Bitcoin's security spend is not looking good

Looking at Bitcoin's consistently diminishing security spending, or how fees are not replacing block rewards, leaving Bitcoin vulnerable.

Bitcoin’s security spend is not looking good.

The table above shows that while Bitcoin’s absolute security spend has been increasing or at least steady, the picture is nowhere near as pretty when we take into account Bitcoin’s market capitalization and calculate the more important metric of security spending as a percentage of market cap.

The reason security spending as a percentage is going down is that block rewards in Bitcoin are decreasing. The halving means that every 4 years, the number of Bitocin rewarded to miners for a mined block halves. Currently, it’s 6.25 BTC per block, leading to current annual inflation of ~1.7%. This halves again in 2024, at which point rewards fall to 3.125 BTC per block and presumably security spend falls to ~0.9% of market cap. This opens Bitcoin up to attacks.

If absolute security spend decreases (as it has done the past years), it is clear to most people how it becomes easier to attack Bitcoin. To outspend the rest of the miners takes less money, hence it is easier to attack. However, if security spend as a percentage of market cap decreases, it becomes more profitable to attack.

One way to profit off of such an attack is to open a big short position on Bitcoin. Following this, one could attack the chain through a 51% attack - censoring blocks and causing general havoc - leading to the price cratering. An open short position would reap the rewards from this.

Short selling involves borrowing an asset whose price you think is going to fall from your brokerage and selling it on the open market. Your plan is to then buy the same asset back later, hopefully for a lower price than you initially sold it for, and pocket the difference after repaying the initial loan.

The smaller the percentage of market cap spent on security, the more profitable and more likely such an attack becomes. If you have to spend $20 bln to potentially profit $30 bln, such an attack is far less attractive than spending $20 bln to profit $60 bln. With increasing market cap and increasingly relatively lower security spend, it becomes increasingly more attractive.

This is already worrying now. It only gets more worrying with more halvings, unless fee income drastically increases. At the same time, we’re not seeing increasing fee income. On top of that - no one likes to pay high fees. Increasing fees would drive people to use other chains even more than already happens.

I see no easy solution to this and have no happy ending to this article. This is a massive problem for Bitcoin that is massively ignored, for which the only simple (yet only partial, and extremely unpopular) solution within Bitcoin is to have a tail emission.

Bitcoin will likely have a tail emission at some point, with even prominent Bitcoiners now discussing this as a way to maintain security. One of the few remaining talking points for Bitcoin as a store of value will be gone. The writing is on the wall, in more ways than one.

I personally think that over time people will move towards solutions like Nano that do not suffer from these problems and that are a more secure form of money. Regardless, if we want broad adoption for crypto, we need security to be indisputable, and we need to think rationally about these issues without assuming it will simply be okay.