Can Governments Ban Bitcoin Effectively?

Summary

• Bitcoin is into limelight again as it broke the previous life time high and crossed $5000 mark convincingly, after the "China driven" meltdown.
• Experts and charts suggest further upside potential for Bitcoin.
• Ultimate resistance from Governments is yet to come.

Since China banned ICO's and closed down some of its crypto currency exchanges, the question of "Ultimate Ban of Bitcoin" is there in the mind of most of the crypto investors. Can governments or international government organizations implement their own centralized crypto currencies and ban the mining or ownership of open decentralized ones like Bitcoin and Litecoin? Answer to this question is crystal clear and straight forward. Yes, they can. But the unanswered part of the question is, how effectively they can destroy Bitcoin.

Let us discuss about the methods possible for any government or international government organizations to act against Bitcoin. Below are the four possibilities I could imagine.

1. Direct Attack on Bitcoin by Laws

2. Direct Attack on Bitcoin Network

3. Virtual Attack on Bitcoin

4. Destabilize the Value of Bitcoin

1. Direct Attack on Bitcoin by Laws

This form of attack is the most feasible, time tested way to attack Bitcoin. Laws can be made by governments to either support Bitcoin or to destroy Bitcoin's acceptance. Democratic governments like Australia, Switzerland etc have regulated Bitcoin, which helped more mainstream adoption of Bitcoin and other cryptocurrencies. But authoritarian governments like China have implemented laws to directly attack Bitcoin.

This is done by implementing anti money laundering laws to ban entities that allow Bitcoin to interface or exchange with the "real" (non-Bitcoin) world. We have seen from the price history that Bitcoin market is negating such events in long run as it anticipates much movements from authoritarian governments. But if a similar movement from USA or Australia, would damage the whole crypto space.

So in nutshell, a rich, powerful, hostile government could probably do quite a bit of damage to the Bitcoin economy, even if they cannot actually touch the technical foundation of the cryptocurrency - the blockchain.

2. Direct Attack on Bitcoin Network

Direct, small scale, attacks on Bitcoin network is happening every day. But a combined attack to Bitcoin network from a consortium of powerful governments can destroy the network or corrupt the confirmed blocks in blockchain. This is because of the fact that Bitcoin is a centralized network in practice even though it is decentralized one in theory. Data shows that

• 68% of mining power is concentrated at 10 nodes (mining pools)
• 3 transit networks see more than 60% of whole Bitcoin traffic

A determined, powerful consortium of governments can even cut electricity of these concentrated mining pools and then attack the network by different means like

• Routing attack
• Partitioning attack
• Delay attack

If this happens, it can result in denial of service, double spending etc. Even if they are able to alter a single confirmed block, Bitcoin will be dead!!. I am not sure about the practicality of this, but there is a wild chance. Can this happen?.

3. Virtual Attack on Bitcoin

Virtual attack on Bitcoin is probably the easiest way of tarnishing Bitcoin. Here, people target to attack the image of Bitcoin. JP Morgan's CEO, Jamie Dimon is the best example to demonstrate how a powerful person can attack Bitcoin. The strategy is to associate Crypto currencies with hard drugs, child pornography, terrorists and brainwash an average investors mind that crypto currencies are the currencies for criminals

"Who cares about Bitcoin? Bitcoin is "great" for criminals and countries like North Korea or Cuba. If you're stupid enough to buy it, you'll pay the price for it one day" ~ Jamie Dimon, Bitcoin price~ $5500.

4. Destabilize the Value of Bitcoin

The ultimate aim of Bitcoin is to become the digital currency of the world. For that to happen we need stability, as similar to USD or yen. As of now people buy Bitcoin as store of value as the price is in upward trajectory for the last many years. Experts assume that Bitcoin will stabilize once it reaches the real value.

But before it go further mainstream, powerful governments can perhaps buy a huge bunch of Bitcoin over time, and then selling them all at once, causing market crashes. The possibility of this is quite less as democratic governments will not go against people's wishes.

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Conclusion

Among the four possibilities, one and three are already happening. Price history shows that (1) and (3) can have short term negative impact on the price. Option (4) can shake out weak hands but cannot challenge the underlying blockchain technology.

I would rather worry about the ultimate option (2), which would destroy Bitcoin and other cryptocurrencies once and for all. Since we are uncertain, I would advise taking a calculated, minimal risk. Remember, without risk there is no reward. As I wrote last time, November event is coming for Bitcoin. Let us wait and see how the story turns out. Happy investing!!

Analyst’s Disclosure: I am/we are long BITCOIN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.