Sometimes when we see things in the crypto world, they really strike a nerve – problems that need to be solved, experience to be drawn from other fields. This happened to us earlier in the week. We had the chance to meet with a long time crypto participant. He has raised an ICO, and has done engineering work with dozens of other blockchains. In our wide-ranging conversation, he touched on a subject near and dear to the hearts of us at D2D – investor relations.
His point was that no one has fully grasped the problems of the fact that digital tokens are tradeable 24 hours a day. Stocks and bonds operate during market hours, so there is a blocking function when things go wrong the markets close and everyone can take a breath. By contrast, if bad news emerges in the middle of the night, a digital token can be devalued before the team managing it wakes up. With so many coins out there struggling for relevancy, a one-night breakdown in valuation can permanently cripple the project. Rumor can make a killing before fact even logs on to Coincap.
This is not some theoretical problem. From our point of view, trading in cryptoassets is incredibly violent. One of the great things about crypto is the way it combines the worlds of technology and finance. One of the most vulnerable things about crypto is the way it lets technology open the door to the most aggressive parts of finance. For those of us who have spent some time in the financial markets, the trading of cryptoassets looks like it has a giant neon sign flashing over it screaming “Open for Manipulation”. The lack of regulatory oversight, the largely anonymized nature of traders, the shallowness of liquidity and the concentration of holdings all smell like blood in the water to the sharks of the trading world. There are already SEC investigations underway, and rumors of much worse.
Here is how a theoretical attack could work.
For a few days prior to the attack, someone starts posting negative headlines comments about a project in multiple blogs and social media/messaging channels. Nothing serious enough to cause the project owners to react, but enough to get people thinking there might be something going on.
Then at 2 am in the local time for the team, a new wave of more serious rumors hit the same channels. This is amplified by a Twitter bot attack with thousands of retweets about “Problems” for the target blockchain. Simultaneously, someone starts selling the coin, in a large number of small trades, driving the price down.
Finally, at 6 am local time, a friendly ‘journalist’ posts a scathing expose of the project, full of hard-to-deny accusations (e.g. technical problems with the chain) and innuendo about malicious actions by the company backing the chain. By the time everyone has woken up the story is all over social media and possibly mainstream media. By the end of the day, the coin is down 60+% and a full-blown PR crisis has pushed the burden of proof firmly onto the company. The most pernicious part of this is that there is no way for the company to deny it. They end up chasing shadows, with outsiders assuming that ‘someone must know something’, otherwise why the coin be down by so much?
This kind of things happen in all markets, what makes crypto especially vulnerable is the fact that round-the-clock trading allows for bad actors to build unstoppable momentum. There is reason to believe that this kind of attack has already taken place, possibly even with Bitcoin itself.
The crypto world really lends itself to conspiratorial thinking, people are likely to believe the worst because so much is secret and anonymous by design. Fortunately, there is a solution to this, which we will discuss in our next post.