Bitcoin is a decentralised asset that will probably be extremely valuable in the future, it is even very likely that it will become the new monetary standard. An entity that can manage to take control over Bitcoin will become the elite in the new world because control over money equals control over the people. Of course, we users have to avoid that by any means because decentralisation and thus distribution of power is the reason that we were attracted to Bitcoin in the first place!
Will the next war to fight be against fraudulent financial institutions?
As Bitcoin grows in value powerful entities will try to take control over it, but the users can make them fail terribly.
Bitcoin goes to Wall Street
ICE, the owner of the NYSE announced that they will create a startup named Bakkt that will set up a cryptocurrency trading platform and Bitcoin future contracts with delivery of real bitcoins. Bakkt will come with a custody solution too, private keys will be stored in a warehouse and the funds will be insured.
This is extremely bullish: Investors will be able to add Bitcoin to their portfolio as easy as it is to buy any stock. Also, big players like pension funds will now be able to invest in Bitcoin. On top of this, other financial products like an ETF will be much more likely to be approved. Bakkt will probably deliver the first of a huge amount of financial Bitcoin based products.
However, the creation of financial products on Wall Street will eventually lead to the same manipulation and fraud that is currently subject to the entire financial system. The Wall Street firms will try to slowly convert Bitcoin from an equity based asset into a debt based asset. In other words, they will try to create paper assets without full backing of real bitcoins and thus mess up the limited supply. This happened with every asset that is tradable on Wall Street, some assets have ten times more paper claims than the available underlying asset!
Imagine that Wall Street firms succeed to create ten times more paper claims than the real asset they own: They will ‘control’ a big part of the total supply while destroying the ‘limited supply’ feature and thus greatly suppress the price. For example: If 500.000 real bitcoins are stored with these firms and they create ten paper claims per bitcoin they will have control over 5 million bitcoins while the total available bitcoins is increased to 23 million. Owning more than 20% of the total amount will give them the full control to manipulate the price as they wish. I don’t expect ICE to do this from the beginning, but probably it will slowly and sneaky infiltrate the Bitcoin market as more financial products are developed and with more layers of backing.
Here some interesting sources:
Gold and silver manipulation
Gold and silver are decentralised assets, there is no entity that has control over the issuance and there is no entity that can freeze your precious metal. As fraud in the financial markets increased (fractional reserve banking, excessive money printing) gold and silver became more popular because it was immune to the negative results of the fraud. Gold and silver became a competitor to the fraudulent financial system and thus a threat to the fraudsters.
The financial institutions managed to beat the competition of gold and silver by creating unbacked paper claims and thus suppress the price and get control over the market. By suppressing the price of gold and silver the interest in the asset was suppressed too and the competition to the financial industry was eliminated. This means that they could go on with their fraud without being punished by the market. Bitcoin is serving exactly the same purpose as gold and silver and the reaction of the financial industry will be exactly the same.
This game will be much harder with Bitcoin
Gold was quite easy to manipulate because the majority of the supply was already owned by central banks and the financial system, thus they owned the underlying asset to issue paper claims on already. Even more important is the fact that Bitcoin is extremely transparent, since the blockchain is public and you can proof the ownership of the private keys very easily. When you send your Bitcoin to a custody party they can easily prove that they still own your Bitcoin, it is even possible to create a warning system that automatically warns the owner when the funds are moving. With gold this is much harder.
Bitcoin is also much easier to hold without a 3rd party, and new innovation will make it even more easy over time. This means that the benefit of a 3rd party is much smaller and thus that probably a bigger part of the total supply will be held by the holders themselves. Beside that Bitcoin has much more use cases than gold, thus many coins will be kept out of the financial system too. Last but not least: When a hardfork occurs it will be hard to pay this ‘dividend’ to the holders of unbacked paper claims, it could even make the issuer insolvent.
Segwit2X and Bcash takeover attempt
Bitcoin has been through an internal takeover attempt by miners and powerful businesses, but Bitcoin has shown its resiliency that comes from the game theory where it is based on. The Bitcoin network was under a threat of falling in pieces (in case of a messy fork), stop functioning (if the Segwit2X fork was not cancelled) and heavy obstruction by miners leaving the network (when Bcash used their flawed EDA to be much more profitable to mine). All these doom scenario’s came very close but were resolved at the last moment because of the amazing stabilising mechanisms in Bitcoin.
The people behind these forks knew that if they were able to change the code by pushing it through with the power of their businesses they could slowly gain control because they would become the leaders who made a positive change to the network and their next fork will be even easier. By creating a coalition of businesses and sign a contract behind closed doors about what the future of Bitcoin should be, they were actually creating a governing entity and with every successful fork they would gain control.
Segwit2X was backed by a staggering 95% of the miners and about half of the businesses, but because the users (80 to 90%) signalled to be against it they couldn’t force the change. By showing preference for legacy Bitcoin through a higher futures price the users showed the miners that they would mine a valueless coin after the fork and thus lose a lot of money. Also exchanges knew that they would lose many customers when they would list 2X as BTC. This made them cancel the fork even before the activation date.
This game theory that describes that every individual player will eventually act in his own best interest even if they signed contracts with other players, will probably also protect Bitcoin in the next take over attempt by financial institutions. Like with the hardfork events the situation might become extremely scary, but if we as users defend ourselves Bitcoin will certainly win again! The upcoming fight might be violent, but we as users decide what Bitcoin is and we will finally after decennia break the manipulation machine of the financial institutions!
Governments will create a monopoly of financial institutions that issue Bitcoin deviates, thus they can dilute the supply without being punished by the market. However, the advantage over paper Bitcoin will be much smaller than the advantage over paper gold, thus physical bitcoins might be a strong competitor and bad behaviour by the issuers of paper Bitcoin might drive investors to the real bitcoin.
Of course this will not happen immediately, especially because the government (f*cking government again!) have regulations that certain investors are ONLY allowed to invest in these paper assets. Now the game theory will come to play: because Bitcoin is very transparent the market will probably figure it out when more bitcoins come into existence than there possibly can be (the amount of gold is very hard to estimate, the amount of BTC is known exactly to the Satoshi).
Now investors will start to worry whether they own a backed bitcoin or an unbacked bitcoin and a huge demand for backed paper bitcoins will arise. Now a small financial institution that is registered with the government can grab a huge market share and thus power by creating a fair financial product where every paper asset is real time signed by it’s underlying keys and thus 100% provable backed at any time while stabbing the other cartel members in the back. Once this product comes to existence it will probably trade for a premium against the unbacked paper assets and the premium will probably be as big as the estimated difference in backing.
So what can we do
Now Wall Street is coming in it becomes even more important to hold your own keys. It will not only protect you against counterparty risk, but it will also protect your asset against devaluation. When you have no choice than using a 3rd party, be sure that it is in the contract that your bitcoins will not be lend out and claim the right of future forks.
I also want to ask blockchain analyse companies to allocate their knowledge and effort by exposing the crime of giving out unbacked paper assets instead of destroying the network users their privacy. Also individuals with analyse knowledge will do the entire ecosystem including their own investment a favour by identifying and publishing the addresses of financial institutions. This will push more investors to the real Bitcoin when financial institutions misbehave.
The fight against the next take over of Bitcoin will probably be heavy and scary as the previous one was. The media will publish how the limited supply feature of Bitcoin is broken. However, because of the much better properties of Bitcoin compared to gold, decreasing trust in governments and financial institutions and the huge power of Bitcoin users as well as the strong game theory I am confident that we will win this fight again and break a multi decennia old manipulation machine! I want to ask every holder to please keep your own private keys and prepare to fight the 2nd war! Also, keep your eyes open: Seeing the game theory playing out before your eyes will bring you a lot of knowledge about Bitcoin and give you confidence in the battles to come!
This is no financial advice, just my view on the market.
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