Who’s laughing now?
There is a certain mass psychology in the Ethereum community with respect to its competitors, Ethereum’s design/governance principles, and even generally unrelated projects such as Bitcoin. Make any singular attack or critique against Ethereum, its potential, or its “based god” Vitalik will likely leave you open to a vitriolic backlash that borders on the edge of insanity. In the eyes of those who support Ethereum, kids and grown adults alike coalesce to form an echo chamber of ideas, support, and more fatally, the rejection of criticism of anything challenging their status quo.
This kind of group-think is dangerous to any society, but especially so when it comes to technology and building the future. After all, that’s what Ethereum’s claim to fame is – “the future of smart contracts” or some other trite that is needlessly repeated over and over until the voice of the crowd drowns out dissenting opinion. Sharding won’t work? The Ethereum blockchain can’t scale to meet world demand? Oracle bribing and Turing Completeness pose dangerous threats to the stability of the platform? No, these aren’t legitimate concerns, but FUD! If you can’t understand that this is the future, then get out of the way! Obviously, this echo-chamber mentality of parties with the same interest repeating and consoling each other is evident enough in politics. Once you add in the prospect of money and people putting in their house mortgages, savings accounts, or college tuition fees towards a product, it’s going to magnify the pathology even more.
It’s important in this industry (whether you’re a miner, investor, trader, or otherwise) to always be paying attention to your own biases. Keep them in check, because falling in love with one product over another equally viable one can lead you to financial ruin. There was once the era of Bitcoin Maximalists, investors who truly believed in the network effect and capability of Bitcoin to such an extent that Alts were nothing more than trash, humorously nicknamed “shitcoins” and ignored by the vast majority of these Bitcoin Maximalists. Of course, we know how that turned out – as of today, Bitcoin Dominance is more like Bitcoin Majority, making up less than half of the market cap of all cryptocurrencies combined. The Bitcoin Maximalists took a hit for their ideology where it hurt most – their wallets. And the remaining Maximalists? The ones who could get over their biases stopped talking about Bitcoin and started putting their money in alts.
"May 2013, I got a whole pile of shit from Mr. Peter Todd, because I'm a Bitcoin maximalist. I'm still a Bitcoin maximalist." CW, Scammer
— Peter Todd (@peterktodd) June 30, 2017
But this isn’t an Ethereum or a Bitcoin piece. This is about Bitcoin Cash.
Bitcoin Cash, the hotly debated new kid on the digital block, started out with less of a bang and more of a whimper. Their first block took around 13 hours to actually show up on the network and they’ve been having issues since, namely with the ongoing difficulty adjustment and the ironic tx malleability bugs that have started to crop up on the network. For the first few days, Bitcoin Cash was also almost entirely locked up on hardware wallets or otherwise, and those that could move their corresponding BCH tokens had to wait almost an entire day for their transactions to get confirmed on the Bitcoin Cash network. The result? A massive pump due to limited supply and relatively high demand:
Now that’s a pump.
What followed was the floodgates being opened – massive amounts of confirmed deposits of Bitcoin Cash came in, exchanges started accepting the currency, and most of it was dumped on the open market, crashing the price down to as low as 150$ before things slowed down. Here’s where the cult mentality part comes in, however:
— ϻ 🔺 𝔤 𝔲 𝔯 𝔞 ♻ ᙇ (@_mad_MagUra) August 3, 2017
— [50k $BTC] ŁIGHTNING MORTY (@chryspto) July 30, 2017
— Matt Odell (@matt_odell) July 29, 2017
Turns out most people, in their ideological rage, dumped all of the free BCH they got on the open market the second it was available to them. This made the actual price of the coin ridiculously cheap compared to where it would likely be – in essence, people sold themselves short. They either believed that Bitcoin was simply superior and that Bitcoin Cash didn’t have a chance, wanted to cash in some free money, or simply sold out of spite of Jihan Wu and company.
The next question you have to ask yourself is, “who actually bought all of this Bitcoin Cash?” For every seller there’s a buyer. This part is completely my own speculation, but I personally don’t see Jihan Wu and Roger Ver as the idiots that people in the Bitcoin community make them out to be. I believe that this entire event was planned months in advance and executed with people being none the wiser. What they did was possibly the greatest hat trick that has ever been seen in the crypto space. What did they do? Let me explain.
It’s common knowledge that miners will always gravitate toward whatever chain is most profitable at the time – it’s a simple aspect of game theory that we can rely on to support blockchain technology. Let’s take a look at the current differences between Bitcoin and Bitcoin Cash’s profitability to get a better picture of what I mean:
— Jean-Pierre Buntinx (@jdebunt) August 8, 2017
Bitcoin Cash, while admittedly starting out slow, has been having a meteoric rise in terms of its profitability in relation to the Bitcoin chain. While initially, it was over 11 times more profitable to mine Bitcoin, this gap has lessened at a frightening pace. Once Bitcoin Cash reaches around 500-700$, it will at that point be more efficient to mine that chain over Bitcoin.
Considering that BITMAIN owns most of the hash power of Bitcoin, and they have pushed Bitcoin Cash themselves, there’s no debate that Jihan wants to make Bitcoin Cash the dominant blockchain. At this point it’s simply a matter of driving the price of Bitcoin Cash up to the required levels as to make it more profitable than Bitcoin. Once this happens, BITMAIN can swap all of their hashpower to the now more lucrative version of the chain, leaving the original Bitcoin in a weakened state, with a small fraction of current hashpower:
What’s the easiest way to drive the price of a currency up? Supply and demand – and most people walked right into this trap, quickly selling off their Bitcoin Cash to others for reasons stated above. Who bought all of this seemingly worthless Bitcoin Cash?
In Jimmy Song’s overview of Bitmain, he estimated the company to have a valuation of around 1 billion dollars, with about 200 million dollars in profits this year off of their AntMiner’s alone. It’s difficult to find financial data on Bitmain as it is a privately held Chinese company, however it’s certainly possible and likely that this was orchestrated by the company to buy everyone’s cheap Bitcoin Cash. With the lowest valuation of the BCH tokens at 150$, it would only take around 2.2 billion dollars in total to buy out the entire Bitcoin Cash network at this price (15 million coins in circulation multiplied by 150).
That’s speculating that absolutely everyone sold their BCH (they didn’t), that Bitmain had no Bitcoin in their wallets at the time of the fork (they almost certainly did), that no one is working together with Bitmain to orchestrate this scheme (highly unlikely), and that you need 100% of the tokens in order to control the market (even something like 30% is likely enough).
If this gambit actually works, Bitcoin Cash will be the predominant chain – whether for a short amount of time or more permanently largely does not matter. Once people see the signs that a potential “flippening” might occur, they’ll buy back those same BCH tokens they sold at a premium, thus driving demand and lowering the network effect of Bitcoin. At this point, mass panic might start to hit the markets, and we all know what happens when traders start panicking.
It’s a dangerous game that’s being played here. One is best served by remaining vigilant, keeping an open mind to new information, and thinking their moves carefully. In the case of Bitcoin Cash, hedging might be the last, best option for those who have already liquidated their positions.