Now that BitCoin is going back down to $0 is an opportunity to re-examine the weakest link in the cockamamie scheme: Use of proof of work to finalize a notary digest chain.

Notary digest chains (NDC) are not new. The patent on them ran out seven months after BitCoin was launched. The reason nobody could do anything of interest with the technology was purely the absolute myopia of Surety, the patent rights holder.

The only real problem with an NDC is knowing what the last block value to validate against should be. Harber and Stornetta proposed publishing the output value daily in a ‘newspaper’ which in those days were printed on ‘paper’ with something called ‘ink’.

The simplest way to arrive at a stable NDC value in the real world is to have a large number of NDCs operate by different authorities. So we might have NIST, Press TV, NYT, Google, Bank America etc. all run their own NDC and cross link the output from everyone else’s NDC every 30 minutes. This would make it pretty much impossible for any one party to defect without the defection being visible. And it is impossible for any party to fool a party running their own NDC.

The degree of collusion required to break such a system is at a level that if you can find a single cause that would make all those actors be willing to defect at the same time then it is probably going to be a good enough reason that you would agree with it as well.

Given that I have no problem with the fact that my broker could steal pretty much all my money without me being able to do a thing about it, the idea that we need worry about every bank and broker defecting simultaneously is David Ike alien reptile impostor level whackaddodle.

But no, the BitCoiners insist. We must obsess about this one particular threat to the exclusion of all else because gubermints and the bankers are evul and untrustworthy and we should instead trust the security of a scheme with a hole big enough to swallow it whole.

The Achilles heel of proof of work schemes is that the mining capacity grows in direct proportion to the incentives. BitCoin is like a star that has to constantly fuse hydrogen into helium to create the outward pressure necessary to prevent its collapse under its own gravity. When the price of BitCoin hit $1000, the mining capacity expanded and the difficulty increased so that the cost of mining increased to keep the system in equilibrium.

And here we get to the interesting bit: Tether. If the price of BitCoin was denominated in real money, the system would have to be constantly sucking real money in to sustain itself. BitCoin does require quite a large amount of real money to pay for the electricity to fuel mining rigs which should in theory prevent the type of rapid price rises we have seen. But the price of BitCoin is not denominated in real money, it is denominated by a hypothetical currency called Tether which is alleged to be backed dollar for dollar with real USD but as with much else in the cryptocurrency world, this claim has never passed a third party audit.

Tether became a necessary part of the cryptocurrency world when governments started to make it difficult to move real currency into or out of the system. A large fraction of the cryptocurrency exchanges do not cash out BitCoin to actual dollars, they only cash out to Tether which might or might not be exchangeable for real cash when the time comes.

It is rather curious isn’t it that a scheme which in theory frees us all from the tyranny of having to trust financial institutions instead puts us at the mercy of an unregulated, unaudited shadow banking system whose architects pride themselves on their ability to make themselves ‘judgement proof’.

There is an old poker adage that if you can’t see the fool at the table, its because its you.

So now we have a perfect storm of a government crackdown on BTC and its ilk and the largest drop in the history of the stock market. And these are of course interconnected. The BTC bubble has grown to a size where central banks around the world are forced to consider the impact when it bursts.

BTC is currently below $7K and looks set to lose a quarter to a third of that today. We are getting perilously close to the point where the only way to make money out of BTC mining rigs is to attack the blockchain itself and use surge mining on a 51% attack to unwind previously committed transactions.

The way this works is that the attacker makes a series of large BTC transactions which are committed in the original blockchain and then repudiated a few hours later by mining a different fork.

This particular attack can only work if the attacker has at least 51% of the ‘mining capacity’. And here is the problem, while obtaining 51% of the total mining capacity is very hard, obtaining 51% of the active mining capacity in the wake of a pullback is potentially rather easy.

Bitcoin mining difficulty doubled between 5th December 2017 and 29th Jan 2017 and so did mining capacity. Over the same period, BTC price declined from $16K to $11K but this merely shows that total mining capacity lags price somewhat. If we map peak to peak, it appears that difficulty lags price by one to two months which is what we would expect.

The danger point is reached when the price of BTC drops below the cost of mining. At that point the least cost efficient rigs will be idled and the active capacity will drop.

As with any other bubble, what keeps BTC price high is irrational expectations. All it takes to cause a collapse is an irrational fear. Any long term decline in the hash rate is going to raise concern that a 51% attack may be attempted.

BitCoin ideology has an answer to this issue of course. Ideologues always do. The fact that I chaired a conference on Digital Cash in Amsterdam a quarter century ago is irrelevant, my opinion on the topic is ‘uninformed’ and I need to ‘educate myself’ and ‘do some research’. Strangely enough, none of the people who used to argue that BTC=$20K proved them to be experts seem to have concluded that BTC=$7K has any significance.

Of course ‘BitCoin will adapt’. Only BitCoin cannot change because the whole value proposition to BitCoin is precisely the fact that the rules are embedded in the code and nobody can change it. Either BitCoin eliminates intermediaries or it does not. I for one see no value in swapping a world in which the financial rules of engagement are set by entities such as the Federal Reserve which are subject to at least some oversight and transparency for one in which a shadowy cabal of crooks and conmen set the rules while denying that such a thing is even possible.

Of course ‘other coins will replace BitCoin’. Only there is really no reason to believe that any alt.coin will survive the collapse in confidence in cryptocurrencies as a system that would follow a collapse in BitCoin.

Of course ‘fiat currencies’ are also a consensual illusion. But so are governments. In all of human history, there is only one major instance in which governments suddenly collapsed because the people withdrew their consent. It was 1989 when communism collapsed in Eastern Europe because the people withdrew their consent. And the unanimous first demand of those people? A new government.

​The approach used by BitCoiners is the same ‘Mao Mao​’ tactic that used to be popular with parts of the far left. As soon as an unacceptable opinion was voiced, it was shouted down with cries of ‘Mao Mao​ Mao’. It is essentially the same tactic George W. Bush used to start the Iraq war and the one Trump is attempting to use to start a war on North Korea.

I have seen this story before. I never invested in WebVan or Pets.com or any e-tail dotCom because it was obvious that the stories they were telling simply did not make sense. The grocery business is notorious for its wafer thin margins. Companies like WalMart and Costco are only able to turn a profit because of their aggressive use of sophisticated high technology in their distribution chains. It was obvious nonsense to suggest that a capital intensive online only operation could make better margins on online sales than paying a shelf filler to wheel a shopping cart round an already bought and paid for store. Today, the market is making the rather absurd proposition that Tesla, a company that has yet to make a profit on a single car it has made is worth 50% more than Ford which sells ten times as many cars and sells them at a profit.

The notion that cryptocurrencies will somehow ‘revolutionize’ the business of finance is not just a part of the sales pitch, it is the whole of it. It wasn’t just Pets.com that was crushed in the dotCom bust, even mighty Amazon crashed from $90 to $5. I find it really hard to believe that Etherium or any of the other coins purportedly ‘better’ than BitCoin are different enough to survive without BitCoin.

Popping a bubble as it inflates is always a lose-lose proposition for government regulators. They will be blamed for allowing the bubble to inflate that far and blamed for the consequences of its collapse. The ideology of BitCoin and in particular the aggressive opposition to all forms of government ‘interference’ raises the political cost of interference further. But the recent decline in price by two thirds have given regulators both the opportunity and incentive to make sure that the bubble is on no account allowed to re-inflate.

Fed to BitCoin: “You have fallen and now I am going to give you such a kicking to make sure you never get up”.

So now we appear to be in the end game for BitCoin and probably for cryptocurrencies in general. It is of course possible that BitCoin might stage another rally, but the technical analysis (and what else is there?) suggests a continued decline. I may well be wrong in expecting the bubble to finally burst this year, after all, I predicted the dotCom bubble would burst in 1997, 1998 and 1999.

What I think important is that we don’t let the collapse of BitCoin take cryptography with it. NDCs are a very useful invention, an invention that existed long before BitCoin and an invention that should survive long after BitCoin ideology meets its well deserved end.