been made scores of times before () and hasn’t come true. But today it’s maybe, kind of, actually only a half-joke. Because researchers at Google released a paper this week explaining in depth (without detailing the exact steps) how a quantum computer could, as soon as within three years, defeat bitcoin’s encryption and render the network extremely vulnerable to malefactors.

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The people at Google expect that quantum computers could effectively crack any current public encryption method by 2029 – yes, in three years. This is something our Carter Pape reported on yesterday from the RSAC conference in San Francisco. Security experts are basically telling banks and everybody else they need to get going now on this. While it was compared to the Y2K hoopla from a quarter-century ago, anybody who’s old enough to remember that can plainly see the difference. Y2K was just a weird coding bug where computers weren’t coded to handle years starting with a 20 rather than a 19. By the time the 20 dates started appearing, the bug had been overwritten. Nothing happened.

This is very, very different. Without getting into the technical details, suffice it to say that quantum computers can do things standard computers can’t. The computers we’ve all grown up with execute commands in a straight line one after another. Quantum computers can handle multiple commands at the same time, to the point where a quantum computer could crack current encryption in a matter of minutes. Left unaddressed, this would mean that virtually every piece of information sitting on every hard drive everywhere would be vulnerable to hackers.

When might this become reality? Anywhere from three to 30 years, depending upon who you listen to. If you want to bet on 30 years go ahead. But that’s an awfully risky bet.

What all this means for bitcoin is fascinating. The Google researchers went into great depth (the paper is 57 pages) to show how an attacker armed with a quantum computer could invade bitcoin’s network, break the encryption, and steal gobs and gobs of bitcoins. And while the quantum computer is the important part here, the way bitcoin’s network is set up also plays a key role and gets to the point I’ve been making about products versus technologies. 

Apart from the potential to make scads of money off wild rallies, the main attraction of bitcoin is the idea that it is a different kind of money that is not controlled by any single group. There is no central bank of bitcoin. The network operates as a program running across myriad independent computers. Everyone contributes computing power, but nobody controls it. And every transaction is final. There are no chargebacks in bitcoin.The entire attraction of bitcoin rests upon that premise. And that will be a critical problem if somebody can manipulate the program into draining wallets and stealing bitcoins. The whole value proposition goes poof, literally and figuratively. 

Sure, technically, fraudulent transactions could be rolled back but doing so would be a bigger assault upon bitcoin than some burglar draining wallets. Independence is bitcoin’s product. Apart from the potential to make scads of money off wild rallies, all bitcoin offers is that independence. Take that away and nothing is left. That’s the real threat of quantum computers, that to rewrite bitcoin’s code in a way to protect against these new attacks might require making it look more, well, like the traditional financial system.

So, what makes a crypto product attractive then?

If you look at the crypto legislation fight through the product vs. technology lens, then you start to realize some things. 

Crypto products, on their own, are not particularly popular. Yes, there is the potential to make scads of money off wild rallies. There is also the potential to lose scads of money in wild collapses – getting rekt, in the parlance. A certain type of person is very attracted to that dynamic, but for most people those two things tend to nullify each other. Which is why most people you know have nothing to do with crypto. Which is why Coinbase’s key measure of its retail customer base, its monthly active users, has not grown in five years. 

What would make a crypto product more attractive? The ability to deliver real dividends on a regular basis regardless of market conditions. You know, the kind of things banks have offered for centuries. Interest. Yield. And this explains why the fight in Washington is so important for the crypto companies, as our Claire Williams reports this morning. In terms of products, banks have ones that are more attractive than crypto companies. So while the fight has been portrayed as the tech bros disrupting the staid, boring bankers, that framing gets it backwards. It’s the crypto companies that need this much more desperately than the banks.

Crypto companies need to be able to offer yield if they want to attract anybody outside of the typical crypto demographic. The banks just don’t want to have to compete for deposits. They don’t want Coinbase or Crypto.com or any of them blasting out ads touting 4% or higher yields on deposits, or balances, or whatever language they use to fit inside the regulatory sleeve. You can make 4% parking your money with us, repeated five or six times during the ad breaks for a Knicks-Celtics game, will get people’s attention.

For a consumer, there really isn’t a more attractive money product than one that makes you more money. Most people don’t give a fig about how bitcoin works, or the libertarian freedom fever dreams. They want money that makes them money, in good times and bad. This is what the crypto firms have finally figured out, and it’s why they so badly need the yield thing.

*If you want to see an all-time classic April Fool’s Day joke, watch this 1957 BBC report on the spring spaghetti harvest.