#26: Bitcoin Without a Fight

Dial the clock back by thirteen years. It’s the spring of 2012. Bitcoin is trading at five dollars a coin. You ask me “what would the world look like at $100,000 a coin?” When Bitcoin is 20,000 times more valuable? It’s unimaginable. Maybe the financial systems of some small countries have failed, and been taken over completely by Bitcoin. Surely it has become a popular currency. You ask me “what would the world look like when the US Government officially starts keeping a Bitcoin reserve?” Again, it’s unimaginable. Surely there’s been a big fight? A great showdown between Bitcoin and the almighty dollar? And somehow, scrappy Bitcoiners came out on top?

This week, the President of the United States has promised to make America the “Bitcoin superpower of the world” and established a Strategic Reserve that is never to be sold. I’ve been thinking a lot about this, not just because it’s amazing news for Bitcoiners, but because the world has turned out surprisingly differently from what Bitcoiners expected ten or fifteen years ago.

Setting the Scene

In the late 2000s, American institutional power crested an all-time high. The country rallied around the flag after 9/11, the government expanded significantly, and wars in Iraq and Afghanistan made clear that America would defend its interests, no matter what. The Subprime Mortgage Crisis of 2008, resolved by a $700B+ bailout for banks, once more drove the message home: true free-market economics be damned, American institutions must survive.

But the Subprime Mortgage Crisis showed millions of Americans that the institutions had, in some way, failed. And few people were satisfied by how it resolved: on the left, people thought the banking and mortgage industries hadn’t been punished enough, and on the right, people thought that the government had failed to uphold the free market. Occupy Wall Street on one hand, and End the Fed on the other.

Bitcoin as Political Instrument

Bitcoin launched into this uniquely charged political zeitgeist, right around the very peak of the financial crisis. Many people felt screwed by the system. The idea of using Bitcoin for savings and financial transactions — be your own bank! — sounded like a cool way of sticking it to the banks. But Bitcoin went much further: giving people trustless, decentralized money was a great way of sticking it to the central banks. Many early Bitcoiners saw a vision, far in the distance: if you can separate money from the state, then that takes away a core power of the state.

Satoshi himself was careful to be politically neutral, though his libertarian, cypherpunk¹ leanings shone through. But practically, many early adopters had very strong views on (monetary) politics: Bitcointalk in those days had a lot of discussion about Ending the Fed, anarcho-capitalism, and generally pushing back on the state in favor of individual privacy and liberty. Just by being a powerful tool for political causes, Bitcoin was necessarily political.

Surely Governments Will Try to Kill It?

In the long term, weakening the monetary autonomy of states is a tremendous threat to them. Back then, I wondered if Bitcoin could survive: in those days of strong American institutions, it seemed only like a matter of time until the statists in charge would nip this little experiment in the bud.

In May 2013, the US killed Liberty Reserve, an offshore centralized digital currency service — imagine PayPal without KYC/AML.² The CEO got 20 years in prison for money laundering. At the same time, governments everywhere seemed to be slowly cracking down on cash (that they issued!) just because it’s not traceable.

Those were ominous times. After the big MtGox crash of early 2014, the price went sideways for three years. High-profile early Bitcoiners quit. Simple legal questions, like whether a Bitcoin wallet operator was a money transmitter, were unresolved. The US financial system is so rife with opaque regulations that many early Bitcoiners were worried that they were doing something that would one day be deemed illegal.

Even years later in 2017 and 2018, I remember speaking with people who were sincerely worried about one day being persecuted for their Bitcoin evangelism. They saw the totality of what large-scale Bitcoin adoption implied, and the challenge it would pose for governments and their fiat currencies. It was a common view that there was a Big Fight ahead, that one day the regulators would wake up from their slumber and fire every weapon they had.

Surprise!

The Big Fight never came. Regulators slowly clarified the important questions, and the law turned out to be favorable. Cryptocurrencies became mainstream via several hype cycles of ICOs, NFTs, and memecoins. Those hype cycles got a lot of people interested, and created a “pro crypto” political constituency. Most of these people had very little in common with the Bitcoiners of 2012, but that didn’t matter — they thought the coins were cool,³ and they had the right to vote.

As crypto became a voting bloc, the Big Fight became more and more unlikely: shutting it all down would really require bipartisan consensus, but that wasn’t going to happen — if one party rejected this constituency of voters, the other party would welcome them.⁴ The Biden administration rejected crypto voters, pressured the industry under Operation Chokepoint 2.0, but Trump took the crypto voters as allies, and today we have a Bitcoin Strategic Reserve.

American Institutions Have Changed

But the success of Bitcoin is not just about voting bloc dynamics. Over the last fifteen years, the formerly strong American institutions have also pulled back significantly, and created an opening of permissibility for Bitcoin to succeed. Things have changed:

• Covid: the Fed pulled out all the stops, printed 3 trillion dollars, and caused significant inflation. If they’re willing to do that, then how sacred is the dollar?

• Defense: the US has pulled out of its wars, and pursued isolationist foreign policy.

• Government: there is widespread dissatisfaction among Americans with their leaders and institutions. Donald Trump has been elected President twice on the articulation of that dissatisfaction, and the promise to shake up the system.

• Trust: the trust that Americans have in their institutions and authority figures is at an all-time low. People don’t trust their doctors or schools, let alone banks.

The last decade has been a time of relatively weaker institutions. Donald Trump’s promise in his first term was to drain the swamp and shake up Washington. Biden’s term didn’t change American institutions much one way or another, and Trump’s second term so far has been characterized by mass firings and dissolution of certain government agencies.

Today, there isn’t as much willpower to defend the institutions as there once was. If Bitcoin had gone mainstream in 2003, the Bush administration would’ve probably tried to nuke it just like Liberty Reserve. But Bush-era conservatives would be surprised by politics today in general. Imagine a cabinet official in 2004 openly talking about the dollar losing reserve currency status and hedging against it!⁵

Speculation De-Fanged Bitcoin

Early on, there was a common belief that Bitcoin would be viewed as a threat, and banned in many countries. It would be a slow grind for expansion over time, working its way up from overtaking the weakest financial systems. But in reality, almost no country has truly banned it.⁶ To the surprise of many early Bitcoiners, governments mostly didn’t care.

What had happened was that all the speculators came in, and changed the tone. They made it much easier for governments to get comfortable with it. Early Bitcoiners were talking about buying groceries with Bitcoin, using Bitcoin ATMs, etc., framing it as an immediate fiat replacement.⁷ But people buying memecoins, or even saving Bitcoin as “digital gold” aren’t threatening the dollar in the same way.

If the vibe of crypto had stayed like the early days — people talking about being their own bank and separating money and state — it might have faced more scrutiny.⁸ But instead, the crypto community was overrun by people saying things like “my dentist bought a Lambo after making 100x on Dentist Coin”. This apolitical appearance of harmless get-rich-quick-schemes is much easier for governments to ignore.⁹ Ironically, this made it easier for Bitcoin to succeed as a political project long-term.

The Fork in the Road

Looking back, probably the most important thing for Bitcoin was that Donald Trump won in 2016, and Hillary Clinton lost. Clinton was a serious statist who would’ve taken a hard-line pro-American-institution position on every issue. Donald Trump, by contrast, was tapping into an electorate that wanted to shake up the institutions.

While Trump made some disparaging comments about crypto during his 2016-2020 term, his administration mostly left crypto alone. By contrast, Clinton’s views on crypto remind me more of Elizabeth Warren’s views, who has been one of crypto’s fiercest critics, always pushing legislation to hobble the crypto markets.

2016 was probably the last time that it was really possible to kill Bitcoin. It ended the year at ~$800 a coin, a $15B market cap. It was small, hadn’t run through a public hype cycle, and didn’t have many investors who would stand up for it. A serious attack from Clinton-Warren-Gensler types, something on the order of Operation Chokepoint 2.0, could’ve killed Bitcoin adoption in the US, and maybe even pushed some international consensus among G8 Countries.¹⁰

Where Bitcoin Goes from Here

Bitcoin’s position finally seems secure. At long last, its market cap dominance has been steadily growing. There’s no longer the risk of getting “flippened” by higher-tech alternatives; the positive feedback loop of confidence in Bitcoin is winning. Regulatory uncertainties have been blown away, and Bitcoin is now positioned favorably to and distinct from all other cryptocurrencies.

It’s probably too big to fail now. It has institutional support at the highest levels, and will grow into an even stronger position by the end of the Trump presidency. Four years from now, it will be too deeply intertwined with the financial system and political interests to undo. The possibility of the eventual Big Fight now seems remote.

In some ways, it looks like an easy trade. Bitcoin is “expensive” today relative to the past, but it’s far more de-risked than it has ever been before. For once, the future is somewhat predictable. It seems like all the obstacles have been cleared, and it’s a straight shot for digital gold to overtake physical gold — that’s a 12x from here.¹¹

Reflections

• When I was looking at Bitcoin early on, I was 19 or 20. I viewed the positions of American institutions as fixed, because they were all I had ever seen. It turned out these positions weren’t fixed at all. Over the course of ten years, things can actually really change. If I had been a little older and seen more change, maybe I would have understood this at the time. This is my biggest lesson.¹²

• Early Bitcoiners viewed the state as a bipartisan, self-interested monolith, that they would eventually conflict with. It turned out that the state is not monolithic, and that a controversial idea can succeed when it becomes a wedge issue, with different parts of the state on either side of it.¹³ Technologists stereotypically have little patience for the political process, but it turned out to work fine.

• Bitcoin never had to go underground. Bitcoin’s decentralization never really got tested in practice — most activity is still via exchanges. Perhaps just having a credible defense is good enough to never see it get stressed? People say “you can’t ban bitcoin, it’s decentralized” and so nobody really ever tries.

• Speculators not only brought massive amounts of capital to the ecosystem, but also took the political edge off its appearance, without compromising the long-term vision. Early Bitcoiners worried about many obstacles to adoption: is it not private enough? Will it be illegal? What if people don’t want to be their own banks? But almost everyone underestimated how easily Bitcoin could go mainstream: give people a way to get rich, and they will move mountains for you.

To a meaningful extent, Bitcoiners have won. And it all happened without a fight. The chance of getting to this point seemed so small thirteen years ago. But connecting the dots looking backwards, the simple market dynamics at work did not leave much up to chance. Perhaps the odds were always very good. The power and elegance of a system bootstrapping its own value just from provable scarcity seems to have been, and perhaps still is, undervalued and misunderstood.

1. In the 1980s, technologists noticed that personal computers made strong encryption available to ordinary people, and that encryption could be used to preserve their privacy, and thereby their liberty. These were the cypherpunks, and their political activism was instrumental in creating the free and open internet we know today.

Strong encryption underpins the free and open internet. However, strong encryption was historically a military technology. It was on the list of controlled exports, which created legal hurdles to deploying it on the internet. Early cypherpunks filed a number of lawsuits and publicity stunts that led to strong encryption slowly becoming legally available to consumers. This took a long time: it was 1996 by the time that Bill Clinton signed the executive order to formally remove commercial encryption technology from the munitions export list. Had the cypherpunks not put in the legal legwork, the world might look very different — and in my view, worse — today.

Beyond freedom of speech, the cypherpunks turned their eyes to the freedom to transact. They created early digital currencies like ecash, b-money, and bit gold. Bitcoin is a direct descendant of their early efforts.

2. As a sign of how much has changed, you might say this is not too different from some shady crypto exchanges today that have lax or absent KYC/AML requirements.

3. And they thought the coins would make them rich! (And for many of these early adopters, that’s how it turned out!) Never underestimate the political power of a strong financial incentive.

4. Early Bitcoiners recognized this game-theoretic dynamic would play out among nation-states — if one country is opposed to Bitcoin, another can benefit from permitting it — but it hadn’t dawned on me that the exact same dynamic would play out in US politics!

5. Not to mention that some of the recent tariff policy is so aggressive that some commentators think these are moves to prepare for de-dollarization. Again, it’s noteworthy to me how much the Overton window has shifted regarding the sanctity of the dollar.

6. China is the big example where crypto has been nominally illegal for a decade, but it was simultaneously home to an absolutely massive crypto scene. This scene faced some crackdowns in late 2021, and has been smaller since, but it’s still a large market participant.

7. Back in the day, everyone knew the three-step process toward Bitcoin replacing fiat currencies:

1. Store of value

2. Medium of exchange

3. Unit of account

It seems that Bitcoiners overestimated how quickly this process would occur. People thought of currency as something actively used to transact, so the 2014 era was littered with Bitcoin ATM startups and other clunky attempts to transpose fiat use-cases into Bitcoin. It turned out that the Store of value step would take many years, but it’s also much less threatening to states: simply pitching Bitcoin as “digital gold” and not anything more, was the right move.

8. Another minor, but important “de-fanging” aspect is that Bitcoin doesn’t implement privacy. All activity is public and perfectly traceable, which is great for any state. There are some proposals and methods for adding more privacy to Bitcoin, but they’re a long way out. Again, a worse-is-better mechanic proved successful: privacy coins like Monero, ZCash, etc. have drawn much more scrutiny and are less available on major exchanges. It turned out that a compromised approach was much more effective for getting governments comfortable than a hardline libertarian-privacy technology from day one.

9. More surprisingly, with each hype cycle there was a wave of crypto-related fraud, but little of which was ever prosecuted. Not only did governments not really perceive crypto as a threat to monetary autonomy, they cared so little that they didn’t bother going after any but the most brazen ICO scams. I suppose the government turning a “blind eye” goes both ways.

10. By the time that the Biden administration ran OCP2.0, it was of course already too late. Bitcoin adoption was too widespread, and the network effect too powerful. When Bitcoin was very small in the early 2010s, it was probably possible to kill it just by hobbling adoption such that its network effect would never really start kicking in. Even then, some people would’ve still used Bitcoin. Perhaps adoption would’ve just been slower.

11. Bitcoin market cap at $1.7T, Gold market cap at ~$20T.

12. Cue the old adage that people overestimate what will change in two years, and underestimate what will change in ten years.

13. Perhaps a big lesson here is that interacting with “politicians” or “regulators” is not interacting with one large stereotyped group, but with individuals who are less ideological and more malleable in their views than the group as a whole.