Bitcoin's Leverage Flush and Quantum Computing Fears

Bitcoin’s leverage flush on Monday after breaching the $100,000 level last week coincided with Google’s announcement of Willow, its first quantum chip, reigniting fears that private keys could be decrypted to access users’ funds.

Google’s Willow Chip

Google’s Willow chip represents a significant advancement in quantum computing. However, at 105 qubits, it is still far from the millions of qubits needed to practically attack Bitcoin’s Elliptic Curve Digital Signature Algorithm (ECDSA) and the secure hash algorithm (SHA-256). Bernstein analysts, led by Gautam Chhugani, wrote in a note to clients on Tuesday that:

> ECDSA is a cryptographic algorithm used to secure private keys and enable digital signatures for Bitcoin transactions. SHA-256 ensures the integrity of the Bitcoin ledger by hashing transaction data, playing a crucial role in mining through Bitcoin's proof-of-work mechanism.

Preparing for the Quantum Future

“Should Bitcoin contributors start preparing for the quantum future? Yes, but any practical threat to Bitcoin seems to remain decades away,” the analysts said. “Bitcoin contributors have also been debating a transition to quantum-resistant encryption.”

The solution to quantum computing threats involves implementing quantum-resistant signatures, but this comes with trade-offs. Mike In Space, creator of Bitcoin STAMPS, warned that these signatures are larger and may require a hard fork to increase block size. This could lead to higher storage and bandwidth demands for node operators, and a hard fork might split the network, causing community contention over the dominant chain. A soft fork could avoid this but requires migrating coins, a slow and costly process under current block size limits that could take years to complete, he said.

Different Perspectives on Quantum Threats

However, not everyone is confident in the timeframe of viable attacks. Capriole Investments founder Charles Edwards suggested a 50% likelihood of a quantum threat emerging within 5-10 years, with as few as 2,500 logical qubits potentially able to break SHA-256.

> “Whether it's 3, 5, 10, or 15 years away isn't the point, the point is action needs to be taken TODAY,” Edwards said.
> “Best case scenario, once we have agreed on a QC proof cryptography upgrade for Bitcoin, it will likely take 1 year just to move most across to it. Further reducing the lead-time we have to act. It's good everyone is talking about quantum computing today; perhaps it will finally start to be taken seriously.”

Broader Implications of Quantum Computing

Quantum computing ultimately poses a potential threat not only to Bitcoin but to all cryptocurrency networks, traditional bank accounts, secure file storage, and any system relying on current cryptographic standards.

Bitcoin Dip Driven by Excess Leverage

Despite coinciding with Google’s news, Monday’s Bitcoin price drop was driven by more mundane triggers like an excessive level of leverage deployed around the $100,000 level. The Bernstein analysts urged clients to:

> “stay long” and “eat the dip” amid strong exchange-traded fund demand and corporate treasury participants like MicroStrategy, MARA, and Riot.

> “Maybe, Bitcoin takes a small ‘holiday breather’ here before the demand breaks through the $100K wall permanently,” Chhugani said. “We believe Bitcoin in the $95K-$98K price range remains attractive for investors looking at a horizon of 6-12 months. Our 12-month Bitcoin price view remains at $200K.”

Gautam Chhugani maintains long positions in various cryptocurrencies. Bernstein or its affiliates may receive compensation for investment banking services from MicroStrategy. Certain affiliates of Bernstein act as market makers or liquidity providers in the debt securities of Riot Platforms.