Bitcoin Faces ‘Bank Run’ Vulnerability, Warns Cyber Capital Founder Justin Bons

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As a seasoned researcher who has witnessed the rise and fall of various financial systems throughout my career, I find Justin Bons’ analysis thought-provoking, albeit somewhat alarmist. While I agree that Bitcoin’s current transaction capacity is a significant bottleneck, I also believe it’s important to consider its historical resilience and the adaptability of its community.

According to Justin Bons, the founder and Chief Investment Officer of Cyber Capital, Bitcoin (BTC) could potentially face a massive “rush withdrawal” event or financial panic, similar to a bank run.

As an analyst, I would describe a bank run as a situation where individuals rush to withdraw their funds from a banking institution due to concerns about its financial stability or potential bankruptcy.

Bitcoin Cannot Handle Mass Exits, Bons Says

As I delved into a comprehensive social media discussion, I underscored some substantial issues with Bitcoin’s transaction capability, self-custody model, and network security. From my perspective, these weaknesses could potentially trigger a catastrophic event that would jeopardize the network’s stability and inflict significant losses on investors.

Bons’ research primarily focuses on the restricted ability of Bitcoin to process transactions, which he estimates at around seven transactions per second (TPS). Leveraging data from Glassnode and examining Bitcoin’s code, he posits that Bitcoin’s 33 million active users could encounter a traffic jam if a sudden panic-induced surge leads to simultaneous withdrawals.

Given the current pace,” Bons said, “the line could stretch out to approximately 1.82 months even under ideal circumstances. Unfortunately, in practice, transactions may get delayed and eventually discarded, creating a situation where smaller entities can’t leave unless they’re willing to pay unusually high fees.

Bons cautioned that this restriction might trigger a “downward spiral,” where a decrease in price forces miners to halt operations, which in turn slows down the network even more. These delays could exacerbate the panic, leading to a harmful cycle of decreasing mining rates, extended block times, and continuously falling prices.

In his analysis of Bitcoin, Bons argued that its transaction processing speed is too low for practical applications. He pointed out that Bitcoin can only handle around 7 transactions per second, while systems like Visa can manage up to 5,000 transactions per second, and some cryptocurrencies even surpass the 10,000 TPS mark without compromising on decentralization.

“There are literally ZERO use cases that can be supported by 7 TPS. Mass self-custody over BTC is a dangerous narrative. The only scalable path forward for BTC adoption is through centralized custodians and banks, contradicting its ethos as ‘freedom money’,” he stated.  

As an analyst, I too have raised concerns about Bitcoin’s long-term sustainability. One aspect I find troubling is its decreasing security budget, which could potentially intensify the risks I’ve identified. Additionally, the network seems to be straying from its original intent as a peer-to-peer electronic cash system. It’s disheartening to see how the limitations and governance have transformed Bitcoin into more of a speculative asset than a practical means of exchange.

Heated Bitcoin Debate on Social Media 

Bons’ comments sparked a passionate discussion on the topic that used to be known as Twitter. However, Patrick Flanagan, who refers to himself as a tech specialist, refused to acknowledge the assertions.

According to Flanagan, this idea is purely speculative. If such an event were going to take place, it should have happened long time back.

Bons rebutted, asserting that the risk increases as the number of users grows. He noted that even a fraction of users leaving could trigger a run and added that the larger the network gets, the more severe the problem becomes.

As a crypto investor, I’ve come across some interesting suggestions from fellow investors about potential alternatives to investing directly in Bitcoin. One of these options is trading Wrapped Bitcoin (WBTC) on Ethereum, which apparently bypasses some limitations on Bitcoin’s base layer. However, Bons pointed out that while WBTC users can easily exit their positions, those who hold Bitcoin directly may find themselves trapped during a sell-off, potentially worsening the situation.

Self-custody proponents need to take note of this point. If even a small amount of fear, uncertainty, or doubt (FUD) arises, it could result in people being unable to access their funds,” as stated by DashPay’s Joel Venezuela.

In response, Bons admitted his predicament as a cypherpunk and self-custody advocate, with another user bringing up a parallel to gold, asking about the time required to sell off all worldwide gold reserves. Bons then pointed out that while gold does have practical restrictions, its potential for theoretical transactions greatly surpasses Bitcoin’s, making it less vulnerable to such congestion issues.

Opponents of Bons’ assessment believe that Bitcoin has faced comparable issues before without crashing. Yet, his cautionary note strengthens the call for a fresh look at Bitcoin’s capacity to handle increased transactions (scalability) and its overall user-friendliness (usability).

Regarding Bitcoin, Bons maintains a pessimistic stance; however, he remains positive about the general cryptocurrency market. In his view, there’s still significant potential for the entire cryptocurrency sector. He finished by implying that Bitcoin’s initial principles have found new life in various other blockchain initiatives.

As Bitcoin reigns supreme among cryptocurrencies, discussions persist regarding its capacity to scale and robustness. Bons’ warning underscores the hurdles Bitcoin encounters as it strives for wider acceptance amidst a dynamic financial landscape. Meanwhile, Galaxy CEO Mike Novogratz shares similar concerns about the prospect of a Bitcoin reserve in the US.

Novogratz suggests that it could be a wise move for the U.S. to increase its holdings of Bitcoin rather than relying on something tangible to support the dollar.

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2024-11-20 12:52