Hacker News new | past | comments | ask | show | jobs | submit login
U.S. Launches Criminal Probe into Bitcoin Price Manipulation (bloomberg.com)
308 points by sdfx 11 months ago | hide | past | web | favorite | 215 comments



For anyone who hasn't been following, the prevailing theory is that the largest Cryptocoin exchange "Bitfinex" also runs an altcoin called "Teather" which was marketed as being backed 1:1 by USD. So far they've created 2.8 BILLION USDT and coincidently the times they create millions of these happens to be in the middle of extreme market crashes.

See this chart: https://i.imgur.com/Uo07d1d.jpg

More details here:

https://medium.com/cryptomedication/uncovering-the-real-cart...

https://medium.com/@bitfinexed/latest

https://medium.com/@mattcollburner/bitmex-insiders-caught-in...


For anyone who hasn't read the article - I wish Tether was investigated too - but this article is not about that: "The illicit tactics that the Justice Department is looking into include spoofing and wash trading"


This could be working up to that.


Also the same people running Tether and Bitfinex are highly suspected of also spoofing / wash trading.


If there was a problem redeeming Tether for USD, you'd expect that the market price distortion of Tether. But it hasn't[1]

https://www.tradingview.com/chart/?symbol=POLONIEX:USDTUSD

>they've created 2.8 BILLION USDT

Absolute numbers are meaningless and less eye catching when they're compared to the entire market. 2.8 ~~Billion~~ USDT is only 0.5%-0.8% of the market. Do you really think that a 300-500 billion dollar market is being propped up by less than pennies on the dollar?

What can be said about Tether: it's a trusted third party that's vulnerable to fractional reserve (like all other exchanges). I wouldn't recommend people use it but to point to the tether creation as proof positive of manipulation rather than discussion fractional reserve issues I think is people confusing lurid facts with silent evidence threats.

Other reading: https://medium.com/crypto-punks/tether-misconceptions-298443...


The mechanics are probably this: suppose someone goes to Bitfinex to redeem 10million USDT into USD. Since Bitfinex is behaving fraudulently, they don't actually have the 10million USD they promised they would hold to back the USDT. But they do have the ability to issue new unbacked USDT.

So they issue 11million unbacked USDT and use it to buy bitcoin. They sell the bitcoin for 10million USD on one of the exchanges that allows bitcoin to hard currency exchange. The 10% loss is because you have to pay a premium to exchange bitcoin to real currency. Bitfinex then pays the 10million USD to the customer in exchange for the 10million USDT which is retired.

The net results are 1million new unbacked USDT have been printed, and the illusion that USDT is backed by USD has been maintained.

Possibly the "Bitfinex issues unbacked USDT to buy bitcoin" step is being done not based purely on customer demand, but on a periodic basis when bitcoin price is falling.

Maybe Bitfinex has a hope to preserve their fraud by propping up bitcoin, or to dig out from under the fraud by building a big long bitcoin position and hoping it will rise in value.

Or maybe the timing of USDT issues with market drops is just that bitcoin price falls when there are more sellers than buyers, which is the same time there are more USDT redemptions. So to carry out the mechanics above, Bitfinex has to print tether to fund the redemptions at the time of the drops.


> So they issue 11million unbacked USDT and use it to buy bitcoin.

Who is selling them BTC for USDT apart from a few daytraders? Where is the sink of 2.8 billion USDT?


That's a very interesting and plausible hypothesis.

One wonders whether the prolonged slump might lead to some sort of bursting of outfits like Tether/Bitfinex. It seems like a downward spiral of people selling BTC and Bitfinex doing the dance you described, and a bigger hole being created.


The other allegation (which is pretty viable) was with large reserves to play with, they could cause crashes or spikes in order to gobble up their users risky shorts. Shorts they would know the exact number and values of.


Well, I could see how the government might not like people printing their own money without going through the central bank.


yeah, i thought it was a ponzi scheme too.


No, not necessarily. Ponzi schemes can survive redemptions for years or even decades; they blow up when there's finally a run.


You're confusing a Ponzi scheme and fractional reserve. Two very different systems.


A fractional reserve bank is a bank where:

Cash on hand < Outstanding liabilities (Deposits)

Cash on hand + Investments > Outstanding liabilities (Deposits).

A ponzi scheme is where:

Cash on hand + Investments < Outstanding liabilities.

A fractional reserve bank doesn't have the cash to let 100% of its depositors withdraw their accounts tomorrow. It does have the assets to let 100% of its depositors withdraw their accounts once its investments mature, or if they are sold at market value.

A ponzi scheme can't do either of the above. It's a pure scam.


>It does have the assets to let 100% of its depositors withdraw their accounts once its investments mature

This line of thinking is what caused the 2008 crisis. The two metrics are interdependent. If a bank doesn't have liquidity, it can't make loans, which cant support the prices of the assets it owns which results in financial collapse.

Ponzi schemes are 'investment' promises that require ever growing layers of patsies to be recruited for each patsies' pay off to occur. Fractional Reserve is a practice where an institution leverages themselves by only keeping the expected liquidity needs in reserve and using the other capital for other means. Eventually they blowing up, when the market demands the apparent liquidity.

A ponzi scheme has to continue to grow or else it will collapse. Frantional reserve risks can perpetuate indefinitely until the liquidity is request:

StableCoin takes $100MM in USD deposits. Issues 100MM StableCoins. StableCo notices that it's 'never' had more than $10MM in USD of liquidity tapped. It decides "Hey we could make a stack of cash investing the remaining $90MM USD in XYZ" not until X years later does the fractional reserve issue arise as 'unforeseen circumstances' cause a liquidity demand of $15MM


Yes, what led to the 2008 crisis was a misvaluation of investments. Fortunately, there exist solutions to that problem, built into the system. Short-term interbank loans, the FDIC, and nationalization. Notice how not a single American bank stole it's depositor's money... And that the rules of fractional reserves were changed, to reduce the likely hood of such a catastrophe.

There is a world of difference between that and a Ponzi scheme. How many investors took a haircut from Madoff's little game, again?


Tether is claimed to be fully backed by USD. If it is not then it quickly ends up being an effective Ponzi scheme.


Ponzi schemes are 'investment' promises that require ever growing layers of patsies to be recruited for each patsies' pay off to occur.

Fractional Reserve is a practice where an institution leverages themselves by only keeping the expected liquidity needs in reserve and using the other capital for other means. Eventually they blowing up, when the market demands the apparent liquidity.


The only difference is that ponzi schemes promise a positive return on investment while fractional reserves just make the people holding the fractional reserve more money.


> USDT is only 0.5%-0.8% of the market.

This is false. Market cap is a meaningless statistic when applied to cryptocurrencies. If I create a billion 'FOOCoins' and sell one to a friend for $1, FOOCoin now has a 1 billion market cap, but only a single dollar has changed hands. He sells it back to me for $2, now FOOCoin has a cap of $2 billion! With only $3 having changed hands.

This is clearly an exaggerated scenario, but it does show that the market price multiplied by the number of coins is not meaningful.

> Do you really think that a 300-500 billion dollar market is being propped up by less than pennies on the dollar?

I don't think it's a 300-500 billion dollar market.

In fact the article you linked to goes on to explain this very phenomenon! That in fact it's possible that only around $6 billion in inflow has gone into cryptocurrencies, ever. This puts tether at around 1/3 of the entire inflow. Is that still trivial?


> If I create a billion 'FOOCoins' and sell one to a friend for $1, FOOCoin now has a 1 billion market cap, but only a single dollar has changed hands. He sells it back to me for $2, now FOOCoin has a cap of $2 billion! With only $3 having changed hands.

Only $1 has changed hands in this.


$1 changed hands, but the trading volume is $3.

There's a lot of speculation that this sort of "wash trading" happens in Bitcoin - some exchanges permit buying/selling to yourself, which lets someone boost both price and volume trivially.


Well true, in aggregate. But we may have used up to three different notes :)


Did you read the article you posted?

It makes the point that it is in fact possible to influence the market with pennies on the dollar.

Remember that market cap is meaningless while no matter how USDT were created(backed or not) those represent at least some fiat inflows.

My personal opinion: Tether initially had some USD backing maybe not 100%. Now, I'd be surprised if Tether has backing in excess of 10%.

That is still enough to control Tether if you have issuing authority and can limit redemptions for fiat.

In fact Bitfinex/Tether has done exactly that. You would be hard pressed to redeem Tether for dollars.


> What can be said about Tether: it's a trusted third party that's vulnerable to fractional reserve

What? Isn't the entire friggin point of Tether that it's _not_ a fractional reserve system?

From their own FAQ (emphasis mine):

> All tethers are pegged at one-to-one with matching fiat currency (e.g., 1 USD₮ = 1 USD) and are backed 100% by actual assets in our reserve account.

https://tether.to/faqs/


Their FAQ also promises to have audits of their USD reserves, which as I understand it they've since reneged on.


I think by "vulnerable to fractional reserve," he means that since there is no way to transparently verify or audit their USD reserves, they could run a fractional system while claiming to be fully backed, like Mt Gox did.


Ah. I guess that my reading was "vulnerable to [bank runs, due to] fractional reserve."


If tether isn't a scam, why have then not yet found an auditor willing to actually audit them?


This.


A fractional reserve means you keep a fraction of your total assets in cash and the rest of your assets in loans or investments that are less liquid, but entirely real.

It doesn't mean that you have assets that all total up to be a fraction of your liabilities. You're severely misunderstanding what fractional reserve means.


What I wonder is: Even if it is totally a ponzi scheme/scam, it seems like the price holds even if people have little faith on whether or not it's properly backed.

So, has it _psychologically_ managed to create price stability? So long as there isn't a giant run on the currency where they actually did run out of the necessary US Dollars (as well as insufficient people stepping in willing to pay $1 for 1 USDT), does it actually matter whether or not they have fully collateralized the currency?

I find that to be sorta interesting.


Fractional reserve BANKING is when a bank keeps a fraction of its deposits on hand while the rest is being INVESTED so that they can earn money to pay you interest. The money exists, but most of it is tied up in long-term investments.

Is Tether a bank? Does it invest its reserves? If you answered no to either of those questions, then you have no business comparing it to a fractional reserve banking system.


They created another $250 million worth just one week ago.

https://omniexplorer.info/address/3MbYQMMmSkC3AgWkj9FMo5LsPT...


So, who are “they” and where is all this fiat going? That’s a great and yet unanswered question. If Tether was real, then KPMG would be glad to audit them..


I'm lost. Why is it significant that they supposedly create Tether during market crashes?


You can create Tether out of thin air and use it to move the market in a favourable direction.


But assuming Tether was legitimate, wouldn't they also need to create new Tether units during extreme market crashes because that's when the highest demand for Tether would be, so they'd run out of the existing Tether?

They wouldn't need to create new Tether during bull runs, because nobody cares about putting their money into Tether then.


No, it's unlikely if Tether was legitimate USDT printing would correlate so closely with bitcoin (crypto) market downturns.

The reason being, assuming tether is legitimate, for every printing they are sourcing additional USD to back the newly minted USDT. The idea they could so consistently find large investors willing to make NEW 100M+ investments while the crypto markets were in free fall is unlikely to say the least.

And it's not as if that's the only complaints about Tether. The fact Bitfinex and Tether has the same management; USDT pretty much acts as a proxy for Bitfinex to maneuver around banking laws; and that USDT supply pretty much grows monotonically are just a few of the other issues that suggest Tether is not legit.


This is inaccurate. Tether demand INCREASES when the cryptomarkets crash because traders want to escape to non-volatile assets. If everyone converts their crypto to USDT at the same time (which is what happens during big crashes) they MUST print more Tether or the price will increase.


> If everyone converts their crypto to USDT at the same time (which is what happens during big crashes) they MUST print more Tether or the price will increase.

This doesn't make sense.

You don't "convert" other cryptocurrencies to USDT, you sell your cryptocurrencies to people who have USDT. If there's a big sell pressure on the cryptocurrency, people want to move back to dollars, and there are not enough USD(T) then the price of the cryptocurrency should come down.

By adding more USDT to the picture you're magicking up money out of thin air to prop up a price. You're basically saying that when people want to sell cryptocurrency, dollars should be brought into existence to facilitate this at their preferred price.


It makes perfect sense. If many people are trying to BUY USDT (increasing demand for USDT) the price of USDT will increase. Tether tries to prevent this by printing more USDT (increasing supply). They are not "magicking" Dollars, they are magicking a commodity (USDT) pegged to Dollar.

I'm not saying that I'm a big Tether fan or anything. However to say that it "doesn't make sense" when they print more Tether during market crashes is false.


> It makes perfect sense. If many people are trying to BUY USDT (increasing demand for USDT) the price of USDT will increase.

Why? It's worth exactly one dollar. Which they have in an account. That's the point. The price of the other cryptocurrency will come down, and the value of USDT compared to that cryptocurrency will indeed rise, as it should when people want to sell to a market where there's more demand on dollars than the asset.

> They are not "magicking" Dollars, they are magicking a commodity (USDT) pegged to Dollar.

But it's supposed to be pegged to the dollar by a real dollar backing. In the scenario you're describing, it's a floating asset not backed by anything, with a value maintained purely by supply manipulation, and being issued to prop up an asset price. The opposite of what it's supposed to be.

> However to say that it "doesn't make sense" when they print more Tether during market crashes is false.

It still doesn't. I mean, it makes sense from a "lets conjure up some money to prop up the price of BTC" angle, sure, but that's not the same as it making sense for something that's backed by cash on a 1:1 basis. Tether should only be issued when people give dollars to the tether foundation. That's the claim on their front page, and the basis of their peg.


There's zero proof they have anything in there account.


Well indeed! But that's how it's supposed to work.


Completely fraudulent?


Nobody outside of tether really knows until there's some sort of audit.

But the secrecy, false claims of regular auditing etc. don't look good from here.


Bitfinex hired Friedman LLP to audit them.

Friedman only gave a report explicitly specifying "THIS IS NOT AN AUDIT" because Bitfinex wouldn't provide the documents and access beyond simple statements.

Friedman LLP recently removed all mention of ever having been involved with Bitfinex from their webpage.

Previously visible here:

http://archive.li/xbhxI

http://www.friedmanllp.com/insights/auditor-engagement

The Bloomberg article states that Friedman was issued a subpoena from the CFTC, at the same time Bitfinex was subpoenaed.

  Friedman LLP, a New York-based auditing firm, was also 
  subpoenaed by the CFTC after Tether hired it last year to 
  assess claims that Tether held enough U.S. dollars, 
  according to a person familiar with the matter.


I thought that what people call a "currency peg" is normally the same as what you are calling "maintained purely by supply manipulation". So I suspect you may be using words in a nonstandard way.


Not here, not the way tether is set up. Its claim is that its peg is concrete and reliable in the way a floating peg is not, because every tether is backed by a real dollar in a bank account, and in theory is redeemable.

Take a look at their homepage.


I don't understand why you are getting downvoted, because this is indeed what Tether claims. From their homepage

"100% Backed

Every tether is always backed 1-to-1, by traditional currency held in our reserves. So 1 USD₮ is always equivalent to 1 USD."

Whether Tether's claim is actually true is at best unclear, of course.


I'm saying that I have the impression that some countries have a currency that is pegged to the dollar, and they maintain dollar reserves, but not one for one. And people do not say that is "floating", but that it is not floating. So it becomes misleading if you start defining a peg as requiring one for one reserves and being "floating" otherwise. There's no downside to using terminology that is clear to other people, unless you are trying to be deceptive.


I'm not making these claims you seem to think I am.

I am 100%, absolutely, positively not saying 1:1 backing is required for a currency peg.

I am saying that in the case of tether, that is the explicit claim they are making about their cryptocurrency. They are claiming that each and every one is backed by a dollar in their account. This is their value proposition, this is what you are buying when you buy tether. An open, audited, 1:1 backed US dollar token * .

Please go and read their homepage if you have some sort of issue with this, it's right there at https://tether.to/

The idea is very much that you can park money in tether and it's not vulnerable to a run on the currency and it cannot drop below a dollar, because each one has a corresponding dollar in an account.

(* unfortunately they are not very open and have never been audited)


Yes of course demand increases for UDST on downturns which increases the market value of USDT and that's fine.

In fact printing tether to ensure it's market value is $1 is a fine solution. Except for the fact that the bank accounts that BACK the tether with USD are now in deficit compared ot the UDST supply. So while the crypto market value of USDT is $1 it's no longer backed 1-1.

So now, if they're legit, tether must figure out a way to get the missing dollars back into the bank account. The most efficient way to do this is to find an outside investor and trade him all the newly printed USDT for USD. In practice this would be rather difficult to do consistently in sliding markets, difficult enough that the correlation would be low as I pointed out.

You could also exchange USDT for various COINS then sell the coins for USD which then go into those reserve bank accounts. If you have a willing exchange partner with lots of cash and a need for bitcoins then this could work pretty well. Considering Bitfnex is run by the same dudes as tether, if they are legit then this is probably what they are doing. But all that's just IF they are legit and there's plenty of things wrong with USDT outside of whether it's backed 1-1 with USD.

TLDR: Trading volume and market value of USDT does not relieve tether of actually having USD on hand for each Tether that exists.


By your logic if that were the case, Tether would need to be destroyed everytime the crypto-markets rise...

Plus, Tether's offical website and documentation state that's not how Tether is intended, they claim it is always 1:1 backed by a real USD reserve in a bank account (which they tell people they will audit, but the auditor backed out after giving a statement that said Bitfinex would not provide the proper documentation and access, later erasing any mention of having been associated with Bitfinex.)


No, they don't need to print more tether to protect the price. The price of tether is locked to $1.


> But assuming Tether was legitimate, wouldn't they also need to create new Tether units during extreme market crashes because that's when the highest demand for Tether would be, so they'd run out of the existing Tether?

BTC crashes inherently would create BTC -> USDT interest, sure, but not inherently create USD availability for backing new USDT.

Creation of legitimate USDT would mainly seem to happen when there is high USD -> BTC interest, because that is, in many cases, realized by USD -> USDT conversion (with, in principle, the USDT created at that time and the USD in reserve backing the new USDT) followed by USDT -> BTC exchange.

You might see new legitimate, large-scale USDT creation in a crash if, say, bargain-hunting new USD money is flowing into BTC, but the people exiting BTC and driving the price down are holding USDT without converting to USD.

> They wouldn't need to create new Tether during bull runs, because nobody cares about putting their money into Tether then.

Yes, they would, unless “bull runs” in the USDT-denominated BTC market are just money already held in USDT rushing back into BTC, rather than new USD flowing into the USDT/BTC market.


Day traders use Tether a lot, even during bull runs. Because the market never closes, many full-time traders put their crypto all into tether when they're done trading for the day.


Why not just put it into USD when they are done for the day?


Crypto/Fiat transactions are much more expensive than Crpyto/Crypto transactions. Why impact your bottom line if you don't need to?


Why is exchanging 1 BTC into 10,000 USD on an exchange more expensive then exchanging 1 BTC into 10,000 USDT - as long as you don't withdraw it?

Is it because you don't trust the exchange to honor your USD withdrawal the next morning?

What makes you trust that Bitfinex is more likely to honor USDT to USD exchanges the next morning?

It's almost certain that USDT isn't actually backed 1:1 by USD. If it were, it would be trivially auditable. You're just moving yourself from one category of potential risk (Your exchange steals your USD), into a category of almost certain risk (The shoe drops and we discover that USDT was a scam all along.)


In addition, it's more "liquid" too. It's easier to turn tether into pretty much any altcoin on most exchanges vs turning USD back into altcoins.

There's still a belief in some circles too that a crypto/crypto transaction isn't a taxable event, which isn't true anymore. Regardless, some either believe this or know it's not true but find it easier to tax-evade this way.


  which isn't true anymore
It's hard to argue it was ever true, or ever likely to have been treated as such.


a lot of exchanges don't support USD conversion due to increased hassle of dealing with the dollar/us gov regulations. its easier to be a crypto only exchange than a crypto/fiat exchange


What happened to the bitfinexed guy, he's gone silent on social media?


My first guess would be perhaps he is helping with the investigation...


> So far they've created 2.8 BILLION USDT

Who bought all these USDT? Who is holding them? Why would you hold them?


My understanding is that there was a confusing UI where people who intended to sell bitcoin for USD actually selected USDT by default.

And one reason they might hold them is because they can't figure out how to exchange them for USD.

I mean, I'm sure there must be some people who bought USDT when that was their intention, but there are also a bunch who bought it by accident.


But you can easily buy BTC using USDT and then sell the BTC somewhere for real USD. Where are the reports of people stuck with USDT?


Nobody will be stuck with USDT until the Ponzi scheme is finally revealed in the form of an indictment. Until then, investors don’t hesitate to hold a few USDT now and then, because the likelihood of being stuck with them when it all goes to hell is small.


> investors don’t hesitate to hold a few USDT now and then

But it is not "now and then". It is 2.8 billion all the time! Maybe they are hold by different people at different times. Yet, they have to be held somewhere by someone all the time, who think that it is a good idea to have USDT instead of USD or BTC.


You lose a percentage of what you exchange


Don't you have it the wrong way round? The value (in $) of USDT crashes after they create more of it, because they create more of it (i.e. supply increases). I mean, surely it doesn't make sense to increase supply after USDT crashes (and hence depress the value further)?!


If Tether is a scam, they'd care more about the value of Bitcoin and the altcoins being propped up with it (as that's where they'd be actually making their money) than the value of Tether.


Ah, I get it. I thought the parent was implying USDT/USD market crashes, but I didn't notice the `.jpg` that shows BTC/USD price.


Tether, not "teather." As in, tethered to USD (nominally).


What is the author of the first article attempting to show by including "An actual picture of the area where this account is registered"? That just feels irrelevant.


They mint Tether during market crashes because that's when there is the highest volume on USDT pairs, and when Tether needs to create tokens to maintain the exchange rate around $1. Have you read their whitepaper?

Further, there is more proof that Tether has the funding to back up the USDT than proof that Tether does not have the funds:

https://blog.bitmex.com/tether/

https://blog.bitmex.com/tether-addendum-new-financial-data-r...

Reddit memes, medium posts with no research, and "correlation implies causation" assumptions does not make rumours true.


Well, right on tether.to they say, and I quote:

> Our reserve holdings are published daily and subject to frequent professional audits. All tethers in circulation always match our reserves.

They've been around for years and the grand total of independents audits is 0 (zero).

Sure, assumptions don't make rumors true but them flat-out lying about audits and transparency speaks louder than anything else and we're not even getting into how it took the Panama papers leak for the public to find out that several of the people in charge of Tether and the people in charge of Bitfinex being the same.


Even worse, they tried to get an audit, but it ended up with them and their auditor ending the process without producing an audit. Apparently they weren't too happy the auditor wanted to actually take a close look:

“We confirm that the relationship with Friedman is dissolved. Given the excruciatingly detailed procedures Friedman was undertaking for the relatively simple balance sheet of Tether, it became clear that an audit would be unattainable in a reasonable time frame. As Tether is the first company in the space to undergo this process and pursue this level of transparency, there is no precedent set to guide the process nor any benchmark against which to measure its success.” - Tether spokesperson

See https://medium.com/@bitfinexed/bitfinex-and-tether-is-unaudi...


The fact that people still support tether after getting fired by their auditor and then releasing the statement you quoted astounds me.

It is the most clear cut indicator that there is some super sketchy shit going on ever.

People seem to be willing to believe whatever they want despise clear signs they are wrong. Especially when there is the possibility of getting lambo-rich with Bitcoin....


>It is the most clear cut indicator that there is some super sketchy shit going on ever.

Yes, there is something that they're hiding, but there is no evidence that this has anything to do with their 1:1 USD reserve being a bogus. It's far more likely they are encountering regulation problems given the regulation uncertainty surrounding crypto.

>People seem to be willing to believe whatever they want despise clear signs they are wrong.

Or perhaps I'm not willing to commit to conspiracy theories based on baseless speculations.


So wait, am I reading this right? They want to say that their holdings are audited, but want an auditing process that stops at "yes, this bank account as a $X balance" and doesn't include anything about who actually owns the account or what its liabilities are?

In fairness, I can kind of understand the bind: it seems that use-case of tethers depends on not being a legally enforceable claim to dollars, specifically so they can't legally be regulated as such (which would trigger reporting requirements, accreditation as a money transmitter, etc). But that's a double-edged sword: it also means that no (ethical) auditor will sign off on a statement saying they legally own the assets they claim to have.


For example... let’s say Bitfinex really does have $2.4B (or whatever) in the bank. But they have borrowed $2.3B using the cash as collateral. This is the sort of shenanigans that come out during an audit.


Their cheerleaders usually reply claiming that they're under no obligation to publish audits and pretend that statement doesn't exist on the website, or is an old outdated webpage they forgot to remove.


> Sure, assumptions don't make rumors true but them flat-out lying about audits and transparency speaks louder than anything else and we're not even getting into how it took the Panama papers leak for the public to find out that several of the people in charge of Tether and the people in charge of Bitfinex being the same.

An interesting fact is that all of the original RealCoin/Tether founders (Brock Pierce, Reeve Collins, Craig Sellars) are now associated with a pair of connected blockchain startups: BLOCKV[1] and vAtomic[2].

[1]: https://blockv.io/#team

[2]: https://www.vatomic.io/ (this is, incidentally, another of vAtomic's founders, "accused of paying $2.5 million of bribes to two technology executives at the bank, so they would arrange $10.4 million of contracts to inflate his company’s revenue." https://www.reuters.com/article/us-servicemesh-cba-bribery/e...)


>flat-out lying about audits

Huh? They did do audits https://tether.to/announcement-transparency-update/ and they don't say they must be as public or as comprehensive as the community demands.


Erm, quoted from the exact announcement you linked (including the typo):

> These consulting services do not constitute anaudit or attestation engagement

They're saying themselves that they weren't audited.


Not quite--they're saying that the consulting services that Friedman offered on top of the audit procedure they were hired to do are not an audit. Friedman audited Tether, but it was not "a full audit" (https://www.coindesk.com/tether-confirms-relationship-audito...) and, according to Tether, the reason for the that is as follows:

>Given the excruciatingly detailed procedures Friedman was undertaking for the relatively simple balance sheet of Tether, it became clear that an audit would be unattainable in a reasonable time frame. As Tether is the first company in the space to undergo this process and pursue this level of transparency, there is no precedent set to guide the process nor any benchmark against which to measure its success."


> there is more proof that Tether has the funding to back up the USDT than proof that Tether does not have the funds

There is no way Bitfinex has $2.2 billion in bank accounts. If a bank handles U.S. dollars, they are under U.S. jurisdiction. Bitfinex cannot show who own Tether; that makes beneficial ownership tracing, rules surrounding which became stronger twelve days ago, impossible.

Had they picked any other currency, the claim could have been plausible. But $2.2 billion in anonymously digital U.S. dollars? (Physical cash, too, might have been plausible.) Not likely.


Right, not to mention that phase 3-6 months ago where they were supposedly injecting several rapid (a few times a week) multi-hundred million dollar issuances. That's the kind of thing that raises red flags. "Hey, Mr Banker, here's $200M USD", three days later, "Hey, I have another $150M for you", and a few days after that, "Another $150M. Business is go-ooo-d!".


>>If a bank handles U.S. dollars, they are under U.S. jurisdiction.

I've always thought of Tether as the loose cryptocurrency equivalent of a eurodollar[1] facility. If the eurodollar was Bitfinex's original inspiration, then Bitfinex probably thought that keeping their USD deposits (which allegedly back Tethers 1:1) in custody of foreign banks (i.e. non-US domiciled banks) would place them outside of US jurisdiction.

[1] https://en.wikipedia.org/wiki/Eurodollar


Have you looked at any of the links I posted? https://blog.bitmex.com/tether-addendum-new-financial-data-r...


I think the supposed trick is that they are not in bank accounts.


So, BTC created 16 million coins from air and nobody complained. Ripple created 100 billion coins from air and nobody complained. Tron, Stellar, Cardano, Iota, all in the billions. The top 1000 coins were created from air and nobody complained (most are scams).

Why creating Tethers from thin air is now a cause of concern? That's a coin just like every coin out there, like Tron, Verge, EOS, they're created from nothing by a program, they have the value the market decides it has and the creator has all the right to print all the coins they want just like everybody else.

And the market has decided USDT has more value than all other coins combined as it is number two in volume just behind BTC.

People use USDT as a safe harbor when markets collapse, it has its use, a very valuable use. Of course they will print trillions if they could, everybody would print trillions of their shitty coins and cash out tanking the market if they could, that's the nature of cryptocurrencies.

I fail to see why people complain about Tether (highly valuable) and not about the rest of the scam coins that are draining the market from stupid money.


> Why creating Tethers from thin air is now a cause of concern?

If you are claiming they are backed by USD, and you are creating them out of thin air, then that's a scam.

Other coins are only valued based on how the market values them. There is no fraud there; you are not claiming that you will redeem them for something else, they just represent themselves and are valued based on how useful people find that particular kind of cryptocurrency, plus hype.

MtGox was also a scam by the end, since they were trading on their exchange bitcoins and USD that they didn't actually have for people to cash out.


>MtGox was also a scam by the end, since they were trading on their exchange bitcoins and USD that they didn't actually have for people to cash out.

Heh. When a bitcoin exchange does it, it's a "scam". When a bank does it, it's "fractional reserve".


Banks that use fractional reserve should still have balanced assets and liabilities. It is just that some of their money is tied up in loans to be paid back instead of liquid cash. If everyone the bank loaned money to paid back there would be enough cash to allow all the customers to fully withdraw their accounts.

Bitfinex, on the other hand, is just outright insolvent.


Ah, so there is a difference. Thank you for clarifying.

I wish I had phrased my post as a question - as a statement it seems rather unpopular...


You would be surprised how often other people use that exact argument but as a statement they say full of conviction instead of a question :) That might be the source of the confusion here.


It also helps that banks are insured federally.


Banks don't pretend that they're not fractional reserve.


Fractional reserve is also regulated and deposits are insured up to a certain amount, so it's definitely not comparable to printing imaginary USDT - even if fractional reserve banking has many well-known issues.


That regulation didn't work so well 10 years ago. Regulation is for us, not the big dogs.


It worked fine. I don’t know what you’re talking about.


Americans got screwed and no banking executives went to jail. It didn't work.

It's one of the reasons Bitcoin was created, per the first transaction in the blockchain.


Fractional reserve banking is not what failed in the financial crisis. Multiple things failed, including credit ratings, mutual funds/pensions/etc investing in high risk investments, etc. The biggest risk people think of for fractional reserve - they won't have the money when you need it, a run on banks, etc - didn't really happen in the states in any significant fashion.


No one really went to jail because they didn't break any laws. They fucked up, but not in an illegal manner.


Its not the same thing because exchanges often trade only Tether/Bitcoin pairs, and don't allow people to withdraw into actual USD. If you can print as many tethers as you like, then you can massively pump the bitcoin price buying it with worthless tether.

This only works as long as people selling Bitcoin have been happy to accept Tether instead of USD, which (inexplicably to me) they have been doing. If Tether is proven to be backed by nothing at all, then there could be a serious crash as people try to get real money out and dump Tether. Your bitcoin being worth 7350 USDT isn't very exciting if your USDT are worth 0 USD.


What's inexplicable? Tether supplies real value, by allowing people to trade in USD without complying with American (or any other) banking law.

And the alleged fraud is that they're creating USDT out of thin air, and spending them to buy BTC, in order to manipulate the price of Bitcoin upward. If you're a Bitcoin bull, then that's almost a selling point. I don't think any of this ends well, but I see the short-term appeal.

People don't appreciate how slowly government works, especially on financial crimes. Liberty Reserve was blatantly illegal and technically simple, without even the blockchain fig leaf. It operated openly for seven years. Then the government arrested the founder, and sentenced him to twenty years in prison.


Tether posits that it is worth ~$1/Tether, backed by some mechanism that the exchange hasn't revealed. If you create Tether like any other coin, you probably aren't also creating $1 to correlate.


the idea being that you create new tether when someone deposits the same amount of USD and when USD is withdrawn from the loop then so should the same amount of tethers. What I dont see happening is the removal of tethers when the USD flows out of the crypto space. Enough people have taken profits at this stage that surely some of those USD should have been used to pay out early investors in BTC, thus some tethers would need to be destroyed to maintain parity. Bitfinex should not even be keeping tethers where they have paid out the USD as they can easily create more when new USD is deposited. if it is a scam I am impressed by how long they have managed to keep it going.


You don't need the withdrawal step in the current market

I buy BTC w/ USD Bitfinex prints USDT Bitfinex uses USDT to get BTC

In the end of this operation bitfinex has the USD and everyone else is satisfied. Normally Bitfinex needs to hold onto it to settle USDT claims, but so long as there's a USDT-usable market this might not be necessary

Even if USDT is at 50 cents to the dollar it's still a license to print money


For every buyer there is a seller, bitfinex are not selling you the BTC. So that seller now wants to trade his USDT for USD to withdraw, whether he does that through bitfinex or another exchange using USDT, the end result should be an outflow of USD and a corresponding drop in the number of USDT.


Exactly, I'm wondering the same. Somebody bought 2.8 billion USDT and it is unclear who and why (to me).


I think people hold USDT:

1. For convenience, like if they're speculating in BTCUSD and their exchange uses Tether.

2. Deliberately, because they're breaking the law and they'd get caught if they tried to deposit their money in a regulated institution.

I doubt many people in the first category have thought much about the risks, or even know the difference between USD and USDT--if they had, then they'd probably use a different exchange. I'll bet there's a lot of them, though. I could imagine that people in the second category would consider the risk and still want USDT. A portfolio of half each BTC and USDT is probably less risky in some sense than all BTC. Even if the investment in USDT has negative alpha, it might improve your portfolio's Sharpe ratio, if the correlation between the risk that USDT collapses and the price of Bitcoin is small enough.


"And the market has decided USDT has more value than all other coins combined as it is number two in volume just behind BTC."

No, that just means that there's more of them.


>"The Justice Department has opened a criminal probe into whether traders are manipulating the price of Bitcoin and other digital currencies, dramatically ratcheting up U.S. scrutiny of red-hot markets that critics say are rife with misconduct, according to four people familiar with the matter. [...] Federal prosecutors are working with the Commodity Futures Trading Commission, a financial regulator that oversees derivatives tied to Bitcoin, the people said."

Why isn't there a better source for this than "four people"? I didn't see anything on the DOJ site. Perhaps they are talking about this: https://www.cftc.gov/PressRoom/PressReleases/7731-18

However, that doesn't mention the DOJ so maybe not. Is it normal for the DOJ to anonymously report its activities to journalists like this?


> Why isn't there a better source for this than "four people"?

Because they're leaking. "Four people" is how a media organization says "it's not just one whackjob making shit up".

> I didn't see anything on the DOJ site.

Why would you? They don't appear to have publicly announced anything yet.

> Is it normal for the DOJ to anonymously report its activities to journalists like this?

It's normal for people at the DOJ to do so, yes. Some leaks are done on a semi-official basis (https://boingboing.net/2017/02/22/the-leaky-leviathan.html), others are just individuals doing it on their own.


So it sounds like we are dealing with a rumor here. What reason do we have to believe these four people? I guess it is the reputation of the journalist on the line if the rumors turn out to be false.


> So it sounds like we are dealing with a rumor here.

Media organizations get pretty good at distinguishing between rumor and leak. Any major one will have all sorts of policies on how a story gets verified, and they tend to work. Mistakes do get made, as with anything involving humans.

> What reason do we have to believe these four people?

The media organization involved deems them credible enough to use as sources. It's left mostly up to you whether you trust that media organization.

> I guess it is the reputation of the journalist on the line if the rumors turn out to be false.

Yes, essentially (and their editors, and the publication, and the media as a whole...). This is why reporters cultivate sources, vet their information, keep track over time of their reliability, and generally require multiple independent sources if those sources are leaking anonymously.


> Why isn't there a better source for this than "four people"?

The same reason that (except for actual indictments and subsequent court filings, and the extraordinary fact of the appointment of a special prosecutor) we get most—often later confirmed as accurate—info on the Mueller probe through similar sources outside DoJ: the DoJ doesn't leak much but a criminal investigation naturally touches people outside the DoJ that are less prone to avoiding leaking. Those can be people in the agency giving a criminal referral, which this reporting suggests would likely have come from the CFTC, or they can be people connected with witnesses (including, but not limited to, those who have been given notice indicating that they are subjects or targets of the investigation.)


Its highly unlikely that any of those 4 people are DOJ employees. More likely 4 traders that have been interviewed and confirmed as much to the journalist.


This is even worse than if it was DOJ leak. We would be dealing with a rumor started by people under investigation for manipulating bitcoin prices...


Being interviewed in the course of an investigation means you are a potential witness, not necessarily a target or even subject of the investigation.


This going to be interesting. They will ask all the US based exchanges - Coinbase, Circle etc for their trade and order data for analysis. Coinbase has already fought and lost a case when it came to sharing the data for tax purposes. And one of the touted features of cryptocurrency has always been anonymity.


Bitcoin is traceable by nature. Anyone who makes claims of anonymity either doesn't understand how it works or has a system in place that provides uncertainty (ie tumbling).


Tumbling is plagued by a horrible tragedy of the commons problem: the more tainted your coins are, the more you want to tumble them. People who legitimately acquired their bitcoins don't need to tumble them, so chances are you are just getting other tainted coins in return.

People seem to think that coins are 'clean' after tumbling, but I think its much more likely that you'll get back more suspicious coins: superlatively, "Here's my personal-use drug bitcoin, give me coins that were earned by assassinating someone"


Isn't the whole goal of tumbling to provide plausible deniability? The goal is to avoid tying the coins earned or used in an illicit activity with the the people involved in those activities. If a drug dealer gets an assassin's coins and vice versa then the goal is still accomplished even though all the coins involved are tainted. The drug dealer's possession of the assassin's coins don't help in building a case against his or her drug dealing operation.


True, but being in possession of coins tied to an assassination probably puts you at greater risk of being the subject of a federal investigation than being in possession of drug-related coins.


Traceable yes, but also anonymous since a BTC address is just a number without any personally identifiable information attached to it. It's at the edges - e.g. exchanges - where it becomes traceable.


Good luck using bitcoin in a way where you can't connect the BTC address to a real person after a small number of transactions. Anonymizing data is very hard, pseudonyms are almost never anonymous.


I know people who have exchanged bitcoins and cash anonymously on the street. Sounds pretty risky to me and I certainly don’t think it’s feasible for large volumes of either currency, but it’s possible and has happened, at least.


> I know people who have exchanged bitcoins and cash anonymously on the street.

If I were a narcotics undercover agent, I'd be working to become The Guy locally to trade Bitcoins with in this manner.

Have a partner snap a photo or follow them home to compile a list of people transacting like this.

Chances are good this is already happening in some cities.


Sure, as I said it sounds pretty risky (for many reasons), I’m just saying that it does happen and st least has a possibility of anonymity.


And vendors. https://www.technologyreview.com/s/608716/bitcoin-transactio...

And if your id is leaked in one transaction, it links your id to all other transactions done with that wallet.


Pseudonymus


If you buy them with cash and use them in a way that can't be traced back to you, you can stay fairly anonymous, but you still have to be very very careful.


Unless your cash-bitcoin counterparty is the mole.


The mechanics of manipulating price are just too easy not to do it. The wash trading is clearly so bad on many exchanges that I bet there are agreements with the miners to recuperate losses to trading fees. It is in all parties interest to prop the price up this way so why wouldn't they do it. So many sketchy things get ignored because they prop the price up.

The USDT situation will get interesting eventually. Somebody made a spreadsheet of non-fiat volume of cryptocurrencies.

https://docs.google.com/spreadsheets/d/1pIrTYpJZrGbeI9QTIWGw...

Basically the fate of many shitcoins are tied together. My thought is that when USDT finally gets revealed as totally fraudulent the whole crypto house of cards crashes.


Tether will just be replaced by other stable coins if it turns out that Bitfinex can't back them if there were a run on Tethers (the only scenario we would find if this were actually true). There are alternative stable coins which will rise to compete with Tether and balance out the market, including Circle's USDC (https://blog.circle.com/2018/05/15/circle-announces-usd-coin...) and the ETH/Gold-backed MakerDAI: (https://makerdao.com/).


Huh, that's interesting. So when it says "USD Volume 700mm" does that mean 700MM was actually exchanged from BTC to USD or vice versa? Does a pair of trades USD-BTC-USD count double?


Funny how the cryptocurrency values were crashing in advance of this news...


Here https://drive.google.com/file/d/0Bzu6iGPza2s9amFURTFzenRWVGg... are some slides from a talk I gave last year at Strata about what spoofing and layering is, and how a trading firm or exchange might detect or prevent them.


Thanks for sharing!


Despite all predictions to the contrary, the US government is doing quite a lot to legitimize Bitcoin.


Or, Bitcoin finally got to a place where enough normal retail financial customers are exposed to it that the DOJ can't ignore scams, and by the time the ecosystem is locked down and the get-lambos-quick schemes are foreclosed on, Bitcoin will look about as attractive as it did in 2010.


Btc value increased not due to scams - neither the scammers nor the scammed ever hold the stuff (that is, off an exchange in a secure wallet), but due to long term holders, to whom it will continue to be attractive until some state goes back on the gold standard, which is not happening.

EDIT:

Also, the number of people to whom btc is attractive is less important than the type of people. It may be that there is never mass adoption of Bitcoin - it is also the case that throughout history most people never had any money at all. And even though most people never had any money, sound money has been extremely valuable nonetheless because most people don't know what to do with money anyway.


Nobody knows why the value of BTC decided to spike like it did last year. Just like nobody knows why it is sliding back down to earth.

It is one of the many reasons it makes a piss-poor store of value.

(Of course the answer to the spike could very well be “somebody fired up the tether printer” plus “super shady exchanges did tons of wash trading/oughright made up fake transactions”.


It is indeed a piss-poor store of value for people who have high time preference, but unmatched for those with low time preference.


There is no insane investment you can't say that about. Those metallic-cover special issue Marvel X-Men comics they used to "limited collector release" in the early 90s will eventually be of enormous value to archaeologists in the future, too.


Although this is a true statement it is not persuasive in that Bitcoin (unlike a special issue comic, or any other rare thing) has specific, meaningful properties (fungibility, divisibility, durability, etc.) that interact with the world according to well known principles (Gresham's Law, Lindy Effect, Theory of Computation, Network Effect, etc.) that must be shown not to apply in order to disqualify it as the best available store of value.



What principle is not being universally applied? Or do I misunderstand?


Many of the ostensible characteristics of Bitcoin you've provided also apply to special-edition 1990s Marvel comics. The idea that a good needs to be "divisible" to be valuable is nowhere supported by evidence and easily rebutted by counterexample. Your argument is essentially handwaving: all sorts of terrible investments are "great for people with low time preference", in that they will have no value in the immediacy, and their only hope of profitable redemption is to hold until some unspecified, unpredictable future date.

Illiquidity is a bad thing, not an generally an indicator that something is an especially good investment.


How could Gresham's Law apply to Bitcoin if it were not divisible? Or are you suggesting that comic books could be considered money (one property of which is divisibility) to the same degree as Bitcoin? Hopefully we agree that divisibility is not an "ostensible" characteristic of Bitcoin, but a "factual" characteristic of it?

Also your tendency to define things in binary terms (liquid/illiquid, value/no value) is troubling.

Why the struggle to pretend not to be able to tell the difference between Bitcoin and limited edition comic books?


I'm not "pretending" anything. I think the difference is illusory, except for the fact that you can actually read the comic book, so it has some marginal real utility.


What grates my nerves isn't primarily Bitfinex/Tether, it's the other exchanges. Why did they accept Tether? Of all the 'altcoins', one backed by an asset like cash is the easiest to verify (or be skeptical of if verification requests are dismissed or ignored). When I signed onto Bittrex, USDT was one of the prominent trading pairs. It was a useful trading pair, because instead of seeing numbers like ".000000314121 : 1 BTC", you'd get a dollar figure you could mentally parse. Of course, the damned software could have done that automatically with a currency of the user's choice. That's kind of a tangent, though. Why weren't the other exchanges more critical of Tether and kept it after months of controversy and skepticism?


Coin price is determined by (amount of $ chasing coins) / (number of those coins). Tether is effectively inflating the $$ side by pumping USDT into the system and making people believe USD and USDT are virtually the same. As long as the game continues the prices go up, which benefits everyone in the coin scene, hence everyone is playing along.

Also I imagine that major exchanges could get discounts on volume USDT purchases - this would allow them to paper over their own cash shortfalls in exchange for lending legitimacy to the scheme.


Some context from a non-expert.

From what I understand, things like spoofing in financial markets (where you submit orders which you don't plan to have filled for the purpose that the market sees "interest" in a certain direction and in hope that moves the market), are regulated but still a grey area. The reason for this is that it's an activity that involves intent. Placing certain orders is perfectly ok if you're hoping that they get filled and you take a position, but placing the same orders could be spoofing if your goal is to cancel them once the market starts moving as a consequence.


This is an execelent flowchart detailing the regulatory policy on spoofing on US stock markets: https://pbs.twimg.com/media/DXD3RlQVoAALYLa.jpg


Is this serious?


The person who wrote it was probably serious, but it is not correct.


"Everybody" hates HFTs, but everybody also wants the illusion of a continuous market that can be bought and sold into at any moment in any quantity. So a lot of the arguments/discussions are really about how we can pretend that the trading which is required isn't really happening.


Yes, it seems like intent is important, but in some cases (e.g. the BATS rule), no intent is needed. There are statistical properties that indicate intent, but it seems like most of the criminal cases involve finding an email or text message like "I found a bot" or someone telling an engineer to build a system with a manipulative intent.


Link to BATS rule?



What is the track on Winklevoss' proposal to a self regulation org for crypto currency exchanges?


Man I wish I could understand only 5% of the economics behind this. It seems so interesting.


Economics? Bitcoin has no intrinsic value and it's propped up by speculation. It's ridiculous.


Nothing has intrinsic value.


Food? It certainly has some kind of value that dollar bills, gold, and bitcoin don't. You may not like the word "intrinsic", but it's still in the right direction.


There are plenty of things.


Why? I like the wild west landscape that is Bitcoin! If anything it's going to turn it to be an interesting experiment in macroeconomics!


I was surprised to read that the US regulators feel they have jurisdiction to regulate bitcoin transactions. How can this be - is it just because there are BTC futures now?


How could they possibly not have jurisdiction when a large percentage of bitcoin traders and several large exchanges are in the US?


more than that - the blockchain is global, reconciliation happens everywhere - and that doesn't mean that no country's laws apply to it, it means that ALL of them potentially do


Because fraud laws have no provision about them only being applicable to USD or any specific currency, plus there's the whole debacle of whether BTC is a security or a commodity, both of which fall under their own set of regulations.


This is so strange to me because I was unaware bitcoin was a real financial instrument any country would care about. I've had three financial advisors, from Edward Jones, Stifel Nicolas and a little guy around the corner, all tell me to stay away from bitcoins. One even told me that, in two years, bitcoin would be dead.

So this is all strange to me.


To be fair almost every financial advisor ever would have told you to stay away from bitcoin because it was an unknown quantity and very high risk. In hindsight everyone of them was wrong if you bought in at any point between 2009 and mid - 2017 and sold in the last 6 - 8 months.

Also they have been calling bitcoins death since about 2009 when it was created so I would not put too much faith in those predictions. If anything this sort of thing could help bitcoin, either price manipulation is identified, the culprits prosecuted and bitcoin goes on as it is. Or no manipulation (or not significant manipulation) is identified and bitcoin carries on as it is but with a govt. seal of approval (up to that point).


They would've been right if it was the Zimbabwaean dollar if you bought it in the 80's, or one of Bernie Madoff's financial products.

They could still be right, given time. They've been right for Bitcoin Gold, for example. They were right when MtGox crashed.


What market have you been watching where you think the statement 'Investing in bitcoin is extremely risky' has been proven wrong?

In one day in Nov 2017 bitcoin went up 15% in early trading then was down 21% later in the day before rebounding to close near even.

Whether bitcoin will be some like long lasting actual useful thing remains to be seen, but one thing that is undeniable is that investing in bitcoin is extremely risky.

This hold true just focusing on the general market behavior alone while ignoring all the issues such as getting money into and out of exchanges and hacks.


My point was more that as a regulated individual a financial advisor should never have advised an investment in bitcoin. Even if the market proved them wrong (as it has up to now) it doesn't make them wrong for not advising you to invest in it.


Not necessarily "should never have advised an investment in bitcoin", that would depend on the investors risk profile.


Markets are constantly manipulated and what we consider acceptable or not seems at times quite arbitrary. For instance quantitative easing is a practice we engage in whose entire purpose is to artificially inflate the value of markets to help spur 'growth.'

Is the problem that people may be trying to manipulate the price of decentralized commodity or that people are investing in a decentralized commodity without realizing that there may be people trying to manipulate it? I think there is a place for 'hard regulations' but I think there is also a time when the focus should be more on information than trying to enforce national rules on a global scale. Even more so when those rules are likely to fall subject to all the failings of political systems including graft, corruption, and the like.


   decentralized commodity
This is a misconception about cryptocurrencies such as Bitcoin or Ethereum. Both are highly centeralized, in the hands of a tiny oligarchical ownership along with a small group of mining warehouses.

https://news.earn.com/quantifying-decentralization-e39db233c...


And they are likely going to get more centralized over time. The smaller currencies, outside of the top 10, are now all likely vulnerable to 51% attacks. I wouldn't be surprised if that grows to include any outside of the top 5 soon.

It looks like this is how smaller currencies die, they are vulnerable at any time to 51% attacks thus no one wants to use them. At least in the traditional banking system if you had a lot of money you could manipulate exchange rates, but you couldn't just outright steal when you had extreme market power.


The case of coins that optimise for consumer/general purpose hardware (by employing PoW algorithms suited for CPUs, or explicitely switching algorithms periodically) is interesting in this context.

Traditional cloud platform providers are also in a position to impact mining on those. I doubt that any coin could cope with those warehouses of potential mining power.

I'm looking closely at monero on this subject. Despite or because of their hardcore emphasis on privacy, that project has made interesting decisions regarding how to deal with potentially hostile miners.

Disclaimer: Yep, you guessed it, I hold coins, and monero is among them. I'm not saying buy XMR, but definitely take a look at their "politics".


I think it's only postponing the inevitable. If any cryptocoin manages to become "the new dollar" the incentives to micro-optimize the mining will be tremendous. Even assuming that they manage to create an algo (or change it often enough) to make custom ASIC pointless it just means that it's CPU vendors who have the edge. Intel, AMD and friends could sell their first batches of new and improved CPUs for a primer during the first months. And it's even less risky for them than for cryptocurrency ASIC vendors because CPUs don't immediately become useless if they can't be used to mine cryptocurrency. It's just a bonus.

On top of that even if a cryptocurrency manages somehow to completely level the playing field when it comes to mining hardware you still have significant differences when it comes to cost of electricity. Bitmain will stop building ASICs and start building hydroelectric dams instead.

I can't see how you can imagine a future where cryptocurrencies are successful and it's still worthwhile for individuals to mine in their basements. There's always be economies of scale that'll favor the cartels.

Beyond that it might even be possible that PoW algorithms designed to run on general purpose CPUs can end up giving more power to the cartel than an ASIC optimized algorithm because in the latter case the network consensus can decide to hard fork and change the PoW algorithm, hurting immensely the ASIC vendors and their users. That gives leverage. Similarly a new cryptocurrency or minority fork can protect itself from a 51% attack by changing the PoW algorithm, making highly-optimized mining farms unable to attack the coin (Bitcoin Gold should probably have considered that).

Meanwhile if everybody uses general-purpose server farms to mine then they can easily be repurposed to attack any small coin, making sure that the coin they favor remains dominant.


I think you're missing some context on the difference between CPUs and ASICs in terms of PoW algo design and hardware cost&distribution.

Again with monero because it's pertinent to your point, I would encourage you to read up on its design goals, and the discussions around the recent PoW algo change on github or Reddit.


Monero changing its mining algorithm doesn't change how most of the supply was produced and given away nearly for free to the dev team and early users.

The math behind it equates to existing capital wealth being used to generate the supply which is amplified by several magnitude for the first users to show up and run the software. Future production costs increase, and the relative newly produced supply decreases.

Old users rely on the gullibility of new users to exchange real world value for these easy to produce database-tokens.


Decentralization does not mean owned by everybody, it means owned by nobody.

For instance imagine we had a mine that was effectively infinitely large (for the sake of the analogy). If we allowed absolutely anybody with a pickaxe to to come in and mine it, we might call it decentralized. Nobody would own the mine. That one group sent a million miners to go mine it would not suddenly make them owners, even if they happened to receive the largest benefit from the it. By contrast centralization would be when one individual or group forcefully stops, generally with government support, any other individual from mining in "their" mine. In this case they would indeed own the mine. In the case of Bitcoin there is absolutely and literally nothing stopping from somebody from starting up a mass mining farm becoming the new plurality beneficiary.


Due to centralization of hardware the Chinese government can trivially do a 51% attack. That's a form of centralization your ignoring due to an overly specific definition.

The tiny block size is arguably an ongoing 51% attack from an oligarchy that is in collusion. Again, depending on what you consider centralization having a tiny group that's in direct communication easily qualifies.

Pas: In your example if the only option is to use picks from one company or your hands because other tools are confiscated at the enterance then it's very centralized.


51% attacks are mostly overblown. If a group decides to engage in a 51% attack, all they are doing is effectively revoking their own license to print money - which is what having a > 51% mining capacity in a major crypto translates to. Bitcoin is a public ledger and double spend transactions would be completely visible to all. All this means is that the coin would end up getting forked, similar to what happened when Ethereum screwed up - and it continued on with minimal fanfare. And in that case their screw up was of their own fault instead of something inherent - even fewer people would be inclined to stay on a Bitcoin line that has been 51%'d.

Rolling with the mine analogy, a 51% attack is equivalent our group that sent in a million miners changing the diamond mine into a 'glass' one. It becomes fake, and loses nearly all of its value and people move to the new 'real' mine. You do nothing except critically hurt yourself.


This assumes the entity wants Bitcoin to survive. The Chinease government has zero intrest in keeping Bitcoin alive and would happily kill it off.

Forks don't help with 51% attacks as the attacker can continue to use their hardware on the fork. Further, you can use a proxy to hid the origin of a block, so Bitcoin would need to move to a new hash which would take a long time and prevent any obvious successor.


I was making the assumption that the entity wants to kill the coin. Doing a 51% attack out of greed makes no sense as it'd be immediately self defeating, at least on a mainstay coin.

There are numerous different hashes with varying levels of ASIC 'resistance' - yeah it's a cat and mouse game, but hardly a major issue. The 'obvious' successor would be a matter of the unpredictable public as I'm certain numerous entities would vie to become e.g. Bitcoin 2.0. In the end the market would decide which was the winner. The great thing about it all being that the users could actually come out net winners in the end as the successors would likely not only be technical superior, but it would also be able to use the exact same ledger (as with Bitcoin cash for instance) so that you start with the same relative share in it as you did with the original.

In a way it would even be a good thing as Bitcoin itself is increasingly dated technologically, but is dominant because of its market positioning - which makes it difficult to change. If its market positioning was damaged, we could see the rise of an improved successor.


A few weeks/months/years of not being able to trade Bitcoins at old value is a real downside.


Besides double spending attack they can also censor certain transactions not allowing them to be confirmed.


Ethereum and Bitcoin mining work like this:

Take a freshly baked pie, and give half of it away for a suggested donation of $1 USD to the first 10 people who show up.

Now split the last half of the pie into smaller chunks and slowly give out bread crumbs to new "miners" with the requirement they spend large amounts of capital on exceedingly inefficient number guessing machines in order to win the lottery of "mining" more crumbs.

  Satoshi Nakamoto
  Thu Jan 8 14:27:40 EST 2009
  I made the proof-of-work difficulty ridiculously easy to 
  start with, so for a little while in the beginning a 
  typical PC will be able to generate coins in just a few 
  hours. It'll get a lot harder when competition makes the 
  automatic adjustment drive up the difficulty.

  first 4 years: 10,500,000 coins
  next 4 years: 5,250,000 coins
  next 4 years: 2,625,000 coins
  next 4 years: 1,312,500 coins
The 10,000 BTC pizza is a case study in how Satoshi designed the supply to rapidly dump very cheaply before other users were able to discover the network, by that time and later new users not only need to spend more to mine but less coins are produced for a correct lottery number.

  In economics, the Gini coefficient is the standard measure 
  of how inequitable a society is. This is tricky to 
  determine for Bitcoin, as it's not quiet a "society" in 
  the Gini sense, one person may have multiple addresses and 
  many addresses have been used only once or a few times. 
  (The commonly-cited figure of 0.88 is based on one small 
  exchange in 2011.) However, a Citigroup analysis from 
  early 2014 notes: "47 individuals hold about 30 percent, 
  another 900 a further 20 percent, the next 10,000 about 
  25% and another million about 20%"; and distribution 
  "looks much like the distribution of wealth in North Korea 
  and makes China's and even the US' wealth distribution 
  look like that of a workers' paradise

  Dorit Ron and Adi Shamir found in a 2012 study that only 
  22% of then-existing Bitcoins were in circulation at all, 
  there were a total of 75 active users or businesses with 
  any kind of volume, one (unidentified) user owned a 
  quarter of all Bitcoins in existence, and one large owner 
  was trying to hide their pile by moving it around in 
  thousands of smaller transactions. (Shamir is one of the 
  most renowned cryptographers in the world and the "S" in 
  "RSA encryption")"



Ethereum:

  Presale ICO / Premine ( max cost $0.50 USD per ETH  )
  = 72,009,990 ETH
  
  Total Supply today (Feb 23rd 2018)
   = 97,800,000 ETH

  Source:
  https://etherscan.io/stat/supply


Central banks are in the business of market manipulation via interest rates, and money supply. This is to control growth and inflation so that business cycles are smoothed out to a degree.


Central banks are however beholden to national and international laws, governmental scrutiny, and the international financial market. Yes they can - and do - manipulate the markets on an unfathomable scale, but it's to enable and protect national and international economies, instead of optimising for quick wins and personal gain.


And it's a good thing that the international financial market and governments are not driven by self interest... Decisions like quantitative easing completely distort our economy and more importantly benefit a certain group of individuals and hurt another. To imagine that these considerations are put aside by those involved in these decisions is unreasonable.

I mean I don't understand the cognitive dissonance here. In nearly every action our government carries out we can see the behind the scenes motivations which tend to be appeal to special interests. And here you are straight faced arguing that because quantitative easing is done by government (and financial markets) it's somehow above the notion of quick wins and personal gain. This is illogical.


The problem with that approach is that market cycles serve important purpose: they faciliate best allocation of our resources by ensuring that inefficient companies will go bankrupt. Smoothing those cycles out enables poorly managed companies to stay in business for way too long. Then, since there's a limit to a market manipulation that central banks can do we end up with one huge crisis, like Great Depression, or 2008 housing buble, instead of series of small ones.


This austrian-style economic thinking about market cycles lines up with bitcoin ideology but is far from being accepted in mainstream economcs. It is flimsy pseudoscience.


Appeals to authority are generally not great, but this is made even more bizarre given that our current economic systems seem to be teetering on a precipice. Think about how truly desperate we are when we need to resort to quantitative easing, zero interest rates, and even flirting with negative interest rates - just to desperately try to maintain the status quo.

This doesn't mean any alternative is better, but rather that trying to refute alternatives by appeals to authority is an even worse idea than it usually is. And it's usually already an awful idea!


Europe did even more than flirt with negative interest rates and yesterdays reports proved the negative outcome of that experiment


Plenty of poorly managed companies are still able to stay in business despite economic downturns because they have inertia.

Not to mention that, businesses going under means people without jobs. Lots of businesses going under at the same time means lots of people without jobs, and fewer companies able to take them on. That's a bad thing, no matter how you slice it.


Inefficient and poorly run things die in down cycles but so do new things and innovative things. Efforts to innovate must usually burn money for a long time and are more vulnerable to downturns since in downturns people become more conservative.


Not to mention steal money from the public with QE.


It's interesting that bitcoin (and crypto maximalists in general) repeatedly harp on and attack QE as if it was the end of democracy itself.

QE is just another tool for monetary policy designed to combat deflation and increase available capital supply as a stimulus measure. Because QE belongs to the school of thought that the economy is driven by consumer spending as opposed to consumer savings.

Could you please elaborate on what you mean by: > steal money from the public with QE ?


Sure. QE is buying stock with printed money, inflating stock prices. People with lots of stocks get inflated value. When the inflated value leaves the stock market, it has an effect of deflating the value of the USD. It's a slow inflationary method of distributing public funds to the rich in the stock market, while creating market manipulation tools to coerce stock-driven companies into essentially being proxy government entities, since a large percentage of their value can be decided with 'monetary policy'(leading to things like google's pentagon drone ai collaboration).

I also believe SV companies are lining up to IPO because of this blank check.


First off (but probably inconsequential), why do you put "monetary policy" in quotations? Monetary policy is literally an Econ 101 term.

But also: A large percentage of any public companies' value can be decided by monetary policy, in the sense a companies value can be decided by inflation or deflation. Monetary policy is just an official term for central bank decisions to influence the supply of money and credit in an economy.

> When the inflated value leaves the stock market, it has an effect of deflating the value of the USD

If you're trying to argue that QE is bad because inflation is bad and people participate in profit taking, you'll need to get over that. What would you like to do? Ban the sale of stocks by persons over a certain net-worth?

> while creating market manipulation tools to coerce stock-driven companies

What, pray tell, are these tools? You know, besides creating mild inflation and some influence on interest rates?

Additionally, you seem to have forgotten that an explicit goal of QE is to lower interest rates, allowing everyone, not just the rich, easier access to capital in order to stimulate the economy. QE demonstratively does not solely redistribute more wealth to the wealthy.

Furthermore, your entire premise is shaky, considering the most prominent historical example (the US recession) mostly consisted of the Fed purchasing $4.5 trillion of mortgage-backed securities.

It's really not exactly "making money out of thin air" considering the Fed purchased securities pegged to a real good/service, mortgages.

Lastly, SV IPOs weren't exactly popular last year. Nor in 2016 or 2015.


QE extracts wealth from the public through seignorage, and redistributes it to private parties.


Never get in the way of web devs inflated egos when they're ranting about things which are vastly outside their scope of expertise. Bitcoin is a trigger word for the HN community and unless you're using every big word to insinuate it's a scam, then you'll get downvoted/ridiculed.

You're absolutely right by the way, libor rates have been rigged for decades and governments simply "fine" companies doing it. A simple google search will bring up sources for this claim.


QE is announced and done by central banks. It’s their job to do that. I don’t see how that is arbitrary.




Guidelines | FAQ | Support | API | Security | Lists | Bookmarklet | Legal | Apply to YC | Contact

Search: