Insight
December 13, 2024
On Monday, Google unveiled its state-of-the-art quantum chip, Willow, sparking some concerns within the Bitcoin and broader digital asset community. Although quantum computing (QC) has long been a peripheral fear for investors, its future distance has kept it from being a pressing issue for analysis. Advancements like Google’s are inevitable, and while their significant impact may still be decades away, we’re providing this as a reference for investors the next time QC-related concerns arise. Expert opinions on the timeline vary widely, but we believe informed investors are best equipped to make sound decisions.
To start, let's cover the basics of how Bitcoin utilizes cryptographic technologies. It relies on two key types: digital signatures and cryptographic hash functions.
Digital signatures, such as ECDSA (Elliptic Curve Digital Signature Algorithm with the secp256k1 parameter) and Schnorr, are fundamental to generating private/public key pairs and managing how users send and receive bitcoins. Users create a key pair and lock an output (bitcoins) to a public key. These bitcoins are secure because only the corresponding private key can produce a valid signature to unlock or spend them. The public key is derived from the private key using ECDSA or Schnorr algorithms.
Hashing, particularly through the Secure Hash Algorithm 256-bit (SHA-256) and RIPEMD-160, processes an input string to produce a fixed-length output, known as a digest. Bitcoin relies on hashing for several critical functions, including address security, transaction verification, time stamping, and mining.
Both digital signatures and hash functions could, in theory, be compromised by QCs. QCs could compromise existing digital signatures using Shor’s algorithm, which efficiently solves the Discrete Logarithm Problem, allowing QCs to reverse a private key from a public key. Similarly, QCs could threaten current hash algorithms using Grover’s algorithm, known for its quadratic speedup over classical search methods. This could affect mining.
The issue, however, is the practicality of these theoretical vulnerabilities. Digital signatures are widely seen as the more vulnerable of the two technologies, with an estimated 8.56M physical qubits required to break ECDSA in 10.5 hours. Google’s Willow chip operates at 105 physical qubits, implying that an 81,523x improvement would be required for a similar attack. SHA-256 is much thornier for QCs, requiring 2.2M physical qubits (21,238x improvement over Willow) to break - in 18,000 years. Mining is not likely to be impacted significantly by QCs given what we know today.
While experts differ on the timing of when (or even if) QCs of sufficient strength will be available to break digital signatures, let’s pretend that QCs of sufficient power have arrived. There are two potential vulnerabilities: bitcoins at rest and bitcoins in transit. Bitcoins for whom their public key has been revealed, either through P2PK transactions, the earliest type of transaction types that is no longer in use, or through address reuse (of any signature type). These include Satoshi’s potentially 1M+ bitcoins, which are sitting in P2PK addresses. In total, this amounts to about 4M bitcoins (~$400B). A sufficiently strong QC could reverse the private keys for these bitcoins and move them to new addresses the attacker controls. For bitcoins in transit, whose public key has been revealed in a spending transaction, a QC would need to reverse a private key in 10 minutes to intercept these bitcoins and double spend them, again moving them to addresses the attacker controls.
What is to be done about these risks, however remote they may be? First, QCs pose a risk for all sorts of real-world applications that are far more important than Bitcoin – commerce, banking, government, and military, just to name a few. Second, the experts haven’t been sitting down. The NIST (National Institute of Standards and Technology) started a competition in 2016 for post quantum computing (PQC) digital signatures, and today we have 3 viable candidates. The agency is continuing the search for more candidates too, with 14 more algorithms moving on to the next phase of evaluation. For federal systems, the NIST has set a deadline of deprecating ECDSA by 2030 and disallowing it entirely after 2035, to give readers a sense of how it views the timing of transitioning to a PQC world.
Several things could be done for Bitcoin specifically to address QCs. PQC digital signature algorithms could be implemented on Bitcoin. Vulnerable bitcoins at rest could be moved to PQC addresses. Those that cannot be moved because of private key loss or because the individuals are no longer around (Satoshi) could have non-spending conditions put on them via a soft fork. These are some simple solutions, but given the inventiveness of the Bitcoin community, we are certain plenty of other options will come forth. Furthermore, this isn’t just a problem that the Bitcoin community faces, but all digital assets. General solutions may arise from other parts of the broader digital asset ecosystem as well.
QCs may conjure up bewildering visions of the future, but they also spark fears, particularly for technologies like Bitcoin. Fortunately, the risks posed by QCs are often overstated (in the case of hashing) or remain many years away (for digital signatures). Moreover, cryptographers have been preparing for a PQC world for years, and Bitcoin developers are actively addressing this challenge. Technology risks are one of the largest categories to consider when evaluating Bitcoin, and while QCs carry significant theoretical implications due to their novelty, investors can take comfort in the fact that these risks are manageable if the threat ever becomes more immediate.
Bitcoin ended the week above $100K, up 0.9%. Although bitcoin was largely unchanged, the week wasn’t without its volatility. On Monday, the broader digital asset market experienced a price correction resulting in $1.55B in long perp liquidations. Liquidations on bitcoin were only a small portion of that total, $143M, with most of the liquidations hitting the altcoin market, hinting at where most of the leverage was in the market. Perp funding rates, which had risen with the rally in the markets, have been reset to significantly lower levels, implying a degree of speculation has been taken out of the market.
It had been something of a rotation into alts in the past few weeks. Bitcoin’s dominance (share of industry market cap) peaked at 61.5% 3 weeks ago and is now down 5 points to 56.5%. This loss in dominance seems to be part of every market cycle, however. So rather than a cause for concern, to us, this is just another checkpoint along the cyclical waves we’ve seen in the past.
What’s next for bitcoin? Trump seems intent on keeping his campaign promise of creating a national bitcoin reserve, although exact details have yet to come forth. Reporting from Axios indicates that he’s hoping to get bitcoin to $150K early in his presidency, which would certainly be helped by the presence of a national bitcoin reserve. We at least know some of his cabinet and agency picks now, which all seem to be in keeping with continued support for Bitcoin and the broader digital asset industry. Things are all lining up for another good year in 2025.
Investing:
Sizing Bitcoin in Portfolios - BlackRock Investments
Billionaire Investor Ray Dalio Recommends Bitcoin As 'Hard Money' Amid National Debt Increases - The Block
Politics and Regulation:
Trump Remains Keen on Strategic Crypto Reserve with Aim of Making US Industry Leader - The Block
Trump Puts Tech Moguls in Driver's Seat of Washington - Axios
Andreessen Crypto Policy Lead Quintenz in Running for CFTC Chair - Bloomberg
LINK, AAVE Surge as Donald Trump's Crypto Project Buys $1 Million Each - CoinDesk
Technology, Industry, and Companies:
Developer Report: Analysis of Open-Source Crypto Developers - Electric Capital
How Stablecoins Will Eat Payments, and What Happens Next - A16z Crypto
Amazon Bitcoin Shareholder Proposal - National Center for Public Policy Research
Wrapped Bitcoin Hides Bitcoins for WBTC On Tron - Protos
Circle and Binance Form a Strategic Partnership to Accelerate Global USDC and Crypto Adoption - Binance
As BitMEX Turns 10, the Market Is Still Thankful for the Perpetual Swap - CoinDesk
Crypto.com Acquires Orion Principals Limited to Boost Financial Product Expansion - Crypto.com
Former Grayscale Investments CEO Michael Sonnenshein joins Securitize as COO - Crypto.com
Dec 18 - FOMC rate decision
Dec 27 - CME expiry
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