backtop


Print 73 comment(s) - last by TSS.. on Jun 21 at 8:41 AM


Much like the New York Stock Exchange, Bitcoin exchanges have suffered from their first massive loss -- a virtual "Black Friday", so to speak.  (Source: Google Images)

Some say Bitcoins could make buying illegal drugs easier. However, in reality Bitcoins are far from "untraceable".  (Source: YouTube/Beardo/Dirt Nasty)

Mt. Gox is the world's largest bitcoin exchange, but it's suffered from major liquidity issues in recent weeks. The recent massive inflationary drop is also a sign of poor controls at the exchange.
Currency experiences massive inflation in a single day, markets stay open

The day was October 28, 1929 and the sky was falling.  That Monday the DOW Jones Industrial Average (DJIA) fell 12.82 percent.  History books show that the next day the DJIA bled another 11.73 percent.  Vast amounts of wealth were wiped out in an instant.

Today modern exchanges automatically close to prevent such catastrophic sell offs.  Or, they do in the real world, at least.  But on June 10, a new kind of market -- Bitcoins suffered a massive decline, that may signal the start of the world's first digital depression.

I.  A 30 Percent Decline in One Day

This Friday the New York Stock Exchange (NYSE) was hammered, losing 172.45 points (approximately a 1.4 percent dip) to close below 12,000 for the first time since March 18, 2011 -- nearly three months ago.  Traders greeted signs of slowdowns in global markets with serious concern.

But as bad a day as Friday was for NYSE traders, it was far worse for those who invested in an increasingly popular digital currency -- Bitcoins (BTC).  At the opening bell at Mt. Gox, the world's largest Bitcoin exchange, a single BTC cost $28.919 USD.  By mid-day that total had plunged to $20.01 USD -- a drop of 30.8 percent.

Granted, in recent weeks the market for Bitcoins has soared upwards, nearly tripling, due to increased demand and built in technical issues.  So perhaps this inflation was merely reactionary.  Nonetheless, it took many by surprise, as inflation on this scale had never before been seen in the fledgling Bitcoin market.

But, wait let's not get ahead of ourselves.  Why should anyone care if the Bitcoin market crashed?

Well, today on Mt. Gox alone, approximately $2M USD in Bitcoins were bought and sold in 5,871 trades.  That's unusual in and of itself -- only a total of $19M USD in trading volume occurred over the past six months.

The bottom line is that several things are clear from today's trading.  

1. The Bitcoin market endured its first digital equivalent of a "bank rush" with people rushing to exchange their BTC for U.S. Dollars.  
2.  People have a large amount of money -- millions of USD sunk into Bitcoins lost big in the flash crash.
3.  Unlike modern markets, which automatically close to prevent massive inflation, the digital Bitcoin markets stayed open.
4.  Something major is moving the Bitcoin market in a sharp inflationary direction, in contrast to the predict deflationary trend

So what are Bitcoins and why is this intriguing?  Let's take a look.

II. What is a Bitcoin?

Bitcoins [wiki] are virtual currency similar to the Linden Dollars (L$) used by Second Life users.

However, unlike L$, which are ultimately controlled by Linden Labs, a company (or "governing body" in some people's eyes), BTC have no central authority.  The currency instead relies on a peer-to-peer system where everyone logs transactions and monetary events, prevent false transactions.

Also, unlike the L$, the focus of BTC is to exchange the virtual currency for real world services, not virtual ones.

People can obtain Bitcoins in two ways  -- buying them or generating them.  

To generate them, you have to run a complex math hashing algorithm, which tries to find a new bitcoin "block".  Parallel computing devices -- namely GPUs have shown themselves most capable for this task.  In fact with modern AMD GPUs it is possible to "break even" on your hardware costs by generating Bitcoins.

For more info about Bitcoin generation, refer to DailyTech founder Kristopher Kubicki's webpage bitminer.info.

The other method of gaining Bitcoins is to purchase them at an exchange -- the largest of which is Mt. Gox.  For a full list of exchanges, refer here.

III. Are Bitcoins Anonymous?

One of the biggest monkeys on the back of Bitcoins is public misconceptions about privacy.

For example a Reuters report quotes a letter from Senators Charles Schumer (D,New York) and Joe Manchin (D, West Virginia) wrote to Attorney General Eric Holder and Drug Enforcement Administration head Michele Leonhart stating:

The only method of payment for these illegal purchases is an untraceable peer-to-peer currency known as Bitcoins. After purchasing Bitcoins through an exchange, a user can create an account on Silk Road and start purchasing illegal drugs from individuals around the world and have them delivered to their homes within days.

Now this is somewhat misleading in that Bitcoins themselves can be more or less traceable than how the user communicates with uses their IPs.  Any time a transaction occurs, it's sent out from an initial IP to nodes on the Bitcoin network, which verify its authenticity.

Take Silk Road, for example -- the topic of a recent Gawker piece.  An IP accesses this site, which is known for selling narcotics illegal in the U.S.  If this is a user's direct IP, anyone who can sniff the traffic of the site can trace that user back to their home address, assuming cooperation of the internet service provider.

However, if you first route your IP through Tor -- an anonymizing service, you can make it extremely difficult for anyone to trace you.  This is because BitCoin "accounts" are regularly generated and a single individual holds keys to multiple microaccounts rather than a single large account.  To an outsider, this account is just a random-looking string -- nobody can tell who owns it.  But using your personal key, you can sign transactions on the accounts you own.

As long as the public/private key cryptography scheme is sound, and you anonymize your IP, even the government will have a relatively tough time tracking you.  The same can be said about any activity that occurs online.

That said, there's numerous ways your privacy could be compromised if you're buying drugs or performing elicit activities. Some points of possible attack include:
1. Failure to anonymize IP due to using your direct ISP-provided IP address.
2. Failure to anonymize IP due to misconfiguration of Tor or other anonymizer (a surprisingly common occurrence).
3. Tracking of physical goods associated with purchases.

Wait, you say, how could #3 occur?  Well, let's say you order a kilo of powder cocaine, using your Bitcoin treasure trove.  Well the kilo comes from a well known dealer who's being monitored by law enforcement for their real world activities.  Law enforcement note the package arrives at your house.  They wait for you to take it in and then begin using it.  They obtain a warrant and raid your house.

Remember, almost no "drug dealer" is going to be exclusively doing business via Bitcoins.  So they're likely engaging in real world transactions that will make it likely for law enforcement to inspect anything they decide to mail.

In other words Bitcoin does provide users with a bit of anonymity, but to claim it's generally "untraceable" in principle is pure paranoia on certain government officials' and journalists' part.  Bitcoin-driven transactions are very traceable; it's just that so far nobody has been interested in investing the large amount of effort it would take to trace them, as they have with copyright infringement or child pornography.

The DEA's response indeed seems to hint at this.  Reuters quotes agency spokeswoman Dawn Dearden as stating, "The DEA is constantly evaluating and analyzing new technologies and schemes perpetrated by drug trafficking networks. While we won't confirm or deny the existence of specific investigations, DEA is well aware of these emerging threats and we will act accordingly."

IV. A Big Problem -- Getting Money In Or Out

While the threat of the U.S. government taking some sort of action over anonymity fears is certainly looming over the Bitcoin market, a far more serious problem is liquidity.  In the traditional global currency markets, you can instantly exchange your currency for other foreign currencies on a number of exchanges.  These exchanges can take bank wires or funds from digital accounts, such as Paypal.

By contrast Bitcoin exchanges like Mt. Gox do not accept debit/credit transactions.  Up until last week they did accept eBay, Inc. (EBAY) subsidiary PayPal.  However, PayPal has blocked transactions to the site.  This is because PayPal has a policy against virtual currencies.

With an easy PayPal route gone, market liquidity was dramatically reduced.  This may be a major cause for the market crash.

Currently the most well published ways to convert Bitcoins to USD or vice versa is to use Dwolla or Liberty Reserve.  These methods are relatively straightforward, but transactions through these online billing services often move at a glacial pace, hampering liquidity.  API problems with Dwolla further exacerbated the liquidity issues in recent weeks at Mt. Gox.

You can also mail a check to a certain individual known as "Bitcoin Morpheus" listed at the exchange, who will add funds to your Mt. Gox account.  Granted this route might not be for the faint of heart as it seems rather "unorthodox" to say the least.

Now there is another method that could work slightly faster than any of the above.  For now you can use a variety of means to quickly buy L$ (Second Life currency) and then use the virwoxSLL exchange to exchange L$ to BTC.  The purpose of L$ and BTC is quite different, so it's unclear how long this route will stay viable, and many people don't realize you can get Bitcoins in this fashion.

At the end of the day Bitcoin has a very real liquidity problem.

V. What's Next for Bitcoin?

Unless Gawker and other media outlets can drum up enough unfounded paranoia about peer-to-peer currency to evoke some kind of draconian action by the U.S. federal government, it's unlikely that Bitcoins will go away.

However, market volatility poses a very serious risk to BTC users -- be they miners, traders, or merchants who accept BTC as payment for goods or services.  To that end, a major improvement would be for Bitcoin exchanges to implement mandatory market closures if the currency value dropped below a threshold.  In theory this would be relatively easy to implement, and we expect that it will be done at some point to prevent one-day flash inflation/deflation.

At the same time, a viable billing service must step up and offer people the ability to use credit or debit card billable transactions in USD to buy bitcoins quickly and directly on a major exchange (e.g. Mt. Gox).  If this can be done, market liquidity can be restored and the currency will once more flourish.

Last, but not least, concerns about deflation must be addressed as demand grows and production slows.  As mentioned in the introduction, if deflation is not controlled, reactionary inflation spurts could be experienced.  Indeed, a reactionary market movement could have been part of the cause for today's record-setting inflation.

It is possible that additional bitcoins could be distributed or other mechanism employed to prevent deflation, much as they are with standard currencies.  

Bitcoins are certainly a novel idea in their implementation details and purpose.  This article offers an introduction, but barely skims the surface of this phenomena and the true facts about it.

Ask some and they'll say Bitcoins are a scam/pyramid scheme.  Ask others and they'll say the Bitcoin market has the promise to offer sustained success.  There's valid arguments on both sides, but at the end of the day Bitcoins will still be around for the forseeable future.

In trading late Friday, Bitcoins recouped nearly half their losses, bouncing back to 24.34.  That's still a massive crash -- around 15 percent in one day.  But it shows that the market isn't dead.  The U.S. economy survived Black Friday and today sustains a massive amount of wealth.  Likewise, perhaps the Bitcoin movement can survive this tough time and find its way.  After all -- people are still buying Bitcoins.


Comments     Threshold


This article is over a month old, voting and posting comments is disabled

Crash
By SpaceLord75 on 6/10/2011 7:14:51 PM , Rating: 2
The current rate on MtGox is now around 24 USD. Marking the high and lows in less than a day isn't a good indicator of anything.




RE: Crash
By JasonMick (blog) on 6/10/2011 7:17:50 PM , Rating: 1
quote:
In trading late Friday, Bitcoins recouped nearly half their losses, bouncing back to 24.34. That's still a massive crash -- around 15 percent in one day. But it shows that the market isn't dead. The U.S. economy survived Black Friday and today sustains a massive amount of wealth. Likewise, perhaps the Bitcoin movement can survive this tough time and find its way. After all -- people are still buying Bitcoins.

($24.34-$28.919)/$28.919 =-15.8%

15.8 percent depreciation IS a major crash. I do note the opening and closing values in my piece, so that's invalid.

You didn't read carefully enough...


RE: Crash
By mira on 6/10/2011 7:21:26 PM , Rating: 2
15% decline following a 70% rise, yeah major depression.


RE: Crash
By JasonMick (blog) on 6/10/2011 7:25:58 PM , Rating: 3
quote:
15% decline following a 70% rise, yeah major depression.

The Great Depression followed a major market rise, as well (which occurred during the "roaring" 20s). Albeit the boom and bust have been much more rapid in the Bitcoin market and we have yet to see if the bust is sustained.

Still a massive market event...


RE: Crash
By Solandri on 6/11/2011 3:13:39 AM , Rating: 2
Not sure why you're being downrated for this. In the windup to the Great Depression, the DJIA dropped 12.8% on October 28, 1929, followed by another 11.7% on October 29. These things do not happen quickly. It took nearly 3 years (til July 1932) for the DJIA to lose 89%. So comparatively, a 30% drop in a day is a massive, massive drop for what's supposed to be a general index/currency.

OTOH, Black Monday, Oct 19, 1987, the DJIA lost 22% in one day. But it bounced right back. So you never know.


RE: Crash
By JasonMick (blog) on 6/12/2011 1:57:35 PM , Rating: 4
quote:
Not sure why you're being downrated for this. In the windup to the Great Depression, the DJIA dropped 12.8% on October 28, 1929, followed by another 11.7% on October 29. These things do not happen quickly. It took nearly 3 years (til July 1932) for the DJIA to lose 89%. So comparatively, a 30% drop in a day is a massive, massive drop for what's supposed to be a general index/currency.

OTOH, Black Monday, Oct 19, 1987, the DJIA lost 22% in one day. But it bounced right back. So you never know.

I assume I got downrated because Bitcoin miners assumed this article was somehow an attack on Bitcoins themselves, rather than an economic commentary.

Quite to the contrary, the fact that I'm addressing this major inflationary event as significant is supportive of the legitimacy of the Bitcoin movement.

The problem is a number of people are very defensive about Bitcoins and their coverage in the media. The humorous part is that they've essentially parroted my commentary on a number of points, while saying that their paraphrased version somehow contradicts my piece.


RE: Crash
By Targon on 6/11/2011 6:51:33 AM , Rating: 2
Considering that most people don't know or care about Bitcoins, that is why no one really cares. It isn't as if there is a huge huge ecosystem that affects the lives of millions of people. While there is a market(primarily in Asia) for buying/selling in-game items and money for online games, no matter how much money may be involved, if it doesn't affect most readers in any way, it's not a big deal.

Basically, if virtual currencies go away, it won't be the end of the world for those who actually make our money in the real world.


RE: Crash
By Suntan on 6/13/2011 1:37:38 PM , Rating: 2
I remember, back when we were kids, we'd get done playing Monopoly and then we'd put the play money back in the box until we wanted to play again.

Sounds like a lot of adults should follow the same procedure...

-Suntan


RE: Crash
By nickwit on 6/10/11, Rating: -1
RE: Crash
By fteoath64 on 6/11/2011 2:59:16 AM , Rating: 4
I think the establishment is trying to sabotage an alternative mechanism of payment. It would weaken the control over monetary flow.

Hence, uses examples of buying illegal drug which can be done in many ways using existing payment systems. Traceability is just an excuse. They wanted to TRACK!.

People need to wake up when governments tries to use FUD to mess around ideas that would NOT benefit them. It is a shame if people cannot see past the BS in mainstream news.


RE: Crash
By Mike Acker on 6/11/2011 6:39:26 AM , Rating: 2
="I think the establishment is trying to sabotage an alternative mechanism of payment. It would weaken the control over monetary flow."

of course

what happened when JFK authorized issue of US Treasury Notes?


RE: Crash
By 91TTZ on 6/11/2011 7:48:36 AM , Rating: 3
quote:
you talk (as so many do) as though the only country in the world that matters is the US. This is 5% of the global population. The rest of us can buy and sell without using USD at all.


You're being intentionally misleading. You make it sound as if the US has a 5% influence in the world because we have 5% of the population. Yet the US dollar influences the economies of many other countries and has a very wide ranging effect.


RE: Crash
By adiposity on 6/11/11, Rating: -1
RE: Crash
By JasonMick (blog) on 6/12/2011 2:18:05 PM , Rating: 3
quote:
Got an agenda much?

So what exactly do you think my "agenda" is? Or do you just prefer some vague and nonspecific aspersion so you don't have to both to articulate an actual thought?

quote:
The bitcoin market has had a slow and steady increase in the number of people/value over a the last couple of months, then there's a sharp increase on one day followed by a slightly smaller decrease two days later, and you call that a "depression"? One day?

Depression/recession... time will tell which it is. Nonetheless, it's a MAJOR inflationary event. Bear in mind, this is a currency drop, not a stock market drop. A 15 percent drop on the stock market would be a massive event -- it's only happened a handful of times on the NYSE. A 15 percent inflation in a currency in a SINGLE day is virtually unheard of... that's an even more noteworthy event.

I'm just observing this from an economic perspective...
quote:
This whole article reads like a desperate hit-piece... ticking every single box that newbies ask about on the forums... only to have them debunked. You're deliberately misunderstanding so people who can't be bothered checking things themselves are misled.

Unadulterated paranoia. How am I trying to "hit" the bitcoin market? I say that I think it will survive this turbulence and point out some valid suggestions for how market stability can be improved. If anything I'm DEBUNKING misinformation.
quote:
So just to clarify:

And here you go on to reiterate the text of my article, and humorously try to claim that it debunks it. Pathetic... Read below.
quote:
1) bitcoin addresses are linked to IP. It's easy to obfuscate IP. Bitcoins can be as untraceable as you want them to be.

Oh really?
Maybe if you read:
"Now this is somewhat misleading in that Bitcoins themselves can be more or less traceable than how the user communicates with uses their IPs. Any time a transaction occurs, it's sent out from an initial IP to nodes on the Bitcoin network, which verify its authenticity."
"As long as the public/private key cryptography scheme is sound, and you anonymize your IP, even the government will have a relatively tough time tracking you. The same can be said about any activity that occurs online."

...So you've parroted me... nice.
quote:
2) the link between bitcoins and drugs is about as serious as the link between cash and drugs. Detractors bring up "drugs" every single time.

When did I suggest that bitcoins are fuel a drug economy? I point this out, only because the Gawker piece and others on the Silk Road have gotten significant attention as demonstrated by the letter from the Democratic Senators...

People want anonymity for a number of reasons. One is indeed disguising illegal activities... one example of which is drugs. Nowhere do I suggest that this is the primary driver of the Bitcoin economy or that it's a major problem.

In fact, my whole point is that it's less of an issue than people think, because any drug traffic is tied to traceable real world material exchanges and thus can be tracked regardless of the currency used.

Possession of illegal narcotics is a crime, no matter if you bought it with bitcoins or USD.

So you're just blowing smoke here, parroting me.
quote:
3) we do not need credit-card-based buying of bitcoins because credit-cards/paypal are prone to fraud.

Errr, money itself is prone to fraud.

Sure peoples' Paypal and CC accounts get stolen, but so do people's money.

If Paypal and CCs were inherently completely insecure, our current economy wouldn't exist. Most people use CCs and get by just fine...
quote:
4) you talk (as so many do) as though the only country in the world that matters is the US. This is 5% of the global population. The rest of us can buy and sell without using USD at all

Err the US controls 14.6T USD of the total global GDP of 58.9T USD... so it controls over a quarter of the world economy. And when you count its deep influence on Europe and China via its powerful banking ties, the U.S. is the world's strongest economic power currently.

So there's some facts -- feel free to try to challenge them if you think your facts are better...

BOTTOM LINE
I don't have an "agenda" other than to clue people in to the Bitcoin phenomena. I think it's a very interesting economic experiment and I hope it succeeds.

Your accusations are pure paranoia and practically comical in that they either fall under the category of easily disprovable nonsense, or you repeating what I said in the piece and trying to claim it shows that I'm wrong.

Take off the tin foil hat and realize that I'm not out to get you. Or keep it on and post back some equally raving reply... it's a free country...


RE: Crash
By docbill on 6/11/2011 9:57:36 AM , Rating: 2
I agree. Even if you look at the week at a whole, there is no down trend. In fact if you look at the volume that traded at the higher value it was extremely small. The average sale price of bitcoins remained fairly stable. If you look since the start of the month, there is still a dramatic increase. If you look at it since the start of the year the increase is unheard of. The real story that the increase in the value of bitcoins has been much faster than the models predict. The reason is unjustified economic speculation. Less than 2% of bitcoins are being publicly traded. So huge changes in trade volumes are possible any given day. Hence, huge changes in price. The fact is a "currency" that increases in value over time, encourages saving, not investment. There will always be a low percentage of bitcoins on the market, so the market will always be very volatile.


RE: Crash
By chetrasho on 6/11/2011 9:22:07 PM , Rating: 2
Good points, docbill. I quoted you in a longer reply:
http://poibella.org/emptyset/?p=324

This whole "depression" thing is nonsense. I'm happy for the lower prices....


RE: Crash
By docbill on 6/12/2011 12:19:15 AM , Rating: 2
I personally would be quite happy to see the price drop all the way to January 2011 values. But I feel bad for those who are speculating on the value of bitcoins. If the goal is currency speculation, it is better to pick something that is backed by a central authority, as at least then you have better chance at predicting the trends. The anonymous nature of bitcoins make it very difficult to determine how they are being used and predict trends. Buying them for investment is about a good idea as betting at the race track without even looking at the spread. Eventually if they stabilize the deflationary value of a bitcoin will probably be just enough so people don't feel like they need to dump them right away after making a transaction, but not so much that they are a good longterm investment.


"We’re Apple. We don’t wear suits. We don’t even own suits." -- Apple CEO Steve Jobs

Related Articles
eBay To Delist Virtual Goods From MMORPGs
January 30, 2007, 4:53 PM













botimage
Copyright 2014 DailyTech LLC. - RSS Feed | Advertise | About Us | Ethics | FAQ | Terms, Conditions & Privacy Information | Kristopher Kubicki