Can governments care about bitcoins?

Bitcoin: what happens if cryptocurrency is banned? - A mind game

How did he come up with it? According to a statement on Wednesday, the US government and the Food and Drug Administration (FDA) want to ban e-cigarettes in the US. As of now, flavored e-cigarettes are no longer legally available and must be withdrawn from the US market within 30 days.

According to Lee, this shows the power of the US government to wipe out a market overnight. “While it's not a related topic (to cryptocurrencies), it does show that the White House can issue an“ executive order ”to ban everything. And the government could even ban Bitcoin, ”he wrote. “I don't expect it. But with the current White House there is nothing out of bounds or beyond imagination. "

In his view, a further increase in the Bitcoin price is a possible trigger for a ban. Trump would have already expressed his displeasure with Bitcoin via Twitter at a price of $ 10,000; for example, if the price increased tenfold, a ban could, in his view, be much closer. A Bitcoin price of $ 100,000 would represent a much greater threat to the conventional monetary system, as the relevance would increase. A state's monopoly of money, and above all the dollar as the world's reserve currency, is a crucial source of economic and (geo) political power for states like the USA. Similar measures were taken in the 30s when gold was banned in the USA in order to prevent the then outflow of the precious metal from the domestic market, which would have led to lasting weakness in the banking sector, among other things, as the dollar was still backed by gold at the time .

Also read: Trump is targeting cryptocurrencies

How could Bitcoin be banned?

Banning Bitcoin per se is difficult if not impossible, as the cryptocurrency exists on a decentralized blockchain, the maintenance of which works in such a way that many, many different participants around the globe make their computing power available in the form of computer hardware to carry out Bitcoin transactions validate and keep the network running.

This means that there is no central company that holds the scepter over Bitcoin and therefore no one has the say - and therefore does not fall under the legal position of any state. Ergo, there is no target or point of attack for authorities that could be prohibited from operating the Bitcoin blockchain. Companies that do so-called mining (the process of transaction validation and the creation of new bitcoins) can be banned in the country in which they are based - but their loss would be compensated by the remaining mining actors in other locations and (long-term) would have little impact on the continued existence of the blockchain.

Bitcoin trading as the only point of attack

However, states, especially the US, could prohibit trading in Bitcoin. That would affect the various exchanges that offer trading in cryptocurrencies. If one of the countries, in which a large part of the market and the trading volume is located, prohibits trading, this would have massive effects on the entire sector, since the crypto exchanges usually accommodate customers from all over the world and would have to act accordingly to deny customers from the prohibited countries trading.

The Bitcoin blockchain would not really be attacked by such a ban, but market access for the vast majority of people would be considerably more difficult. Especially if critical players such as the USA, Singapore, South Korea, Hong Kong or Great Britain were to issue a ban in terms of trade volume, it would be conceivable that other countries would follow suit in order not to impair general trade relations with these countries. The negative reaction of the US government to Facebook's Libra and the following warning words to Switzerland (the seat of the Libra Association) already show the pressure that is being exerted internationally in practice. The sharp criticism from France against Libra could also swing to Bitcoin if its relevance continues to grow.

Also Read: Libra - Everything You Need To Know About Facebook's Crypto Project

What would be the impact of a ban on Bitcoin trading?

A ban would have two main effects: On the one hand, general market access would be made considerably more difficult. The vast majority of investors in cryptocurrencies buy their coins directly on the major exchanges. The most important players are Coinbase (USA / Great Britain) and Binance (founded in China, now main offices in Japan / Taiwan and Malta). Should Bitcoin no longer be available in the main economies, one would have to switch to alternative, smaller exchanges, which are often less secure or offer no access at all for certain citizens. Trading would therefore only be possible freely via OTC (over the counter / direct trading) and that poses considerable hurdles for private investors.

On the other hand, such a ban would mean a massive loss of reputation. It would shake the confidence of many investors that the concept of Bitcoin has long-term potential for success, as (official, regulated and therefore safer) trading would be massively difficult, as I said. A ban would be nothing more than an active rejection of the states against Bitcoin and thus an official declaration of war. That would certainly put off many investors, since a healthy, sustainable further development of the technology and the entire crypto industry would be considerably more difficult without the foundation of a regulated economic infrastructure embedded in official laws.

Would a ban be the death sentence for Bitcoin?

As an inevitable consequence of a ban and the effects described above, the price of Bitcoin would fall sharply. A very difficult market access and serious damage to the reputation would be priced in accordingly. It is still unlikely that all countries will issue a ban, which means that Bitcoin trading would basically still be possible, albeit with restrictions. The possession and use of Bitcoin would continue to work anyway, since the blockchain itself, as I said, cannot be destroyed or switched off by official bodies.

The sharp drop in prices would have a dangerous effect on the Bitcoin ecosystem. This is due to the way in which the transactions on the blockchain are validated and the whole network is kept running. The "miners" enter all transactions in so-called "blocks", which ultimately map the blockchain. Each completed block pays out Bitcoins as a reward to the respective miner as an incentive for maintaining the network. However, a very specific amount of computing power is required to create such a block. This is automatically adjusted by the system, the more miners join the network (the more, the more difficult, the more computing power is required). Ergo, due to the size of the network, you now need a lot of power to have enough power for the mining process to make it worthwhile. That costs the miners a corresponding amount of money. This also means that a Bitcoin must have a certain minimum price for mining to be profitable. However, if the price should fall sharply as described above, the mining business would no longer be worthwhile for a certain period of time due to the slowly adapting calculation difficulty and many mining companies would be forced out of the market due to a lack of profitability.

Also read: How does Bitcoin work?

Horror scenario "51 percent attack"

The difficulty of creating blocks adapts very slowly (it is updated every 2 weeks). If the computing power in the network continues to decline over a longer period of time because more and more miners get out, this would also endanger the security of the blockchain. If a large miner, who combines a lot of computing power, should "endure" longer than his competitors despite the negative profitability, he would theoretically be able to gain the upper hand in the validation processes of the transactions for a certain period of time because he would do a large part (Minimum 51 percent) of the computing power of the blockchain. So it would be possible for him to change the blockchain and to assign Bitcoin to himself that does not belong to him. The real strength of a blockchain, the decentralized validation of the transactions, would actually be a weakness in this particular scenario.

However, it is rather unlikely that in such a scenario one of the big miners would take such a measure in practice, because: If he continues to participate in the mining process and invest money and resources, then that would also mean that he continues to believe in the long-term success of the concept behind Bitcoin and calculates economic profitability again for the future (since with decreasing computational difficulty the electricity costs also decrease, or the existing hardware works more efficiently). Therefore, a so-called 51 percent attack in which he would manipulate the blockchain and "steal" Bitcoin would be bad for his own reputation, the reputation of the network itself and therefore bad for business.

Also read: How does blockchain technology work?

Nevertheless - if there is a ban, for example in the USA, then this phase of the likely price decline and the subsequent "restructuring" of Bitcoin mining would be a critical component for the continued survival of Bitcoin. Should he survive this phase without damage, for example by manipulating the Bitcoin stocks on the blockchain, then it would also be possible for smaller players to enter the mining business again. The necessary computing power might even drop so far that it would be profitable again to mine Bitcoin with a comparatively "weak" private PC. (In this scenario we are talking about Bitcoin prices in the lower three-digit range, which are only available as house numbers) This would open up the possibility of creating a new, let's call it “safe mining foundation”, and from this position the network could grow organically again .

Conclusion: Even a ban would not inevitably mean the death of Bitcoin, the network would have a certain chance of surviving, albeit severely weakened. And bans at the political level could also be lifted by a change of government, further critical developments in global trade and the financial sector, as well as further technical advances and adaptation. Nevertheless, such a scenario would set Bitcoin back by at least years in terms of price and adaptation in the real world.

By Alexander Mayer

Photo: ImageFlow / Shutterstock.com

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