How to Protect Your Bitcoin Investment From the Threat of Quantum Computers

Cryptocurrency is one of the fastest-growing asset classes, but some predict when quantum computers become powerful enough, they will be able to crack a bitcoint private key in a matter of minutes. This would undermine the blockchain as a whole and bring it tumbling down. This article addresses this threat and what investors can do to Quantum-Proof their portfolios.

Despite failing to reach the heady heights of late 2017 bitcoin and other cryptocurrencies remain among the best performing asset classes. Even after a sharp dip in March, bitcoin has grown rapidly over the course of 2020. It’s currently up 60% year-to-date (YTD), outperforming traditional safe haven and “fear trade” assets like gold (up 35% YTD). And bitcoin isn’t showing any major signs of slowing.

Despite this positive performance there is a looming threat on the horizon, the dreaded quantum computer.

What the Heck Is a Quantum Computer Anyway?

Quantum computers are special because they can process data at speeds no conventional computer could hope to match. Traditional computers use bits (binary digits), namely 1s and 0s, to represent data. Whether it's video games, Netflix, or this website, the underlying information can be broken down into patterns of 1s and 0s. In comparison, quantum computers use a qubit, a two state quantum system. This changes everything.

Rather than being forced to process data with a huge string of binary code, quantum computers are able to leverage the almost magical nature of quantum physics to calculate multiple outcomes simultaneously.

In essence, a quantum computer is designed to capture and contain qubits in a stable state. They are then able to take advantage of two important aspects of quantum mechanics in order to process large amounts of data.

  • Superposition: Qubits can hold all possible combinations of 1 and 0 simultaneously. This allows a quantum computer with several qubits to process large numbers of different outcomes. This means that as quantum computers are able to hold more qubits their power grows exponentially.
  • Entanglement: It’s also possible to generate qubits that are entangled. This means that you can change the state of one qubit and immediately and predictably alter the states of other qubits that it is entangled with. This enables you to run all possible calculations simultaneously, significantly increasing processing power.

This process is complex and far beyond the scope of this article. To learn more, I recommend the series of MIT articles or this excellent Kurzgesagt video.

Creating quantum computers is incredibly difficult due to decoherence. Even small changes in temperature, or slight vibrations, can completely break a quantum computer. This effect has prevented quantum computers from becoming viable but their potential is huge.

What Does This Have to Do With Cryptocurrency Investing?

Like the printing press, steam power, and the internet, quantum computing is a game-changing technology. Quantum computers could provide a huge boost to research efforts and the leap in processing power could enable us to solve some of our most pressing societal problems.

On the other hand, new technologies naturally cause disruption. The printing press broke traditional power structures, steam power and the industrial revolution made the skills of huge numbers of artisans obsolete, and the internet has all but destroyed brick and mortar shops.

Quantum computers threaten to shatter encryption.

This could have wide ranging implications for everything from banking to general cybersecurity. It could also be devastating for cryptocurrency investors.

Most major blockchains rely upon ECDSA (Elliptical Curve Digital Signature Algorithm). This enables bitcoin and other cryptocurrencies to create a random 256-bit private key and a linked key that can be shared with a third party.

Currently, these keys are all but impossible to crack by brute force. This means that hackers can't use computers directly and are thus forced to rely upon social engineering in order to gain access and steal cryptocurrency.

Theoretically, a quantum computer of sufficient power could crack a bitcoin private key in a matter of minutes. This would give a bad actor access to all of your funds on an exchange and could threaten to undermine the blockchain as a whole.

What Can Investors Do to Quantum-Proof Their Portfolios?

The good news is that a quantum computer would need around 4,000 qubits to be able to crack Bitcoin’s encryption. Most modern quantum computers can only utilize around 52 qubits, meaning that the threat is still theoretical. This gives investors time to protect themselves against the threat. And there are a number of ways that they can do that.

Invest in Quantum-Proof Cryptocurrencies

The most direct way that investors can protect their currency from this threat is to invest in currencies that are actively using quantum-resistant encryption methods.

The most obvious example is the Quantum Resistant Ledger (QRL) which represents the first industrial implementation of the eXtended Merkle Signature Scheme (XMSS). This hash-based signature is more advanced than ECDSA and should be more difficult for a quantum computer to crack.

Also, any cryptocurrency leveraging symmetric encryption like AES-256 should also be quantum resistant.

Only Use a Wallet Address Once

This is already the recommended practice for all Bitcoin transactions but it is especially useful in combating the threat of quantum storage.

Whoever controls the keys to a wallet or address is essentially in control of the bitcoin sent there. This means that the best way to protect yourself from a hack is to use an address once and then immediately transfer those tokens to an offline cold storage wallet, safe from any attack.

This won’t protect you from any price fluctuations quantum computing might cause, but will help to protect your owned cryptocurrency. And it is just good practice.

Diversify Outside Cryptocurrency

Your portfolio should not be 100% allocated to cryptocurrency, but should include multiple assets including commodities, index funds, and even dividend stocks. A well-managed, diverse portfolio will help you weather any storms and enable you to better protect your investments against quantum computers, or other potential threats.

Prepare but Don’t Panic

The fact is that quantum computers are still not a reality. Even if a company like Google does follow through on recent breakthroughs, it is likely that they will remain the preserve of governments and big companies for the near future.

It is entirely possible that quantum computers never reach a point where they are scalable and in the hands of people who might do blockchain harm.

That being said it would be foolish to dismiss a threat like this. The best thing that investors can do is balance their portfolios and keep an eye on the latest news about quantum computing and the efforts taken by cryptocurrency projects to counter the threat.

TabbFORUM is an open community that provides a platform for capital markets professionals to share their ideas and thought leadership with their peers. The views and opinions expressed are solely those of the author(s). They do not necessarily reflect the opinions of TABB Group, its analysts, TabbFORUM and its editors, or their employees, affiliates and partners.


Add a Comment

Your email address will not be published. Required fields are marked *