The Empire Strikes Back with a Coordinated War on CryptoOn Sept 1 2017, Bitcoin roared to a new all-time high, touching the $5000 mark for the first time in history.
And then the bottom fell out.
While Twitterverse crypto enthusiasts called the sudden drop a natural correction, it quickly became clear there was nothing natural about it.
Over the course of two weeks, Bitcoin and every other crypto faced a sustained assault of relentless negative press designed to crash the price, spread fear and destroy the trust in decentralized money.
And it wasn’t random at all.
It was a coordinated attack on crypto.
To understand why you just have to know a little about the history of power in the world.
The Empire Strikes Back
David Smooke, the king of Hackernoon, called decentralized cryptocurrency “this decade’s iconic battle of government vs. business.”
But it’s more than that.
It’s not a battle between business and government. It’s a battle between the centralized empires of the world and decentralized rebel alliance of every day people, an eternal battle.
And it’s not just a battle.
It’s a war.
It’s been raging since humans first crawled out of the primordial swamp. It’s a battle of freedom versus control, power to the people versus the power of a select group of elites who’ve kept their jackboot on the face of humanity for thousands of years.
Each generation must face the fight anew. Like a pendulum that swings back and forth forever and ever, when the world goes too far in one direction it must swing back in the other.
Today, overcentralization is a disease. The pendulum only has one way to go.
But centralized empires don’t give up easily. Like Gollum clutching the dark ring, they’ll do anything to hold onto that precious power at all costs. It’s not even about what’s good or right. It’s about power for the sake of power.
At first the Dark Lords of the world don’t pay much attention to rag-tag bands of rebels. They’re scattered and disconnected. But then they sack a trade ship or take a city and suddenly the Eye of Sauron turns.
And now the Eye has turned towards cryptos.
The Dark Lord’s playbook is simple but devastatingly effective:
Co-opt, coerce, corrupt, outlaw, and kill.
And many of these were on full display the last few weeks.
Corrupt and CoerceIt started with China.
First they lashed out at ICOs, declaring them illegal fundraising.
Of course, many applauded the move. While ICOs represent a revolutionary new way to crowdsource funding, moving beyond the straight-jacket of “accredited investors” and VC money, the space was rampant with scams and questionable projects. While the crypto market initially reacted with a short drop, very quickly the trading public saw the move as positive. Bitcoin bounced right back up. They assumed China would make the freeze only temporary and provide better guidance to protect investors with sensible legislation.
But they were wrong.
It was only the opening shot in a new wave of information warfare.
Over the next few weeks, the news became a deliberate and coordinated drip of terrifying information, designed to derange the market and spread panic. Instead of the China regulatory news breaking all at once, like a normal story does, it kept dripping out in “leaks” and press releases and planted stories.
Soon a story dropped in the Wall Street Journal, citing only “unnamed sources familiar with the matter” that China planned to shutter all crypto exchanges.
Now the panic really set in. The sell-off started in earnest.
Still, many pro traders were calling for HODL, aka holding your position, and waiting for the price to correct back up. Most traders, including me, took the rational position that China would never ban exchanges because it made no sense for them to do it.
We should have known better.
Leaks don’t just happen in authoritarian regimes. The regulatory groups and circles of power meet in secret, in smoke filled rooms, behind closed doors. The people in those circles are chosen carefully for clannishness and absolute loyalty. Real leaks get people killed.
The only leaks are deliberate ones.
While the rumors swirled, the big three exchanges reacted with caution, saying they had received no official word from the People’s Bank of China (PBOC).
cnLedger @cnLedger
Replying to @cnLedger
3/ OKCoin and Huobi PR said they have not received notice from regulators and are operating normally
7:59 AM - Sep 14, 2017
But the optimism wouldn’t last.
Despite the fact that closing down crypto exchanges will only drive trading underground, rob the Chinese government of tax revenue and crater their ability to enforce KYC or “Know Your Customer” style laws, the PBOC moved swiftly to attack exchanges.
Right on schedule with the stream of negative news, the PBOC released a statement attacking the exchanges for running without a license. Now suddenly those exchanges that ran for years without issues need a made-up license to operate.
You see, Chinese law doesn’t work like western law. Although the Chinese Constitution provides legal, executive and judicial powers, they’re all subject to the whim of the Communist Party. The Party is supreme. Courts and regulatory bodies don’t need to follow any of those frameworks in deciding cases.
China runs by rule of man (rén zhì 人治), not rule of law (fǎzhì 法治).
Essentially, it means that regulators can change the rules whenever they feel like and that’s exactly what they did here. In classic rule of man style, the statement was overly broad, vague and subject to interpretation any way they saw fit, a staple of bad law making (just drop it into Google Translate to see).
Now the panic really set in as traders dumped faster and faster. Classic trader memes flowed fast and furious from top crypto Twitter accounts.
A few days later the first of the major exchanges, BTCC, announced it would suspend trading.
BTCC ✔ @YourBTCC
1/ After carefully considering the announcement published by Chinese regulators on 09/04, BTCChina Exchange will stop all trading on 09/30.
7:05 AM - Sep 14, 2017
A day later, the other two, OkCoin and Huboi, said they would meet with regulators. The day after that, they announced their own suspensions by the end of October.
All hell broke loose.
Bitcoin posted the largest one day red candle in history, as traders everywhere sold everything as fast as they could in a stampede of panic.
And if it was just China news driving the market, that wouldn’t be enough to call it a coordinated attack on crypto. The Chinese government has flirted with cracking down on Bitcoin in the past and even closed exchanges.
But this time was different.
Hot on the heels of the Chinese story, a storm of negative press flooded the interwebs.
Out of nowhere, the CEO of JP Morgan, a company known for investing in blockchain technology, called Bitcoin a “fraud” that’s “worse than tulips.”
A few days later, JP Morgan’s lead quant backed the attack calling cryptocurrencies “pyramid schemes”.
Soon after, CNBC was trotting out economist Mohamed El-Erian to say “Bitcoin should be worth half” what it was trading at, and that it would never achieve “mainstream adoption”, essentially the same argument they used against the Internet, video games, eBooks and digital cameras.
Now the price of every single crypto was circling the drain, driven down by the relentless assault of information warfare.
Innovative Chinese platforms, like NEO, took some of the biggest beatings.
But why now?
On the surface none of this makes sense.
The blockchain space has been booming. Investor money is flooding in. While there are certainly a number of useless projects out there, the space is filled with startups who will revolutionize everything from neighbors trading solar energy among themselves to supply chain management, with heavy hitters like IBM and the Apache Foundation backing the technology.
But when looked at through the lens of the eternal war between centralization and decentralization, it becomes much clearer.
Guerilla WarfareFor years cryptocurrencies have ripped along, mostly under the radar.
Early verbal assaults on coins were weak and didn’t do much to dampen enthusiasm among adherents to the crypto creed. Back in 2013, when the first attacks started, the market cap of Bitcoin was tiny, a mere spec of the global economic pie. It traded at around $10–$20. Not much for a centralized empire to worry about at all.
Those attacks were simple and straightforward, such as saying that only drug dealers and criminals used Bitcoin, usually by calling attention to Silk Road. Big government boot-licking economist Paul Krugman posted a now infamous missive in the New York Times called “Bitcoin is Evil” describing it as a weapon “intended to damage central banking and money issuing banks.”
But the attacks didn’t stick. Bitcoin’s price continued to rise, despite laughable obituaries getting written almost weekly.
In fact, the only thing that brought the mighty money badger’s rise to a grinding halt was an actual crime, the hacking of Mt. Gox, the most well known early exchange. Hackers made off with 850,000 Bitcoins, more than $450 million dollars at the time, making it one of the most audacious heists in history. Even with Bitcoin’s recent price slide, those coins are now worth upwards of $3.1 billion dollars.
That’s a lot of money.
And it was a serious blow. If exchanges can’t keep money secure, they’re unusable. That attack brought about the “crypto winter” and the prices of every major coin remained depressed for over a year.
But they’ve been on a tear ever since rising from under $300 in the aftermath of Mt Gox to $5000 at its peak this year.
New cryptocurrencies, like Ethereum, sprang onto the scene. They looked to address the shortcomings of the original crypto king, by providing Turing complete programming languages, smart contracts and more.
This year, ICOs raised more than $1.5 billion dollars, outpacing VC money as the number one way to raise cash but doing it all from small investors like Kickstarter on steroids. Projects designed to do everything from decentralized DNS, to identity management and distributed storage started making waves, promising to upend the way we do just about everything in technology.
Even the companies and governments that initially laughed at the ideas behind Bitcoin started to understand the breakthrough power of the technology behind it: the blockchain.
No longer would you need to go to one of three central companies to get a web certificate or register a domain name, you could go to a decentralized web of trust that no one group controlled.
Along the way, Chinese miners came to dominate Bitcoin. Today they make up half of the mining power on Earth. Their entrepreneurs built the fastest ASIC chips, designed to mine coins at astonishing rates, and filled up huge data centers to run them.
At the Consensus Summit this year, an industry trade show, the halls were covered with familiar logos like IBM, and Deloitte Touche and JP Morgan.
Wait, what? JP Morgan?
Aren’t those the same guys that were ripping Bitcoin a few weeks ago?
That’s right.
While CEO Jaime Dimon was pissing on Bitcoin, his office was hosting crypto venture capitalists and crypto investors in San Francisco. And his analysts were lauding the technology in their own papers calling blockchain “the real deal”:
“While the notion of blockchain may seem novel, the underlying technology is not new. It is the combination of proven, existing technologies: peer-to-peer networking, asymmetric cryptography and cryptographic hashing (see: In plain English). Bitcoin was the innovation that combined these technologies, offering the ability to transfer value, while preventing double- spend in a trustless, pseudonymous, publicly accessible system.”
Oh yeah, and at Consensus, JP Morgan announced they would integrate the anonymity technology behind Zcash, another crypocurrency, into their own blockchain technology.
“Monday, the company behind Zcash, the Zerocoin Electric Coin Company (ZECC) announces a partnership with JPMorgan Chase to add Zcash’s privacy technology to Quorum, an enterprise blockchain platform JPMorgan built on Ethereum, a network similar to bitcoin’s but focused on smart contracts.”
Wait, JP Morgan has their own blockchain too?
You bet’cha.
So what the hell is going on here?
How is it that China’s regime turned its back on a technology that its entrepreneurs dominate, while big banks like JP Morgan tout the power of the blockchain and the innovation of Bitcoin, only to try to destroy the technology that created it?
Simple.
It’s about power and control.