How Bitcoin Can Fail and the Risks of Confirmation Bias

tl;dr: the greatest threat isn’t math, computer science, or governments. It’s people.

I think a lot about confirmation bias.

At this point, I have a lot tied up in the experiment that is blockchain and Bitcoin.

There’s the financial stake, of course, but there’s a reputation stake as well as an emotional stake.

I believe it is a good thing so I want it to be successful.

It’s not difficult to believe that my ego and a desire for approval or just to “look smart” compels me to remain bullish and optimistic.

It’s a perfect scenario for sunk cost fallacy.

I have to be careful of that and it weighs on me. BSing yourself can be a dangerous path.

Devil’s Advocate
I recently had a meeting recently with a 3-star general at the Pentagon. He had asked me to answer the questions of:

• what is blockchain?
• what are some of the possible national security ramifications of blockchain?
• why do I keep hearing about China and blockchain?

There’s nothing sacred in the deck that I prepared (and it’s deliberately not designed), so here you go, if you are interested. I also sent this post to him: Could Blockchains Lead to the End of the Nation-State As We Know It?

What was really interesting to me, however, was his role. He’s basically the Pentagon’s version of the Devil’s Advocate.

His job is to tell everyone else why their plan or idea won’t work (or will).

Apparently, the Catholic Church invented the role of Devil’s Advocate during the process of nominating people for Sainthood.

There was one person whose job was to come up with every conceivable reason why the nominee should NOT be elevated to sainthood.

I realized, however, that I needed to be my own Devil’s Advocate, lest I elevate things to sainthood, like Bitcoin, the blockchain, or Satoshi Nakamoto that don’t deserve it.

Where Bitcoin is Vulnerable
Now, there’s a big difference between blockchain (or more broadly, crypto-economic systems) and Bitcoin.

One is technology that can underpin a huge number of applications designed to transfer a recognized amount of value between two parties without the need for intermediaries.

The other is just the first application to do this at meaningful scale.

Public blockchains are here to stay, I believe. Bitcoin is, I think likely to stay, but there are reasons why it won’t.

In my work of thinking about them, however, I got lucky.

One of the stories I like to tell about the potential for Bitcoin to actually help real people is about Wences Casares.

If you haven’t read it, I suggest you do. Here it is.

In putting the Non-Obvious Guide to Understanding Blockchain together, I reached out to Wences to get his permission to use the story (and to fact check it).

In the process of the exchange, he shared with me a fantastic essay he wrote called “The case for a small allocation to Bitcoin.”

He’s given me permission to share it.

Here’s the section on where Bitcoin could fail.

“Bitcoin can fail in many different ways. It could be taken over by a bad actor. It could be displaced by a better platform. It could be hacked. And Bitcoin can probably fail in many ways that we cannot imagine yet.

Because Bitcoin does not have any intrinsic value and because its value depends on a social consensus which is a sort of collective delusion in my opinion the most likely way in which Bitcoin could fail is a price panic.

If we all decide at the same time that we think Bitcoin is worthless then it will be worthless. It is a self-fulfilled prophecy. If the price of Bitcoin were to plummet to zero or near zero even if the platform remained intact, its reputation would suffer immensely and it could take a generation to rebuild that credibility. This could happen if people buy amounts of Bitcoin they cannot afford to lose.

For example, if people invest their retirement funds or their kids’ college funds into Bitcoin and as the price goes does down they are forced to sell pushing the price further down and forcing others to sell. So in my opinion the biggest risk to Bitcoin is people investing amounts they cannot afford to lose.”

It’s interesting. He’s not concerned about regulation or government censoring. Just people getting out of control, speculating, and getting greedy.

All the math and code in the world won’t help you if people get crazy.

And we know that people get crazy.

All I have to do to know that is look in the mirror.