
How the Bitcoin 1% manipulate the currency, deceive its user community - npalli
http://blog.p2pfoundation.net/how-the-bitcoin-1-manipulate-the-currency-deceive-its-user-community-and-make-its-future-uncertain/2013/06/30
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jimrandomh
There's an important basic confusion here: addresses are not accounts. The
closest thing to an "account" is a Bitcoin _wallet_ , which is a database that
can contain many addresses. And not all addresses are owned by a single party;
any business that takes deposits (eg, Bitcoin exchanges), will tend to have a
high-balance address full of Bitcoins that it doesn't own, but is holding for
others. (The largest-balance address is used by MtGox, and many third parties
own the rights to varying numbers of coins in it.) Drawing inferences from the
Bitcoin blockchain is very hard, an deliberately so; that's what protects
users' privacy.

> the subgraph of these transactions contains many strange looking chains and
> fork-merge structures, in which a large balance is either transferred within
> a few hours through hundreds of temporary intermediate accounts

This is what happens when someone with a large account balance spends it a
little at a time using the default Bitcoin software: each time they send coins
to someone else, some of them go to the recipient, while the rest (the
"change") goes to an automatically-created new address that's kept in the same
wallet. If there are hundreds of transactions in a short time, you're probably
looking at a wallet that's controlled by a Bitcoin-oriented business such as
an exchange.

> or split into many small amounts which are sent to different accounts only
> in order to be recombined shortly afterwards into essentially the same
> amount in a new account.

This sounds like coins getting withdrawn from an exchange, circulating a
little bit, then getting deposited back in the same exchange. This also
happens if someone takes all their coins (split between different addresses
because they've been doing transactions on them), and sends them all to the
same address (eg, to move them to a new wallet). Alternatively, it might be a
coin-mixer (eg, I have read that Silk Road does coin-mixing on its depositors'
coins). And there are other things that make weird transaction patterns, like
Satoshi Dice.

> It is remarkable that 97% of all owners had fewer than 10 transactions each,
> while 75 owners use the network very often and are affiliated with at least
> 5,000 transactions

This doesn't say anything about the _owners_ , only about the _addresses_.
Large numbers of addresses are created and used only once, because that's what
the software does. A few addresses are reused many times, because they're
published and many people send coins to them

------
argumentum
I'm not sure about the entire bitcoin community, but I myself own a 100 or so
btc and I'm not that worried by the issues raised. The distribution of
bitcoins and distribution of mining compute power seemed to be well understood
at the bitcoin 2013 conference as well.

There is no good reason for the "1%" to dump and run. Bitcoin is either going
to give you 10000x returns or it is not. In that sense, investing in bitcoin
(either in actual btc, in mining hardware or in bitcoin startups) seems
similar to angel investing. Yes, some may make money in speculation and day
trading, but there's still no incentive to sell out if you hold a significant
%, as your real stake is in the possibility of wide bitcoin adoption.

Everyone knows that only a small % of bitcoins are actually used as currency
at the moment, and further it's understood that a decent percentage of that
use is for illegal activities. That's why there is excitement about startups
that might engender greater circulation and wider adoption as currency.

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qwertzlcoatl
The paper this blog entry is based on was debunked. [1]

 _tl;dr_ : "The Ron/Shamir paper contains provably-false key assumptions.
Further, their data source (website scraping) is a secondary data source known
to have served invalid data in the past.

We do not claim this wholly invalidates their statistical results, but given
the web wallet and cold storage examples, seems likely to introduce
statistically significant changes in the results."

[1]
[https://gist.github.com/jgarzik/3901921](https://gist.github.com/jgarzik/3901921)

~~~
lisper
The debunking has been debunked:

Oct. 31 UPDATE

The authors have introduced several revisions to their paper, available at the
same URL as before.

The criticism below may be outdated in part or in full.

~~~
qwertzlcoatl
I don't know if I would necessarily call that debunked. It only means the
previously debunked introduced revisions to amplify their original points and
the debunkers disclaimed that their debunk _may_ be outdated in part or in
full. Or not at all. I wouldn't necessarily assume that it's a forfeit. It
could just mean the debunkers didn't want to invest more time into it. It's
weird that they didn't link to the revisions though.

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pyalot2
Yes, the distribution of coins isn't egalitarian (early adopters get more,
later adopters get fewer).

Yes there is a fair deal of manipulation (pump&dump and all that and more).

No it's not a kill-switch. In order to exercise their advantage, big hoarders
have to sell coins, and not just a few, and not invisibly, they have to do it
publicly, on the exchanges to move anything. And everytime they do, no matter
if they're ghost-trading with themselves, they loose some, thereby re-
distributing the coins, usually to those with less coins.

A big horder sellout isn't the "end of bitcoin". It'd just be the big equality
readjustment that occasionally happen, when prices convince holders to sell.

Yes there'll be tears and all that, and a bunch of people loosing everything,
but after it happened, the market's more balanced, and ready for the next
round. And then the round after that, and so forth, ad-nauseum.

Welcome to bitcoin.

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robotcookies
Don't similar things happen on the stock exchange all the time? I'm not sure.
But I think the fact that one can discover these things with bitcoins by
tracing activity while it would be much harder to do with more established
markets is a plus for bitcoins.

It's like when android first came out, all these people got upset because it
informed you about what personal information apps wanted. So some went back to
IOS despite those apps doing the same things (you just didn't know about it).
Way to punish transparency.

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grimtrigger
Not sure why an uneven distribution of btc implies currency manipulation. The
author should explain how exactly this manipulation supposedly works.

~~~
lisper
Did you not even bother to read the article?

"The most damning fact revealed in the paper is not the extreme top-heaviness
of the Bitcoin ownership pyramid, but rather the elaborate lengths to which
the hoarders went in order to conceal their existence from “rank and file”
users."

I don't see how it could possibly have been made any clearer.

~~~
scotty79
It's just statement of the impression they got. It doesn't give any
explanation why they've thought that. They apparently think that splitting
money between accounts is sign of attempts to conceal wealth and that it's
done not because they want protection from criminals (also governments) but to
keep ordinary users in the dark.

If I had 5% of all bitcoins I wouldn't keep them in single wallet either.

~~~
lisper
No, it's a paraphrase of one of the conclusions of the original source paper:

[http://eprint.iacr.org/2012/584.pdf](http://eprint.iacr.org/2012/584.pdf)

"[W]e isolated all the large transactions in the system, and discovered that
almost all of them are closely related to a single large transaction that took
place in November 2010, even though the associated users apparently tried to
hide this fact with many strange looking long chains and fork-merge structures
in the transaction graph."

------
scotty79
> the exchange rates (as denominated in anything) would dive through the
> floor, never to recover.

Why people keep saying such things? If 1% were to sell all bitcoins they have
for 0.01 $ then other people would just suck them up at such price. Mostly
miners would be interested in acquiring bitcoins well below price of the
electricity they use to mine. Since mining gear is becoming increasingly
specialized it's either bet on bitcoins bouncing back or write off all your
investments in hardware.

If people who own most bitcoins cashed up they would have to do it at
significant loss to themselves and even then they could not drive bitcoins to
0. Even if bitcoin lost 99.9% of its current price it doesn't significantly
harms its utility as a mean of exchange. Paradoxically it would make it even
more attractive for investors.

Some people think that if price drops significantly people will just abandon
the thing. It's not tulip bulbs or hollow dotcoms. It's the first truly
valuable thing on the internet.

------
greenyoda
I don't know enough about Bitcoin to be able to say whether this article has
any merit. However, it does bring up an interesting question: could an
organization with lots of computing power deliberately destabilize Bitcoin by
mining many more Bitcoins than anyone else had?

For example, what if the NSA discovers that Bitcoins are being used by
terrorists and decide they want to make Bitcoins useless. NSA has lots and
lots of computing power that can be used to mine Bitcoins, and, as far as I
know, there are no laws that provide any kind of legal protection for Bitcoin
or its users.

~~~
gwern
No; the number of bitcoins allowed to be mined is fixed per block. The NSA
could womp up a bunch of ASICs and take the reward from almost every block,
but that doesn't mean much; it would also take a long time to build up a big
enough bitcoin hoard to really crash the market, and that would likely be a
temporary setback inasmuch as miners are already selling a lot of mined coins
and so a 'hoard' would have pushed up the price a lot in advance (supply &
demand, right?) and everyone understands what has happened and takes advantage
of the firesale. (If they had that much hashing power, they'd be _much_ better
off doing other attacks like double-spends and censoring other people's
transactions.)

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joshuak
It continues to amaze me how much hate bitcoin generates. Lot's of assertions
in that article based on opinion. That's common with most technologies, but
the vehemence is not.

We've all seen some real apple haters, or Microsoft, or vi vs. emacs wars, but
man the energy that goes into bitcoin FUD is worth a study in itself.

Even worse if you just ask people on the street (I have) does a non-FED
controlled currency that has low transaction fees and was easy to send over
the internet sound interesting or useful to you?

Everyone, to a man, says yes.

~~~
NegativeK
You're framing the question in a Bitcoin positive way.

I guarantee a dollar is more useful than Bitcoin, simply because it's far more
popular and most people don't care enough about the benefits of Bitcoin to
outweigh its downsides.

Even if you grant that Bitcoin is based on sound principles, I expect it to
remain of limited popularity for the same reason than Plan 9 didn't replace
Unix: "the most dangerous enemy of a better solution is an existing [thing]
that is just good enough."

------
sans-serif
This paper highlights the only real concern I have with BitCoin over the long
term: that it's possible to engage in class warfare.

If you believe the socioeconomic pyramid to hold true, the middle and lower
classes will always outnumber the top 1%. And by achieving this power of
economic majority, they can gang up on the "elites" by means described in this
paper. I'm not going to get into the messy debate of whether it's justifiable;
just that the capability exists. Maybe this paper won't do it. Maybe one that
comes out in 30 years will, under the correct economic and political climate,
finally incite people to make this happen.

Or you could argue that the top 1% would have been prepared by using some of
their wealth to gain control of the means of production (mining machines) and
secure an economic majority. What's to guarantee they won't rig up some
positively reinforcing rules to ensure their prosperity at the expense of the
general public?

Currencies run on immutable rules. BitCoin has had a good run so far, but its
kill switch is already in the collective hands of three people: the leaders of
ASICMiners, Slush, and BTC Guild.

------
NikolaTesla
How is this any different than the current monetary system? Bitcoin is no
panacea, but I would first ask the same questions of why we ‘stick our head in
the sand’ with regard to the worldwide fiat system?

------
jpdoctor
Before this is over, I suspect that folks will migrate to LTC over BTC.
Currency concentration is one of several reasons.

------
simonb
Wouldn't exchanges have precisely this signature in the blockchain?

~~~
lisper
I don't think so. Why would they?

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hardwaresofton
btc has it's own 1% class already? Isn't this a huge step towards legitimacy?

~~~
doctorfoo
I don't really see that a new currency is even relevant to solving any "1%"
problem. If anything has value, wealthy people will be able to own more of it.

~~~
hardwaresofton
Not quite what I meant by my comment...

I meant the 1% problem being almost a validation for btc, in the whole "things
change but they stay the same" vein.

[EDIT] - While the article does indeed discuss doing something about
it/focusing on the 1% problem, I was not surprised by their findings --
hoarders gonna hoard.

