Money Without Borders II
As the price of Bitcoin and cryptocurrencies continue to go down think about this…
When you are bailing out and selling, who is the counterparty? Who’s on the other side doing the buying?
Big Players Want Your Seat At The Table
As the price of Bitcoin exceeded the mark to market value of United States gold deposits in the fall of 2017, governments around the world scrambled to close the gates.
Bitcoin is not fully anonymous. It’s semi-anonymous. And this is why if you control the gates and control the amounts of fiat currency swapped for cryptocurrencies you can track, from that point forward, the route the flow of value takes.
Make no mistake. Governments see cryptocurrencies as a coup d’état against the international banking system. And if you own or trade cryptocurrencies, you are viewed from the establishment’s point of view as taking something that is not yours to take — autonomous control of your wealth.
In 2018 cryptocurrency demand was choked. As Bitcoin supply overwhelmed demand, the price of Bitcoin and other cryptos fell while the big players were quietly accumulating a position.
The Hands Of The Many – Back To The Few
Bitcoin moved out of the realm of tech enthusiasts mining coins in their bedrooms. It progressed from using a couple of standard multi-core processors to a GPU (Graphic Processing Unit), from a single GPU to arrays of GPUs. From GPU arrays to specialised CPUs, the ASIC or Application Specific Integrated Circuit. From single ASICs to arrays of ASICs. And from arrays of ASICs setup in home-brew garages to industrial size ASIC farms.
Image Source: https://qz.com/1055126/photos-china-has-one-of-worlds-largest-bitcoin-mines/
And ASIC farms require cash.
Lots of it.
Who Controls The Market?
Understand who controls the market you are investing or trading in, and you’ll have an advantage. Bitcoin is a free and open source market. Nobody owns it.
But does anyone control it?
Ask yourself this—
How are Bitcoins created?
Who is incentivised to create Bitcoin?
Between 2013 and the beginning of 2017, big money had been slowly moving in on Bitcoin. They saw its potential as a relatively rare asset and also the mechanism that made it work. Bitcoin is seen as having a value greater than the sum of its parts.
If you attended the symposiums in New York City, it would have told you everything you needed to know.
Image Source: www.coindesk.com
Suits had replaced the hoodies.
New York City, Spring 2017: An agreement was made, backed by the Digital Currency Group. A venture capital company who tried to organise support for a hard fork of the Bitcoin blockchain. They called it SEGWIT2X. (We’ll cover hard forks in much more detail soon, but for now, it’s enough to know that a “hard fork” is a permanent and irreversible split in the Bitcoin blockchain.)
SEGWIT2X proposed two changes.
1. A backward compatible soft fork.
SEGWIT is an acronym for Segregated Witness. SEGWIT was a proposed “Soft Fork” in the Bitcoin blockchain. Soft forks differ from hard forks because they do not permanently or irreversibly split a blockchain, and they’re backward compatible. (For now, think of soft forks as software upgrades.)
The purpose behind SEGWIT was to remove nonessential data taking up space in Bitcoin’s 1-megabyte block limit. This has three advantages.
i. It increases the Bitcoin block size from 1 to 4 megabytes.
ii. It could help Bitcoin to scale by lowering costs and improving transaction speed.
iii. It’s backward compatible.
2. A permanent hard fork. A non-backward compatible split in the Bitcoin blockchain.
Hard forks are not backward compatible with the blockchain they are spawned from. The technical reason for the hard fork was to increase Bitcoin’s block size. And the reason for this was to increase Bitcoin’s transactions per second speed and scalability.
SEGWIT went live on August 24, 2017.
At the eleventh hour, 2X was cancelled.
There are two ways to take control, gradual consensus and brute force. The argument was publicly about scale, but part of the Bitcoin community viewed the real agenda as control and some regarded Digital Currency Group’s motives as a strategy to centralise Bitcoin’s decentralised advantages.
At the last minute the support DCG had garnered fell away, and the hard fork did not happen.
If DCG has been successful in doubling Bitcoin’s block size from 1 to 2 megabytes, then it would have increased the scalability of Bitcoin by increasing its transaction time.
It would also have done something else. It would have made it much more difficult for miners to be profitable unless they could substantially increase the size of their mining operations. The cost of doing this would strangulate a large percentage of miners and put them out of business.
Doubling Bitcoin’s block size would have centralised a decentralised system by effectively moving the control of Bitcoin’s consensus mechanism into fewer hands.
Was this the real intention of the DCG group? Was SEGWIT2X an attempted hostile takeover of Bitcoin? Some saw it in the cryptocurrency community as precisely that. A hostile takeover.
This might sound like a conspiracy theory. Take a few minutes and see who is behind DCG. The idea of a hostile takeover of Bitcoin, planned by big money venture capitalists, might not seem so far-fetched.
When a potential threat challenges the ability of governments to control the economy, they take notice.
And in 2017 governments woke up.
Why Governments Took Action
Governments run economies using budget deficit spending. This relies on being able to control the flow of value across borders.
From its genesis in 2009 Bitcoin has had four price bubbles, each one ending with Bitcoin gaining thousands of percent in price and an ever larger market capitalisation.
The third bubble ended when Bitcoin hit $1163 US dollars a coin. Prices then collapsed 87%.
Things went quiet on the surface for three years, but by the end of 2016 Bitcoin’s market cap had doubled to around $15 billion. To put this in perspective, this is equal in size to the 341st biggest company in the United States.
In 2017, things went sideways.
The driving force of international capitalism chasing Bitcoin for a share of the action pushed the price to just under $20,000 US dollars.
At this price, the total value of Bitcoin hit $315 billion US dollars. More than the mark to market value of all of the United States gold deposits.
And at this price Bitcoin could, in theory, be used to transfer massive amounts of value across international borders.
If the price of Bitcoin could not be contained, this would quickly put the system of capital that drives international commerce and the wealth and property of nations at risk.
And this is why you saw the reaction in late 2017 and early 2018.
For eastern countries, who don’t have things like democracy to worry about, it was easy. They banned it.
The West took a more subtle approach using the jab-cross-left-hook of fear, dis-accreditation, and tax. Fear of capital loss and distrust. Stories of stolen coins, bankrupt and corrupt exchanges. Linking cryptocurrency to crime, and what the government will do to anyone who actually makes a profit.
Globally the response to the rise in the market capitalisation of cryptocurrencies was not homeopathic.
Governments didn’t bring out the heat lamp and cream to soothe the problem.
They brought the sword and started swinging.
On the demand side…
China outright banned ICO offerings and cryptocurrency trading, but India was slightly more subtle. The Indian government made an offer the banks couldn’t refuse — sure, you (banks) are free to do what you want. But if you let your customers swap between rupees and cryptocurrency the Indian Central Bank will cut you off. Not quite waking up with a prize stallion head in the bed, but Johnny Fontaine got his movie.
South Korea, a country whose citizens are understandably Bitcoin crazy, initially banned ICO’s but allowed the restricted buying and selling of cryptocurrency. The restrictions include prohibiting anonymous deposits and reporting anyone who moved more than 10 million won ($9,300) a day into the cryptocurrency market.
In the West, while not outright banning cryptocurrency trading, the campaign to stop cryptocurrency demand moved into full swing and included…
Full KYC (know your customer) requirements to open a cryptocurrency account.
Restrictions on how much fiat currency can be moved in and out of exchanges.
Huge increases in fees from credit and debit cards to fund cryptocurrency accounts.
New tax laws. The IRS now treats cryptocurrency as property. Any profit must be disclosed. Not just from moving fiat currency into cryptocurrency and then back again, but on every individual transaction.
Strong-arming cryptocurrency exchanges with new regulation caused massive delays in account opening, and all this combined with a negative media frenzy successfully killed the demand.
Big companies too joined the anti-cryptocurrency stance.
Facebook and Google outlawed cryptocurrency advertising. Perhaps they have been persuaded by the wisdom of the establishment, considering the lightness of touch over regulation and taxation. Why bite the hand?
The speed and aggressiveness in response to the rising value of cryptocurrencies is a significant tell on the future of this technology.
The establishment wants your seat at the table.
99% of the internet is not accessible by Google. It’s called the “Deep Web,” and hidden in the shadows of the deep web is the “Dark Web.”
Want access to something illegal?
Your dark web destination of choice was the Silk Road. You could buy everything from drugs to hitmen. Dread Pirate Roberts aka Ross Ulbricht was charged with running the site between 2011 and 2013. He is currently serving a life sentence without the possibility of parole for drug trafficking, money laundering, and computer hacking.
The currency of the Silk Road?
What percentage of the global economy is from criminal activity?
No one knows the exact number but in 2014 trade between OECD countries was estimated by the OECD as being 10 trillion US dollars. And according to UNODC profit from within the shadow economy, in 2011, could be as high as 870 billion US dollars. Half of the profits was successfully laundered using the financial system.
870 billion is 8.7% of 10 trillion, and with 50% being successfully integrated (cleaned) back into the legitimate economy, we can guess that $4.35 of every $100 that passes through your wallet was involved in a crime.
Bitcoin with a market cap of few million is not seen as a problem because it’s not a big enough vehicle for money laundering and crime to use.
In 2009, Bitcoins were cheap and easy to produce. The total value of all the coins, the market capitalisation, was a few thousand dollars.
By the end of 2011, Bitcoin’s market cap was $35 million US dollars. By year-end 2012 $142 million.
The shift in Government awareness was triggered when Bitcoin’s market cap hit $1 billion. In 2013, Bitcoin’s total value jumped from $142 million to $8.6 billion.
Bitcoin at 10 cents a coin? Not a vehicle for money laundering. Bitcoin at $20,000 a coin. Different story.
As you’ve seen, Bitcoin has moved up and then back down in a bubble like price-action four times.
So why should you care about Bitcoin? Why, if you are interested in other cryptocurrencies and tokens, is it useful to know about Bitcoin and its history?
Because today, like it or not, Bitcoin is still the go-to coin. It’s the coin most people buy to move their fiat currency into cryptocurrency initially.
The problem is that most exchanges, where you can do this, are not the same exchanges where you can buy other coins and tokens. Once you have your Bitcoin, you then need to transfer it to another exchange so you can purchase the actual alt-coin you are interested in.
Governments banned Bitcoin, or they did the equivalent of forcing their citizens to use “state-sanctioned” centralised exchanges. Most of you will have opened an exchange account using a selfie of you and your passport. And if so, everything you do once your fiat currency has entered the cryptocurrency exchange will be tracked and accounted for.
In Guns and Butter, we talked about how your wealth has been undemocratically confiscated and manipulated in the past. We asked the question— How is money given value?
We discussed in Games without Frontiers how global economics and trade is changing and how this change is leading to less trust between nations. And why this lack of trust will provide opportunities for the mass adoption and roll out of blockchain technology.
In Money without Borders part 1 we talked about budget deficit economies and why governments need to control the movement of value across borders. We’ve seen how Bitcoin prices have moved in the past and why governments around the world have been forced to take action.
And finally in Money with Borders part 2 we’ve addressed who controls Bitcoin, who is trying to control it, who is trying to kill it, and why.
But there’s a new technology slowly making its way into the cryptocurrency domain.
You become the exchange. And this, for your government, is going to be the next huge cryptocurrency problem.
How will they stop us from placing our bids and offers, without the need for a centralised exchange, using apps on our phones?
Of course, there’s always a way. They could ban the use of decentralised exchange apps. They could ban Internet Service Providers from allowing traffic from these apps to run, although this would be difficult because of encryption. They could ban your bank from allowing the movement of fiat currency into decentralised exchanges. They could limit your transaction size to $50 a day.
Do you notice the theme? The establishment has banned or restricted you to slow down investment into cryptocurrency. Using fear they have dissuaded the public from buying it.
Ban. Restrict. Dissuade.
It only means one thing.