Why central banks are terrified of Bitcoin?

Posted almost 3 years ago by LN+

Central banks and international organizations like the IMF are well informed and most definitely not stupid. They understand macro economics, game theory and technology. They are gigantic organizations and thus slow to act, but they make up for this with their immense reach and power. Despite this they are terrified of Bitcoin. Why is that?

When Bitcoin goes 10x or more from the current price, it will reach the range of market capitalization of the largest currencies in the world including Pound Sterling, Japanese Yen, Euro, US$ and Chinese Yuan. When this happens, in people's minds, the Bitcoin project turns from a spectacularly successful science project to a serious contender to claim the reserve currency status. What's more terrifying for current powers is that all odds are against the incumbents on all fronts.

Why Bitcoin is winning?

Bitcoin carries less risk, because it's international and not dependent on the natural, economic, or political events within a single country (or even continent) as opposed to every other fiat currency. Bitcoin's risk is decentralized among 195 countries. Ineviably there will always be a few countries where unfortunate events happen, but there will always be other countries where things go well. Being 100% invested in Bitcoin means you're diversifying across the globe. Bitcoin outcompetes fiat currencies in terms of long term stability, especially during black swan events.
Bitcoin fits the modern age, because it's designed to be the currency of the internet. The foundations are built on strong cryptography, thus it's significantly safer to transfer between parties across the globe. Compare Bitcoin's strong security to the most videly used legacy payment systems, the credit and debit cards that expose your private key (card number) to every single person and business you pay to. Bitcoin is also faster with settlement reached within seconds on the Lightning Network (LN) for smaller amounts, and within minutes on the base layer for any amount. Fiat systems are much slower, and settlement normally takes days. Bitcoin is also cheaper to send because sending smaller amounts on LN takes fractions of cents, and less than a dollar on layer one. Bitcoin outcompetes fiat currencies in features.
Bitcoin has better monetary policy, because it's reliable and predictable for decades and even centuries to come. It doesn't bend to the whims of any politician, or anyone else. Bitcoin can't be mined faster no matter how high the price is as opposed to gold. The concensus rules can't be corrupted no matter how much of it you own. Bitcoin outcompetes every other fiat based reserve asset in terms of management of money supply.
Bitcoin has the moral highground, because it's permissionless and maximally inclusive. Anyone with access to most basic, widely available cheap technology can open a Bitcoin and LN account and participate in the network and thus join the global economy ensuring they can provide for themselves and their families. It doesn't matter how poor, how uneducated, how old, or culturally supressed you're: you're welcome to use Bitcoin. Bitcoin outcompetes legacy systems in terms of serving humanitarian values.
Bitcoin is more efficient, because despite the critics who focus on the energy expenditure required for Bitcoin mining, the overall cost of securing Bitcoin is minuscule (similar to the energy required to run Christmas lights), compared to what is required to secure legacy fiat based system. Legacy systems require massive armies, and law enforcement agencies just to ensure the currencies aren't counterfeited and continued to be accepted for valueable commodities. Bitcoin outcompetes legacy fiat systems on cost effectiveness.

Can fiat be fixed?

Legacy fiat systems are only better than Bitcoin in one aspect: they are more widely accepted. But this advantage is evaporating as Bitcoin is growing in terms of usage. Bitcoin is superior and is winning overall. And this reality can not be changed. You can't fix fiat. You can't replace Bitcoin. The discovery of digital scarcity was a single historical event. It's not a technology that can be copied. Blockchain, the technology existed long before Bitcoin. Blockchain is just one of the several aspects and technologies which made Bitcoin's discovery possible.

Even if hypothetically a leading fiat currency was turned into a crypto coin which copied Bitcoin's properties perfectly, it would just be one of the many 10K+ copies (altcoins) that have been created that all failed to overtake Bitcoin. However, this hypothetical scenario can't even happen, because the huge amounts of debts need to be repaid and inflation generating money printing is the only way to do it. You can't tax your citizens more to create more fiat, because everyone either will go bankrupt or leave. You can't not repay the loans because the country goes bankrupt. The only remaining option is to inflate the currency away.

Also, if a hypothetical central bank digital currency (CBDC) was created, nobody would have the means to force it on other nation's governments, and all the citizens of every nation.

What's next for central banks?

I can think of three scenarios that central banks can follow:

Fight Bitcoin to death. This will be bloody for everyone involved, but eventually there is no way for fiat to win, because of the fundamentally inferior properties that can’t be changed as discussed above. In fact, such a fight may accelerate the adoption of Bitcoin, because it will bring the issues currently hidden from a big part of the population into the forefront.
Embrace Bitcoin as soon as possible. This means current powers will have to buy in and play by Bitcoin’s consensus rules. This would be beneficial for all participants, because we could inflate away the fiat debt and at the same time transition economies into a stable and fair Bitcoin standard that can last for centruries.
Take control of custodial services. Governments and international agencies can take over exchanges and turn legacy banks into holders of Bitcoin. This way they can indirectly take control of Bitcoin without the need to buy in. This can be done through very strict regulation or literal takeovers. Self custody of Bitcoin and proof of reserves will however keep such actions in control.

Since I'm not aware of the existence of a world government or a coordinated power structure behind the curtains that can pull all the ropes, a single coordinated strategy isn't likely to play out. It's likely that all above strategies will happen at the same time. Either way, eventually the Bitcoin Standard and hyperbitcoinisation is inevitable in all scenarios. (Do let me know if there are other scenarios I didn't consider.)

What can you do?

What to do as an individual to survive the likely tumultuous transition towards the Bitcoin Standard?

Take self custody of as much bitcoin as possible as fast as possible
Learn how to secure your coins best
Learn how to run your own Bitcoin and Lightning node
Help the Bitcoin ecosystem as much as possible through development, education, participation, ideas, etc.