
Veteran fraud expert sets his sights on Bitcoin - DanielBMarkham
http://fortune.com/2014/10/24/bitcoin-fraud-scam/
======
TomGullen
> When you know that there’s, what, 13 million coins in circulation, and more
> than 50% of the them are owned and managed by about 950 people, you realize
> how shallow the market it is and how subject the market is to manipulation.

Is it wrong to apply this to say, Microsoft stock? For the sake of the
argument let's say Bill Gates owns 50%, and a handful of other employees 20%.
Does that intrinsically make it a shallow market, subject to manipulation?

And what sort of manipulation is he talking about exactly?

> There’s no evidence that people who spend down their wallets buy back in.

There is evidence, people do this all the time. I'm not sure if he literally
means no evidence, or that he's suggesting it's an insignificant minority.

> When you heard the hype coming from the community, and … that people were
> spending money on this stuff, they needed to know the truth.

I really just don't think this is as objective as he thinks it is... there
isn't a 'truth' that desperately needs exposing here. It's more complicated
than that and we're still yet to see how it develops.

He does raise some good points though, and I find it interesting he says
Bitcoin isn't very good for money laundering.

I can also see why someone would think it's a pump and dump - it does appear
to share many characteristics from an outside view. People pump it sure, but
the vast majority of 'pumping' I observe is sincere, backed by a strong belief
and excitement in Bitcoin. Not to realise quick profits. Also now with a total
dollar value of billions, it's not really in the traditional value range for
'pump and dumps', schemes that tend to rely on much lower value and easily
manipulable assets.

I do think telling the average Joe on the street right now to probably stay
away from Bitcoin is becoming an increasingly savvy advice. There's a lot of
scams and bad ideas out there.

~~~
gatehouse
The enthusiastic and energetic manipulation of the stock market is well
documented and is the reason for the formation of the SEC in 1933. One
difference between pre-SEC stock manipulation and bitcoin is that the
"controllers" of bitcoin can't arbitrarily issue more bitcoin. Controlling a
company you can issue new stock and debt at will which opens up a lot more
possibilities for market manipulation.

My personal opinion on bitcoin (the specific blockchain, not the tech), is
that it is either a good currency or a good investment, it can't be both.
Since people are calling it a currency and treating it like an investment,
I've only bought/sold it before/after transactions.

With a pump-and-dump scheme, you have a small number of people who are
insincere (the dumpers) and a large number of people who are sincere (the
pumpers). For example, you have promoters saying "BTC is decentralized"
because the ledger is decentralized, but on the other hand ownership and
mining power are highly concentrated.

One area where I think the author is wrong is that he seems to be predicting a
slow death. I think that is unlikely since it has already crashed hard twice
in three years: [https://blockchain.info/charts/market-
price?timespan=all](https://blockchain.info/charts/market-price?timespan=all)

EDIT

Here is an example of some stock market manipulation from the 1800s:

 _The entire period in the affairs of the Erie system from the ascendancy of
Daniel Drew in 1851 to the end of the Civil War witnessed an endless
succession of stock-market exploits both large and small. In the spring of
1866, however, Drew found an opportunity to achieve a real masterpiece in
manipulation. The stock of the Erie road was then selling at about 95 and the
company was in pressing need of funds. The treasurer came to the rescue as
usual and made the necessary advances on adequate security. The company had in
its treasury a considerable amount of unissued stock and had also the legal
right to issue bonds to the extent of $3,000,000 which could be converted into
stock. Drew took these bonds and the unissued stock as security for a loan of
$3,500,000.

It so happened, naturally, that Drew was soon heavily short of Erie stock in
Wall Street. The market was buoyant; speculation was rampant; and the outside
public, the delight and prey of Wall Street gamblers, were as usual drawn in
by the fascination of acquiring wealth without labor. All this time our
friend, Daniel Drew, was quietly selling Erie stock and closing contracts for
the future delivery of the certificates; and he was doing this at rising
prices. As the days went by, his grave, desponding manner grew more and more
apparent. Erie stock continued to rise. In the loan market its scarcity became
greater hour by hour. The rumor began to spread that "Uncle Daniel" was
cornered. His large obligations for future delivery must be met. Where was the
Erie stock to come from? The stock continued to soar, and Treasurer Drew
seemed to become more and more depressed.

Then the blow fell. Drew laid his hands on the collateral which he held for
his loan to the Erie. In the twinkling of an eye his $3,000,000 in Erie bonds
was converted into Erie stock, which he proceeded to dump in Wall Street. Eric
quotations fell from 90 to 50. Every one at last realized the trap—but not
before Daniel Drew had pocketed a few millions in profits._

Source: Moody, The Railroad Builders, Chapter 6.

[http://www.gutenberg.org/ebooks/3036](http://www.gutenberg.org/ebooks/3036)

[https://archive.org/stream/cu31924070687961#page/n93/mode/2u...](https://archive.org/stream/cu31924070687961#page/n93/mode/2up)

The struggle for control that follows the part I quoted is also pretty
interesting.

~~~
jacquesm
The pumpers and the dumpers are the same people, pump and dump relates to the
two different phases of the fraud, the first where the stock is hyped either
by cold calling, spam or some other way to artificially increase demand for an
otherwise remarkable stock that was obtained at a very low price. Once the
price has gone up enough for the fraudsters to unload they start selling their
stock (the dump phase) leaving the investors with a stock worth pennies.

It only works because of the hype ('pump'), and it's pretty rare for a pump to
go viral enough that the pumping would be sustained without the perps
marketing their trash. That would move their clients into the realm of the
pumpers as well.

Think of pump-and-dump as a mini bubble inflated by high pressure marketing to
gullible targets.

------
DennisP
This idea that the "blockchain" can be divorced from a currency that has value
ignores a simple fact: if you don't reward miners with something that has
value, few people will mine and the blockchain won't be secure anymore.

(And a mature version of proof-of-stake would have similar issues. There has
to be something at stake.)

~~~
wmf
That still leaves the possibility that Bitcoin's rules (semi-fixed block
reward and 21M BTC limit) are bad and some other altcoin will have much better
rules.

~~~
kristofferR
Well, that's honestly irrelevant as long as Bitcoin is the only cryptocurrency
with any significant market share.

Bitcoin's market share is currently over 15 times larger than the combined
market share of the following 10 most popular cryptocurrencies! An altcoin
could be much better than Bitcoin technically or economically/philosophically,
but it wouldn't matter since Bitcoin would be much better in practical use due
to its market penetration.

An altcoin could do some really cool stuff that would in theory make it more
secure than Bitcoin, but Bitcoin would be vastly more secure in practice due
to its massive network.

And if an objective flaw actually were discovered in Bitcoin, it would be
solved pretty quickly.

------
modeless

        the idea of putting copyrights on the blockchain: suddenly there’s an irrefutable copyright worldwide.
    

This makes zero sense. Refutation has never been a problem with copyright. The
problem with copyright is enforcement. Blockchains can't help with that. I'm
not sure he has a good grasp of what a blockchain actually is.

~~~
Renaud
It makes sense in the fact that the blockchain can be used to store a proof of
copyright that may help in settling disputes when two parties claim to be the
origin of the thing being copyrighted.

So, you could imagine storing in the blockchain proof that your wrote some
code. If someone comes along and pretend it's theirs, you have irremediable
proof that it's not.

You could build a whole framework of copyright registration around this. Say
you could register the hash or fingerprint of pictures you took, so nobody
could claim that they were theirs.

Of course, this doesn't solve the issue of enforcement but it gives a way for
the owner to prove ownership, making it arguably easier to settle conflict.

~~~
modeless
A blockchain can't prove that you created anything. It can only prove that you
have possession of the same private key as a person who _had knowledge_ of
some information at a certain time in the past. Having knowledge of something
isn't the same thing as creating it, and furthermore possession of a private
key isn't proof that you are the sole or original owner of that key. So, I
fail to see how a blockchain could prove ownership of any copyright.
Furthermore, proof of ownership is rarely the main issue in copyright
disputes, so even if a blockchain did work to prove ownership of copyrights it
wouldn't even be useful.

------
semiel
I've started reading the book, and it's an interesting read. I'm very, very
interested in cryptocurrency, but he hits a lot of skeptical notes that
resonate with thoughts I've had. Bitcoin is an awesome technology, and it's
easy to accidentally assume that it must therefore also be useful and
valuable. Unfortunately, those are actually three separate questions. Plenty
of things are technically cool but not useful, or useful but not profitable.

Personally, I think there's a serious chance that cryptocurrencies will
disrupt (in the original sense) a lot of economic and organizational systems,
but I also think it will take a lot more than Bitcoin to get there.

EDIT: Probably worth saying that I don't unreservedly endorse the book.
There's more than a bit of misunderstanding, exaggeration, and hyperbole. But
it's a useful counterweight to the hype.

------
williamcotton
Can anyone else name a distributed public data store that acts as a point of
truth that is not controlled by anyone in particular?

Can anyone else name a system where everyone has equal read and write
privileges to a data store where that data is reliably available?

Look at this stuff:

[http://coinsecrets.org/](http://coinsecrets.org/)
[http://cryptograffiti.info/#](http://cryptograffiti.info/#)
[https://www.coinprism.info/address/1BvvRfz4XnxSWJ524TusetYKr...](https://www.coinprism.info/address/1BvvRfz4XnxSWJ524TusetYKrtZnAbgV3r)
[https://blockchain.info/new-transactions](https://blockchain.info/new-
transactions)

The currency aspect and the incentives for mining keep these transactions
secure and make sure they're propagated to clients over the network.

There has never been any thing remotely like this kind of shared public space
on the Internet. Blogs and RSS are private residences. Twitter and Facebook
are giant private residences that many people interact within.

The Bitcoin blockchain is like a public park or sidewalk.

We've never seen anything like it before.

~~~
wmf
Maybe one day they'll even add a good payment system to it.

~~~
williamcotton
There's a lot of truth to that somewhat sarcastic response and I agree that
Bitcoin probably won't be the kind of day-to-day mechanism that people use to
buy lunch and concert tickets.

It's a shame you didn't really engage with what I had to say.

~~~
codehalo
Don't expect real conversation regarding bitcoin, most of the people that
comment on bitcoin related threads are trolls and bank shills.

------
eternauta3k
Won't increasing reliance on the blockchain lead to a wasteful computing power
arms race?

~~~
TomGullen
Honestly, even if you consider it wasteful (and there's a strong argument to
contest this) it's currently pretty low on the things to lose sleep over.
There's a lot more low hanging fruit in wasted resources in this world that we
should be looking at first. In my opinion Bitcoin comes under too much unfair
scrutiny in this regard.

~~~
eternauta3k
Would that still be the case if a significant part of transactions went
through Bitcoin?

~~~
ougawouga
Yes. The majority of the energy is spent maintaining the network's security.
Once that security has been obtained, additional transaction volume --
assuming it's within the network's constraints -- will add little to no
additional cost.

To expand, Bitcoin's security is maintained by the miners, who also expend the
majority of the network's energy. Transaction volume for the most part is
borne by all the network's full nodes, which use relatively little energy.

~~~
DennisP
Miners don't choose whether to mine based on whether the network is secure.
They mine if it will be profitable to mine.

So we can expect the total cost of mining to be approximately equal to the
total block rewards plus transaction fees. The more valuable Bitcoin becomes,
the more valuable those rewards will be, and the more money will be spent on
mining.

Some percentage of the mining cost will go to energy, and the rest to
hardware. So it's possible to estimate the energy cost of mining at various
price levels and times (since block rewards decrease over time).

Ignoring transaction fees, it's actually not terrible. I figured out a while
back that it would be something like several gigawatts, if Bitcoin became a
trillion-dollar currency in twenty years. But if transaction fees become
significant it could get a lot worse. (Luckily there's some work in progress
that could increase scalability enough to keep the fees low.)

------
vonklaus
>But then there is this aspect of the pretend currency and the pretend
commodity. Part of the con is in the pretend commodity, because this is a
completely shallow, liquidless market. When you know that there’s, what, 13
million coins in circulation, and more than 50% of the them are owned and
managed by about 950 people, you realize how shallow the market it is and how
subject the market is to manipulation.

You just described the U.S economy.

