Yes, a 51% attack on Bitcoin is possible. The probability may be low at the moment, but the possibility cannot be denied.
With claims that Bitcoin is ‘mainstream’ and retail investors being lured to invest in this ‘scarce’, ‘secure’, ‘new gold’, the time has come to consider the likelihood and possible market reactions in the event of a 51% attack on the most popular cryptocurrency.
Some of the most notable 51% attacks on blockchains:
- Ethereum Classic suffered various 51% attacks during 2020;
- Bitcoin Gold suffered 51% attacks in 2020; and
- Bitcoin SV suffered 51% attacks in 2021;
At the time of writing, these cryptocurrencies are ranked 40th, 118th and 62nd respectively in terms of total value among global cryptocurrencies.
A 51% attack is performed by miners who gain more than half a network’s computing power.
This gives them the power to stop payments between some or all users or to double-spend coins.
Bitcoin is essentially a technology platform underpinned by source code that was initially described as ‘a peer-to-peer electronic cash system’ in the original white paper. When Bitcoin was released as open-source code, blockchain was wrapped up together with it in the same solution. Bitcoin cannot exist without the blockchain technology that underpins it.
In simple terms, Bitcoin is outsourcing all its security and operational capacity to third party ‘miners’. Without these miners, Bitcoin cannot operate.
In the original Bitcoin White Paper, the intention of the relationship (incentive) with the miners is described as: “The incentive may help encourage nodes to stay honest. If a greedy attacker is able to assemble more CPU [central processing unit] power than all the honest nodes, he would have to choose between using it to defraud people by stealing back his payments or using it to generate new coins.”
There are no service level agreements with these miners, so they are free to come and go as they please.
What prevents a miner from mining a few coins, selling them on the open market and simply moving on to a more profitable coin to mine? There are no incentives for the miners to ‘stay honest’ or ‘stay loyal’ after they sell the coins they mined.
It is worth noting that incentives for these miners are purely capitalistic, which brings me to the next point, which is the possibility of a 51% attack actually happening.
At the time of writing, the total value of all bitcoins in circulation (market cap) is around $800 billion. When considering the calculations of various industry stakeholders, the cost of a 51% attack on Bitcoin seems to be in the range of $5.4 billion to $13.5 billion, or between 0.7% to 1.7% of the current ‘market cap’ of Bitcoin (according to What Is a 51% Attack, and How Much Would It Cost? on Eqonex and ‘How Much Would it Cost to 51% Attack Bitcoin? on Braiins).
When considering the risk appetites of players in this industry, someone spending 0.7% to 1.7% of the market cap of Bitcoin to acquire mining capacity (both physical and virtual) while holding significantly leveraged short positions in Bitcoin might not be too far-fetched.
The possibility of 51% attacks increases from time to time when the total hash rate of the Bitcoin network drops significantly.
When this happens, the amount of computing power required for a 51% attack is reduced as well.
The hash rate dropped nearly 50% following China’s mining crackdown in 2021. The possibility of an attack further increases when the market cap of Bitcoin increases, which increases the monetary incentive of a 51% attack – leveraged short combination.
So how would the market react?
The main selling proposition of Bitcoin seems to be the security of the blockchain. It cannot be scarce, secure or decentralised if not for the blockchain, right?
So, if a 51% attack proves that the blockchain isn’t as secure as everyone thought, the main selling proposition is invalidated, right?
It seems not.
I have a few friends who are Bitcoin bulls. I asked them what they would do if Bitcoin suffered a 51% attack, and without fail the overwhelming answer was: “I would buy the dip.”
Amazing, right? In a rational market, the assumption would be that the invalidation of the main selling proposition would destroy the price of an asset and maybe even the asset class as a whole.
Most of them even confirmed the threat of quantum computing which may render many aspects of the crypto industry unfeasible just a few years (or months) from now.
If we consider the fact that the price of USDT, a so-called stablecoin, remains closely pegged to the US dollar despite ongoing questions about the amount of actual dollars backing the cryptocurrency,
… it is safe to assume that the crypto bulls aren’t too fazed by … well, pretty much anything.
Do people trust the blockchain or do they trust the miners? The blockchain is nothing without the miners, who act upon pure monetary incentives. The question remains: how will these miners act when the monetary incentive to attack outweighs the monetary incentive to support?
And if the miners choose to attack, how will the crypto bulls react? Only time will tell, but based on recent events in the crypto industry, they will simply ignore any news of a 51% attack, buy the dip and HODL (hold on for dear life) to the moon.
Daniel Strauss is an entrepreneur, investor, author and director of Stocks & Strauss.