One of the most hallowed rules of Bitcoin (BTC +0.93%) going back to its inception is that nobody is allowed to take your coins from you. As long as you or the custodian you delegate remains in control of the cryptographic key associated with your wallet, the contents of the wallet are your property, and that principle is the bedrock on which the asset was built.
This week, a group of developers formally proposed breaking it. If the proposal is implemented, would it destroy the cryptocurrency's value forever? It's more likely than it sounds, so let's dive in and unpack what's going on.
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What's being proposed and why
One of the biggest issues facing Bitcoin right now is that it's theoretically vulnerable to having its encryption cracked by a powerful quantum computer.
Although no such quantum computers exist now, it's still a big problem, because an attacker equipped with such a device could steal coins from people's wallets even if they didn't make any kind of security mistake. And, as a Google Quantum AI research paper published on March 31 found, cracking Bitcoin's encryption with a quantum machine will probably require a far less sophisticated quantum platform than what was previously widely anticipated. So this threat is no longer abstract.
CRYPTO: BTC
Key Data Points
The Bitcoin developer community is thus springing into action, attempting to find work-arounds or potential patches that would guard against the quantum threat. Enter Bitcoin Improvement Proposal 361, or BIP-361, which was submitted to the chain's official code repository on April 14, and which immediately ignited intense controversy.
If BIP-361 is adopted, it would force all Bitcoin holders to migrate their coins to new quantum-resistant wallet addresses within five years, or (and this is the controversial part) permanently lose the ability to transfer or spend them after that migration period ends. It's expected that among the frozen assets would be the estimated 1.1 million bitcoins belonging to Satoshi Nakamoto, the coin's pseudonymous creator, which are worth roughly $80 billion. It's also expected that the proposed violation of holders' rights to control their coins would have severe impacts on prices, most likely to the downside, and perhaps permanently so.
If some of the proposal's detractors are to be believed, it could even be the end of Bitcoin. After all, nobody would want to hold an asset that a group of crypto developers can (seemingly arbitrarily) decide to lock you out of because of their preferred solution to a technical problem.
What investors should watch
In short, critics see BIP-361 as a precedent-setting violation of the immutability of property rights that gives the cryptocurrency its underlying value. Phil Geiger, the head of business development at a Bitcoin treasury company called Metaplanet, said that the proposal is essentially claiming that "We have to steal people's money to prevent their money from being stolen."
Even if that might seem a bit flip, Geiger's take isn't too far from the truth. The only nuance is that with BIP-361 as it's currently conceived, it would be more like burning people's money without their permission to prevent it from potentially being stolen in the future.
BIP-361 is not being adopted anytime soon, and it might not ever be. The path from draft to consensus usually takes years. Bitcoin's decentralized governance also makes it slow to coordinate crucial upgrades. One developer of BIP-360, estimated that a full migration could take about seven years from the moment a consensus forms -- and a consensus is nowhere close to forming by anyone's estimation at the moment.
If you hold Bitcoin, you don't need to act right now. The tools for a quantum-safe future are being built, and the coin will likely implement them in some form or another eventually. And if you hold your coins in a spot Bitcoin exchange-traded fund (ETF), your custodian will make sure that your coins are migrated to whatever is needed to keep them secure.
Nonetheless, the decisions made now about how to mitigate quantum computing risks to this asset will shape whether Bitcoin still functions as a dependable store of value in the next decade and beyond. Keep an eye on how the developer community works its way through this issue. Until it's resolved in a graceful way, high-risk proposals like BIP-361 are going to continue being floated, and the coin is going to be riskier as a result.
