The Exodus: What you should know before investing in Bitcoin

The Mango Cart returns with a short piece on the mining exodus.

Having seen the overly positive sentiment from groups of Bitcoiners on how hashrate migration to the USA is positive; I thought to express some of the downsides and risks with such migration to users, investors, and miners.

The migration is being seen as a positive, as it dampens the prevailing narrative in the west that China controls Bitcoin, however this migration also comes with a unique set of attack vectors.

It’s difficult to estimate how much of the hashrate is actually physically located in China as some of these operations are kept low-profile, use anonymising services, or performed in “pools” that can be joined by anyone around the world- however, the general consensus is a number in the range of 50–70%, e.g. it’s reasonable to say that roughly half the world’s hash rate is in China.

Clearly moving some of that hashrate away from China is important to keep the network decentralised, but lets recognise one important observation we have seen.

Chinese miners ran fair nodes, they created blocks indiscriminatingly and relayed them around the world. They stuck to the core principals of Bitcoin being an open and neutral network; they where 100% capitalists.

In contrast to the homeland of capitalism, the USA, where we have seen miners start to modify the bitcoin core software and introduce their own restrictive rules, essentially creating their own soft-fork. In particular I am referring to Marathon Patent Group, whom recently introduced a concept of “OFAC Compliant Blocks”. This US miner decided to sift through the network’s transaction pool (mempool), and based on their own whitelist, decide whether to include or exclude transactions in its block mining attempts.

This scenario is not new and was anticipated many years ago, where governments may attempt to regulate part of the Bitcoin network by prescribing which transaction addresses may or may not be included by their local miners, similar to what the current banking system does.

This obviously doesn't impact the Bitcoin network as there are other miners around the world that would not discriminate, and would be pick up those transactions.

To further cement the idea that this move demonstrated a poor understanding of the Bitcoin network and implications, Marathon has recently decided to backtrack, and deploy an unadulterated version of the Bitcoin core software in their mining operations.

Nevertheless, it does beg the question of Why? Why did Marathon try this? In a recent podcast interview, Fred Thiel (Marathon’s CEO) explains their main drivers here. The gist is Marathon asked major US investors what was important to them to invest in bitcoin and their company, and they mentioned compliance with traditional banking sector regulations amongst other things such as ESG. Marathon ended up backtracking not because they had an awakening, and wanted to stay true to the core principals of the network’s neutrality, but because their investors decided not pay them a premium for introducing these controls!

If we are now to extrapolate on this we can see that the institutionalisation of Bitcoin is a slippery slope. As more mining gets performed by US listed public companies and more bitcoin is offered in ETFs/ETPs and purchased by financial institutions, this creates a concentration of influence on the network and its rules that could lead to a hard-fork, e.g. Bitcoin and Bitcoin Inc.

It’s difficult to predict where the hashrate would go but if we look to history and in particular the Block Size War, the users won, as most of the miners reversed their position. All network participants realised their economic well-being was interdependent.

The aim of the article is not to imply that the Bitcoin network is doomed, rather to balance out what is being perceived as an overly positive outcome and to emphasize to new entrants what it means to invest in Bitcoin. Bitcoin has survived for nearly 13 years by continuously being tested in game theory scenarios and has so far continued to be resilient.

And hence its important to pose a question to anyone new undertaking mining operations and investors wanting to enter BIG in bitcoin.

If you wish to at some point modify the core principals to simply replicate the existing financial infrastructure at a lower cost of operations, why chose Bitcoin? Why subject yourself to this potential risk and uncertainty of a split and potential value erosion? If you want to transfer value within your own country, economic block, or banking alliance, the are countless other projects especially those operating on proof of stake that can do a much better job. A proof of work chain is not ideal for this, a very important subtlety. A proof of work chain allows anyone in any corner of the world to simply pop-up and provide security to the network by enforcing the agreed rules.

The article serves to remind all Bitcoin network participants the importance of keeping the network fair, open, and neutral. And if these principals don’t align with yours, their are plenty of other crypto experiments and bank blockchains to invest in.

For a deeper dive into the what crypto means, you can read my first article here.

This is also a good time to remind all of us some of the key principals that are repeatedly said in the Bitcoin community:

• Buy actual bitcoin instead of products
• Earn in bitcoin
• Take your coins of exchanges
• buy/trade coins on decentralised exchanges
• Run your own node (or several nodes) to help enforce community rules
• If you are investing in mining, focus on developing countries
• If you mine, consider joining a pool in a developing country

Notes & Signature

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