I mean, we need only remember that in late 2016 two wash trading bots at Coinbase accounted for 99% of all global trading volume in Litecoin. (Likely Charlie Lee, btw) [1] And that Tether continues to exist after this devastating NYAG settlement. [2]
It's clearly manipulated. And it's manipulated because its roughly speaking globally unregulated, and tracks globally via cross-exchange arbitrage bots.
If the author found anything different I'd eat my ...hat, and if you believe the trading patterns are as pure and organic as the driven snow I've got an NFT of the Brooklyn bridge to sell you.
Why is what tether did (held 76% of its reserves in cash and cash equivalents and other short-term deposits and commercial paper as of the end of March, as opposed to 100% backed) any different to fractional reserve banking?
The minuscule fine ($18M) shows that the AG didn't even really think it was a big deal.
For the same reason when the police abduct someone and throw them into a small room it’s called an arrest but when you do it, it’s called kidnapping. I wouldn’t read too much into the magnitude of the fine they’re just one state. They also forced them to stop doing business in, or with anyone connected to New York.
They were fined because at one point they had a tiny fraction of the money they said they did, and at a different point they had all of their money in Stuart Hoegners personal bank account at BMO, comingled with his lunch money lol. Among many many many other frauds.
> The police are a government entity - banks are unelected private companies.
My point was to do with charter. The difference between the two situations is one is legal and one is illegal because it's an activity carved out for a specific group. Private or government is not a meaningful distinction. For instance, doctors are private-sector individuals but performing medicine is their exclusive charter. If you offer back-room plastic surgery you're going to prison.
Fractional reserve banking is how money is created and destroyed. It's created by retail banks (when loans are originated) on behalf of the federal reserve which is chartered to do so by congress. The federal reserve manages the money supply in part through these private banks, under their supervision and charter, to maintain low, consistent inflation and maximum employment. While protecting the deposited assets via the FDIC.
When a private individual hits print and synthesizes 60 billion ersatz dollars for their own benefit or the benefit of a small group of entities, it's quite likely to be a crime of one sort or another. Seems like we'll know for sure sooner rather than later.
> The fine was tiny, it's a nominal slap on the wrist.
It was IMO a trial balloon for a federal suit - the one their executive team got target letters for, announced today. I've maintained this the whole time, and it was also the consensus among attorneys on crypto twitter. This is how the justice system operates under these circumstances. The wheels of justice turn slow.
The NYAG settlement is a scathing indictment of fraud and garbage business practices. Honestly there's not a single thing redeeming Tether or its leadership team.
It's pretty clear at this point you're trying to defend the indefensible and it's time to ask yourself why.
Would you react the same way if this settlement was between Wells Fargo and the NYAG? If not, why are you holding Tether to a different standard?
The NYSE looks that way because of a stock market rule that if the price falls below US$1 for 30 days, it becomes a "penny stock" and will be de-listed. There's also a tradition that when a stock gets well over $100, it splits. (Berkshire Hathaway refuses to go along with this, but everybody else does.) So issuers tend to split and reverse split to stay in the traditional trading range.
Commodity prices and foreign exchange rates don't behave like that.
They don't split or reverse split. Also, their price is different depending on which currency you view it in.
> There's also a tradition that when a stock gets well over $100, it splits.
Typically in doing analyses like this, you use "split-adjusted" prices. That is, you use the total value of a single (or 100 or whatever) shares as of the start date and follow all the split/reverse split rules to determine the new value.
Being delisted as a penny stock may as well be going to zero - that rounding error won't produce these results.
In fact, this is about exponential growth, not an accounting artifact, and applies to many areas.
> Commodity prices and foreign exchange rates don't behave like that. They don't split or reverse split. Also, their price is different depending on which currency you view it in.
But they still produce similar artifacts. I mean, if you list everything in 1/3rds of a dollar, it should follow the same pattern.
What is the statistical likelihood of this appearing by chance? Note that 2014 to today isn't actually that long of a timeframe, as prices in a time-series are highly linked to the previous data point.
Berkshire Hathaway has been trading for several decades; so that's 40 years of data; as compared to 7 years of data. yet the author, by using the same charts, seems to falsely imply that these are remotely comparable.
This article seems to have as much logic as the whole "Benford's law proves the elections were rigged!!!" claims by QAnon, who tried to apply Benford's Law on a county level, found that it generally fits a vast majority of the time, but cherry-picked the counties where it didn't fit (which generally tended to be smaller and hence less data points). Well, duh, it's statistics: outliers are to be expected.
Pretty poor take from an author at "statmodeling.stat.columbia.edu".
Isn't Andrew Gelman's take more like "Look what they did, that's kind of interesting, what do you think?" rather than "look at this article, it is true"?
See also the comment section.
Yes indeed. Most of the article is quoted from Smith, and Gelman (the prolific author of the worthwhile blog at columbia.edu) only really adds a few inconclusive sentences at the end. ("... There’s a lot going on, and people have lots of reasons for doing things.")
Benford's law doesn't give much of a guarantee except in highly specific scenarios. You can however show it's pretty accurate if you've got a 'smooth' probability distribution spanning multiple orders of magnitude (how much of a guarantee you can give depends on how specific you define what it means to be 'smooth').
The rigged elections example you gave was, I believe, mostly explained by the fact that the number of votes they were looking at were all roughly the same order of magnitude [1].
The market is simply too young compared to the "baseline," and he's only testing one ticker. This might make more sense, even with the limited age of data around today, if he took the 20 or so most prominent cryptocurrencies to have a better sample size, since they are all correlated anyways.
The progression of charts correlating with Benford is exactly what you would expect if the titles "NYSE, Berkshire Hathaway, Bitcoin" were replaced with "2800 tickers over 40 years, 1 ticker over 40 years, 1 ticker over 7 years."
Given that Benford's law tends to apply when the numbers span many orders of magnitudes, I would have expected more emphasis on that. Berkshire Hathaway (low 200, high 450,000) covers about 3.4 orders of magnitude (and much more time, ie opportunities to wander up and down), BTC (low 200, high 60,000) covers about about 2.5 orders of magnitude.
So, we should expect BTC to have a worse fit than Berkshire. How much worse would require some more sophisticated analysis than looking at the graphs, it seems.
> prices in a time-series are highly linked to the previous data point.
And how many data points are there in seven years of BTC?
> seems to falsely imply that these are remotely comparable.
Why is it "false" that they are "remotely comparable" if we are looking at time series of security prices?
You are long on the insults and short on the reasoning. Given the author is a well-known statistician and you are some anonymous individual, I'm going with them.
The author at statsmodeling.stat.columbia.edu is the person who wrote several of the books on things like this. I don't think he can be finger-wagged away quite so easily as that.
There's a huge difference between this and the election one, which is that this one is working with data that satisfies the key statistical assumptions needed to properly apply Benford's Law, and the QAnon elections rigged claims didn't. (Or at least the ones I know about offhand - I don't use Benford's Law at work, so this is not really my area of expertise.)
The big one you need to look for is that the variable spans multiple orders of magnitude.
Berkshire Hathaway going back to 1980 spans three orders of magnitude, so we're good there. Note that we could not use Benford's Law to look at BRK going back only 7 years, but that is not because it's not enough data. It's because that would cover only 1/4 of an order of magnitude.
BTC going back 7 years is also decent. It's not quite as good - only spanning two orders of magnitude - but it's enough that we would expect Benford's Law to apply better than it does in this graph.
By contrast, a lot of the cases where people thought they were using Benford's Law to uncover electoral fraud, the data only covered a small fraction of an order of magnitude. It's just silly to expect 1 to be the most common leading digit in a set of data that's constrained to the range [300, 600].
I don't know that this is compelling evidence of fraud or manipulation in BTC, but it at least seems like clear evidence that BTC doesn't behave like other securities. There's something unusual going on that merits further investigation. Perhaps it is just a shortcoming in the statistical model being used. But, since this isn't a big data conference, it's not sufficient to just keep hitting the "need more data" number until you finally get the number you want.
The time series spanning 3 orders of magnitude over a course if years is not sufficient condition for Benford's law to apply. As a trivial example, a stock whose price started at $1 and increased by $1 every day for 30 years would span 4 orders of magnitude over that time period, but would not follow Benford's law.
A formal justification for applying Benford's law to a time series like that would depend on some kind of ergodicity argument which has not been made either by Gelman or the original author of the post he's talking about. I'm rather skeptical.
As a first step into deciding whether it's reasonable I would do something like the plot for Berkshire Hathaway for each of a large collection of companies, and collect some measure of disagreement between the model (Benford's law) and the observed distribution for each stock. I'm guessing many of these stocks would follow Benford's law no better than Bitcoin.
> As a trivial example, a stock whose price started at $1 and increased by $1 every day for 30 years would span 4 orders of magnitude over that time period, but would not follow Benford's law.
You would expect if you deliberately created a security whose growth rate monotonically tends to zero over time that you would get anomalous results in any statistical point, but I don't quite see why you bring up this pathological example?
Because the claim was made that spanning several orders of magnitude is sufficient to allow application of Benford's law:
> The big one you need to look for is that the variable spans multiple orders of magnitude.
> Berkshire Hathaway going back to 1980 spans three orders of magnitude, so we're good there.
> BTC going back 7 years is also decent. It's not quite as good - only spanning two orders of magnitude - but it's enough that we would expect Benford's Law to apply better than it does in this graph.
This claim is false. I provided a counterexample to demonstrate as much. Whether or not it's "pathological" is both subjective and irrelevant.
> As a trivial example, a stock whose price started at $1 and increased by $1 every day for 30 years would span 4 orders of magnitude over that time period, but would not follow Benford's law.
That's actually a great illustration of the kind of thing we'd expect Benford's Law to raise red flags about. Your hypothetical posits the kind of behavior that we would not expect to naturally come out of the kind of process that governs stock prices over time. Stocks simply don't have their price go up by exactly one dollar a day, every day, for thirty years.
(This is briefly covered in the the article, which describes how the other big assumption of Benford's Law is that you're working with a system where things tend to change by percentages rather than absolute values. So yeah, it's true, covering orders of magnitude is not sufficient. Nor did I claim that it is, mind. I was just pointing out the assumption that I thought he original poster was missing.)
So, if we saw the kinds of initial digits that your hypothetical produces, we would be correct to guess that this stock is behaving in an unusual way. And it would be a correct application of Benford's Law, because we can reasonably expect that its key assumptions apply.
By contrast, if we hypothesize a stock whose price goes up by exactly 0.0001% every day for 30 years, its record of daily closing prices would obey Benford's Law. In fact, it would match it so well that we would also (correctly) consider it to be suspicious.
No, it's not a formal justification in any case. It is just a red flag. It turns out that red flags are useful even when they're not admissible in court, because they provide an easy heuristic that you can use to help direct your search for more compelling evidence.
> So, if we saw the kinds of initial digits that your hypothetical produces, we would be correct to guess that this stock is behaving in an unusual way.
Sure
> And it would be a correct application of Benford's Law, because we can reasonably expect that its key assumptions apply.
No, absolutely not.
The fact that Benford's law would trigger on that one example is not evidence that using Benford's law in this situation is actually a reasonable thing to do. Applying Benford's law to observations over time from a highly correlated time series (e.g. a stock price over time) is fundamentally different from applying Benford's law to a bunch of observations from different time series at a single point in time (e.g. the NYSE prices in the first figure from the original post). As I pointed out in my comment above, applying Benford's law to the single time series must be justified by an ergodicity argument which nobody has attempted to make. I don't know if Smith has any background in stochastic processes, but given Gelman's work on MCMC convergence (which deals with similar issues) he should have flagged that.
> It turns out that red flags are useful even when they're not admissible in court, because they provide an easy heuristic that you can use to help direct your search for more compelling evidence.
No. A "red flag" like this with no theoretical justification and unknown operating characteristics is a good way to get led down false paths. About the only thing it's good for is confirmation bias.
I don't think you are correctly using "orders of magnitude" in benford's law in this analysis. The orders of magnitude are in percent change over a few days, which is similar for both BTC and BRK.
With a fixed exchange rate, the choice of currency does not matter for Benford’s law.
Benfords’s law states that for many real-life numbers x, log(x) is uniform.
Converting to another currency using exchange rate E, so that y = E*x, yields log(y) = log(E) + log(x). This corresponds to a shift of the distribution of log(x) and does not change how uniform the distribution is.
However, if the exchange rate varies with prices, then it will matter.
The currency against which BTC is exchanged the most is very likely the one that shows the best fit (most perfect market). Assuming that currency is the USD I expect any other currency would result is an even worst fit
Benfords law is used to find evidence that the numbers came from a person, not a measurement or mathematical process, right? So anyone who knows what a limit order is should not be surprised to find evidence that humans are involved in picking the prices, right?
It should be obvious that violating Benfords law isn't evidence of fraud or manipulation or even fomo, just evidence that the price is impacted by the people typing in the orders having to pick what number to type in.
Edit: I've softened the language in my comment a bit, but I stand by the fact that this only shows humans are affecting prices, this analysis can't distinguish between fraud and psychological effects around "key" prices, like $10,000.
I guess we need to make a distinction between the blog post and the Gary Smith post it links to here.
Gary smith (the person I think you're referring to having spent a career in this) says this:
>The market manipulation, the irrational price gyrations, and the enthusiasm of so many investors for investing in bitcoin (and other cryptocurrencies) is ample evidence that market prices are not invariably equal to intrinsic values.
I entirely agree. A perfectly efficient market should follow Benford's law given enough data.
It's the blog post by Andrew that I think totally misses the point. He leaps from inefficiency which could be market manipulation to this:
>I saw this and I was like, well, yeah, isn’t all bitcoin use either crime or manipulation? But then I realized, no, that’s not all of it. Some bitcoin playas are motivated by politics, some by fomo, some are doing anti-virtue signaling...
And never considers the fact that the world is full of people who feel very different paying $100.00 vs $99.99
> the world is full of people who feel very different paying $100.00 vs $99.99
Agree, though that effect is not constrained to Bitcoin. Retail orders, for instance, follow Benford's law. This is despite well-documented psychological biases towards e.g. certain digits, whole numbers, round numbers, et cetera [1]. Benford's law [2] derives from deeper mechanics.
As you point out, however, a better control would have been not all prices in public stocks, but retail orders.
Liquid retail stocks follow Benford's law because there is a notion of intrinsic value from the company and an army of quant traders trying to exploit any price inefficiency caused by the retail traders.
With cryptocurrency, the market is less mature and the intrinsic value largely comes from people believing in its value. So really, it would be surprising if we didn't see some Benford's law anomalies associated with people picking numbers.
Anyway, thanks for the discussion; the links above have given me stuff to chew on and calmed the red mist after I got so many drive-by downvotes.
Benfords law is a perfect example of something that is cool and compelling and then gets applied inappropriately all over the place by people who don’t know better. Voting, for example.
> Benfords law is a perfect example of something that is cool and compelling and then gets applied inappropriately all over the place by people who don’t know better.
Yes, but an Ivy-League educated Professor of Economics who created Yale's first course on the stock market under the mentorship of a nobel prize winner (for his work on the stock market) and whose research specialty is statistics and financial markets should be able to use Benford's law correctly.
That this analysis was then repeated by Columbia is also pretty strong credibility.
Usually because the pop-description is, as usual, misleading. People find data covering "several orders of magnitude" and just assume by some cosmic fact that Benford's law should apply, despite the mechanics being their data having no reason to imply that the law holds.
This is exactly it. If you look at price changes as bitcoin approaches round numbers, you can see that a significant number of people have their limit price set to something like $10,000. When it would approach those round numbers, it would be stuck just under that number for a while. If the price cracked the round number, meaning all those limits got sold, the price would then slingshot much higher.
Intrinsic value is a specific term in finance [0] and it is by definition an estimation/approximation. Saying there's no such thing as intrinsic value because value is subjective is like saying there's no variables that are undefined because undefined variables have a defined value of undefined.
I don't buy it. My intuition here is that Benford's law is a thing because for pretty much any statistical distribution, large numbers are less likely than small numbers, and small numbers are more likely to start with 1. But I'd only expect this effect to show up when aggregating across many different statistical distributions (e.g. looking at all stocks in the S&P 500 at once) rather than looking at individual distributions (i.e. I think maybe he just got lucky choosing Berkshire, and other S&P 500 stocks might not show Benfordness in their price even if they're not manipulated).
Plus, even if Bitcoin's price is mainly a product of manipulation -- speculators trying to make the price rise or fall relative to where it is right now -- there's no reason we can't think of that as also being a random process which produces some statistical distribution.
Benford's law works for detecting fraud because the process that humans use to choose random numbers -- just write down a bunch of random digits -- results in a statistical distribution that is unusual relative to what would be produced by a natural process. But it seems quite unlikely to me that Bitcoin price manipulation takes the form of a whale saying "OK, I just wrote down a bunch of random digits, this is our BTC price target for Wednesday".
I don't really know anything about this but every time I read these analyses using Benford's Law I don't understand why anyone would expect Bitcoin's exchange rate to begin with the digit "1" ~30% of the time. Once you're not talking about human-guestimated numbers, it seems more like a question of scale factors. If bitcoin's value fluctuates between 30k and 70k it's never going to start with a "1". Or if its value fluctuates between 120k and 180k then it's always going to start with "1". That's where I struggle trying to understand how Benford's Law is supposed to provide any insight.
Yes, I don't know if the prices should have a better Benford's Law fit when the price is around and 10k or 100k but then a lesser fit when the price is between 5/50k and 9k/99k if you have not enough data. But if there is enough data, maybe it should better fit the Benford's Law, and this may be a proof that arround 10k/20k the price was rigged and should have stay around it longer but manipulation put it around 30k/50k.
Correct. I've been in the bitcoin space for a decade now, and there were only brief moments* where it was difficult to buy or sell at the price quoted by major exchanges.
I suspect your "shameless plug" message is trying to draw attention away from the fact that you've added an adblock whitelisting query param to the url, presumably whitelisting ads from certain providers. This is more unethical than sharing tracking links in here.
Good spot, but I think this happens by accident rather than by design. If you have AdBlock Plus, and chose some option to allow YouTube ads on certain channels, it edits URLs to include this [0]. So @saivan may have just copied it from his browser's URL bar.
Why do some people keep trying to prove Bitcoin as a pump and dump scheme? Yes it has pumps and dumps, but if you zoom out, those pumps and dumps get smoothed out and you see a digital asset which keeps increasing in value because people see it as a hedge against USD and other currencies inflation. The increase in value is not infinite, and that can also be seen in the price increase curve (log). The price increase is slowing. Why is it difficult to come to the conclusion that initially Bitcoin price increase will be volatile and eventually it will come to parity, decreasing the volatility. From that point onwards, the price will be more closely related to actual inflation (world over).
(The above purposefully ignores the other debate about electricity, usage, etc. to keep the discussion simplified.)
I'm not an expert, I am referring to the following. Am I misunderstandibg something?
> due to its real-price volatility, gold had not been a good inflation hedge over the short- or long-term.
They did find that, going back to the era of Emperor Augustus who reigned from 27 BC–14 AD, gold had been a pretty good hedge for inflation measured by military pay. So, if you have a liability due in 2,000 years, gold might be a good way to maintain your purchasing power.
>Why do some people keep trying to prove Bitcoin as a pump and dump scheme?
And why do all the Bitcoin bros get instantly butthurt the moment anyone shows any skepticism about it (but they feel totally entitled to have skepticism about any/all other currencies)
Frankly, I can’t judge the merits of this article because I lack the knowledge required.
But I think at this point we know that all cryptocurrencies are ‘greater fool’ “investments”. [1]
They are in every way totally irrelevant and detrimental to society. Governments are unfortunately slow to crack down on the exchanges, although progress is being made.
And that effort is essential to battle the cancer that is the ransomware epidemic.
Anyone who follows the Lock Picking Lawyer on YouTube knows that with time, resources and dedication virtually all locks can be defeated and cryptocurrencies make ‘expensive’ attacks worthwhile on IT infrastructure.
Frankly it hurts to see how cryptocurrencies have been ‘legitimized’ by HN & ycombinator’s coinbase. Because so many people will be hurt.
I equally find it strange that people continue to come to hackernews- the Silicon Valley VC startup land - and can’t grasp that the infrastructure for programmable money might have some value. And write off p2p communication and coordination tools as zero-sum/ fraudulent games. And then wish for the government to ban other people’s jobs and hobby’s and communities because they don’t like it.
Blows my mind that people might spend their day coding, and night playing mmorpgs, and still not understand crypto. I guess we need better UX and storytellers.
Nobody has been able to tell me a single thing that this "programmable money" can do, despite having 12 years of gestation to think on it. Everyone just seems excited about the concept and assumes that because it's "natively programmable", it's somehow more useful than what we have right now, which is that we write programs which move around money.
And please don't reply with DeFi, that's not taking advantage of the inherent programmability of Bitcoin, it's just a marketplace based on failed economics.
> the infrastructure for programmable money might have some value
And it has, Central Banks are creating their own digital currencies for digital wallets. They aware based on real needs for speed, volume, security, trazability, etc.
> the infrastructure for programmable money might have some value
I think that people understand cryptocurrencies quite well, and from that knowledge comes the skepticism.
> wish for the government to ban other people’s jobs and hobby’s and communities because they don’t like it
I want it banned because people with unsofisticated knowledge of economics and technology are being scammed out of their money by snake oil salesmen. But, that is not needed. As soon as normal accounting guaratees are required it probably will call by its own weight.
I know people working hard jobs putting hard earned money into this scam trying too get money to better their lives. It breaks my heart to thing that they are being lied in such a way, this study suggests is all manipulation, and that is my experience with everything related to cryptocurrencies. The sooner it gets regulated the better.
You can easily (!) and efficiently (!) do "programmable money" without crypto[1]/blockchain/consensus (ie whatever Bitcoin and its descendants brought to the table), and guess what, people do.
> Blows my mind that people might spend their day coding, and night playing mmorpgs, and still not understand crypto.
Let's agree that you can lambast cryptocurrencies even despite understanding them, ok?
[1] with good old cryptography, of course, but without "crypto"
El Salvador's Bitcoin Beach project is a great example of people profiting from a debit based value network instead of a credit based financial system: even though both US and El Salvador had USD as the legal tender, it took $10 to remit $50 through the western union network.
Lightning network (which is using Bitcoin as a settlement network) is both dramatically lowering the fees and provides instant debit transfer from an El Salvadorian living in US remitting money to his/her parents in their village (or directly paying the rent / gas bills) instead of the parents needing to travel hours by bus to the city.
LN isn't actually used - the way it actually works is: Strike holds dollars for the user. The user wants to send dollars to someone. Strike buys btc using dollars (from itself), sends btc via ln - to itself - and then sells btc for the same amount of dollars, again to itself, and credits the receiver.
What's actually happening is that Strike is a normal payment provider like Paypal, Venmo, Revolut that fakes the btc transfer process because pretending to be only a btc wallet means less regulation than a full payment provider.
They don't actually spell it as directly - they just claim an absurdity that buying btc and then selling btc is somehow cheaper than a direct transfer, which of course is impossible because it means taking the ask and then selling into the bid, and the actual spread on most liquid btc markets can be observed on biggest exchanges like Coinbase or Binance, and that's ignoring the fact that one part of the exchange is supposed to happen in a local illiquid market in El Salvador.
The whole thing would be less convoluted if stablecoin tokens were sent directly using a payment channel without a fake trade step - using btc is a completely pointless for anything but marketing (Strike to btc holders and marketing btc itself).
You are totally right in each step, but there's 1 thing that makes it different from most exchanges: you can already transfer money in/out of it using LN, which makes it much more practical than using a Coinbase exchange account.
Also, while Coinbase Pro has a 0.1-0.3% fee for market order, if you want guaranteed execution, Coinbase and its competitors take 3-4%.
If you listened to talks from Jack Mallers, he was tracking lnd head instead of waiting for the full releases, and picking and testing pull requests by hand, fixing bugs that come up in practice (or giving feedback to lightning devs), that's one of Strike's advantages over other exchanges.
Attacks on IT infrastructure have other motives besides ransom too.
For example. IP theft such as stealing the secret recepcie to the KFC herbs and spices, or stealing the soure code to a competitors product, or the user database. Moreover, attacks to ravage the target without the motive of ransom are common, see the Sony hack for example.
The only solution against attacks is better security.
Once you learn the externalities of fiat monetary systems, you will understand why we need Bitcoin. And you will realize that it is the most important innovation of our lifetime.
It's clearly manipulated. And it's manipulated because its roughly speaking globally unregulated, and tracks globally via cross-exchange arbitrage bots.
If the author found anything different I'd eat my ...hat, and if you believe the trading patterns are as pure and organic as the driven snow I've got an NFT of the Brooklyn bridge to sell you.
[1] https://www.cftc.gov/PressRoom/PressReleases/8369-21
[2] https://ag.ny.gov/sites/default/files/2021.02.17_-_settlemen...