May 4, 2021

Who You Gonna Trust? – China?

Andrew D. Ellis avatar Andrew D. Ellis
Bitcoin and China

“If you want to beat the S&P 500, start thinking of the index as a filter and not a benchmark. It’s the starting line; not the finish line.” Andrew D. Ellis, Founder, ThinkingLonger, LLC

In an earlier post about China and their potential dominance of the machinery that supports the Bitcoin universe, I cautioned about the role that will ultimately be played by Bitcoin miners. Right now, the system automatically pays miners for their efforts by awarding them Bitcoins. This will end when there are no more Bitcoins to be created (approximately 21m). But, when these payments end, who will manage the system? What are they going to charge? Who will regulate them? China? Certainly not the United States which is home to only 3% of the Bitcoin miners in the entire world.

But, there’s more.

One of my favorite writers at LinkedIn, Patrick McConnell, points out that the Bitcoin system, from its inception, always assumed that there would be a needed a trusted third party and that Bitcoin could never be a completed autonomous system. Quoting from Nakomoto’s Original Paper, he points out that:

“Transactions that are computationally impractical to reverse would protect sellers from fraud, and routine escrow mechanisms could easily be implemented to protect buyers”

From this one sentence, McConnell extracts the essence of the problem. Remember, an escrow is “a financial and legal agreement designed to protect Buyers and Sellers in a transaction. For a fee, an independent third party holds payment until everyone fulfills their responsibilities in the transaction.”

McConnell draws the inevitable conclusion:

So, in order to complete a two-way transaction, in Bitcoin, an independent third party is needed to ensure both parties comply with their legal obligations!

So, the question is, when there are no more Bitcoins to mine, and the need for an escrow party becomes plainly evident to all participants, and the miners need to get paid to manage the system, and the electricity bill has to get paid to operate that system, what entity is going to manage those systems, and control those escrowees and pay those expenses? Duh! The only player big enough to serve these functions is a government, and it has to be a large government with the resources and power to assume those functions.

It doesn’t take a mathematician to see that 82% of all Bitcoin mining occurs in authoritarian countries. And, 75% of it occurs in China. If you think that the Chinese are not going to assert their power over activities going on within their own borders that constitutes an alternative financial system that is independent of the United States, you’re ignoring the future. In fact, the biggest monetary shift in the history of the world is happening right before our eyes. Don’t tell me about safeguards and protocols. All of that comes to an end at the point of a gun. If you think that your “money” is safe in the hands of authoritarian governments, think again (and, by the way, have I got a bridge to sell you).

Distribution of Bitcoin Mining Hashrate (by Country – April 2020)

Bitcoin Mining Hashrate