The Breakdown - The Ghosts of Bitcoin's Future

Episode Date: December 31, 2024

Part 3 of a three part end of year special exploring where we've been, where we are, and where we're headed in Bitcoin and crypto more broadly. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? We are back with another breakdown end of year episode. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly. slash breakdown pod.

All right, friends, this is the third and final episode in this holiday-themed series. For this episode, we are talking about the ghost of Bitcoin's future, and that means we are zooming into the far ahead, or at least farther ahead than the Ghost of Bitcoin's present episode. I would characterize the content here less as predictions and more as thought experiments about how the future could play out. And you will see there's kind of a variety of level of conviction or likelihood of these but we'll get into all of that as we dig in. I will say that I believe that we've never been

in a better position to explore this far out. Things that once seemed like a pipe dream, or at least still very, very much deep in the future and conditional upon a lot of things working out, now seem on much more solid footing. So here's a fun one to start. Have we seen the end of the days of five-figure Bitcoin? Now, of course, I'm recording this as Bitcoin has greater down to 93,000 over the last 24 hours, so I don't literally mean right now. But there is still a very different sense from the other side of 100,000 about where the future price of Bitcoin lies. The two sort of consensus price targets for Bitcoin are either one, flipping the market cap of gold, or two, just a clean million dollars per BTC. But maybe the more interesting question is where

we bottom out in the future. It feels fairly possible that the age of 80% drawdowns and brutal crypto winters is an artifact of the past. Now, on the one hand, I feel like this makes sense to me, just because the presence of such a different and diversified investor set seems like it has to make Bitcoin more subject to general market forces rather than its own cyclical patterns, but at the same time, I'm not totally ready to call the end of the four-year cycle, just because we haven't actually seen yet how much the four-year cycle forces win out over the institutionalization forces, or vice versa. It is a very important. It is a very important. It is a highly likely to me that Bitcoin will still remain volatile and cyclical, and probably more so

than other assets in the traditional system. It's just will it be as volatile as it was before when it was fully outside the system? Part of the reason to think that these huge drawdowns might be in the past is that if you look at last cycle, for example, the most significant drawdowns were triggered and sustained by a massive unwind of credit. Crypto firms had lent to each other at such a huge scale and with so little collateral that it caused systemic risk to ripple through the entire industry. The cycle before that has a number of competing explanations. ICO projects selling their Bitcoin to cover expenses, the Plus Token Ponzi scheme dumping Bitcoin they raised from victims. But in both of these cases, the size was relatively tiny compared

to where we are today. Plus token at its height was less than $3 billion, $3 billion, $3.0.3 billion, who were likely patient zero of the 2022 collapse, owed creditors $3.5 billion. It's difficult to estimate the size of the full 2020 credit unwind, but it seems likely that it was less than 50 billion in total? Compare that to the Bitcoin ETFs, which have gathered almost 120 billion in AUM this year. The industry is starting to be too big to be blown up in quite the same way. Beyond that, at least at this stage, we're not seeing the same warning signs. Even before the failure of the crypto lenders, people were asking where the yield is coming from. There were persistent rumors about absurdly risky loans long before we learned that money was being borrowed on reputation

alone. Ponsonomics was a meme long before the Luna collapse. This cycle certainly has its segments of degeneracy, but it is at a categorically different level to the previous cycles. Asset collapses aren't caused by selling. They're always caused by a leverage unwind, and the signs just aren't there. Theoretically, the poster void for irresponsible leverage this time around is Michael Saylor. His firm is carrying around $7 billion in debt against $46 billion in Bitcoin. But the debt is termed out, with the bulk of it not coming due until 2030. The micro strategy in the firms that followed it can certainly get into a tough spot during the next spare market, but they're not likely to dump their Bitcoin in a panic like we saw in 2022. And even if they do,

there are now thousands of trad-five firms salivating at the idea of discounted Bitcoin. Here's what I will say from a real prediction standpoint. We may not have seen the last four-year cycle. But I think that if we haven't, we are in the last four-year cycle that resembles the previous four-year cycles. I think by the time we get through this next one, a full cycle with the presence of institutions, that four-year cycle power will, to some extent, have been broken. What about on the flip side of things?

If Bitcoin continues to push higher over the coming decades, it seems to be that It seems inevitable that it will become a political flashpoint. In previous cycles, Bitcoiners were told they were lucky to have bought Bitcoin so early and that the Crypto Lampos were a joke. In this cycle, wealthy Bitcoiners are being accused of unfairly influencing the election, and unrealized gains taxes are being proposed across the globe. It's inevitable that the conversion of Bitcoin into power accelerates along with the calls to clamp down on the crypto billionaires.

The more focus there is on big wealth divides, like the tech wealth divide that we've seen over the last decade or the Wall Street wealth divide in the decades prior, a Bitcoin wealth divide could be part of that social story. As a counterweight to that, Bitcoin has an extremely broad ownership base, representing a huge number of different types of people. And so it could be that that insulates it a little bit from that sort of rhetoric. At the same time, that also means that any policy aimed at reducing Bitcoin wealth could end up hurting small holders disproportionately. Now, there are a lot of other things going on that are going to be competing for our attention when it comes to massive social upheaval issues. We have increasing geopolitical conflict. We have the looming

challenge of AI and potential job displacement therein. But if we are thinking about realistic scenarios for the perhaps not immediate but not too distant future, some pushback here is not impossible. Speaking of geopolitics, it seems clear that Bitcoin will be a major part of the geopolitical story over the next few decades. While we're likely to see several nation states form a Bitcoin strategic reserve, the more interesting question, frankly, is what happens during the next stage of sovereign Bitcoin adoption. The easy predictions have already been done to death. Bitcoin will be used to settle global trade, at least to some extent. We may even live to see Bitcoin become the global reserve currency displacing the dollar. I tend to think that that scenario is a little less likely,

also due to crypto. I think that a dollar disconnected from the United States in the form of stable coins has very long legs as a continued reserve currency. But of course, there are reasons that Bitcoin will be appealing. Still, what's more interesting to discuss is what the world looks like during a digital gold rush and which countries might come out on top. In previous cycles, you might have been tempted to say that the winning nations in the Bitcoin era would be those with the cheapest energy, and that state-sponsored mining would be the path to national dominance. History, however, hasn't really played out that way. Paraguay never established Bitcoin mining operations to take advantage of their plentiful hydroelectric power, and the nation-states

who have, like Bhutan, are doing it on a scale that doesn't really shift the global power structure. If Michael Saylor has proved anything during this cycle, it's that it's far easier to buy Bitcoin than to mine it. And so then the candidates for the dominant Bitcoin sovereigns become pretty clear. China as a leader in manufacturing, Russia as a leader in commodities, Saudi Arabia as a leader in oil production, and of course, the U.S. as the global hegemon. Unfortunately, the EU as the leader in regulations doesn't quite make the cut. One or more of these countries will eventually realize they're trading their production for depreciating currency. In fact, most seem to have already realized that, but don't quite know what to do with it. The key concept is that the countries that do well in

the Bitcoin era will be those who have a valuable commodity or productive capacity to trade for Bitcoin. There is also, of course, a massive first-mover advantage. The first country to accumulate substantial Bitcoin holdings will likely gain a massive advantage over the coming decades. This is one of the reasons the debate around the U.S. Strategic Bitcoin Reserve is so fraught. Some people are prioritizing the protection of the dollar over the medium term, while others are advocating for a much longer term and structural game plan. Point is, however the next few years play out, it seems as though the next geopolitical era

will be heavily influenced by Bitcoin. One piece of Bitcoin fud that's recently come up more is the risk of quantum computers breaking encryption. Google's release of a new quantum chip earlier in December made this fear much more tangible for many. The chip is the first to achieve what scientists call being below threshold. This means the chip design was able to demonstrate reduced errors while scaling up the amount of quantum compute available. For the first time in the history of the field, there seems to be a viable pathway to achieve useful quantum computing. Now, when they dug in, most experts still believe this is at least a decade away. But then again, a decade is in much time

for a monetary system designed to last a century. We've already had entire fud cycles dedicated to prematurely freaking out over quantum risk, with, of course, the risk factor being that a quantum computer could break the encryption that protects private keys. The reality, though, is that this is a problem that is much bigger than Bitcoin alone. Bitcoin is far from the only thing in the world that uses cryptography. Once quantum computers become real, they would be able to hack into basically any communications network or computer. Think banking networks, energy grids, air transit infrastructure. In other words, believe it or not, even for the most hardcore of Bitcoiners, Bitcoin could be the least of our concerns. The shift to the quantum arrow will come with new quantum.

quantum-resistant and quantum-safe encryption as well. The global effort to upgrade systems will make Y2K feel like a non-event. There are distinct challenges for Bitcoin. It is designed to be hard to update. Now, one would think that saving the Bitcoin network from quantum hackers will be less divisive than changing the block size, but it'll still take some doing. There are some other interesting points of failure. Users will likely need to individually migrate to a new wallet with quantum-safe keys, which would be a gargantuan task to coordinate. There's also the issue of the Satoshi If we assume Satoshi is dead or has intentionally forgotten their keys, the coins would be stuck in a vulnerable wallet. They could serve as an interest in quantum canary, letting everyone know

when the encryption has been broken. And given that the blockchain remains transparent, the coins could easily be flagged and rejected at exchanges. But there's a huge supply of less well-known coins that could be a lucrative target for quantum hackers. And movement of wealth on this scale by the time this happens could distort the economics of Bitcoin and perhaps even the world. Now, at this stage, this is all theoretical. And at some point it will become less so when people will actually start to think about it. I presented here not as a thing to be freaked out about, but just as one potential reality of a complex future. Maybe the most exciting thing over the next few years is what we are about to see in a newly unrestrained industry in the United States.

I expect absolutely every idea to be tried. Bitcoin will become fully integrated into the financial system and we will see all manner of experiments run. We may also start to get answers to the biggest questions. Can Bitcoin fix issues with collateral and settlement systems that contribute to financial crises? Does Bitcoin help demonetize housing and ease the cost of living? What role can Bitcoin miners play in improving the energy system? Will Bitcoin help rebuild countries with dysfunctional currencies? These are the types of things that are much more on the table now than they've ever been, and I for one, am incredibly excited to see them play out. That, however, is going to do it for our ghosts of Bitcoin past, present and future. Hope this has been a fun way to think about

where we are and where we're going. Appreciate you listening as always. And until next time, peace.