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Economic Warfare 2.0

by Benjamin AlexanderNovember 22nd, 2017

Too Long; Didn't Read

Last Sunday, November 12th, was an historic day for cryptocurrencies. Bitcoin was the victim of a highly orchestrated, specialized and incredibly expensive attack. The attack involved carefully timed mis-information, the active manipulation of two of the world’s biggest cryptocurrencies and denial-of-service like tactics. Hundreds of millions of dollars were made, and lost, in a few short hours. Billions of dollars of value were rapidly shunted between coins.

People Mentioned

Companies Mentioned

Coins Mentioned

(when Bitcoin is literally Game of Thrones)

Dubbed the wild west of finance, cryptocurrencies now make the news daily. Whether it’s new all-time highs, erratic drops in price, another record setting ICO, a knee jerk ban from a government or another hack with tens of millions of dollars, lost or in limbo.

Before I continue, I know that the word attack is extremely polarizing in this ongoing bitcoin debate. So let me clarify: Satoshi’s decentralized dream has left us with this incredible ship that’s sailing at breakneck speeds, but with no captain. Twitter is awash with grown adults, some of whom PHD level smart, bickering and slinging verbal attacks at one another. What is the “real bitcoin”? If you’re a core developer, it’s the coin that’s trading at $8000+ shortened to BTC on most exchanges with Segwit activated (more on that below), if you’re on the other side of the fence it’s the coin that is called Bitcoin Cash, BCash or BCH. Currently trading at $1200 with no Segwit but a maximum block size of 8MB (technical details to follow).

So what happened?

A lot of people believe that two coins of this scale and value, that use the exact same computing systems (hashing algorithm) and hardware, can not coexist peacefully. As a result of this thinking the people behind Bitcoin Cash (BCH) made an attempt to topple Bitcoin (BTC) as the number one cryptocurrency. Without getting overly technical, the blockchain (the underlying technology in Bitcoin) is only secure because all of the computers are pulling in the same direction. They are all validating all transactions and blocks (the containers that hold these transactions) making it nearly impossible for any bad actors to make fraudulent changes to the blockchain or any of its transactions. The majority wins on all decisions. As long as no malicious entity gets a majority (51% or more) of the computational power the system will continue to go forward without any fraud. If there is a large amount of computational power working on one coin, let’s say Bitcoin (BTC) and a much smaller amount working on Bitcoin Cash (BCH) then hypothetically a segment of the power of BTC could organize an attack on the smaller coin, BCH, by virtue of then controlling a relative majority that smaller chain’s power (hashing power) and cause all kinds of trouble and fraud. Remember that the value of Bitcoin or any currency is only the value which we, its users, give it, with basic supply and demand economics at play too. The only reason I can pay my laundry services $20 for a clean batch of clothes is because they believe that they can take that same $20 and get $20 worth of goods or services elsewhere. If we lose faith in a country’s government the value of their currency drops compared to currencies of more stable governments/economies. Similarly, if the general public believe that any cryptocurrency is not secure, open to hack or attack, then there will be no trust in that system and we will see a massive sell off of that coin and a consequent nose dive in its price. Simple supply and demand.

With that in mind, the supporters of BCH knew they had to make a play to ensure their network was not the weaker of the two. They wanted to make sure that they were regarded as the primary Bitcoin currency.

The foundation for the 11.12 attack started many years ago when the captainless ship of Bitcoin could not reach a consensus on how to scale the transactional capacity of the network, and as Bitcoin popularity was growing this was becoming an issue. There are two camps on this point of debate, the same two camps that went in their separate directions as per above. There is the camp that believe that Bitcoin should be the world’s currency for everyday transactions, such as purchasing your morning cup of oe (this is the Bitcoin Cash camp, hence the name Cash). The other camp believe that Bitcoin should be more of a store of value. More like a digital gold than a digital dollar, the Bitcoin/BTC side. The debate began over the number of transactions per second Bitcoin can handle. If Bitcoin is to be the new cash for the world it will need to handle upwards of 100’000 transactions per second. For comparison Visa process about 40’000 transactions per second. If Bitcoin is to be like a digital store of wealth then similar to gold reserves it will not need anywhere near this level of transaction capacity, and it’s current capacity of less than ten transactions per second will be enough (for the time being).

One side (BCH) wanted to increase the size of the blocks from the current 1MB to a maximum of 8MB. They believe that they are following the path laid out by Satoshi with this move. The other camp, (BTC) comprising of all the core developers felt like increased block sizes would lead to more centralization of the network. Their thinking, the bigger the blocks, the larger the computer power requirements to be participate in the network. Fewer, large scale, entities on the network is not what Sathoshi envisioned for Bitcoin. Both sides think they are right in following the gospel of the mysterious (God like?) creator of Bitcoin.

Hong Kong, February of 2016, the framework of the Segwit 2x compromise was agreed upon which was then formalized in New York mid 2017. This compromise would first introduce a new technology called Segwit and then 90 days later block sizes would double from 1MB to 2MB (not the 8MB huge leap proposed by the BCH team). Step one of this compromise, the introduction of Segwit, is a system that allows a shorthand version of transactions to be processed on the network to allow for more transactions to be processed in the same amount of space. While technically unrelated, consider Segwit to be what MP3 does for audio files. More songs in less storage space. The second step of this agreement would double the block sizes (also now known as block weight). With both of these upgrades in place the network would see 300–400% uptick in its capacity to process transactions but it didn’t play out that way. At all!

As mentioned above, the majority rules. If a small group of people in the bitcoin network decide to branch (aka fork) off and do their own thing they can, but their input will be rejected from the network they are leaving. Just like if a small town decides not to use the US dollar anymore but make their own Town Dollar, they can do that. The US government won’t be happy about it and the town will have to go through all the headaches of preventing forgery that comes coupled with printing your own money, but hypothetically they could do this. There was a small town in Austria that did exactly this (The Wörgl Experiment: Austria 1932 ). So, despite the agreement, when the first part of the system upgrade was scheduled to happen (August 1st 2017) there was a group that refused to activate Segwit believing it to be against Satoshi’s vision and they went ahead and increased their block sizes to 8MB, hence the birth of Bitcoin Cash. The team believed that the users would flock to their network and use their coin as the preferred currency but this didn’t happen. The market price of Bitcoin Cash plummeted from $600 on day of launch to $200 a few days later. Comparatively Bitcoin was at $2700 when BCH launched and up at $3200 by the time BCH dipped below $200. Clearly the market was talking. BCH was being traded in for BTC. The faith of the users was with BTC. It is worth understanding that unlike with the small town Town Dollar where one currency was abandoned for another, a blockchain fork leaves all the pre-fork historic records intact. So a user who held ten BTC prior to the fork, would then hold ten BTC AND ten BCH. Almost like free money, right?

Fast forward to November 2017. Despite hovering at $300 for all of October, BCH increased in value 100% to over $600 in the first few days of of the month. There was lots of uncertainty about the future of Bitcoin as the end of 90 window for the size increase from 1MB blocks loomed. It seemed like money was being moved over to BCH for safety. Despite the agreement there were still a large group of people, including the Bitcoin core devs, that refused to action the block size upgrade. Majority rules right? It looked like we were going to have BTC 1MB version and a BTC 2MB version. The future of Bitcoin looked incredibly complicated with a potential for four different Bitcoins on the horizon (Bitcoin with Segwit and 1MB blocks, Bitcoin Cash without Segwit but up to 8MB blocks, Bitcoin 2x with 2MB blocks and Segwit (as per the NY agreement) and Bitcoin Gold — I won’t discuss Bitcoin Gold also known as BTG here).

THE ATTACK:

In the week leading up to 11.12 attack the number of transactions going through the Bitcoin network doubled. Normal users were having to wait longer than usual for their transactions to be processed and verified by the network, and some users resorted to adding additional transactions fees to their transactions to try to force priority treatment of their trades. “The Bitcoin network is broken” team BCH said “this is why we need Bitcoin Cash or at the very least, this is why we need to double the block size to 2MB” they claimed…

Then, out of the blue, on November 8 approximately one week before the planned upgrade, 2X was cancelled. The key team pushing the block size increase made a public statement that they were cancelling the upgrade. In a bid to “keep the community together” they did not want to see another Bitcoin fork happen. This immediately lead to large amounts of BTC selling. Selling that looked like speculators had been recently buying additional Bitcoins only to profit from the “free money” created by the hard fork and the new coin it would create. The users were taught this trick in August with Bitcoin Cash. On the outside it looked like a lot of this money was flowing into BCH as it’s price continued to rise and BTC fell.

The next three days were very eventful in and of themselves. The transactions waiting in line on the Bitcoin network (mempool) shot up to seven times the usual levels and transactions were taking multiple hours, if not days to be processed.

This part of the orchestrated plan was designed to make Bitcoin look broken, to make Bitcoin Cash and it’s 8MB blocks and its additional capacity look like the superior technology. The only way forward. This is similar to a Denial of Service attack where multiple spam transactions block the network. Most of these transactions were probably money being sent from one account to another, both accounts owned by the same group. A Bitcoin denial of service attack takes money, a lot of money, each transaction has a transaction fee attached to it. If we look at the baseline in the graph above one could estimate than there were at least 100’000 spam transactions, if we multiply that by the transaction fees of $5–12 that I myself have been paying on the network this week, we start to see the amount of money required to launch a spam attack of this scale.

While this was happening, lots of noise was being created about Bitcoin Cash’s superiority. Roger Ver, one of the earliest large scale adopters of Bitcoin and formerly its poster child was holding talks in LA watched by tens of thousands of people. With this many problems with BTC (delayed transactions and expensive fees) and the cancellation of 2x surely, BCH was the way forward they all said.

On the evening of the 11th, with impeccable timing, Gavin Andresen the programmer the Satoshi hand picked to bear the Bitcoin torch (but had since stepped down from the BTC core team), tweets this bomb:

Going into Saturday evening (US time) this tweet gets picked up by every news outlet that cares about Bitcoin. The tides are turning, if Gavin said so, then maybe BCH is the “true” bitcoin…

Then the real attack started. When most of the US was enjoying their Saturday evening at a bar or already sleeping the price of BTC started to drop, faster and faster. Losing almost 20% of its value ($7500 to $6200) in the run up to the attack. At the same time huge buying of BCH happened. On the 48 hours leading up to Saturday night the price of BCH had doubled, again, on large volumes. BCH was sitting at $1300 when Gavin’s tweet was picked up by mainstream news outlets. The real attack began when America finally got to sleep. Market manipulation on a scale, and at a pace that I’ve never before seen. Billions of dollars of “value” were moved from BTC to BCH. A crypto pump and dump of epic proportions. In a short matter of five and an half hours, BCH doubled in price, AGAIN. From $1400 at 830pm (Saturday EST) to $2799 at 140am. Its market cap increased at a rate that would make even those in Silicon Valley dizzy, at its peak BCH’s value rose from $5.5 billion to almost $42 billion USD, becoming the second largest cryptocurrency by market capitalization (overtaking ethereum).

This price movement even received praise from the founder of what was prior to that the second biggest coin, ethereum’s Vitalik Buterin

What’s really important here is the cascading series of events, events that were planned and timed to perfection but more importantly the effect this would have on the emotions on the players in the market. While watching this unfold there were people that truly believed this was the moment for Bitcoin Cash to take the Bitcoin throne, at the height of the price manipulation Bitcoin Cash was 54% of the value of Bitcoin.

Earlier this year when ethereum went on its monster bull run in price, surging from $8 per ether to over $300, there was talk about the “Flippening” the moment when ethereum would become the world’s largest cryptocurrency, by market cap. On Sunday the 12th of November there was lots of talk of the “Cashening”.

The “Cashening” is near?

So how do we know this was manipulation? An anonymous post dated July 30th foretold the entire plan, precisely. From the BCH fork, to the price dropping, to the pump back up to approximately $600 (he writes 0.1 BTC) and then the run against BTC’s price and pumped rally on BCH. It’s definitely worth a quick skim.

Traders, certain information has come to my attention that is causing me grave c - Pastebin.com_a guest Jul 30th, 2017 152,056 Never Not a member of Pastebin yet? Sign Up , it unlocks many cool features! Traders…_pastebin.com

Understandably this post was largely ignored right up until the cancellation of the 2x upgrade. At which point the whistleblower had gotten far too many facts right to not be taken seriously. But it’s not just that. One of the features of Bitcoin is it’s immutable public blockchain which records every single transaction. The numbers, the sheer amount of money that was moving around as part of the synchronized effort was purely astonishing.

Massive dumps of BTC at the height of the attack.

The above table clearly shows 45’000 bitcoin being sold at 6:13am from account 16cou7Ht6WjTzuFyDBnht9hmvXytg6XdVT. We can clearly see that these coins were deposited into this account over five years ago (note the 1000 times uplift in value!) There are very few individuals, or groups, in the world who have access to $300’000’000 worth of bitcoin and the authority to dump them into a tanking market. Especially when they were just worth almost $340 million a few days before. Most Bitcoin holders with wallets of that size (such as Tyler Winklevoss and Cameron Winklevoss) are diehard “HODLers” of Bitcoin.

The irony of the situation is that this $300 million BTC was probably flipped into BCH to provide buying support to pump the price, when BTC was at $6000 and BCH was over $2000. Some rough back of the napkin math turns those 45’000 BTC into 135’000 BCH. So something that was sitting valued at $340 million a few days before the attack (BTC @ $7500) and would have been valued at $370 million today (BTC @ $8200) was flipped into something that is now worth “only” $160 million (BCH @ $1180). Net losses of $210 million… The last time personal fortunes dwindled so fast there was a Madoff involved!

Massive volume on the forced depression of BTC pricing forcing BTC down from $7800 to $5400 in a matter of days.

So what went wrong?

We’ll never truly know. I believe an attack of this scale would require a concerted effort from a number of players. To artificially pump up the price of of any stock requires large volumes on the buy side, catching the sell orders in the system to ensure demand continues to outstrip supply. By priming the pumps and manipulating the price from its $300 October baseline to $600, the hype machine had already started. Add the misinformation around BTC’s transaction times and fees, and the fire was lit. With the cancellation of BTC’s 2x upgrade and Roger’s carefully timed roadshow things were getting heated. Gavin’s tweet and the media storm that ensued was pure nitrous into the engine. Markets can sometimes act like a flywheel. Momentum attracts more momentum. No one wants to miss out. In the markets sometimes, at least for a short moment in time, hype and reality are the same thing. This was a master class of that. But say again, what went wrong? BCH has since tanked down to less than half its peak price just 9 days ago ($2799 to $1200), it’s no longer the second biggest coin, lagging far behind ethereum’s reclaimed second spot:

Business as usual?

You can see that Bitcoin has reclaimed all the strength and value it temporarily gave away last weekend and is nicely building a level of support around the $8000 mark while posting higher all time highs.

The attack failed.

Here’s my theory as to why: In preparation for this plan there was lots of opportunity for those with inside knowledge about the attack (and the pump of BCH) to acquire the coin on the cheap. As we said above BCH fell to as low as $200 and sat at $300 for most of October. Anyone with inside information could have quietly amassed a large quantity of BCH. BCH hit its high of $2799 at approximately 1:39am EST. By 1:51am BCH was at $1520 never to see the sunny side of $2000 again. Just for clarification we’re talking about a change in market cap of BCH from $47 billion down to approximately $25 billion in a matter of minutes. If you were watching, and riding this wave, you had a very short window of opportunity to sell near the top.

Market manipulation 101. In under an hour the value of BCH pumps from $2000 to $2800 (40%) and then dumps back down again.

I like the way the one day chart show the pump and dump best:

That’s an almighty hammer reversal candlestick!

Why did it fail?

GREED!

Someone started selling at volumes that couldn’t be sustained for the attackers to keep buying. In the heart of hearts of the attackers, they knew the underlying asset, BCH, was probably only worth several hundred dollars. So every purchase they have to make above that hurts. It’s expensive. It’s only worth that expense it if the long term play works out and BCH becomes the Bitcoin. “Someone” breaking ranks and selling their own BCH at huge volumes at the $2799 mark did so for their own personal gains, their own greed made them do it. And in doing so the whole plan was ruined. I would love to know how profitable those few moments of work was for them… I’m thinking it’s a big number. Once the market saw that first drop everyone knew the gig was up! I was watching live commentary from Datadash at the time and as soon as that first huge red candlestick showing a drop of $600 in the space of a few seconds hit the screen, I knew the gig was up. Once the hype bubble is burst, once the hand is shown, even ever so slightly, the costs to keep artificially pumping BCH up get exponentially harder and the likelihood of getting caught in your own dump, literally, get higher and higher.

So why does this matter?

Almost like religious fanatics that have the same God but different interpretations of the Holy word, both sides believe that they are right, that they are continuing with Bitcoin’s original vision in the name of their deity. As Bitcoin isn’t run by any central authority or under the protection of any trademarks there is a very loose definition of what Bitcoin is. According to Satoshi, the longest chain (of blocks) with the highest hashing power is Bitcoin. BCH is currently 9700 blocks longer than BTC but with only 12% of BTC’s power. To add to this debate BTC had 20 times as many transactions on it’s network than BCH did in the last 24 hours (360k compared with 17000). So which one is it?

Notice how BCH’s 8MB chain is only using an average of 64KB per block and how both chains are only 1MB combined.

Bitcoin.com is owned by Roger Ver, Bitcoin Cash’s most crypto-affluent, outspoken proponent. Leading those new to Bitcoin to believe that Bitcoin Cash is the true Bitcoin (BTC’s website is www.bitcoin.org). My biggest concern with the large difference between the price of the two coins is the obvious scams that can be run on new entrants to the cryptocurrency world. Such as selling BCH coins for BTC prices. An activity that would no doubt further tarnish the terrible reputation that cryptocurrencies are already trying to shake. To make matters worse, any BTC accidentally sent to a BCH wallet address, or vice versa, is quite often lost. Stuck in some cyber purgatory, further irritating and confusing novice cryptocurrency users and slowing the global rate of adoption.

In most part it’s quite saddening, a majestic vision of a decentralized currency, without the need for a central ruler seems to have succumb to greed and self interest. Leaving the world of Bitcoin in a state of confusion.

That ship screaming through the waves with no captain at the wheel…

So what’s next?

Blockchain technology is in its infancy. Bitcoin sits atop of what could be called Blockchain 0.7, or Blockchain Beta and we’re only just scratching the surface of what this technology will do for us in the future. If you tried to explain our present day interconnected, mobile app driven world to the pioneers of the internet back in 1994 when Netscape Navigator was launched they would drool at the prospect but have no clue to how get from that primitive N logo to today’s supercomputers shrunk into smartphones. In 2017 we’re looking at a similar one letter logo, but this time it bears a B and we have absolutely no idea how far this ride will take us.

We haven’t seen the end of Bitcoin Cash. TwoBitIdiot makes a compelling case in his recent medium post Politics, Religion, and Bitcoin (Cash) that we are likely to see another attack. I’m not sure when this will happen or even if this will happen but I’m certainly going to be watching intently.

Politics, Religion, and Bitcoin (Cash)_“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” -Mark Twain_medium.com

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Special thanks to Daniel Jeffries for his continued thoughtful insights onto the markets, especially surrounding this attack. Thanks in particular for coining the phrase Economic Warfare 2.0. It summarises the new era of economics travelling at cryptocurrency speeds.