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How the Bitcoin 1% manipulate the currency, deceive its user community, and make its future uncertain

photo of Michel Bauwens

Michel Bauwens
30th June 2013


Excerpted from Stanislav Datskovskiy:

” One of the world’s greatest cryptographers, Adi Shamir, published the following analysis:

- “We discovered that almost all these large transactions were the descendants of a single large transaction involving 90,000 Bitcoins which took place on November 8th 2010, and that 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, 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.” (source: Dorit Ron and Adi Shamir, Quantitative Analysis of the Full Bitcoin Transaction Graph.”

Most bitcoins are, in fact, in the hands of a very few people. Are you surprised? I’m not.

We also learn that, of the approximately 9 million bitcoins which currently exist, less than 2 million actually circulate – that is, change hands with any appreciable frequency:

- “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.”

And it would appear that most of the non-circulating coins are in the hands of a very small number of people – who, one may reasonably suspect, were involved from with building and propagandising Bitcoin from its very beginning. So, who are the lords of Bitcoin?

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. Think of it! Hundreds of thousands of shill accounts, with vast rivers of wealth moving back and forth – for one purpose only: to deceive. None of it was done by accident.

Bitcoin turns out to be something other than the fully-decentralized, unkillable network which so many imagined it to be.

People who have invested serious time and wealth in Bitcoin ought to feel angry. Not from any abstract sense of fair play, but from the simple fact that Ron and Shamir’s findings reveal a serious – and quite mathematically-certain – flaw in the sytem. The total number of bitcoins in actual circulation is much smaller than previously believed. If the early adopters were to cash out and place their hoards on the market, the exchange rates (as denominated in anything) would dive through the floor, never to recover. The hoarders, in effect, possess an off switch for Bitcoin.

Whether and under what circumstances they would press the switch, I cannot say. But the Bitcoin kill switch exists.

So, what, if anything, could be done about it? Unfortunately, the one solution which I can think of (other than the idiotic head-in-the-sand solution of not giving a damn, which the Bitcoin user community seems to favour) is a rather unlikely one, and would be quite distasteful – on a gut level – to most users. I am speaking, of course, of proscription. If the Bitcoin community – or a reasonable subset thereof – agreed that the kill switch ought to be neutralized by any means possible, it would be a fairly straightforward matter to declare the hoarders persona non grata and collectively agree to use modified Bitcoin clients (let’s call them Bitcoin-P) which act as if the particular coins currently held by A, C-F, H-K, and M-S were not bitcoins at all. And that such pseudo-coins will never be accepted as genuine in trade for any good or service. In effect, they would be retroactively shitcoined for all time.

This act would not require cooperation from every single Bitcoin user, or the imposition of any kind of governing authority. If even a minority of users were to move to Bitcoin-P, operating separate exchanges and the like, said users would be forever immune to the effects of a future market glut resulting from hoarders cashing out. Users of conventional Bitcoin would feel the effects in full, suffering the loss of most if not all of their purchasing power.

But I am under no illusions that Bitcoin-P will ever happen, given the libertarian bent of most Bitcoin users. They will mutter of dekulakization and the like. Fine, lose your hard-earned wealth to a pyramid scheme operator at some unspecified future date. But if you like the idea of decentralized cryptocurrencies without built-in kill switches, think hard about Bitcoin-P. Anyone who wants to can start using Bitcoin-P right now, without having to wait for others to be convinced of its merits. Just compile a list of the Satoshi gang’s bitcoins, and start pretending that they aren’t coins at all. It really is that simple.”

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31 Responses to “How the Bitcoin 1% manipulate the currency, deceive its user community, and make its future uncertain”

  1. Evren Yurtesen Says:

    The guys invented bitcoins have most bitcoins? Well, dont they deserve to be rich? It is a huge accomplishment to create such a large scale monetary system without any help from any government or organization. I think it would be strange to not accept somebodies money because they are rich. We do it everyday anyway….

  2. Sepp Hasslberger Says:

    … and what’s worse, there seems to be contamination.

    Ripple, a networking money transfer protocol has been taken over by people affiliated with Bitcoin.

    Instead of being a clean friend-to-friend money transfer protocol, Ripple now has a currency (RPX) that’s needed to pay transfer fees and to make Ripple work at all. You need to have a reserve of it in order to grant credit to your friends on Ripple.

    As with Bitcoin, a limited number of those RPX has been created and is in the hands of the people who invented the scheme. As Ripple becomes used, there will be demand for RPX, and the proceeds from the sales of that currency to the Ripple adopters will be in the hands of the creators of RPX. Most of it seems to be in the hands of “OpenCoin Inc.”, a company that deceivingly took the name of another activity that is an open payment development (opencoin.org) but it is not the same outfit at all.

    Something strange going on.

    Are those people trying to corner the market on electronic alt currencies?

  3. Chris Cook Says:

    Hmmm….I’m no proponent of Bitcoin, but presumably a lot of the traffic relates to the operation of the various exchanges – which isn’t particularly anti-social in itself.

    Bitcoin’s not the endgame for modern money, but it does flag the beginning of the end, I think in the same way that Napster marked the beginning of the end for the music industry parasites.

    Integrate Ripple with value-based systems like Sardex and you are getting somewhere.

  4. Vinay Prashar Says:

    A very well summarized article but you are missing the proofs for your calculations, i.e. how do you calculate the amount of bitcoins in circulations?

  5. Engineer Says:

    The findings do not support your claim. This article is disingenuous at its core. Yes, it’s true of any currency that if a holder of a large amount of it were to dump it on the market with market sales orders, prices would crash.

    You see this right now with the US dollar where the holder of the monopoly on counterfieting dollars, the federal reserve, is creating them as fast as it can without crashing the market… though of course the value of the dollar is going down.

    When talking about currencies you must talk about them comparitively, like any investment.

    How does bitcoin perform relative to other currencies? How is it likely to perform?

    the longer bitcoin goes on and the more it establishes itself, the more buyers there will be if any large holder decides to dump bitcoins.

    This is the solution and it’s already been implemented.

    But of course, that doesn’t support your agenda, does it?

  6. marc fawzi Says:

    Bitcoin is an opportunistic scheme, not an altruistic/egalitarian one. It derives its value not from the rate of its flow/circulation (relative to total currency issued) but from its artificially created scarcity. Ha! who would have thought of that? LOL.

    Never been less interested in a currency system than I am with Bitcoin… and yet it thrives on humanity’s baser instincts, greed, hoarding, unfair competition, trickery, unfair advantage, etc.

    Terrible, indeed.

  7. Tom Says:

    Mind that the few “early adopters” can use their “kill switch” dumping just once, unless they are able to effectively manipulate the market as they want (dumping and then buying back low).

  8. NWL Says:

    Bitcoin-P will be the easiest way for people not to trust the currency anymore. And kill it.

  9. mike Says:

    Wouldn’t large exchanges, eg mtgox and coin base show large amounts of bitcoins “not in circulation” even though, on the consumer side, they are? Is it wrong for early investors to reap rewards of a monetary system that truly will promote equality and an unfettered market check for fiat currencies?

  10. Roman Says:

    China owns more than $1 trillion in U.S. Treasuries. So will USD collapse?

    http://useconomy.about.com/od/criticalssues/p/dollar_collapse.htm

  11. Anonymous coward Says:

    The way bitcoin is designed, it is almost self-evident that the earliest adopters own massive amounts of BTC, because, in the very begining, it took a negligible amount of computational effort to mine a coin.

    However, I don’t think this is a major issue, because:

    1. I don’t see bitcoin as a medium of wealth storage, but as a exchange method. No one in their right mind should store more coins than it takes to fulfil a couple of transactions.
    2. If the founders of BTC are selfish, it is more profitable for them to keep people trusting the currency for a long time, and cash out little by little, than to dump it all at once.
    3. Of course, they might be coerced/incentivized by some government to shut it down. However, this hypothetical government would have to i) pay them more than the value of the BTC they own, and ii) might find it easier to just harvest more computational power than the rest of the network has, and DDOS it.

    Them concealing the fact is another story; there are however some other reasons why they might shuffle their money around that way:

    a) They don’t want to conceal themselfs from the community, but from adverse parties (e.g. governments?)
    b) Bitcoin mining involves certifying transaction blocks. These currency movements create a constant stream of transactions so miners can earn bitcoin.

  12. JohnGalt Says:

    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?

  13. Alan Says:

    Well the other way would to allow more coins to be issued beyond the 21 million limit, say 42 and move the block time to 5 minutes. That would mean more coins in more hands and begin to neutralize the effect of the original horders.

  14. Amin Says:

    Ron and Shamir’s assumption that since many of the transactions were created by a small number of parties, that means much of the activity in the Bitcoin network is being effected out by a few people, was debunked:

    https://gist.github.com/jgarzik/3901921

    Also worth noting is the comment made under the debunking article:

    “When a bitcoin address is used for spending, ALL THE MONEY in that address is always spent by design (see https://en.bitcoin.it/wiki/Transactions), and it is common practice to send the change to a brand new address, which, by being brand new, cannot be associated with any other addresses through the methods used in this paper. So if everybody kept to the standard practices, 100% of bitcoins would be in addresses that have never been used for spending!

    This means that the 78% the article talks about are by no means out of circulation, stored under some mattress or anything like that. The astonishing thing is that 22% of bitcoins are in RE-USED addresses!”

    This article is an example of rushing to burn someone at the stake, without understanding all of the facts.

  15. Olle Kullberg Says:

    It does not matter if the price of Bitcoin falls to the floor (i.e. The kill switch), because if the technology is sound Bitcoin can still be used for trading stuff. If you are new to Bitcoin (like most people on the planet) you will just get more Bitcoins for your $.

  16. Mike Says:

    I have several wallets and I made >5,000 transactions, but most of them are not linked or connected to each other in any way that could be ‘analyzed’ on the blockchain.

    The biggest wallets are owned by services who are storing Bitcoins for thousands of users.

  17. deg Says:

    That’s the reason why Freicoin will be the better Bitcoin, finally… Freicoins want to be spent…

  18. DontWorryAboutIt Says:

    And as you see… The government, even though causing inflation, could possibly have access to 98% of US Dollars too, but do you see it really mattering?… Look at the first inventors of Bikes.. They had more than 98% All Bikes until of course they started selling..

    In otherwords, the creators reap benefits, that’s called economy, business, and LIFE

  19. xtremasd Says:

    “mathematically-certain” Where’s your math?

    “would dive through the floor, never to recover.” Why should that happen?

  20. Lyle Lange Says:

    Adi’s analysis has a fundamental flaw. There is no way to distinguish individual bitcoin users on the network. The closest option is to track IP addresses, which is itself not a reliable source for information. As for hoarding, something called Bitcoin-Days-Destroyed is tracked. If a bitcoin sits idle for x number of days before being transferred, that adds one x of Bitcoin-Days-Destroyed. If 5 bitcoin sit idle for 3 days before being transferred, that adds 15 Bitcoin-Days-Destroyed. You get the idea. Here is a graph of Cumulative Bitcoin-Days-Destroyed. It should also be noted that this analysis is rather old as there are now 11 million bitcoin in circulation.

  21. Apostolis Xekoukoulotakis Says:

    Let us not forget that mining is controlled by 3-4 pools. http://blockchain.info/pools

  22. Peter Šurda Says:

    Wealth inequality is a normal and the only way to avoid it is to supprees freedom. Leftists do not understand that. Even if everyone was physically the same and made the decisions in the same way, they cannot have the same information at the same time, and therefore cannot make the same conclusions and differences will arise.

    The problem is not inequality, but violence. It’s not that some people have more money than others, but that some people have a legal privilege to create money and others don’t. If you create new money without integrating yourself in a hierarchical structure, you are sued for counterfeiting or money laundering or a similar protectionist measure.

    The argument about “hoarding” is also not economically defensible. All money (all goods even) must always be owned by someone. If friction is minimised, then people would keep such an amount of liquid assets that fits their own preferences, and any attempt to change their behaviour will be mitigated by a restructuring of their liquidity portfolio. By the way, the velocity of Bitcoin, based on the Bitcoin Days Destroyed, is similar to that of USD or EUR, and the velocity of Litecoin is even higher. This means nothing, just that the worries about “hoarding” make no sense.

    And as has been said, using phrases like “mathematically certain” is borderline fraudulent, akin to implying that astrology is sound because it’s based on mathematics.

  23. bitcoinator Says:

    Shameless price manipulation attempt. Here is the original article: http://newswax.com/2012/10/bitcoin-has-a-kill-switch-and-how-to-disconnect-it/ (it is pretty old). Here is some competent critisism: https://gist.github.com/jgarzik/3901921

  24. Just some guy Says:

    First of all, this bitcoin-P solution of yours disgusts me. People should not lose their wealth because of other people feeling the need to take it. This is specifically one of the reasons why bitcoin was designed. If people have more money, shouldn’t they have more bitcoins? And if they do have more money it is harder to spend in all so yeah, I imagine some of it is ‘out of circulation.’ People from Cypress literally dumped their fortunes into bitcoin because there government was seizing their wealth. If I were them, I’d probably go through efforts to remain anonymous too.

  25. thomas Says:

    There were only like 4-5 mln bitcoins in existence at the end of 2010.
    Today there are about 12.5mln bitcoins, i don’t know what people are trying to do, scare people into selling and buy cheap? But this ‘most bitcoins are owned by a few people’ is utter nonsense.
    Yes, there are a few people that have a lot of bitcoins, but it’s far, far from ‘most of the bitcoins’.
    These are the people that have been very active since the beginning and helped build the economy and infrastructure of what we see today.
    Also a lot of bitcoins have been lost over time, since they had extremely low value during 2009-2010, people just deleted their wallets and didn’t think anything of it.
    A friend of mine just deleted bitoin including his wallet with 5000 bitcoins because he felt it was a useless project. And i’m reasonably convinced he’s not the only one.

    Anyway, don’t believe these random fud articles, do your own research and draw your own conclusions based on facts.

  26. Lelala Says:

    Regarding the use of just “a new protocol”:
    Since BitcoinQT, the standard client, is ranked #1 by far in comparison to all others – one just need to manipulate/”update” that specific client :-)
    But, i think they’d rater crash than adapt to a more sustainable “currency setup”. We will see… Today announced: The Winkelvoss Brothers are planning to launch an ETF for/based-on Bitcoins.

  27. Dav Says:

    What’s so newsworthy about another deceptive & manipulated market? Aren’t accounting rules such as REPO 105 and mark-to-market specifically used to deceive the small investor? Don’t get me wrong, there is huge money to be made in the markets – it’s just that today, you DO NOT want to be the guy without a chair when the music stops.

    Middle-class investors must keep in mind that when a bubble bursts, the end result for them is often disaster, while the end result for the top 1% is a buying opportunity.

  28. John Says:

    Bitcoin(s) is money only in the very loosest meaning of that word; money. I am not that familiar with it but even US fiat dollars are backed by ‘something’ in the end. Is Bitcoin backed by anything? It seems to me that casino chips have a more solid backing than bitcoins.

  29. Carl Lundström Says:

    The mega-owners have an interest in keeping the currency valuable. So, if they are rational, (which they have been so far) they are more of a guarantee for stability than you are. If it ain’t broken, don’t fix it.

  30. Stu Says:

    “through the floor, never to recover. The hoarders, in effect, possess an off switch for Bitcoin.”
    Whilst I agree that your article is well written and talks of the risks of Bitcoin this statement is a misleading personal opinion not based on facts or science.

    Flooding the market with millions of coins won’t make them less useful, it merely means the price drops as supply outstrips demand temporarily, it’s the purest economics demonstration around. The surplus of coins doesn’t suddenly change their usage and they certainly don’t vanish. Would it knock confidence, yes probably, especially greedy types wanting to make a quick buck but this would be temporary just like the annual crash where it bounces back still to be worth far more by the following year.

    If those coins enter the regular day to day transactions yes the price per coin will drop lower to match demand and will eventually regain value as they continue to be scarcer. A more likely scenario however is people quickly buy the cheap coins to invest. This means the price returns to what they were since once again, if I saw coins drop to around £10 each again I’d be buying as many as I possibly can now and know I’m not alone.

    I’m not saying the experiment is infallible, there are issues that need to be addressed before this can go mainstream but can say that someone selling a lot of coins is far from a built in kill switch.

  31. erick vallely Says:

    i do not have any confidence in bit coin

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