Why a Government Ban on Bitcoin Would Backfire
Want libertarian ancaps to be billionaires? A Bitcoin ban does that.
I’ve recently written a few articles countering anti-Bitcoin hysteria. Today I want to talk about the reason for answering attacks in the first place, the elephant in the room for anti-Bitcoin articles: what happens if the government bans Bitcoin.
In a nutshell, a ban won’t kill Bitcoin, just slow it. But a ban would, ironically, cause one of history’s greatest wealth transfers into the hands of only the very most committed, only the very most radical, Bitcoiners. The end result would be one of the most spectacular backfires of a government ban in history.
Bitcoin The Unbannable
The most important economic fact of a Bitcoin ban, whatever its structure, is that it is literally impossible. Bitcoin can be run using shortwave radio, morse code on a wire — you could run it (slowly) using flashlights from zodiac boats off the coast, or smoke signals from the ragged peaks of the Andes.
This is because Bitcoin, fundamentally, needs nothing more than ones and zeros communicated from person to person -- that is all. You can no more ban a shared ledger like Bitcoin than you can ban human speech, or light propagation through air.
Now, of course, if you’re running Bitcoin on zodiac boats, its use will be very limited. And that’s where the fun begins with some delicious consequences.
In terms of technology, it’s hard to imagine a tech that is less bannable than Bitcoin. Electricity could, and was, banned for years. Even the internet was effectively banned for decades. Until regulators got around to allowing, first, private use, and then – over the FBI’s staunch protests – allowing credit cards. Only then could the internet sustain the economic incentives to build websites worth visiting.
In fact, Bitcoin is much closer to another truly revolutionary and ultimately uncensorable technology: movable type.
Introduced to Europe in the 1400’s, movable type in concept is quite simple: carve out letters, mount them on a rack, smear paint on the rack, and slap on a piece of paper. Fundamentally, it’s about as complex as a rainy-day craft project for children.
Simple but, it turns out, breathtakingly revolutionary. Because movable type radically reduced the cost of printing. No longer do you need a hundred monks hand-printing each letter. Instead, with movable type you can crank out 10,000 copies of a manifesto, give them to 10 conspirators to ride to the surrounding towns, and in a matter of days assemble a 10,000 strong peasant army.
So cheap pamphlets, it turns out, were a super way to turn local peasant revolts into, we now know, fully 300 years of non-stop civil war culminating in a series of negotiated settlements that brought liberty, human rights, and pluralistic government across the West, thence across most of the world. Cheap printing gave us our modern political world.
Now, once governments realized the danger of movable type, they did try desperately to ban it. Unsuccessfully, it turns out, because they could seize machinery, they could close newspapers, they could imprison people for distributing -- even just possessing – pamphlets. But you cannot ban a simple idea once people realize it can change the world.
In his book On Liberty, John Stuart Mill wrote that truth never dies because no matter how many times it’s snuffed out, it keeps rising over and over until the timing is right. So, too, with simple yet revolutionary technologies. Governments can try to ban them over and over. Each time buying a little more time, in return for further radicalization of the users of the technology. It is a game they cannot win.
Governments Can Only Slow Bitcoin
And so, fundamentally, it doesn’t matter what anti-Bitcoiners or, indeed, what the US government thinks about Bitcoin. The underlying concept of Bitcoin, of running an entire economy on an unowned ledger with no intermediaries, nothing to seize, nothing to kill or enslave -- cannot be stopped.
Now, to be fair, just as governments slowed movable press, governments can slow Bitcoin. They can limit its spread, indeed quite effectively. But that very process of slowing, of limiting, will simply concentrate the benefits among its most radical participants.
Partly because, like movable type, the benefits of an uncensorable money would only be enjoyed by a limited group of radicals. But, most importantly, because ownership itself would become concentrated among only the most radical, only the most revolutionary, users. Users who, today, may be destined to be millionaires, but in a sufficiently aggressive ban are be destined to be billionaires or more.
How much would it be concentrated? Easy: in direct proportion to the aggressiveness of the ban. Ban it a tiny bit and you simply shut out JP Morgan. Keep going and you take out the random day-traders and low-commitment users. Keep making the ban tighter and tighter and it simply concentrates, step by step, all the world’s future money into the hands of, step by step, increasingly radical future billionaires.
What Happens in a Bitcoin Ban?
So let’s walk through it.
First off, a ban will certainly affect Bitcoin’s price. If Elon Musk tweets can affect Bitcoin’s price, government bans can, too. For the same reason: knocking demand out of the game.
The most effective way to do this by threatening to arrest Bitcoin users for transacting or even just owning Bitcoin. This would scare away all but the most dedicated and risk-tolerant Bitcoiners in any country enacting such a ban. Assuming the banning government is the US, this would likely include a large percent of countries in the world who, in financial matters, lack effective sovereignty.
So let’s imagine the US completely bans Bitcoin, both transacting in it and owning it. This would knock institutions out very quickly, and completely. Institutional flight would actually have surprisingly little durable impact given institutions still make up less than a tenth of Bitcoin demand. Probably, and ironically, so low specifically because those institutions have been scared about a ban or just regulatory harassment.
What would have more impact is normal investors who aren’t necessarily committed to Bitcoin. Maybe they’re just here for the price, or for diversification, or they bought $100 on a lark. These low-information owners are a large part of Bitcoin owners: one recent survey, for example, estimated that 1/3 of Bitcoin owners report knowing “little to nothing” about it.
Now, it’s worth noting that these low-information owners have actually proven surprisingly resilient as investors, going by the fact that nearly all Bitcoin owners held through the brutal 2018-2019 bloodbath that sent Bitcoin down nearly 90%.
Still, we’re talking arrest here. So I guess the vast majority of this 1/3 won’t take on the risk. Meanwhile, if exchanges are shuttered then Bitcoiners who use them – about 13% of all Bitcoins are on exchanges – probably drop out rather than moving their coins to self-hosted wallets and pretending to forget the key.
So, put it all together, and between fleeing institutions, shuttered exchanges, and nervous day-traders and casual investors, I’d guess Bitcoin’s near-term price could drop temporarily by at least 90% — perhaps to a few thousand dollars.
Note, this wouldn’t necessarily happen overnight: realistically, institutions, business treasuries, banks, and large-scale investors all would pressure government to go slowly so they’re not selling into an abyss.
So that’s Act 1: Bitcoin drops perhaps 90% over a period of weeks or months. Leaving ownership concentrated among only the most dedicated and risk-impervious bitcoiners on earth – the diamond-handed revolutionaries who believe Bitcoin is the path to a radically better world.
A Ban: The Morning After
And that’s where it gets fun. Because a ban, even a fairly effective ban, would only marginally change Bitcoin’s fundamentals – its odds of becoming a global currency. After all, Bitcoin would continue to be what it is today: the monetary backup that replaced gold.
Just as the British monarchy has stood for centuries now as, essentially, a backup plan when parliament screws it up, an underground Bitcoin remains what it is today: a backup plan for when central banks screw it up.
Indeed, the very tyranny of banning Bitcoin could improve the odds that we’ll need that backup sooner than later. It would provide yet more confidence that fiat governments are headed off a cliff.
Pair this ironic improvement in fundamentals with a Bitcoin that’s 10x cheaper since institutions fled, and it’s very easy to imagine thousands of Rothbard fans or anarcho-capitalists happily ramping up their Bitcoin holdings. Joyously taking in all those orphaned Bitcoins as fast as JP Morgan dumps them.
And so, when the smoke clears, when Bitcoin is hyper-concentrated in those most lovingly radical hands, Bitcoin goes back to what it does: resumes its upward march. Because nothing changed, it just concentrated.
Starting from a lower level, sure — we will have lost 4 years, price-wise. But by showing once and for all that Bitcoin is impervious to sovereigns, the ban could paradoxically raise Bitcoin’s price above the pre-ban. All those hundreds of billions accruing to the radicals.
The Great Game
And what are these radicals doing? Waiting. They’ve already seen the future: They now know with certainty that tens of millions want Bitcoin. And they’ve just been handed the keys to that dream at a 90% discount.
And so, they wait. They wait for governments to divert their very limited attention span on some new bugbear, neglecting the ban. Each episode of neglect driving up use, hence driving up price, of Bitcoin once again.
And governments will, inevitably, relax the ban. Not on paper, of course – governments are too proud to admit mistakes. But governments, historically, have the attention span of a squirrel. Once a problem has receded in public opinion, they find new problems to entertain and anger voters with.
Meanwhile, again deliciously, consider what’s going on inside the political sausage machine during all this. The price is jumping again, even crazier Lambo-driving, island-buying anarchists are making the news, and institutions are having no fun staying poor. They are begging, bribing, cajoling politicians, offering jobs to regulators — deploying all their corruption to get rid of the ban that’s handing somebody else their lunch.
In sum, a Bitcoin ban would be arguably the most most self-defeating — and certainly the most deliciously ironic — government ban in history. I’m not rooting for it – I’d rather governments stop stealing peoples’ money. But if governments do decide to redistribute literally all the money in the world to the people who despise them most, so be it. They will have made their own bed.
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It wasn't just moveable type that lead to liberty and human rights. It was also gunpower. So that once the 10,000 peasants are summoned, they can use muskets to defeat the well-trained knights in expansive armor.