Running the Gauntlet

This article is featured in Bitcoin Magazine’s “The Halving Issue”. Click here to get your Annual Bitcoin Magazine Subscription.

Halvings are always looked at as seminal events, a demarking of the end of one era and the beginning of a new one. In the same way that Americans come out of the woodwork to clamor over the new set of presidential candidates in the election cycle, Bitcoiners come flooding out to celebrate the successes of the past block reward epoch and look forward to the possible successes of the next.

I would argue that this halving, it is imperative to do the exact opposite of that in regards to the mining ecosystem. We should be deeply concerned with the potential of what can go very wrong in this next epoch, and how parts of the mining ecosystem can fail in ways that present a systemic risk to the Bitcoin ecosystem.

Bitcoin post ETF approval is finally lunging forward in terms of developing integrations with the legacy financial system, and while this is definitely something that will contribute to deeper market liquidity and likely positive price movement, it is also something that will come with the heavy cost of providing fuel and food to an external influence on Bitcoin that will need to be resisted and fought every step of the way in order to maintain the important characteristics of Bitcoin. Decentralization, censorship resistance, the ability to offer people a truly sovereign money that is within their control.

The integration of bitcoin backed products into the legacy financial system is going to draw the scrutiny of regulators and legislators like we have never seen before. The floodgates are now open in terms of people being able to freely allocate their funds to bitcoin exposure (I say this specifically because they have only price exposure and not ownership). This presents the potential for a massive migration of funds from other asset classes into bitcoin, which would have serious implications for the performance of those other asset classes depending on the size of that reallocation.

This is exactly the type of situation in which the government typically makes significant regulatory changes in reaction to a fundamental change to the structure of market dynamics. Regulators are going to come for every layer of the mining stack, as that is what the rest of the network and protocol is dependent on.

Mining Pools

Mining pools are the lowest hanging fruit for regulators to go after. Pools are an economically necessary aspect of the mining industry. Without pools, two things would be wildly different for everyone mining.

First, any miner not of sufficient size would have highly irregular income. Without pools to well, pool miners’ resources together and proportionately share the income from the block reward regardless of who actually found the block, miners’ income…

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