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How the Bitcoin 1% manipulate the currency, deceive its user community (p2pfoundation.net)
33 points by npalli 1630 days ago | hide | past | web | favorite | 28 comments

There's an important basic confusion here: addresses are not accounts. The closest thing to an "account" is a Bitcoin wallet, which is a database that can contain many addresses. And not all addresses are owned by a single party; any business that takes deposits (eg, Bitcoin exchanges), will tend to have a high-balance address full of Bitcoins that it doesn't own, but is holding for others. (The largest-balance address is used by MtGox, and many third parties own the rights to varying numbers of coins in it.) Drawing inferences from the Bitcoin blockchain is very hard, an deliberately so; that's what protects users' privacy.

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

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

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

This sounds like coins getting withdrawn from an exchange, circulating a little bit, then getting deposited back in the same exchange.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

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

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

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

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

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

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

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

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

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

The debunking has been debunked:

Oct. 31 UPDATE

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

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

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

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

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

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

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

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

Welcome to bitcoin.

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

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

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

Did you not even bother to read the article?

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

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

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

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

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


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

I still don't see how that is currency manipulation. Some people decided they didn't want everybody to know how many bitcoins they have. What am I missing?

It's not "some people", it's an entity or small set of entities that control a significant fraction of the total bitcoins in existence. These entities may or may not be manipulating the currency, but they have the power to do so if they choose. It is not unreasonable to be disturbed by the fact that these entities seem to have taken measures to conceal their existence.

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

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

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

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

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

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

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

In order to mine bitcoins you need not just powerful hardware, you need the right kind of hardware, the kind that is very hard to come by (custom tailored ASICs).

The current network hashrate (about 180 terra hashes per second) outclasses all top 500 supercomputers on the planet taken together by a factor of about 10x.

ASICs miners are good for only one thing, mining bitcoin. They have no other practical use. No matter if you're an agency or company, you'll have to justify throwing hundreds of millions of dollars out the window for something most people consider geek toys.

At this point there are ~11M BTC in circulation but only 3600 BTC mined per day, so even mining and selling all 3600 BTC per day probably wouldn't move the market that much. Especially considering that many miners are already selling.

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

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

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

Everyone, to a man, says yes.

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

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

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

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

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

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

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

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

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

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

I don't think so. Why would they?

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

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

Not quite what I meant by my comment...

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

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

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