. . .In the case of Bitcoin, the current(at the time of this writing) market cap of Bitcoin is about $134 million. . .there is a total of $10.1 million worth of mining equipment protecting that $134 market cap. . .
The question then becomes, is a 10:1 ratio enough? Do we need a near 1:1 ratio for Bitcoin to be protected against wealthy and powerful enemies? . . .Can somebody please explain to me how this is not a fatal flaw in Bitcoin?
If/when bitcoin starts to reach mainstream usage, it is entirely possible that the exchange rate could be closer to 1300USD:1BTC than 13USD:1BTC. This puts your market cap over 13 Billion, and your ratio at current difficulty and equipment cost around 1000:1.
If the price of Bitcoin goes up to $1300 USD then the difficulty will climb as well because of increased mining. The ratio will likely stay around 10:1. The question is whether or not that's enough. If the market cap of Bitcoin rises 100 fold, then it would take 100 fold of $10 million to defeat it, which is $1 billion. That's still easily within the ability of the state to crush.
My conclusion is that Bitcoin still very much is and will be for a long time in a state of infancy and great danger. Until the defense budget(or cumulative mining operations) of bitcoin gets so big that even the governments of the world cannot muster enough resources to challenge it, it will be in danger.
I'll go on record saying I think the value per bitcoin can easily reach $130,000 or more. That's 100 times more than your $1300 figure which makes it at least $100 billion for the attack. And that's before any "bitcoin defenders", people who have interest in seeing Bitcoin succeed, pull out the stops to defend the network.
Granted, there is a long way to go before reaching that lofty figure, so I agree the barrier-to-entry for attack is more palatable early on.
But I think bitcoins are protected in other ways. Using your math let's say it now takes at least 10 million for an attack. That's no small figure. Nobody is going to do that for profit motive. Not Oprah Winfrey, not a company like Apple, nobody. It would not make any sense. Bitcoins pose no threat to these people or entities, so why would they waste their money? Besides money is only part of it what's necessary. You have to hire the right engineers, procure all the hardware, set it up, carry out the operation, worry about blowback, etc. It makes no sense.
No, an attacker investing that substantially would have to feel threatened somehow, like a government. The problem is it would have to be a First World government, and in case you haven't noticed, all of them are in various states of financial crisis right now. I'll tell you why a government wouldn't do it in a second. First, a quick reminder about the state of U.S. finances:
U.S. Fiscal CliffWikipedia: In August 2011, Congress passed the Budget Control Act of 2011 to resolve the debt-ceiling crisis. This law provided ... decrease the deficit by $1.2 trillion over the next ten years. Because the committee failed to do so, another part of the Budget Control Act directed across-the-board cuts split evenly between defense and domestic spending, beginning January 2, 2013. ...
Cuts totaling $110 billion per year will be applied from 2013 to 2022, split evenly ($55 billion each) to defense and non-defense discretionary spending. For scale, discretionary funding for 2011 totaled $1,277 billion
Uncle Sam can no longer airily brush off "oh just another 1 billion dollars". His credit line has been checked. So even spending 1 billion against some project called "Bitcoin" would be felt.
But the real reason I doubt any government would take action is something I mentioned above: blowback. If it was discovered a government actually set up and carried out an attack what do you think would happen? Do you think the thousands of people already involved in Bitcoin would take that lying down? Can you imagine the press something like that would create? And who knows what other reactions it would spark?
If nothing else it would legitimize bitcoin in a way that would certainly put the focus on it. In other words, the effort to kill it could easily backfire. Remember, a 51% hash attack is not something that works in perpetuity; it has to be sustained. The blockchain already has more than 3 years of validity to it, a measurement to which we know transactions are true. A 51% attack doesn't "break" anything. At any point when the network regained confidence that honest nodes were winning bitcoin could continue on.
Such attacks also wouldn't be effective against proper physical bitcoins as I describe here:
https://bitcointalk.org/index.php?topic=98318.msg1076508#msg1076508While I agree such an attack is possible in a theoretical sense, I consider it highly unlikely.
