Category Archives: blockchain technology

WTF is an ICO, TechCrunch

WTF is an ICO?

It wasn’t very long ago that bitcoin felt nascent, laughable and petite. In the ensuing years, bitcoin has matured, become far less risible and grown massively.

Underscoring bitcoin’s maturation, the currency set fresh price records this week as the value of a single coin crossed the $Two,000 threshold. Since bitcoin was announced in 2009, and certainly since I very first wrote about it in 2013, the ecosystem of cryptocurrencies has exploded.

Cryptocurrencies have expanded since the days bitcoin collective some of the media’s spotlight with litecoin and the silly-by-design dogecoin. It was a time when Mt. Gox ruled, cupcake shops could become media darlings by accepting the digital currency and pizza was a critical bitcoin-pricing metric.

Now, there are dozens of cryptocurrencies worth eight figures, and the birth rhythm of fresh entrants is accelerating.

Alex Wilhelm is the editor-in-chief of Crunchbase News and co-host of Equity, TechCrunch’s venture capital-focused podcast.

In that particular milieu of freshly launched coins is a freshly famous transaction type we need to understand called the “Initial Coin Offering” or ICO. An ICO is akin to an IPO, but in temporal switch roles (sort of). Albeit confusing, it has recently acquired prominence as a favored way to launch a fresh cryptocurrency.

But as is typical of nascent cryptoproducts, there are legal questions and unethical players in the mix. So let’s explore what an ICO is in the current cryptocurrency market.

ICO basics

An ICO is a fundraising instrument that trades future cryptocoins in exchange for cryptocurrencies of instant, liquid value. You give the ICO bitcoin or ethereum, and you get some of Billy’s Fresh Super Excellent Coin or the infamous CrunchCoin.

The Financial Times calls ICOs “unregulated issuances of cryptocoins where investors can raise money in bitcoin or other [cryptocurrencies],” which is accurate, especially if you underline the word “unregulated.” We’ll get to that in a moment.

Sticking close to the older financial publications, The Economist also took a look at the financing mechanism, describing what you buy in an ICO in the following style:

ICO “coins” are essentially digital coupons, tokens issued on an indelible distributed ledger, or blockchain, of the kind that underpins bitcoin, a crypto-currency. That means they can lightly be traded, albeit unlike shares they do not confer ownership rights. […] Investors hope that successful projects will cause tokens’ value to rise.

The referenced value increase is critical to understanding the appeal of ICOs. These are not transactions of love. They are investments made in hopes of quick, strong comes back.

Latest Crunch Report

Apple And Amazon Want Bond | Crunch Report

Notably, not all ICOs are for cryptos that will maintain their own blockchain. According to the crypto-focused Smith + Crown research group, some ICOs are actually “launching ‘meta-tokens’ built on Ethereum, Bitcoin, NXT or others.”

After all, why not.

So ICOs can be coins on top of coins funded by the transfer of other cryptos to accounts in the hunt for what’s next. That might sound crazy, but it’s hot times in the crypto world.

And that warmth is keeping ICOs bubbling. The same Economist chunk, published in April of 2017, notes: “[n]early $250m has already been invested in [ICOs], of which $107m alone has flowed in this year,” a metric that it attributes to the aforementioned Smith + Crown.

That is a lot of money, making ICOs large in terms of their sheer dollar-scale. It’s therefore not hard to understand why more traditional business publications are paying attention. Following the money is their jam.

In brief: ICOs are the fresh funding slingshot by which nascent cryptos are flung into the world.

Thieves, lies and laws

As with any boom, there are bad actors to be found in the land of ICOs. Given bitcoin and the larger cryptocurrency world’s deep tradition of bearing bad behavior, it is not a surprise that ICOs are attracting humans of base intent.

In the world of ICOs, fraud is never hard to find. Add in regular sums of incompetence that any fresh venture could fall prey to, and ICOs feel a bit Old West.

But what about regulation, you reasonably protest. Surely that must exist to protect consumers?

Returning to Smith + Crown, skirting usual rules concerning fundraising is almost normal in the area of ICOs — at least partially explaining why guard rails in crypto offerings may remain a homegrown affair:

Most ICOs today are marketed as ‘software presale tokens’ akin to providing early access to an online game to early supporters. In order to attempt to avoid legal requirements that come with any form of a security sale, many ICOs today use language such as ‘crowdsale’ or ‘donation’ instead of ICOs.

So regulation is out of the mix for now.

There is an argument to be made that a dearth of regulatory oversight is actually good, as it permits the ICO market to iterate and innovate quickly. It is a reasonable(ish) argument and likely technically correct, but that doesn’t mitigate the potential for unsophisticated investors to be preyed upon.

Caveat emptor and moral hazard are fine arguments in favor of no rules regarding ICOs and cryptos, but if the market wants to keep growing, it will need to do more to attract consistently larger pools of capital.

Bubble me this

Is there a chance that ICOs will slow? Of course, but the coerces behind them run a bit deeper than we might have very first guessed.

CryptoHustle makes the related point in a latest article that “ICO mania is likely due to early Ethereum adopters making serious comes back after the last bull run.” Etherum’s run has certainly been staggering. If it is fueling the ICO craze, we could be in for a long cycle.

Regardless, the point doesn’t mean that cryptomarkets are as they should be. That ICOs would eventually get ahead of themselves and bubble like so many youthfull technology niches was predicted at least since last October. How long the good times will last isn’t visible. But the correction will come, as always, and when it does, we’ll see which cryptos have a real shot.

Take this away

The cryptocurrency market is hot once again. And while it proceeds to set fresh records, a host of altcoins will request its slice of the market.

Should you buy into an ICO? Only if you have a massive appetite for risk, zero fear of losing your capital and are willing to take a flying chance on an idea that could flop.

Then again, crowdfunding has similar risks and seems flawlessly healthy. Your call.

WTF is an ICO, TechCrunch

WTF is an ICO?

It wasn’t very long ago that bitcoin felt nascent, laughable and petite. In the ensuing years, bitcoin has matured, become far less risible and grown massively.

Underscoring bitcoin’s maturation, the currency set fresh price records this week as the value of a single coin crossed the $Two,000 threshold. Since bitcoin was announced in 2009, and certainly since I very first wrote about it in 2013, the ecosystem of cryptocurrencies has exploded.

Cryptocurrencies have expanded since the days bitcoin collective some of the media’s spotlight with litecoin and the silly-by-design dogecoin. It was a time when Mt. Gox ruled, cupcake shops could become media darlings by accepting the digital currency and pizza was a critical bitcoin-pricing metric.

Now, there are dozens of cryptocurrencies worth eight figures, and the birth rhythm of fresh entrants is accelerating.

Alex Wilhelm is the editor-in-chief of Crunchbase News and co-host of Equity, TechCrunch’s venture capital-focused podcast.

In that particular milieu of freshly launched coins is a freshly famous transaction type we need to understand called the “Initial Coin Offering” or ICO. An ICO is akin to an IPO, but in temporal switch sides (sort of). Albeit confusing, it has recently acquired prominence as a favored way to launch a fresh cryptocurrency.

But as is typical of nascent cryptoproducts, there are legal questions and unethical players in the mix. So let’s explore what an ICO is in the current cryptocurrency market.

ICO basics

An ICO is a fundraising implement that trades future cryptocoins in exchange for cryptocurrencies of instantaneous, liquid value. You give the ICO bitcoin or ethereum, and you get some of Billy’s Fresh Super Excellent Coin or the infamous CrunchCoin.

The Financial Times calls ICOs “unregulated issuances of cryptocoins where investors can raise money in bitcoin or other [cryptocurrencies],” which is accurate, especially if you underline the word “unregulated.” We’ll get to that in a moment.

Sticking close to the older financial publications, The Economist also took a look at the financing mechanism, describing what you buy in an ICO in the following style:

ICO “coins” are essentially digital coupons, tokens issued on an indelible distributed ledger, or blockchain, of the kind that underpins bitcoin, a crypto-currency. That means they can lightly be traded, albeit unlike shares they do not confer ownership rights. […] Investors hope that successful projects will cause tokens’ value to rise.

The referenced value increase is critical to understanding the appeal of ICOs. These are not transactions of love. They are investments made in hopes of quick, strong comes back.

Latest Crunch Report

Apple And Amazon Want Bond | Crunch Report

Notably, not all ICOs are for cryptos that will maintain their own blockchain. According to the crypto-focused Smith + Crown research group, some ICOs are actually “launching ‘meta-tokens’ built on Ethereum, Bitcoin, NXT or others.”

After all, why not.

So ICOs can be coins on top of coins funded by the transfer of other cryptos to accounts in the hunt for what’s next. That might sound crazy, but it’s hot times in the crypto world.

And that fever is keeping ICOs bubbling. The same Economist chunk, published in April of 2017, notes: “[n]early $250m has already been invested in [ICOs], of which $107m alone has flowed in this year,” a metric that it attributes to the aforementioned Smith + Crown.

That is a lot of money, making ICOs large in terms of their sheer dollar-scale. It’s therefore not hard to understand why more traditional business publications are paying attention. Following the money is their jam.

In brief: ICOs are the fresh funding slingshot by which nascent cryptos are flung into the world.

Thieves, lies and laws

As with any boom, there are bad actors to be found in the land of ICOs. Given bitcoin and the larger cryptocurrency world’s deep tradition of bearing bad behavior, it is not a surprise that ICOs are attracting humans of base intent.

In the world of ICOs, fraud is never hard to find. Add in regular sums of incompetence that any fresh venture could fall prey to, and ICOs feel a bit Old West.

But what about regulation, you reasonably protest. Surely that must exist to protect consumers?

Returning to Smith + Crown, skirting usual rules concerning fundraising is almost normal in the area of ICOs — at least partially explaining why guard rails in crypto offerings may remain a homegrown affair:

Most ICOs today are marketed as ‘software presale tokens’ akin to providing early access to an online game to early supporters. In order to attempt to avoid legal requirements that come with any form of a security sale, many ICOs today use language such as ‘crowdsale’ or ‘donation’ instead of ICOs.

So regulation is out of the mix for now.

There is an argument to be made that a dearth of regulatory oversight is actually good, as it permits the ICO market to iterate and innovate quickly. It is a reasonable(ish) argument and likely technically correct, but that doesn’t mitigate the potential for unsophisticated investors to be preyed upon.

Caveat emptor and moral hazard are fine arguments in favor of no rules regarding ICOs and cryptos, but if the market wants to keep growing, it will need to do more to attract consistently larger pools of capital.

Bubble me this

Is there a chance that ICOs will slow? Of course, but the coerces behind them run a bit deeper than we might have very first guessed.

CryptoHustle makes the related point in a latest article that “ICO mania is likely due to early Ethereum adopters making serious comebacks after the last bull run.” Etherum’s run has certainly been staggering. If it is fueling the ICO craze, we could be in for a long cycle.

Regardless, the point doesn’t mean that cryptomarkets are as they should be. That ICOs would eventually get ahead of themselves and bubble like so many youthfull technology niches was predicted at least since last October. How long the good times will last isn’t evident. But the correction will come, as always, and when it does, we’ll see which cryptos have a real shot.

Take this away

The cryptocurrency market is hot once again. And while it proceeds to set fresh records, a host of altcoins will request its slice of the market.

Should you buy into an ICO? Only if you have a massive appetite for risk, zero fear of losing your capital and are willing to take a flying chance on an idea that could flop.

Then again, crowdfunding has similar risks and seems ideally healthy. Your call.

Related video:

Why Your Bitcoin Transactions Are Taking So Long to Confirm

Why Your Bitcoin Transactions Are Taking So Long to Confirm

If you have sent a bitcoin payment in the last duo of weeks, you may have noticed that your transactions are taking much longer than expected to confirm.

We have received your emails.

Since, like the Bitcoin network, we are presently working through a backlog, we want to thank you for your patience. With the high volume of questions we’re getting about delayed payments, we determined it would be best to write a brief explanation about what’s happening with many bitcoin transactions right now.

How Bitcoin Transactions Get Confirmed (or Delayed)

Transactions on the Bitcoin network itself aren’t managed or confirmed by BitPay, but by the bitcoin miners which group transactions into “blocks” and add those blocks to the Bitcoin “blockchain” – the collective historical record of all transactions. When a transaction has been added to a block six blocks ago, it’s considered a done deal.

Presently, bitcoin network traffic is unusually high due to enhancing request for transactions per block. Block sizes are limited, so this means that transactions which exceed the capacity for a block get stuck in a queue for confirmation by bitcoin miners. This queue of unconfirmed transactions is called the bitcoin mempool.

For context on what’s happening now, here is a look at the current bitcoin mempool size.

The good news? A lot of people are interested in using bitcoin for transactions. The bad news is that this network traffic may produce delays of a few hours to a few days for some users and a wait time of weeks for a puny number of users.

What To Do If You Have an Unconfirmed Transaction

If your bitcoin transaction to a BitPay merchant has not confirmed yet, you will need to wait for it to be confirmed by bitcoin miners. Since BitPay does not control confirmation times, there is unluckily nothing we can do to speed up the process once your transaction has already been broadcast to the network.

You can check your transaction’s confirmation status and other payment details on any blockchain explorer (like BitPay’s block explorer Insight). Look up your transaction using your transaction ID or the sending or receiving bitcoin addresses, which can all be found in your bitcoin wallet that sent the payment. For your transaction to be considered fully confirmed by most BitPay merchants, your transaction will need to have six confirmations.

Note that until your payment has six confirmations on the bitcoin blockchain, the recipient will not have access to the funds and will not be able to refund your transaction.

While some BitPay merchants may choose to fulfill orders on payments with fewer block confirmations, you will need at least one block confirmation before your order can be considered accomplish. If your transaction confirms and the merchant does not fulfill your order, you don’t need to reach out to BitPay. Just reach out to the seller and provide your order ID and BitPay invoice URL as proof of payment.

How To Avoid Delayed Transactions

Because block sizes are limited, it’s significant for bitcoin miners to know which transactions they should include in blocks very first. Miners use prices to figure this out. When you broadcast a transaction, your total amount sent usually includes a “miner fee” which goes to pay miners.

If you want your transaction to leave the bitcoin mempool and be added to a block quickly, it’s significant that you include a sufficient miner fee. This is why we strongly suggest using the BitPay wallet or another true bitcoin wallet that can dynamically calculate the miner fee needed for timely block confirmations. For reference, the website bitcoinfees.21.co gives the minimum miner fee as 360 satoshis/byte, however this amount has been fluctuating across this week.

Transactions are being added to the bitcoin mempool’s total queue permanently. Some may have been sent with higher miner fees than the one sent with your payment. This means that with current network traffic, miners may deprioritize your unconfirmed transaction even if it was sent with an suitable fee at the time.

Your transaction will likely confirm, but if the Bitcoin network does not confirm it, it be spendable again in your wallet. Funds are spendable again in the BitPay wallet after transactions fail to confirm for up to seventy two hours, but other wallets may behave differently.

If you are not using the BitPay wallet, you should contact your wallet provider for help if your unconfirmed funds do not showcase up as spendable again after a few days.

What Is BitPay Doing About This?

While BitPay does not control confirmation times on the Bitcoin network, we care about the payment frustrations BitPay merchants and purchasers are experiencing right now.

For purchasers, our BitPay wallet team has been working on updates to the BitPay wallet for our next release which will help to mitigate the effects of these delays on the bitcoin network when they occur.

For bitcoin users and businesses alike, we’re also continuing to explore options for quicker, simpler, and more affordable bitcoin payments. We’ll proceed to post here on the BitPay blog as we make progress.

If this article didn’t response your question, check out our payment guide or our fresh movie walkthrough for more info on how to make a successful bitcoin payment.

Related video:

What is Blockchain? The Technology Explained

The Hub

What is Blockchain? The Technology Explained

2016 was regarded as the ‘coming of age’ of Blockchain and cryptocurrencies, with a big rise in the profile of Blockchain technology and cryptocurrencies like Bitcoin and Ethereum. This year has seen them get a lot of serious attention from the financial sector and some high profile individuals like Russian President Vladimir Putin. One of the reasons is that these virtual currencies have leapfrogged ahead of stocks, bonds and most other investments in their level of comeback.

The price of Bitcoin has tripled since the beginning of the year, rising above US$Three,000 for the very first time, before pulling down back slightly. Ethereum, a not as well known – but quickly growing – cryptocurrency has shown even more dramatic gains. It shot up almost Five,000 percent in June, up to a record price of US$407, before also lodging back down.

The total value of these virtual currencies has grown amazingly too. The market capitalisation shot to more than US$110bn in June, from US$20bn at the beginning of the year. Albeit some financial analysts warn of a crash in cryptocurrencies – along the lines of the dotcom bust – it’s becoming very clear that they are providing a fresh global market for assets similar to stocks, bonds, mutual funds and government-backed currencies.

What are Bitcoin, Ethereum and cryptocurrencies?

Albeit those in the investment and financial services industries are close to the cryptocurrency market and the Blockchain technology they reside upon, most people don’t truly understand what they are and how they work. For more about Fintech visit our previous article ‘Disruption Series: Fintech & The Future of Money’, otherwise, here is a useful summary about cryptocurrencies.

1. This is an online, digital currency – a ‘virtual’ version of money. The name comes from the cryptography used to encrypt transactions and control production of the currency. It is a rigorously monitored process, using Blockchain. It is not issued by any central authority, rendering it theoretically immune to government interference or manipulation.

Two. This technology is a distributed (in different locations) database that’s used to manage and maintain a growing list of data blocks, using a peer-to-peer (P2P network). In a Blockchain, once a chunk of data is recorded, it cannot be edited or switched.

Trio. Cryptocurrency mining. This is the process of creating fresh units of a cryptocurrency. To do this, you need a powerful hardware and software combination. Since the value of a currency depends on the number of units available in the market, this process should be cautiously monitored to make sure the value of the existing units doesn’t depreciate.

Four. Cryptocurrency price. This depends on supply and request. If more people request a specific cryptocurrency and it’s brief in supply its value increases and more units are mined to meet the enhanced request. However, many choose to restrict this number. For example, the number of Bitcoins is presently restricted to a maximum of twenty one million.

Five. Cryptocurrencies list. While there are many cryptocurrencies to buy, here are some of the main ones:

  • Bitcoin. This is the most well known and presently the highest rated cryptocurrency. Interest in the market peaked when its rate surged abruptly earlier this year. To invest in Bitcoins costs about US$Two,500 and it has a market capitalisation of around $42 billion.
  • Ethereum. This cryptocurrency is responsible for diluting Bitcoin’s dominance in the market. Launched in 2015, it is being touted as the cryptocurrency of the future. It is decentralised, secure, and could be used to trade almost anything. Buying Ethereum costs about US$37 and it has a market capitalisation of around $34 billion.
  • Litecoin. This is based on the same common P2P Blockchain system, but with big technical improvements. It has substantially diminished the time for transactions to be finished.
  • Ripple. This cryptocurrency permits banks around the world to directly transact with each other.
  • Dash. Otherwise known as ‘DarkCoin’, this is a very secretive cryptocurrency. It’s almost unlikely for anyone to trace where it has been routed and it is used mainly on the Darknet.

Should I buy Ethereum or invest in Bitcoin?

While the cryptocurrency market is certainly on a bull run, much like the stock market, values can also drop at brief notice. It’s hard to tell whether the current surge is due to historical precedent, a monopoly on investment, or simply an lightly swayed investor pool. Irrespective of the reason, it seems likely that the latest rise of cryptocurrencies will lead to some sort of drop.

However, experts note that while drops in value are likely, they don’t signal an end to cryptocurrency by any means. Brian Kelly, CEO and founder of global investment management stiff BKCM, said recently that Bitcoin is in the very first years of what is likely to be a multi-year bull market. He explained that while there will be corrections, and even crashes along the way, Bitcoin is here to stay.

Interestingly, Blockchain – the technology supporting these digital currencies – may be even more worthy of investment than the cryptocurrencies themselves. A latest Reuters report pointed out that Blockchain – and the underlying technology – is very likely more interesting and has more potential than Bitcoin does itself.

Blockchain technology and digital currencies explained

A key attribute of Blockchain is that it permits digital information to be distributed but not copied. Originally devised for investing in Bitcoins, Blockchain technology is no longer being seen as just an incorruptible ledger of economic transactions, but a record for almost anything of value. Here are some insights from website blockgeeks as to why it holds such promise for the future.

1. Durability and robustness. Blockchain technology is like the Internet, in that it has a built-in robustness. By storing blocks of information that are identical across its network, the Blockchain cannot be managed by any single entity and has no single point of failure. Technology futurist Ian Khan says as revolutionary as it sounds, Blockchain truly is a mechanism to bring the highest degree of accountability. No more missed transactions, human or machine errors, or even an exchange that was not done with the consent of the parties involved. The most critical area where Blockchain helps is to assure the validity of a transaction by recording it not only on the main register but a connected distributed system of registers, all of which are connected through a secure validation mechanism.

Two. Translucent and incorruptible. The Blockchain network lives in a state of consensus; it’s a self-auditing ecosystem where the network reconciles every transaction that happens in ten-minute intervals. Each group of these transactions is referred to as a ‘block. This has two significant results.

Trio. Data is embedded within the network as a entire; by definition it is public.

Four. It cannot be corrupted. Altering any unit of information on the Blockchain would mean using a fat amount of computing power to override the entire network. In theory, this could be possible. In practice, it’s unlikely to happen. Taking control of the system to capture Bitcoins, for example, would also have the effect of demolishing their value.

Five. By design, the Blockchain is a decentralised technology. Anything that happens on it is a function of the network as a entire. Some significant implications stem from this. By creating a fresh way to verify transactions aspects of traditional commerce could become unnecessary. Stock market trades could become almost simultaneous on the Blockchain, for example. Or it could make types of record keeping, like a land registry, fully public. Other areas that could potentially corset Blockchain technology include legal contracts, the sharing economy (think Uber and AirBnB transactions), online shopping, crowdfunding, governance (voting and other polls), file storage, protection of intellectual property and identity management.

Are cryptocurrencies a safe bet? What about the ethics?

However, while Blockchain and cryptocurrencies have the potential to become the future of transactions, there is growing resistance from government and traditional commercial and financial institutions. For example, banks fear money transactions moving online, and in the U.S attempts are being made to stop this. Recently, the U.S Congress submitted a bill to make cryptocurrency illegal on the grounds that it could fund terrorism and corruption.

The anonymous nature of cryptocurrency transactions does make them well suited for a host of illegal activities, such as the purchase of weapons, drugs and other illegal goods, as well as money laundering and tax evasion. And cryptocurrency hasn’t been without controversy, according to website mic.com. Some suggest that by bypassing more established transactional methods, buying cryptocurrencies is somehow contravening the establishment to the detriment of the greater good.

But, despite a rocky commence, including the bankruptcy of Mt. Gox – the world’s largest Bitcoin exchange in two thousand fourteen – buying cryptocurrencies has arguably entered the mainstream. For one, you can actually use it to buy stuff now. Many retailers, like Microsoft and Overstock, have embarked accepting Bitcoin directly, and for the retailers that don’t — notably Amazon — proponents have found a workaround by buying bounty cards with their Bitcoin and making purchases that way.

Numerous stock and commodities exchanges are also now prototyping Blockchain applications for their services, including the Australian Securities Exchange (ASX), the Deutsche Börse (Frankfurt’s stock exchange) and the JPX (Japan Exchange Group). And many observers look to buy cryptocurrencies with the hope that a currency can exist that preserves value, facilitates exchange, is more transportable than hard metals and is outside the influence of central banks and governments.

In brief, mic.com suggests that if you still feel like investing a puny amount of money in cryptocurrency, be sure not to dip into your emergency savings. It’s uncommonly a good idea to buy something when its price is at its all-time high. And reminisce that there are a lot of horses in this race. In addition to Bitcoin, Ethereum, and Litecoin there’s also Ripple, Namecoin and Peercoin.

If you have some ‘play’ money and want to make a bet on cryptocurrency, you should absolutely feel one hundred percent comfy with the idea of losing all that money. Cryptocurrencies have crashed before, often, and very likely will again in the future. They’re also historically expensive — if you must buy some, you might be served by waiting a bit for prices to drop, so you’re more likely to get a deal.

Related video:

What Is Bitcoin? All About the Mysterious Digital Currency – The Fresh York Times

What Is Bitcoin? All About the Mysterious Digital Currency

Here is a look at the basics behind the electronic currency, which has come under latest scrutiny after hackers behind a global ransomware attack demanded payment in Bitcoin.

What is Bitcoin?

Bitcoin is a digital token that can be sent electronically from one user to another, anywhere in the world.

Bitcoin is also the name of the payment network on which the Bitcoin digital tokens budge. Some people differentiate inbetween Bitcoin capitalized, as the token, and bitcoin lowercase, as the network. Unlike traditional payment networks like Visa or American Express, no single company or person runs the Bitcoin network. Instead, it is a decentralized network of computers around the world that keep track of all Bitcoin transactions, similar to the decentralized network of servers that makes the internet work.

Because there is no central authority running Bitcoin, no one has the authority to force fresh users to expose their identities. The network was designed this way to create a currency and a financial network outside the control of any government or single company.

The computers that join the network and track Bitcoin transactions are motivated to do so by the fresh coins that are released to the network every ten minutes and are given to one of the computers helping to track the transactions and maintain the network.

Why are hackers using Bitcoin?

The digital currency Bitcoin has emerged as a dearest instrument for hackers requesting a ransom for a plain reason: You can embark accepting Bitcoin anywhere in the world without having to expose your identity.

For criminals, this makes Bitcoin much more attractive than systems like Western Union, which generally require customers to provide identification before opening an account and receiving transferred money.

How do you buy Bitcoin?

There are companies in most countries that will sell you Bitcoin in exchange for the local currency. In the United States, a company called Coinbase will link to your bank account or credit card and then sell you the coins for American dollars. Opening an account with Coinbase is similar to opening a traditional bank or stock brokerage account, with lots of verification of your identity needed.

For people who do not want to expose their identities, there are services like LocalBitcoins that will connect local people who want to buy and sell Bitcoin for cash, generally without any verification of identity required.

To begin accepting Bitcoin is even lighter. One needs only to create a Bitcoin address, which can be done anonymously by anyone with internet access.

The price of Bitcoin fluctuates permanently and is determined by open-market bidding on Bitcoin exchanges, similar to the way that stock and gold prices are determined by bidding on exchanges.

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Can the authorities track criminals using Bitcoin?

All Bitcoin transactions are recorded on the network’s public ledger, known as the blockchain. Law enforcement or financial authorities can sometimes use the blockchain to track transactions among criminals. But as long as the criminals do not associate a real-world identity with their Bitcoin address, they are generally safe. Complicating matters further, there are increasingly sophisticated Bitcoin laundering services, known as tumblers, which mix large quantities of transactions together in order to make it stiffer for the authorities to track the transactions.

Where it can get more difficult for hackers is when they want to convert the Bitcoin they have received into a traditional national currency. Most companies that convert Bitcoin to dollars in the United States require that their customers provide identification. If a criminal registered with a company like that, it would be relatively effortless for the police to track them down.

But there are many Bitcoin exchanges outside the United States that do not require customers to register with a real-world identity. LocalBitcoins also makes it effortless to find someone in any city around the world who will meet you in person and pay cash for Bitcoin without requiring any identification — a sort of Craigslist for Bitcoin exchanges. It is also getting lighter to buy goods online using Bitcoin, without ever converting the digital currency into dollars or euros.

What’s happening with the price of Bitcoin?

The price of Bitcoin has been rising, and recently hit a high above $Two,000. Like gold, the price of Bitcoin has always been driven by the scarcity of the digital tokens. When Bitcoin was created in 2009, it was determined that only twenty one million coins would ever be created.

Technology investors have purchased coins and shoved up the price out of a belief that the tokens and the system will be a sort of global digital currency and financial network for the future.

While real-world transactions have been slow to take off, Bitcoin has continued to be popular for black market uses like ransomware and online drug markets like the Silk Road and its successors.

The corporate world has also taken interest in the technology that enables Bitcoin, especially its decentralized financial network and the blockchain, the global ledger where all Bitcoin transactions are recorded. Many banks are making big bets that real-world financial transactions will one day be run on networks similar to Bitcoin, which can operate more quickly, efficiently and securely than traditional financial networks.

There are now many competitors to Bitcoin, like Ethereum, and their value has also been shoved up by growing interest in the Bitcoin technology. But Bitcoin has remained the largest so-called cryptocurrency and is generally the one that people use to buy and sell other cryptocurrencies.

What are the currency’s origins?

Bitcoin was introduced in two thousand eight by a shadowy creator going by the name of Satoshi Nakamoto, who only communicated by email and social messaging. While several people have been identified as likely candidates to be Satoshi, as the creator is known in the world of Bitcoin, not one has been confirmed. So the search for Satoshi has gone on.

Satoshi created the original rules of the Bitcoin network and then released the software to the world in 2009. Whether it is he, she or they, Satoshi largely disappeared from view two years later. Anyone can download and use the software, and Satoshi now has no more control over the network than anyone else using the software.

A version of this article emerges in print on May 16, 2017, on Page A8 of the Fresh York edition with the headline: Bitcoin Basics: Why Hackers Request It and How It Works. Order Reprints | Today’s Paper | Subscribe

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What Is Bitcoin? All About the Mysterious Digital Currency – The Fresh York Times

What Is Bitcoin? All About the Mysterious Digital Currency

Here is a look at the basics behind the electronic currency, which has come under latest scrutiny after hackers behind a global ransomware attack demanded payment in Bitcoin.

What is Bitcoin?

Bitcoin is a digital token that can be sent electronically from one user to another, anywhere in the world.

Bitcoin is also the name of the payment network on which the Bitcoin digital tokens stir. Some people differentiate inbetween Bitcoin capitalized, as the token, and bitcoin lowercase, as the network. Unlike traditional payment networks like Visa or American Express, no single company or person runs the Bitcoin network. Instead, it is a decentralized network of computers around the world that keep track of all Bitcoin transactions, similar to the decentralized network of servers that makes the internet work.

Because there is no central authority running Bitcoin, no one has the authority to force fresh users to expose their identities. The network was designed this way to create a currency and a financial network outside the control of any government or single company.

The computers that join the network and track Bitcoin transactions are motivated to do so by the fresh coins that are released to the network every ten minutes and are given to one of the computers helping to track the transactions and maintain the network.

Why are hackers using Bitcoin?

The digital currency Bitcoin has emerged as a dearest instrument for hackers requiring a ransom for a plain reason: You can embark accepting Bitcoin anywhere in the world without having to expose your identity.

For criminals, this makes Bitcoin much more attractive than systems like Western Union, which generally require customers to provide identification before opening an account and receiving transferred money.

How do you buy Bitcoin?

There are companies in most countries that will sell you Bitcoin in exchange for the local currency. In the United States, a company called Coinbase will link to your bank account or credit card and then sell you the coins for American dollars. Opening an account with Coinbase is similar to opening a traditional bank or stock brokerage account, with lots of verification of your identity needed.

For people who do not want to expose their identities, there are services like LocalBitcoins that will connect local people who want to buy and sell Bitcoin for cash, generally without any verification of identity required.

To embark accepting Bitcoin is even lighter. One needs only to create a Bitcoin address, which can be done anonymously by anyone with internet access.

The price of Bitcoin fluctuates permanently and is determined by open-market bidding on Bitcoin exchanges, similar to the way that stock and gold prices are determined by bidding on exchanges.

Newsletter Sign Up

Thank you for subscribing.

An error has occurred. Please attempt again later.

You are already subscribed to this email.

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Can the authorities track criminals using Bitcoin?

All Bitcoin transactions are recorded on the network’s public ledger, known as the blockchain. Law enforcement or financial authorities can sometimes use the blockchain to track transactions among criminals. But as long as the criminals do not associate a real-world identity with their Bitcoin address, they are generally safe. Complicating matters further, there are increasingly sophisticated Bitcoin laundering services, known as tumblers, which mix large quantities of transactions together in order to make it tighter for the authorities to track the transactions.

Where it can get more difficult for hackers is when they want to convert the Bitcoin they have received into a traditional national currency. Most companies that convert Bitcoin to dollars in the United States require that their customers provide identification. If a criminal registered with a company like that, it would be relatively effortless for the police to track them down.

But there are many Bitcoin exchanges outside the United States that do not require customers to register with a real-world identity. LocalBitcoins also makes it effortless to find someone in any city around the world who will meet you in person and pay cash for Bitcoin without requiring any identification — a sort of Craigslist for Bitcoin exchanges. It is also getting lighter to buy goods online using Bitcoin, without ever converting the digital currency into dollars or euros.

What’s happening with the price of Bitcoin?

The price of Bitcoin has been rising, and recently hit a high above $Two,000. Like gold, the price of Bitcoin has always been driven by the scarcity of the digital tokens. When Bitcoin was created in 2009, it was determined that only twenty one million coins would ever be created.

Technology investors have purchased coins and shoved up the price out of a belief that the tokens and the system will be a sort of global digital currency and financial network for the future.

While real-world transactions have been slow to take off, Bitcoin has continued to be popular for black market uses like ransomware and online drug markets like the Silk Road and its successors.

The corporate world has also taken interest in the technology that enables Bitcoin, especially its decentralized financial network and the blockchain, the global ledger where all Bitcoin transactions are recorded. Many banks are making big bets that real-world financial transactions will one day be run on networks similar to Bitcoin, which can operate more quickly, efficiently and securely than traditional financial networks.

There are now many competitors to Bitcoin, like Ethereum, and their value has also been shoved up by growing interest in the Bitcoin technology. But Bitcoin has remained the largest so-called cryptocurrency and is generally the one that people use to buy and sell other cryptocurrencies.

What are the currency’s origins?

Bitcoin was introduced in two thousand eight by a shadowy creator going by the name of Satoshi Nakamoto, who only communicated by email and social messaging. While several people have been identified as likely candidates to be Satoshi, as the creator is known in the world of Bitcoin, not one has been confirmed. So the search for Satoshi has gone on.

Satoshi created the original rules of the Bitcoin network and then released the software to the world in 2009. Whether it is he, she or they, Satoshi largely disappeared from view two years later. Anyone can download and use the software, and Satoshi now has no more control over the network than anyone else using the software.

A version of this article shows up in print on May 16, 2017, on Page A8 of the Fresh York edition with the headline: Bitcoin Basics: Why Hackers Request It and How It Works. Order Reprints | Today’s Paper | Subscribe

We’re interested in your feedback on this page. Tell us what you think.

What Is Bitcoin? All About the Mysterious Digital Currency – The Fresh York Times

What Is Bitcoin? All About the Mysterious Digital Currency

Here is a look at the basics behind the electronic currency, which has come under latest scrutiny after hackers behind a global ransomware attack demanded payment in Bitcoin.

What is Bitcoin?

Bitcoin is a digital token that can be sent electronically from one user to another, anywhere in the world.

Bitcoin is also the name of the payment network on which the Bitcoin digital tokens budge. Some people differentiate inbetween Bitcoin capitalized, as the token, and bitcoin lowercase, as the network. Unlike traditional payment networks like Visa or American Express, no single company or person runs the Bitcoin network. Instead, it is a decentralized network of computers around the world that keep track of all Bitcoin transactions, similar to the decentralized network of servers that makes the internet work.

Because there is no central authority running Bitcoin, no one has the authority to force fresh users to expose their identities. The network was designed this way to create a currency and a financial network outside the control of any government or single company.

The computers that join the network and track Bitcoin transactions are motivated to do so by the fresh coins that are released to the network every ten minutes and are given to one of the computers helping to track the transactions and maintain the network.

Why are hackers using Bitcoin?

The digital currency Bitcoin has emerged as a beloved device for hackers requesting a ransom for a ordinary reason: You can embark accepting Bitcoin anywhere in the world without having to expose your identity.

For criminals, this makes Bitcoin much more attractive than systems like Western Union, which generally require customers to provide identification before opening an account and receiving transferred money.

How do you buy Bitcoin?

There are companies in most countries that will sell you Bitcoin in exchange for the local currency. In the United States, a company called Coinbase will link to your bank account or credit card and then sell you the coins for American dollars. Opening an account with Coinbase is similar to opening a traditional bank or stock brokerage account, with lots of verification of your identity needed.

For people who do not want to expose their identities, there are services like LocalBitcoins that will connect local people who want to buy and sell Bitcoin for cash, generally without any verification of identity required.

To commence accepting Bitcoin is even lighter. One needs only to create a Bitcoin address, which can be done anonymously by anyone with internet access.

The price of Bitcoin fluctuates permanently and is determined by open-market bidding on Bitcoin exchanges, similar to the way that stock and gold prices are determined by bidding on exchanges.

Newsletter Sign Up

Thank you for subscribing.

An error has occurred. Please attempt again later.

You are already subscribed to this email.

  • See Sample
  • Manage Email Preferences
  • Not you?
  • Privacy Policy
  • Opt out or contact us anytime

Can the authorities track criminals using Bitcoin?

All Bitcoin transactions are recorded on the network’s public ledger, known as the blockchain. Law enforcement or financial authorities can sometimes use the blockchain to track transactions among criminals. But as long as the criminals do not associate a real-world identity with their Bitcoin address, they are generally safe. Complicating matters further, there are increasingly sophisticated Bitcoin laundering services, known as tumblers, which mix large quantities of transactions together in order to make it firmer for the authorities to track the transactions.

Where it can get more difficult for hackers is when they want to convert the Bitcoin they have received into a traditional national currency. Most companies that convert Bitcoin to dollars in the United States require that their customers provide identification. If a criminal registered with a company like that, it would be relatively effortless for the police to track them down.

But there are many Bitcoin exchanges outside the United States that do not require customers to register with a real-world identity. LocalBitcoins also makes it effortless to find someone in any city around the world who will meet you in person and pay cash for Bitcoin without requiring any identification — a sort of Craigslist for Bitcoin exchanges. It is also getting lighter to buy goods online using Bitcoin, without ever converting the digital currency into dollars or euros.

What’s happening with the price of Bitcoin?

The price of Bitcoin has been rising, and recently hit a high above $Two,000. Like gold, the price of Bitcoin has always been driven by the scarcity of the digital tokens. When Bitcoin was created in 2009, it was determined that only twenty one million coins would ever be created.

Technology investors have purchased coins and shoved up the price out of a belief that the tokens and the system will be a sort of global digital currency and financial network for the future.

While real-world transactions have been slow to take off, Bitcoin has continued to be popular for black market uses like ransomware and online drug markets like the Silk Road and its successors.

The corporate world has also taken interest in the technology that enables Bitcoin, especially its decentralized financial network and the blockchain, the global ledger where all Bitcoin transactions are recorded. Many banks are making big bets that real-world financial transactions will one day be run on networks similar to Bitcoin, which can operate more quickly, efficiently and securely than traditional financial networks.

There are now many competitors to Bitcoin, like Ethereum, and their value has also been shoved up by growing interest in the Bitcoin technology. But Bitcoin has remained the largest so-called cryptocurrency and is generally the one that people use to buy and sell other cryptocurrencies.

What are the currency’s origins?

Bitcoin was introduced in two thousand eight by a shadowy creator going by the name of Satoshi Nakamoto, who only communicated by email and social messaging. While several people have been identified as likely candidates to be Satoshi, as the creator is known in the world of Bitcoin, not one has been confirmed. So the search for Satoshi has gone on.

Satoshi created the original rules of the Bitcoin network and then released the software to the world in 2009. Whether it is he, she or they, Satoshi largely disappeared from view two years later. Anyone can download and use the software, and Satoshi now has no more control over the network than anyone else using the software.

A version of this article emerges in print on May 16, 2017, on Page A8 of the Fresh York edition with the headline: Bitcoin Basics: Why Hackers Request It and How It Works. Order Reprints | Today’s Paper | Subscribe

We’re interested in your feedback on this page. Tell us what you think.

What Is Bitcoin? All About the Mysterious Digital Currency – The Fresh York Times

What Is Bitcoin? All About the Mysterious Digital Currency

Here is a look at the basics behind the electronic currency, which has come under latest scrutiny after hackers behind a global ransomware attack demanded payment in Bitcoin.

What is Bitcoin?

Bitcoin is a digital token that can be sent electronically from one user to another, anywhere in the world.

Bitcoin is also the name of the payment network on which the Bitcoin digital tokens stir. Some people differentiate inbetween Bitcoin capitalized, as the token, and bitcoin lowercase, as the network. Unlike traditional payment networks like Visa or American Express, no single company or person runs the Bitcoin network. Instead, it is a decentralized network of computers around the world that keep track of all Bitcoin transactions, similar to the decentralized network of servers that makes the internet work.

Because there is no central authority running Bitcoin, no one has the authority to force fresh users to expose their identities. The network was designed this way to create a currency and a financial network outside the control of any government or single company.

The computers that join the network and track Bitcoin transactions are motivated to do so by the fresh coins that are released to the network every ten minutes and are given to one of the computers helping to track the transactions and maintain the network.

Why are hackers using Bitcoin?

The digital currency Bitcoin has emerged as a beloved contraption for hackers requiring a ransom for a elementary reason: You can embark accepting Bitcoin anywhere in the world without having to expose your identity.

For criminals, this makes Bitcoin much more attractive than systems like Western Union, which generally require customers to provide identification before opening an account and receiving transferred money.

How do you buy Bitcoin?

There are companies in most countries that will sell you Bitcoin in exchange for the local currency. In the United States, a company called Coinbase will link to your bank account or credit card and then sell you the coins for American dollars. Opening an account with Coinbase is similar to opening a traditional bank or stock brokerage account, with lots of verification of your identity needed.

For people who do not want to expose their identities, there are services like LocalBitcoins that will connect local people who want to buy and sell Bitcoin for cash, generally without any verification of identity required.

To embark accepting Bitcoin is even lighter. One needs only to create a Bitcoin address, which can be done anonymously by anyone with internet access.

The price of Bitcoin fluctuates permanently and is determined by open-market bidding on Bitcoin exchanges, similar to the way that stock and gold prices are determined by bidding on exchanges.

Newsletter Sign Up

Thank you for subscribing.

An error has occurred. Please attempt again later.

You are already subscribed to this email.

  • See Sample
  • Manage Email Preferences
  • Not you?
  • Privacy Policy
  • Opt out or contact us anytime

Can the authorities track criminals using Bitcoin?

All Bitcoin transactions are recorded on the network’s public ledger, known as the blockchain. Law enforcement or financial authorities can sometimes use the blockchain to track transactions among criminals. But as long as the criminals do not associate a real-world identity with their Bitcoin address, they are generally safe. Complicating matters further, there are increasingly sophisticated Bitcoin laundering services, known as tumblers, which mix large quantities of transactions together in order to make it firmer for the authorities to track the transactions.

Where it can get more difficult for hackers is when they want to convert the Bitcoin they have received into a traditional national currency. Most companies that convert Bitcoin to dollars in the United States require that their customers provide identification. If a criminal registered with a company like that, it would be relatively effortless for the police to track them down.

But there are many Bitcoin exchanges outside the United States that do not require customers to register with a real-world identity. LocalBitcoins also makes it effortless to find someone in any city around the world who will meet you in person and pay cash for Bitcoin without requiring any identification — a sort of Craigslist for Bitcoin exchanges. It is also getting lighter to buy goods online using Bitcoin, without ever converting the digital currency into dollars or euros.

What’s happening with the price of Bitcoin?

The price of Bitcoin has been rising, and recently hit a high above $Two,000. Like gold, the price of Bitcoin has always been driven by the scarcity of the digital tokens. When Bitcoin was created in 2009, it was determined that only twenty one million coins would ever be created.

Technology investors have purchased coins and shoved up the price out of a belief that the tokens and the system will be a sort of global digital currency and financial network for the future.

While real-world transactions have been slow to take off, Bitcoin has continued to be popular for black market uses like ransomware and online drug markets like the Silk Road and its successors.

The corporate world has also taken interest in the technology that enables Bitcoin, especially its decentralized financial network and the blockchain, the global ledger where all Bitcoin transactions are recorded. Many banks are making big bets that real-world financial transactions will one day be run on networks similar to Bitcoin, which can operate more quickly, efficiently and securely than traditional financial networks.

There are now many competitors to Bitcoin, like Ethereum, and their value has also been shoved up by growing interest in the Bitcoin technology. But Bitcoin has remained the largest so-called cryptocurrency and is generally the one that people use to buy and sell other cryptocurrencies.

What are the currency’s origins?

Bitcoin was introduced in two thousand eight by a shadowy creator going by the name of Satoshi Nakamoto, who only communicated by email and social messaging. While several people have been identified as likely candidates to be Satoshi, as the creator is known in the world of Bitcoin, not one has been confirmed. So the search for Satoshi has gone on.

Satoshi created the original rules of the Bitcoin network and then released the software to the world in 2009. Whether it is he, she or they, Satoshi largely disappeared from view two years later. Anyone can download and use the software, and Satoshi now has no more control over the network than anyone else using the software.

A version of this article emerges in print on May 16, 2017, on Page A8 of the Fresh York edition with the headline: Bitcoin Basics: Why Hackers Request It and How It Works. Order Reprints | Today’s Paper | Subscribe

We’re interested in your feedback on this page. Tell us what you think.

What Is Bitcoin? All About the Mysterious Digital Currency – The Fresh York Times

What Is Bitcoin? All About the Mysterious Digital Currency

Here is a look at the basics behind the electronic currency, which has come under latest scrutiny after hackers behind a global ransomware attack demanded payment in Bitcoin.

What is Bitcoin?

Bitcoin is a digital token that can be sent electronically from one user to another, anywhere in the world.

Bitcoin is also the name of the payment network on which the Bitcoin digital tokens budge. Some people differentiate inbetween Bitcoin capitalized, as the token, and bitcoin lowercase, as the network. Unlike traditional payment networks like Visa or American Express, no single company or person runs the Bitcoin network. Instead, it is a decentralized network of computers around the world that keep track of all Bitcoin transactions, similar to the decentralized network of servers that makes the internet work.

Because there is no central authority running Bitcoin, no one has the authority to force fresh users to expose their identities. The network was designed this way to create a currency and a financial network outside the control of any government or single company.

The computers that join the network and track Bitcoin transactions are motivated to do so by the fresh coins that are released to the network every ten minutes and are given to one of the computers helping to track the transactions and maintain the network.

Why are hackers using Bitcoin?

The digital currency Bitcoin has emerged as a dearest device for hackers requesting a ransom for a plain reason: You can embark accepting Bitcoin anywhere in the world without having to expose your identity.

For criminals, this makes Bitcoin much more attractive than systems like Western Union, which generally require customers to provide identification before opening an account and receiving transferred money.

How do you buy Bitcoin?

There are companies in most countries that will sell you Bitcoin in exchange for the local currency. In the United States, a company called Coinbase will link to your bank account or credit card and then sell you the coins for American dollars. Opening an account with Coinbase is similar to opening a traditional bank or stock brokerage account, with lots of verification of your identity needed.

For people who do not want to expose their identities, there are services like LocalBitcoins that will connect local people who want to buy and sell Bitcoin for cash, generally without any verification of identity required.

To commence accepting Bitcoin is even lighter. One needs only to create a Bitcoin address, which can be done anonymously by anyone with internet access.

The price of Bitcoin fluctuates permanently and is determined by open-market bidding on Bitcoin exchanges, similar to the way that stock and gold prices are determined by bidding on exchanges.

Newsletter Sign Up

Thank you for subscribing.

An error has occurred. Please attempt again later.

You are already subscribed to this email.

  • See Sample
  • Manage Email Preferences
  • Not you?
  • Privacy Policy
  • Opt out or contact us anytime

Can the authorities track criminals using Bitcoin?

All Bitcoin transactions are recorded on the network’s public ledger, known as the blockchain. Law enforcement or financial authorities can sometimes use the blockchain to track transactions among criminals. But as long as the criminals do not associate a real-world identity with their Bitcoin address, they are generally safe. Complicating matters further, there are increasingly sophisticated Bitcoin laundering services, known as tumblers, which mix large quantities of transactions together in order to make it tighter for the authorities to track the transactions.

Where it can get more difficult for hackers is when they want to convert the Bitcoin they have received into a traditional national currency. Most companies that convert Bitcoin to dollars in the United States require that their customers provide identification. If a criminal registered with a company like that, it would be relatively effortless for the police to track them down.

But there are many Bitcoin exchanges outside the United States that do not require customers to register with a real-world identity. LocalBitcoins also makes it effortless to find someone in any city around the world who will meet you in person and pay cash for Bitcoin without requiring any identification — a sort of Craigslist for Bitcoin exchanges. It is also getting lighter to buy goods online using Bitcoin, without ever converting the digital currency into dollars or euros.

What’s happening with the price of Bitcoin?

The price of Bitcoin has been rising, and recently hit a high above $Two,000. Like gold, the price of Bitcoin has always been driven by the scarcity of the digital tokens. When Bitcoin was created in 2009, it was determined that only twenty one million coins would ever be created.

Technology investors have purchased coins and shoved up the price out of a belief that the tokens and the system will be a sort of global digital currency and financial network for the future.

While real-world transactions have been slow to take off, Bitcoin has continued to be popular for black market uses like ransomware and online drug markets like the Silk Road and its successors.

The corporate world has also taken interest in the technology that enables Bitcoin, especially its decentralized financial network and the blockchain, the global ledger where all Bitcoin transactions are recorded. Many banks are making big bets that real-world financial transactions will one day be run on networks similar to Bitcoin, which can operate more quickly, efficiently and securely than traditional financial networks.

There are now many competitors to Bitcoin, like Ethereum, and their value has also been shoved up by growing interest in the Bitcoin technology. But Bitcoin has remained the largest so-called cryptocurrency and is generally the one that people use to buy and sell other cryptocurrencies.

What are the currency’s origins?

Bitcoin was introduced in two thousand eight by a shadowy creator going by the name of Satoshi Nakamoto, who only communicated by email and social messaging. While several people have been identified as likely candidates to be Satoshi, as the creator is known in the world of Bitcoin, not one has been confirmed. So the search for Satoshi has gone on.

Satoshi created the original rules of the Bitcoin network and then released the software to the world in 2009. Whether it is he, she or they, Satoshi largely disappeared from view two years later. Anyone can download and use the software, and Satoshi now has no more control over the network than anyone else using the software.

A version of this article shows up in print on May 16, 2017, on Page A8 of the Fresh York edition with the headline: Bitcoin Basics: Why Hackers Request It and How It Works. Order Reprints | Today’s Paper | Subscribe

We’re interested in your feedback on this page. Tell us what you think.

Related video:

Top three Exchanges Confirming Support for Bitcoin Cash Trading – The Merkle

Top three Exchanges Confirming Support for Bitcoin Cash Trading

With the Bitcoin Cash hard fork almost upon us, cryptocurrency exchanges find themselves in another awkward position. Even however we have gone through a similar fight when Bitcoin Unlimited was announced, it now shows up that numerous exchanges will support BCC trading. Regardless of how people feel about the Bitcoin Cash hard fork, the token is becoming real come August 1st.

Three. Livecoin

Albeit Livecoin is a smaller altcoin exchange, the company wants to display its support for Bitcoin Cash. In an official company post, Livecoin announced that they would support future Bitcoin forks. While the company mentioned there may be inbetween two and four Bitcoin forks in the future, just two versions of Bitcoin will be created based on the current information. We will see Bitcoin as we know it and additionally the Bitcoin Cash token, known as BCC.

Considering that the BCC token does not exist right now, the company will do whatever they can to credit users’ account balances with Bitcoin fork tokens in the future. This also means they will support BCC come August 1st, however it remains to be seen if users’ balances will be credited on that date. Trading of fresh forks will be enabled as well, albeit no official dates have been announced at this time. It remains to be seen what type of trading markets we can expect.

Two. OKEX

The OKCoin exchange team made an interesting announcement earlier today. The company will support the Bitcoin Cash hard fork (BCC). However, they will do so on the OKEX platform, rather than on the OKCoin exchange itself. Bitcoin Cash will introduce a radical hard fork to increase the overall Bitcoin block size, and it seems very likely that some miners will support this scaling proposal come August 1st. As long as there is support for the BCC token, exchanges can officially list it as a trading market.

OKEX plans on listing two different trading markets for future versions of Bitcoin. One will be the BCC market, which relates to Bitcoin Cash. The company will also open a BCS trading market, which pertains to the BIP91 version of Bitcoin. No one can be certain which of these chains will become the main Bitcoin. Both tokens will be traded against Bitcoin until August 1st, after which time balances will be converted in the form of one BCS + one BCC equaling one BTC. BCS will eventually be renamed to BTC, assuming that it is the longer chain.

1. ViaBTC

One exchange hopped the gun and already enabled BCC trading a few days ago. ViaBTC , best known for their Bitcoin mining pool, also run an exchange platform where Bitcoin Cash is actively traded right now. Originally, the company provided a BCC/CNY trading market, but they subsequently added a BCC/BTC market as well. When Bitcoin Cash was listed primarily, its price shortly hit US$900.

Right now, users can deposit Bitcoin on ViaBTC and have it split into BCC and BTC_FROZEN2. This means their BTC_FROZEN2 tokens will be converted back into BTC on August 1st. BCC tokens can be traded against BTC or CNY for now, albeit neither rate looks even remotely appealing. Having an exchange freeze one’s initial deposit to enable the trading of tokens which do not exist yet is always a big risk. It is expected that other exchanges will support BCC as well following the fork.

About The Author

Jdebunt

JP Buntinx is a FinTech and Bitcoin enthusiast living in Belgium. His passion for finance and technology made him one of the world’s leading freelance Bitcoin writers, and he aims to achieve the same level of respect in the FinTech sector.

Related video:

The six Most Significant Cryptocurrencies Other Than Bitcoin, Investopedia

The six Most Significant Cryptocurrencies Other Than Bitcoin

Bitcoin has not just been a trendsetter, ushering in a wave of cryptocurrencies built on decentralized peer-to-peer network, it’s become the de facto standard for cryptocurrencies​. The currencies inspired by Bitcoin are collectively called altcoins and have attempted to present themselves as modified or improved versions of Bitcoin. While some of these currencies are lighter to mine than Bitcoin is, there are tradeoffs, including greater risk brought on by lesser liquidity, acceptance and value retention. We look at six cryptocurrencies, picked from over seven hundred (in no specific order). (Related reading, see: How Do Bitcoin Investors Combat Price Volatility?)

1) Litecoin (LTC)

Litecoin, launched in the year 2011, was among the initial cryptocurrencies following bitcoin and was often referred to as ‘silver to Bitcoin’s gold.’ It was created by Charlie Lee, a MIT graduate and former Google engineer. Litecoin is based on an open source global payment network that is not managed by any central authority and uses “scrypt” as a proof of work, which can be decoded with the help of CPUs of consumer grade. Albeit Litecoin is like Bitcoin in many ways, it has a swifter block generation rate and hence offers a swifter transaction confirmation. Other than developers, there are a growing number of merchants who accept Litecoin.

Two) Ethereum (ETH)

Launched in 2015, Ethereum is a decentralized software platform that enables Wise Contracts and Distributed Applications (ĐApps) to be built and run without any downtime, fraud, control or interference from a third party. During 2014, Ethereum had launched a pre-sale for ether which had received an terrific response. The applications on Ethereum are run on its platform-specific cryptographic token, ether. Ether is like a vehicle for moving around on the Ethereum platform, and is sought by mostly developers looking to develop and run applications inwards Ethereum. According to Ethereum, it can be used to “codify, decentralize, secure and trade just about anything.” Following the attack on the DAO in 2016, Ethereum was split into Ethereum (ETH) and Ethereum Classic (ETC). Ethereum (ETH) has a market capitalization of $Four.46 billion, 2nd after Bitcoin among all cryptocurrencies. (Related reading: The First-Ever Ethereum IRA is a Game-Changer)

Three) Zcash (ZEC)

Zcash, a decentralized and open-source cryptocurrency launched in the latter part of 2016, looks promising. “If Bitcoin is like http for money, Zcash is https,” is how Zcash defines itself. Zcash offers privacy and selective transparency of transactions. Thus, like https, Zcash claims to provide extra security or privacy where all transactions are recorded and published on a blockchain, but details such as the sender, recipient, and amount remain private. Zcash offers its users the choice of ‘shielded’ transactions, which permit for content to be encrypted using advanced cryptographic technology or zero-knowledge proof construction called a zk-SNARK developed by its team. (Related reading, see: What Is Zcash?)

Four) Dash

Dash (originally known as Darkcoin) is a more secretive version of Bitcoin. Dash offers more anonymity as it works on a decentralized mastercode network that makes transactions almost untraceably. Launched in January 2014, Dash experienced an enlargening fan following in a brief span of time. This cryptocurrency was created and developed by Evan Duffield and can be mined using a CPU or GPU. In March 2015, ‘Darkcoin’ was rebranded to Dash, which stands for Digital Cash and operates under the ticker – DASH. The rebranding didn’t switch any of its technological features such as Darksend, InstantX. (Related reading, see: Top Alternative Investments for Retirement)

Five) Ripple (XRP)

Ripple is a real-time global settlement network that offers instant, certain and low-cost international payments. Ripple “enables banks to lodge cross-border payments in real time, with end-to-end transparency, and at lower costs.” Released in 2012, Ripple currency has a market capitalization of $1.26 billion. Ripple’s consensus ledger — its method of conformation — doesn’t need mining, a feature that deviates from bitcoin and altcoins. Since Ripple’s structure doesn’t require mining, it reduces the usage of computing power, and minimizes network latency. Ripple believes that ‘distributing value is a powerful way to incentivize certain behaviors’ and thus presently plans to distribute XRP primarily “through business development deals, incentives to liquidity providers who suggest tighter spreads for payments, and selling XRP to institutional buyers interested in investing in XRP.”

6) Monero (XMR)

Monero is a secure, private and untraceable currency. This open source cryptocurrency was launched in April two thousand fourteen and soon spiked superb interest among the cryptography community and enthusiasts. The development of this cryptocurrency is entirely donation-based and community-driven. Monero has been launched with a strong concentrate on decentralization and scalability, and enables finish privacy by using a special mechanism called ‘ring signatures.’ With this mechanism, there shows up a group of cryptographic signatures including at least one real participant – but since they all show up valid, the real one cannot be isolated.

The Bottom Line

Bitcoin resumes to lead the pack of cryptocurrencies, in terms of market capitalization, user base and popularity. Nevertheless, virtual currencies such as Ethereum and Ripple which are being used more for enterprise solutions are becoming popular, while some altcoins are being endorsed for superior or advanced features vis-à-vis Bitcoins. Going by the current trend, cryptocurrencies are here to stay but how many of them will emerge leaders amid the growing competition within the space will only be exposed with time.

The six Most Significant Cryptocurrencies Other Than Bitcoin, Investopedia

The six Most Significant Cryptocurrencies Other Than Bitcoin

Bitcoin has not just been a trendsetter, ushering in a wave of cryptocurrencies built on decentralized peer-to-peer network, it’s become the de facto standard for cryptocurrencies​. The currencies inspired by Bitcoin are collectively called altcoins and have attempted to present themselves as modified or improved versions of Bitcoin. While some of these currencies are lighter to mine than Bitcoin is, there are tradeoffs, including greater risk brought on by lesser liquidity, acceptance and value retention. We look at six cryptocurrencies, picked from over seven hundred (in no specific order). (Related reading, see: How Do Bitcoin Investors Combat Price Volatility?)

1) Litecoin (LTC)

Litecoin, launched in the year 2011, was among the initial cryptocurrencies following bitcoin and was often referred to as ‘silver to Bitcoin’s gold.’ It was created by Charlie Lee, a MIT graduate and former Google engineer. Litecoin is based on an open source global payment network that is not managed by any central authority and uses “scrypt” as a proof of work, which can be decoded with the help of CPUs of consumer grade. Albeit Litecoin is like Bitcoin in many ways, it has a swifter block generation rate and hence offers a swifter transaction confirmation. Other than developers, there are a growing number of merchants who accept Litecoin.

Two) Ethereum (ETH)

Launched in 2015, Ethereum is a decentralized software platform that enables Clever Contracts and Distributed Applications (ĐApps) to be built and run without any downtime, fraud, control or interference from a third party. During 2014, Ethereum had launched a pre-sale for ether which had received an staggering response. The applications on Ethereum are run on its platform-specific cryptographic token, ether. Ether is like a vehicle for moving around on the Ethereum platform, and is sought by mostly developers looking to develop and run applications inwards Ethereum. According to Ethereum, it can be used to “codify, decentralize, secure and trade just about anything.” Following the attack on the DAO in 2016, Ethereum was split into Ethereum (ETH) and Ethereum Classic (ETC). Ethereum (ETH) has a market capitalization of $Four.46 billion, 2nd after Bitcoin among all cryptocurrencies. (Related reading: The First-Ever Ethereum IRA is a Game-Changer)

Three) Zcash (ZEC)

Zcash, a decentralized and open-source cryptocurrency launched in the latter part of 2016, looks promising. “If Bitcoin is like http for money, Zcash is https,” is how Zcash defines itself. Zcash offers privacy and selective transparency of transactions. Thus, like https, Zcash claims to provide extra security or privacy where all transactions are recorded and published on a blockchain, but details such as the sender, recipient, and amount remain private. Zcash offers its users the choice of ‘shielded’ transactions, which permit for content to be encrypted using advanced cryptographic mechanism or zero-knowledge proof construction called a zk-SNARK developed by its team. (Related reading, see: What Is Zcash?)

Four) Dash

Dash (originally known as Darkcoin) is a more secretive version of Bitcoin. Dash offers more anonymity as it works on a decentralized mastercode network that makes transactions almost untraceably. Launched in January 2014, Dash experienced an enhancing fan following in a brief span of time. This cryptocurrency was created and developed by Evan Duffield and can be mined using a CPU or GPU. In March 2015, ‘Darkcoin’ was rebranded to Dash, which stands for Digital Cash and operates under the ticker – DASH. The rebranding didn’t switch any of its technological features such as Darksend, InstantX. (Related reading, see: Top Alternative Investments for Retirement)

Five) Ripple (XRP)

Ripple is a real-time global settlement network that offers instant, certain and low-cost international payments. Ripple “enables banks to lodge cross-border payments in real time, with end-to-end transparency, and at lower costs.” Released in 2012, Ripple currency has a market capitalization of $1.26 billion. Ripple’s consensus ledger — its method of conformation — doesn’t need mining, a feature that deviates from bitcoin and altcoins. Since Ripple’s structure doesn’t require mining, it reduces the usage of computing power, and minimizes network latency. Ripple believes that ‘distributing value is a powerful way to incentivize certain behaviors’ and thus presently plans to distribute XRP primarily “through business development deals, incentives to liquidity providers who suggest tighter spreads for payments, and selling XRP to institutional buyers interested in investing in XRP.”

6) Monero (XMR)

Monero is a secure, private and untraceable currency. This open source cryptocurrency was launched in April two thousand fourteen and soon spiked good interest among the cryptography community and enthusiasts. The development of this cryptocurrency is fully donation-based and community-driven. Monero has been launched with a strong concentrate on decentralization and scalability, and enables accomplish privacy by using a special technology called ‘ring signatures.’ With this mechanism, there emerges a group of cryptographic signatures including at least one real participant – but since they all emerge valid, the real one cannot be isolated.

The Bottom Line

Bitcoin proceeds to lead the pack of cryptocurrencies, in terms of market capitalization, user base and popularity. Nevertheless, virtual currencies such as Ethereum and Ripple which are being used more for enterprise solutions are becoming popular, while some altcoins are being endorsed for superior or advanced features vis-à-vis Bitcoins. Going by the current trend, cryptocurrencies are here to stay but how many of them will emerge leaders amid the growing competition within the space will only be exposed with time.

The six Most Significant Cryptocurrencies Other Than Bitcoin, Investopedia

The six Most Significant Cryptocurrencies Other Than Bitcoin

Bitcoin has not just been a trendsetter, ushering in a wave of cryptocurrencies built on decentralized peer-to-peer network, it’s become the de facto standard for cryptocurrencies​. The currencies inspired by Bitcoin are collectively called altcoins and have attempted to present themselves as modified or improved versions of Bitcoin. While some of these currencies are lighter to mine than Bitcoin is, there are tradeoffs, including greater risk brought on by lesser liquidity, acceptance and value retention. We look at six cryptocurrencies, picked from over seven hundred (in no specific order). (Related reading, see: How Do Bitcoin Investors Combat Price Volatility?)

1) Litecoin (LTC)

Litecoin, launched in the year 2011, was among the initial cryptocurrencies following bitcoin and was often referred to as ‘silver to Bitcoin’s gold.’ It was created by Charlie Lee, a MIT graduate and former Google engineer. Litecoin is based on an open source global payment network that is not managed by any central authority and uses “scrypt” as a proof of work, which can be decoded with the help of CPUs of consumer grade. Albeit Litecoin is like Bitcoin in many ways, it has a swifter block generation rate and hence offers a swifter transaction confirmation. Other than developers, there are a growing number of merchants who accept Litecoin.

Two) Ethereum (ETH)

Launched in 2015, Ethereum is a decentralized software platform that enables Brainy Contracts and Distributed Applications (ĐApps) to be built and run without any downtime, fraud, control or interference from a third party. During 2014, Ethereum had launched a pre-sale for ether which had received an tremendous response. The applications on Ethereum are run on its platform-specific cryptographic token, ether. Ether is like a vehicle for moving around on the Ethereum platform, and is sought by mostly developers looking to develop and run applications inwards Ethereum. According to Ethereum, it can be used to “codify, decentralize, secure and trade just about anything.” Following the attack on the DAO in 2016, Ethereum was split into Ethereum (ETH) and Ethereum Classic (ETC). Ethereum (ETH) has a market capitalization of $Four.46 billion, 2nd after Bitcoin among all cryptocurrencies. (Related reading: The First-Ever Ethereum IRA is a Game-Changer)

Three) Zcash (ZEC)

Zcash, a decentralized and open-source cryptocurrency launched in the latter part of 2016, looks promising. “If Bitcoin is like http for money, Zcash is https,” is how Zcash defines itself. Zcash offers privacy and selective transparency of transactions. Thus, like https, Zcash claims to provide extra security or privacy where all transactions are recorded and published on a blockchain, but details such as the sender, recipient, and amount remain private. Zcash offers its users the choice of ‘shielded’ transactions, which permit for content to be encrypted using advanced cryptographic mechanism or zero-knowledge proof construction called a zk-SNARK developed by its team. (Related reading, see: What Is Zcash?)

Four) Dash

Dash (originally known as Darkcoin) is a more secretive version of Bitcoin. Dash offers more anonymity as it works on a decentralized mastercode network that makes transactions almost untraceably. Launched in January 2014, Dash experienced an enlargening fan following in a brief span of time. This cryptocurrency was created and developed by Evan Duffield and can be mined using a CPU or GPU. In March 2015, ‘Darkcoin’ was rebranded to Dash, which stands for Digital Cash and operates under the ticker – DASH. The rebranding didn’t switch any of its technological features such as Darksend, InstantX. (Related reading, see: Top Alternative Investments for Retirement)

Five) Ripple (XRP)

Ripple is a real-time global settlement network that offers instant, certain and low-cost international payments. Ripple “enables banks to lodge cross-border payments in real time, with end-to-end transparency, and at lower costs.” Released in 2012, Ripple currency has a market capitalization of $1.26 billion. Ripple’s consensus ledger — its method of conformation — doesn’t need mining, a feature that deviates from bitcoin and altcoins. Since Ripple’s structure doesn’t require mining, it reduces the usage of computing power, and minimizes network latency. Ripple believes that ‘distributing value is a powerful way to incentivize certain behaviors’ and thus presently plans to distribute XRP primarily “through business development deals, incentives to liquidity providers who suggest tighter spreads for payments, and selling XRP to institutional buyers interested in investing in XRP.”

6) Monero (XMR)

Monero is a secure, private and untraceable currency. This open source cryptocurrency was launched in April two thousand fourteen and soon spiked good interest among the cryptography community and enthusiasts. The development of this cryptocurrency is downright donation-based and community-driven. Monero has been launched with a strong concentrate on decentralization and scalability, and enables accomplish privacy by using a special technology called ‘ring signatures.’ With this mechanism, there shows up a group of cryptographic signatures including at least one real participant – but since they all show up valid, the real one cannot be isolated.

The Bottom Line

Bitcoin resumes to lead the pack of cryptocurrencies, in terms of market capitalization, user base and popularity. Nevertheless, virtual currencies such as Ethereum and Ripple which are being used more for enterprise solutions are becoming popular, while some altcoins are being endorsed for superior or advanced features vis-à-vis Bitcoins. Going by the current trend, cryptocurrencies are here to stay but how many of them will emerge leaders amid the growing competition within the space will only be exposed with time.

The six Most Significant Cryptocurrencies Other Than Bitcoin, Investopedia

The six Most Significant Cryptocurrencies Other Than Bitcoin

Bitcoin has not just been a trendsetter, ushering in a wave of cryptocurrencies built on decentralized peer-to-peer network, it’s become the de facto standard for cryptocurrencies​. The currencies inspired by Bitcoin are collectively called altcoins and have attempted to present themselves as modified or improved versions of Bitcoin. While some of these currencies are lighter to mine than Bitcoin is, there are tradeoffs, including greater risk brought on by lesser liquidity, acceptance and value retention. We look at six cryptocurrencies, picked from over seven hundred (in no specific order). (Related reading, see: How Do Bitcoin Investors Combat Price Volatility?)

1) Litecoin (LTC)

Litecoin, launched in the year 2011, was among the initial cryptocurrencies following bitcoin and was often referred to as ‘silver to Bitcoin’s gold.’ It was created by Charlie Lee, a MIT graduate and former Google engineer. Litecoin is based on an open source global payment network that is not managed by any central authority and uses “scrypt” as a proof of work, which can be decoded with the help of CPUs of consumer grade. Albeit Litecoin is like Bitcoin in many ways, it has a swifter block generation rate and hence offers a quicker transaction confirmation. Other than developers, there are a growing number of merchants who accept Litecoin.

Two) Ethereum (ETH)

Launched in 2015, Ethereum is a decentralized software platform that enables Clever Contracts and Distributed Applications (ĐApps) to be built and run without any downtime, fraud, control or interference from a third party. During 2014, Ethereum had launched a pre-sale for ether which had received an terrific response. The applications on Ethereum are run on its platform-specific cryptographic token, ether. Ether is like a vehicle for moving around on the Ethereum platform, and is sought by mostly developers looking to develop and run applications inwards Ethereum. According to Ethereum, it can be used to “codify, decentralize, secure and trade just about anything.” Following the attack on the DAO in 2016, Ethereum was split into Ethereum (ETH) and Ethereum Classic (ETC). Ethereum (ETH) has a market capitalization of $Four.46 billion, 2nd after Bitcoin among all cryptocurrencies. (Related reading: The First-Ever Ethereum IRA is a Game-Changer)

Trio) Zcash (ZEC)

Zcash, a decentralized and open-source cryptocurrency launched in the latter part of 2016, looks promising. “If Bitcoin is like http for money, Zcash is https,” is how Zcash defines itself. Zcash offers privacy and selective transparency of transactions. Thus, like https, Zcash claims to provide extra security or privacy where all transactions are recorded and published on a blockchain, but details such as the sender, recipient, and amount remain private. Zcash offers its users the choice of ‘shielded’ transactions, which permit for content to be encrypted using advanced cryptographic technology or zero-knowledge proof construction called a zk-SNARK developed by its team. (Related reading, see: What Is Zcash?)

Four) Dash

Dash (originally known as Darkcoin) is a more secretive version of Bitcoin. Dash offers more anonymity as it works on a decentralized mastercode network that makes transactions almost untraceably. Launched in January 2014, Dash experienced an enhancing fan following in a brief span of time. This cryptocurrency was created and developed by Evan Duffield and can be mined using a CPU or GPU. In March 2015, ‘Darkcoin’ was rebranded to Dash, which stands for Digital Cash and operates under the ticker – DASH. The rebranding didn’t switch any of its technological features such as Darksend, InstantX. (Related reading, see: Top Alternative Investments for Retirement)

Five) Ripple (XRP)

Ripple is a real-time global settlement network that offers instant, certain and low-cost international payments. Ripple “enables banks to lodge cross-border payments in real time, with end-to-end transparency, and at lower costs.” Released in 2012, Ripple currency has a market capitalization of $1.26 billion. Ripple’s consensus ledger — its method of conformation — doesn’t need mining, a feature that deviates from bitcoin and altcoins. Since Ripple’s structure doesn’t require mining, it reduces the usage of computing power, and minimizes network latency. Ripple believes that ‘distributing value is a powerful way to incentivize certain behaviors’ and thus presently plans to distribute XRP primarily “through business development deals, incentives to liquidity providers who suggest tighter spreads for payments, and selling XRP to institutional buyers interested in investing in XRP.”

6) Monero (XMR)

Monero is a secure, private and untraceable currency. This open source cryptocurrency was launched in April two thousand fourteen and soon spiked excellent interest among the cryptography community and enthusiasts. The development of this cryptocurrency is downright donation-based and community-driven. Monero has been launched with a strong concentrate on decentralization and scalability, and enables accomplish privacy by using a special technology called ‘ring signatures.’ With this technology, there emerges a group of cryptographic signatures including at least one real participant – but since they all emerge valid, the real one cannot be isolated.

The Bottom Line

Bitcoin proceeds to lead the pack of cryptocurrencies, in terms of market capitalization, user base and popularity. Nevertheless, virtual currencies such as Ethereum and Ripple which are being used more for enterprise solutions are becoming popular, while some altcoins are being endorsed for superior or advanced features vis-à-vis Bitcoins. Going by the current trend, cryptocurrencies are here to stay but how many of them will emerge leaders amid the growing competition within the space will only be exposed with time.

The six Most Significant Cryptocurrencies Other Than Bitcoin, Investopedia

The six Most Significant Cryptocurrencies Other Than Bitcoin

Bitcoin has not just been a trendsetter, ushering in a wave of cryptocurrencies built on decentralized peer-to-peer network, it’s become the de facto standard for cryptocurrencies​. The currencies inspired by Bitcoin are collectively called altcoins and have attempted to present themselves as modified or improved versions of Bitcoin. While some of these currencies are lighter to mine than Bitcoin is, there are tradeoffs, including greater risk brought on by lesser liquidity, acceptance and value retention. We look at six cryptocurrencies, picked from over seven hundred (in no specific order). (Related reading, see: How Do Bitcoin Investors Combat Price Volatility?)

1) Litecoin (LTC)

Litecoin, launched in the year 2011, was among the initial cryptocurrencies following bitcoin and was often referred to as ‘silver to Bitcoin’s gold.’ It was created by Charlie Lee, a MIT graduate and former Google engineer. Litecoin is based on an open source global payment network that is not managed by any central authority and uses “scrypt” as a proof of work, which can be decoded with the help of CPUs of consumer grade. Albeit Litecoin is like Bitcoin in many ways, it has a swifter block generation rate and hence offers a quicker transaction confirmation. Other than developers, there are a growing number of merchants who accept Litecoin.

Two) Ethereum (ETH)

Launched in 2015, Ethereum is a decentralized software platform that enables Brainy Contracts and Distributed Applications (ĐApps) to be built and run without any downtime, fraud, control or interference from a third party. During 2014, Ethereum had launched a pre-sale for ether which had received an staggering response. The applications on Ethereum are run on its platform-specific cryptographic token, ether. Ether is like a vehicle for moving around on the Ethereum platform, and is sought by mostly developers looking to develop and run applications inwards Ethereum. According to Ethereum, it can be used to “codify, decentralize, secure and trade just about anything.” Following the attack on the DAO in 2016, Ethereum was split into Ethereum (ETH) and Ethereum Classic (ETC). Ethereum (ETH) has a market capitalization of $Four.46 billion, 2nd after Bitcoin among all cryptocurrencies. (Related reading: The First-Ever Ethereum IRA is a Game-Changer)

Trio) Zcash (ZEC)

Zcash, a decentralized and open-source cryptocurrency launched in the latter part of 2016, looks promising. “If Bitcoin is like http for money, Zcash is https,” is how Zcash defines itself. Zcash offers privacy and selective transparency of transactions. Thus, like https, Zcash claims to provide extra security or privacy where all transactions are recorded and published on a blockchain, but details such as the sender, recipient, and amount remain private. Zcash offers its users the choice of ‘shielded’ transactions, which permit for content to be encrypted using advanced cryptographic mechanism or zero-knowledge proof construction called a zk-SNARK developed by its team. (Related reading, see: What Is Zcash?)

Four) Dash

Dash (originally known as Darkcoin) is a more secretive version of Bitcoin. Dash offers more anonymity as it works on a decentralized mastercode network that makes transactions almost untraceably. Launched in January 2014, Dash experienced an enhancing fan following in a brief span of time. This cryptocurrency was created and developed by Evan Duffield and can be mined using a CPU or GPU. In March 2015, ‘Darkcoin’ was rebranded to Dash, which stands for Digital Cash and operates under the ticker – DASH. The rebranding didn’t switch any of its technological features such as Darksend, InstantX. (Related reading, see: Top Alternative Investments for Retirement)

Five) Ripple (XRP)

Ripple is a real-time global settlement network that offers instant, certain and low-cost international payments. Ripple “enables banks to lodge cross-border payments in real time, with end-to-end transparency, and at lower costs.” Released in 2012, Ripple currency has a market capitalization of $1.26 billion. Ripple’s consensus ledger — its method of conformation — doesn’t need mining, a feature that deviates from bitcoin and altcoins. Since Ripple’s structure doesn’t require mining, it reduces the usage of computing power, and minimizes network latency. Ripple believes that ‘distributing value is a powerful way to incentivize certain behaviors’ and thus presently plans to distribute XRP primarily “through business development deals, incentives to liquidity providers who suggest tighter spreads for payments, and selling XRP to institutional buyers interested in investing in XRP.”

6) Monero (XMR)

Monero is a secure, private and untraceable currency. This open source cryptocurrency was launched in April two thousand fourteen and soon spiked good interest among the cryptography community and enthusiasts. The development of this cryptocurrency is totally donation-based and community-driven. Monero has been launched with a strong concentrate on decentralization and scalability, and enables finish privacy by using a special mechanism called ‘ring signatures.’ With this technology, there shows up a group of cryptographic signatures including at least one real participant – but since they all emerge valid, the real one cannot be isolated.

The Bottom Line

Bitcoin resumes to lead the pack of cryptocurrencies, in terms of market capitalization, user base and popularity. Nevertheless, virtual currencies such as Ethereum and Ripple which are being used more for enterprise solutions are becoming popular, while some altcoins are being endorsed for superior or advanced features vis-à-vis Bitcoins. Going by the current trend, cryptocurrencies are here to stay but how many of them will emerge leaders amid the growing competition within the space will only be exposed with time.

The six Most Significant Cryptocurrencies Other Than Bitcoin, Investopedia

The six Most Significant Cryptocurrencies Other Than Bitcoin

Bitcoin has not just been a trendsetter, ushering in a wave of cryptocurrencies built on decentralized peer-to-peer network, it’s become the de facto standard for cryptocurrencies​. The currencies inspired by Bitcoin are collectively called altcoins and have attempted to present themselves as modified or improved versions of Bitcoin. While some of these currencies are lighter to mine than Bitcoin is, there are tradeoffs, including greater risk brought on by lesser liquidity, acceptance and value retention. We look at six cryptocurrencies, picked from over seven hundred (in no specific order). (Related reading, see: How Do Bitcoin Investors Combat Price Volatility?)

1) Litecoin (LTC)

Litecoin, launched in the year 2011, was among the initial cryptocurrencies following bitcoin and was often referred to as ‘silver to Bitcoin’s gold.’ It was created by Charlie Lee, a MIT graduate and former Google engineer. Litecoin is based on an open source global payment network that is not managed by any central authority and uses “scrypt” as a proof of work, which can be decoded with the help of CPUs of consumer grade. Albeit Litecoin is like Bitcoin in many ways, it has a swifter block generation rate and hence offers a quicker transaction confirmation. Other than developers, there are a growing number of merchants who accept Litecoin.

Two) Ethereum (ETH)

Launched in 2015, Ethereum is a decentralized software platform that enables Wise Contracts and Distributed Applications (ĐApps) to be built and run without any downtime, fraud, control or interference from a third party. During 2014, Ethereum had launched a pre-sale for ether which had received an staggering response. The applications on Ethereum are run on its platform-specific cryptographic token, ether. Ether is like a vehicle for moving around on the Ethereum platform, and is sought by mostly developers looking to develop and run applications inwards Ethereum. According to Ethereum, it can be used to “codify, decentralize, secure and trade just about anything.” Following the attack on the DAO in 2016, Ethereum was split into Ethereum (ETH) and Ethereum Classic (ETC). Ethereum (ETH) has a market capitalization of $Four.46 billion, 2nd after Bitcoin among all cryptocurrencies. (Related reading: The First-Ever Ethereum IRA is a Game-Changer)

Three) Zcash (ZEC)

Zcash, a decentralized and open-source cryptocurrency launched in the latter part of 2016, looks promising. “If Bitcoin is like http for money, Zcash is https,” is how Zcash defines itself. Zcash offers privacy and selective transparency of transactions. Thus, like https, Zcash claims to provide extra security or privacy where all transactions are recorded and published on a blockchain, but details such as the sender, recipient, and amount remain private. Zcash offers its users the choice of ‘shielded’ transactions, which permit for content to be encrypted using advanced cryptographic mechanism or zero-knowledge proof construction called a zk-SNARK developed by its team. (Related reading, see: What Is Zcash?)

Four) Dash

Dash (originally known as Darkcoin) is a more secretive version of Bitcoin. Dash offers more anonymity as it works on a decentralized mastercode network that makes transactions almost untraceably. Launched in January 2014, Dash experienced an enlargening fan following in a brief span of time. This cryptocurrency was created and developed by Evan Duffield and can be mined using a CPU or GPU. In March 2015, ‘Darkcoin’ was rebranded to Dash, which stands for Digital Cash and operates under the ticker – DASH. The rebranding didn’t switch any of its technological features such as Darksend, InstantX. (Related reading, see: Top Alternative Investments for Retirement)

Five) Ripple (XRP)

Ripple is a real-time global settlement network that offers instant, certain and low-cost international payments. Ripple “enables banks to lodge cross-border payments in real time, with end-to-end transparency, and at lower costs.” Released in 2012, Ripple currency has a market capitalization of $1.26 billion. Ripple’s consensus ledger — its method of conformation — doesn’t need mining, a feature that deviates from bitcoin and altcoins. Since Ripple’s structure doesn’t require mining, it reduces the usage of computing power, and minimizes network latency. Ripple believes that ‘distributing value is a powerful way to incentivize certain behaviors’ and thus presently plans to distribute XRP primarily “through business development deals, incentives to liquidity providers who suggest tighter spreads for payments, and selling XRP to institutional buyers interested in investing in XRP.”

6) Monero (XMR)

Monero is a secure, private and untraceable currency. This open source cryptocurrency was launched in April two thousand fourteen and soon spiked excellent interest among the cryptography community and enthusiasts. The development of this cryptocurrency is downright donation-based and community-driven. Monero has been launched with a strong concentrate on decentralization and scalability, and enables finish privacy by using a special mechanism called ‘ring signatures.’ With this mechanism, there emerges a group of cryptographic signatures including at least one real participant – but since they all emerge valid, the real one cannot be isolated.

The Bottom Line

Bitcoin resumes to lead the pack of cryptocurrencies, in terms of market capitalization, user base and popularity. Nevertheless, virtual currencies such as Ethereum and Ripple which are being used more for enterprise solutions are becoming popular, while some altcoins are being endorsed for superior or advanced features vis-à-vis Bitcoins. Going by the current trend, cryptocurrencies are here to stay but how many of them will emerge leaders amid the growing competition within the space will only be exposed with time.

The six Most Significant Cryptocurrencies Other Than Bitcoin, Investopedia

The six Most Significant Cryptocurrencies Other Than Bitcoin

Bitcoin has not just been a trendsetter, ushering in a wave of cryptocurrencies built on decentralized peer-to-peer network, it’s become the de facto standard for cryptocurrencies​. The currencies inspired by Bitcoin are collectively called altcoins and have attempted to present themselves as modified or improved versions of Bitcoin. While some of these currencies are lighter to mine than Bitcoin is, there are tradeoffs, including greater risk brought on by lesser liquidity, acceptance and value retention. We look at six cryptocurrencies, picked from over seven hundred (in no specific order). (Related reading, see: How Do Bitcoin Investors Combat Price Volatility?)

1) Litecoin (LTC)

Litecoin, launched in the year 2011, was among the initial cryptocurrencies following bitcoin and was often referred to as ‘silver to Bitcoin’s gold.’ It was created by Charlie Lee, a MIT graduate and former Google engineer. Litecoin is based on an open source global payment network that is not managed by any central authority and uses “scrypt” as a proof of work, which can be decoded with the help of CPUs of consumer grade. Albeit Litecoin is like Bitcoin in many ways, it has a quicker block generation rate and hence offers a quicker transaction confirmation. Other than developers, there are a growing number of merchants who accept Litecoin.

Two) Ethereum (ETH)

Launched in 2015, Ethereum is a decentralized software platform that enables Clever Contracts and Distributed Applications (ĐApps) to be built and run without any downtime, fraud, control or interference from a third party. During 2014, Ethereum had launched a pre-sale for ether which had received an tremendous response. The applications on Ethereum are run on its platform-specific cryptographic token, ether. Ether is like a vehicle for moving around on the Ethereum platform, and is sought by mostly developers looking to develop and run applications inwards Ethereum. According to Ethereum, it can be used to “codify, decentralize, secure and trade just about anything.” Following the attack on the DAO in 2016, Ethereum was split into Ethereum (ETH) and Ethereum Classic (ETC). Ethereum (ETH) has a market capitalization of $Four.46 billion, 2nd after Bitcoin among all cryptocurrencies. (Related reading: The First-Ever Ethereum IRA is a Game-Changer)

Three) Zcash (ZEC)

Zcash, a decentralized and open-source cryptocurrency launched in the latter part of 2016, looks promising. “If Bitcoin is like http for money, Zcash is https,” is how Zcash defines itself. Zcash offers privacy and selective transparency of transactions. Thus, like https, Zcash claims to provide extra security or privacy where all transactions are recorded and published on a blockchain, but details such as the sender, recipient, and amount remain private. Zcash offers its users the choice of ‘shielded’ transactions, which permit for content to be encrypted using advanced cryptographic technology or zero-knowledge proof construction called a zk-SNARK developed by its team. (Related reading, see: What Is Zcash?)

Four) Dash

Dash (originally known as Darkcoin) is a more secretive version of Bitcoin. Dash offers more anonymity as it works on a decentralized mastercode network that makes transactions almost untraceably. Launched in January 2014, Dash experienced an enlargening fan following in a brief span of time. This cryptocurrency was created and developed by Evan Duffield and can be mined using a CPU or GPU. In March 2015, ‘Darkcoin’ was rebranded to Dash, which stands for Digital Cash and operates under the ticker – DASH. The rebranding didn’t switch any of its technological features such as Darksend, InstantX. (Related reading, see: Top Alternative Investments for Retirement)

Five) Ripple (XRP)

Ripple is a real-time global settlement network that offers instant, certain and low-cost international payments. Ripple “enables banks to lodge cross-border payments in real time, with end-to-end transparency, and at lower costs.” Released in 2012, Ripple currency has a market capitalization of $1.26 billion. Ripple’s consensus ledger — its method of conformation — doesn’t need mining, a feature that deviates from bitcoin and altcoins. Since Ripple’s structure doesn’t require mining, it reduces the usage of computing power, and minimizes network latency. Ripple believes that ‘distributing value is a powerful way to incentivize certain behaviors’ and thus presently plans to distribute XRP primarily “through business development deals, incentives to liquidity providers who suggest tighter spreads for payments, and selling XRP to institutional buyers interested in investing in XRP.”

6) Monero (XMR)

Monero is a secure, private and untraceable currency. This open source cryptocurrency was launched in April two thousand fourteen and soon spiked superb interest among the cryptography community and enthusiasts. The development of this cryptocurrency is downright donation-based and community-driven. Monero has been launched with a strong concentrate on decentralization and scalability, and enables finish privacy by using a special mechanism called ‘ring signatures.’ With this technology, there emerges a group of cryptographic signatures including at least one real participant – but since they all show up valid, the real one cannot be isolated.

The Bottom Line

Bitcoin resumes to lead the pack of cryptocurrencies, in terms of market capitalization, user base and popularity. Nevertheless, virtual currencies such as Ethereum and Ripple which are being used more for enterprise solutions are becoming popular, while some altcoins are being endorsed for superior or advanced features vis-à-vis Bitcoins. Going by the current trend, cryptocurrencies are here to stay but how many of them will emerge leaders amid the growing competition within the space will only be exposed with time.

The six Most Significant Cryptocurrencies Other Than Bitcoin, Investopedia

The six Most Significant Cryptocurrencies Other Than Bitcoin

Bitcoin has not just been a trendsetter, ushering in a wave of cryptocurrencies built on decentralized peer-to-peer network, it’s become the de facto standard for cryptocurrencies​. The currencies inspired by Bitcoin are collectively called altcoins and have attempted to present themselves as modified or improved versions of Bitcoin. While some of these currencies are lighter to mine than Bitcoin is, there are tradeoffs, including greater risk brought on by lesser liquidity, acceptance and value retention. We look at six cryptocurrencies, picked from over seven hundred (in no specific order). (Related reading, see: How Do Bitcoin Investors Combat Price Volatility?)

1) Litecoin (LTC)

Litecoin, launched in the year 2011, was among the initial cryptocurrencies following bitcoin and was often referred to as ‘silver to Bitcoin’s gold.’ It was created by Charlie Lee, a MIT graduate and former Google engineer. Litecoin is based on an open source global payment network that is not managed by any central authority and uses “scrypt” as a proof of work, which can be decoded with the help of CPUs of consumer grade. Albeit Litecoin is like Bitcoin in many ways, it has a quicker block generation rate and hence offers a quicker transaction confirmation. Other than developers, there are a growing number of merchants who accept Litecoin.

Two) Ethereum (ETH)

Launched in 2015, Ethereum is a decentralized software platform that enables Wise Contracts and Distributed Applications (ĐApps) to be built and run without any downtime, fraud, control or interference from a third party. During 2014, Ethereum had launched a pre-sale for ether which had received an breathtaking response. The applications on Ethereum are run on its platform-specific cryptographic token, ether. Ether is like a vehicle for moving around on the Ethereum platform, and is sought by mostly developers looking to develop and run applications inwards Ethereum. According to Ethereum, it can be used to “codify, decentralize, secure and trade just about anything.” Following the attack on the DAO in 2016, Ethereum was split into Ethereum (ETH) and Ethereum Classic (ETC). Ethereum (ETH) has a market capitalization of $Four.46 billion, 2nd after Bitcoin among all cryptocurrencies. (Related reading: The First-Ever Ethereum IRA is a Game-Changer)

Three) Zcash (ZEC)

Zcash, a decentralized and open-source cryptocurrency launched in the latter part of 2016, looks promising. “If Bitcoin is like http for money, Zcash is https,” is how Zcash defines itself. Zcash offers privacy and selective transparency of transactions. Thus, like https, Zcash claims to provide extra security or privacy where all transactions are recorded and published on a blockchain, but details such as the sender, recipient, and amount remain private. Zcash offers its users the choice of ‘shielded’ transactions, which permit for content to be encrypted using advanced cryptographic mechanism or zero-knowledge proof construction called a zk-SNARK developed by its team. (Related reading, see: What Is Zcash?)

Four) Dash

Dash (originally known as Darkcoin) is a more secretive version of Bitcoin. Dash offers more anonymity as it works on a decentralized mastercode network that makes transactions almost untraceably. Launched in January 2014, Dash experienced an enlargening fan following in a brief span of time. This cryptocurrency was created and developed by Evan Duffield and can be mined using a CPU or GPU. In March 2015, ‘Darkcoin’ was rebranded to Dash, which stands for Digital Cash and operates under the ticker – DASH. The rebranding didn’t switch any of its technological features such as Darksend, InstantX. (Related reading, see: Top Alternative Investments for Retirement)

Five) Ripple (XRP)

Ripple is a real-time global settlement network that offers instant, certain and low-cost international payments. Ripple “enables banks to lodge cross-border payments in real time, with end-to-end transparency, and at lower costs.” Released in 2012, Ripple currency has a market capitalization of $1.26 billion. Ripple’s consensus ledger — its method of conformation — doesn’t need mining, a feature that deviates from bitcoin and altcoins. Since Ripple’s structure doesn’t require mining, it reduces the usage of computing power, and minimizes network latency. Ripple believes that ‘distributing value is a powerful way to incentivize certain behaviors’ and thus presently plans to distribute XRP primarily “through business development deals, incentives to liquidity providers who suggest tighter spreads for payments, and selling XRP to institutional buyers interested in investing in XRP.”

6) Monero (XMR)

Monero is a secure, private and untraceable currency. This open source cryptocurrency was launched in April two thousand fourteen and soon spiked excellent interest among the cryptography community and enthusiasts. The development of this cryptocurrency is entirely donation-based and community-driven. Monero has been launched with a strong concentrate on decentralization and scalability, and enables accomplish privacy by using a special mechanism called ‘ring signatures.’ With this mechanism, there shows up a group of cryptographic signatures including at least one real participant – but since they all emerge valid, the real one cannot be isolated.

The Bottom Line

Bitcoin proceeds to lead the pack of cryptocurrencies, in terms of market capitalization, user base and popularity. Nevertheless, virtual currencies such as Ethereum and Ripple which are being used more for enterprise solutions are becoming popular, while some altcoins are being endorsed for superior or advanced features vis-à-vis Bitcoins. Going by the current trend, cryptocurrencies are here to stay but how many of them will emerge leaders amid the growing competition within the space will only be exposed with time.

The six Most Significant Cryptocurrencies Other Than Bitcoin, Investopedia

The six Most Significant Cryptocurrencies Other Than Bitcoin

Bitcoin has not just been a trendsetter, ushering in a wave of cryptocurrencies built on decentralized peer-to-peer network, it’s become the de facto standard for cryptocurrencies​. The currencies inspired by Bitcoin are collectively called altcoins and have attempted to present themselves as modified or improved versions of Bitcoin. While some of these currencies are lighter to mine than Bitcoin is, there are tradeoffs, including greater risk brought on by lesser liquidity, acceptance and value retention. We look at six cryptocurrencies, picked from over seven hundred (in no specific order). (Related reading, see: How Do Bitcoin Investors Combat Price Volatility?)

1) Litecoin (LTC)

Litecoin, launched in the year 2011, was among the initial cryptocurrencies following bitcoin and was often referred to as ‘silver to Bitcoin’s gold.’ It was created by Charlie Lee, a MIT graduate and former Google engineer. Litecoin is based on an open source global payment network that is not managed by any central authority and uses “scrypt” as a proof of work, which can be decoded with the help of CPUs of consumer grade. Albeit Litecoin is like Bitcoin in many ways, it has a swifter block generation rate and hence offers a swifter transaction confirmation. Other than developers, there are a growing number of merchants who accept Litecoin.

Two) Ethereum (ETH)

Launched in 2015, Ethereum is a decentralized software platform that enables Clever Contracts and Distributed Applications (ĐApps) to be built and run without any downtime, fraud, control or interference from a third party. During 2014, Ethereum had launched a pre-sale for ether which had received an tremendous response. The applications on Ethereum are run on its platform-specific cryptographic token, ether. Ether is like a vehicle for moving around on the Ethereum platform, and is sought by mostly developers looking to develop and run applications inwards Ethereum. According to Ethereum, it can be used to “codify, decentralize, secure and trade just about anything.” Following the attack on the DAO in 2016, Ethereum was split into Ethereum (ETH) and Ethereum Classic (ETC). Ethereum (ETH) has a market capitalization of $Four.46 billion, 2nd after Bitcoin among all cryptocurrencies. (Related reading: The First-Ever Ethereum IRA is a Game-Changer)

Three) Zcash (ZEC)

Zcash, a decentralized and open-source cryptocurrency launched in the latter part of 2016, looks promising. “If Bitcoin is like http for money, Zcash is https,” is how Zcash defines itself. Zcash offers privacy and selective transparency of transactions. Thus, like https, Zcash claims to provide extra security or privacy where all transactions are recorded and published on a blockchain, but details such as the sender, recipient, and amount remain private. Zcash offers its users the choice of ‘shielded’ transactions, which permit for content to be encrypted using advanced cryptographic mechanism or zero-knowledge proof construction called a zk-SNARK developed by its team. (Related reading, see: What Is Zcash?)

Four) Dash

Dash (originally known as Darkcoin) is a more secretive version of Bitcoin. Dash offers more anonymity as it works on a decentralized mastercode network that makes transactions almost untraceably. Launched in January 2014, Dash experienced an enhancing fan following in a brief span of time. This cryptocurrency was created and developed by Evan Duffield and can be mined using a CPU or GPU. In March 2015, ‘Darkcoin’ was rebranded to Dash, which stands for Digital Cash and operates under the ticker – DASH. The rebranding didn’t switch any of its technological features such as Darksend, InstantX. (Related reading, see: Top Alternative Investments for Retirement)

Five) Ripple (XRP)

Ripple is a real-time global settlement network that offers instant, certain and low-cost international payments. Ripple “enables banks to lodge cross-border payments in real time, with end-to-end transparency, and at lower costs.” Released in 2012, Ripple currency has a market capitalization of $1.26 billion. Ripple’s consensus ledger — its method of conformation — doesn’t need mining, a feature that deviates from bitcoin and altcoins. Since Ripple’s structure doesn’t require mining, it reduces the usage of computing power, and minimizes network latency. Ripple believes that ‘distributing value is a powerful way to incentivize certain behaviors’ and thus presently plans to distribute XRP primarily “through business development deals, incentives to liquidity providers who suggest tighter spreads for payments, and selling XRP to institutional buyers interested in investing in XRP.”

6) Monero (XMR)

Monero is a secure, private and untraceable currency. This open source cryptocurrency was launched in April two thousand fourteen and soon spiked fine interest among the cryptography community and enthusiasts. The development of this cryptocurrency is fully donation-based and community-driven. Monero has been launched with a strong concentrate on decentralization and scalability, and enables accomplish privacy by using a special technology called ‘ring signatures.’ With this technology, there emerges a group of cryptographic signatures including at least one real participant – but since they all show up valid, the real one cannot be isolated.

The Bottom Line

Bitcoin proceeds to lead the pack of cryptocurrencies, in terms of market capitalization, user base and popularity. Nevertheless, virtual currencies such as Ethereum and Ripple which are being used more for enterprise solutions are becoming popular, while some altcoins are being endorsed for superior or advanced features vis-à-vis Bitcoins. Going by the current trend, cryptocurrencies are here to stay but how many of them will emerge leaders amid the growing competition within the space will only be exposed with time.

Related video:

The five Best Ways To Earn Free Bitcoins

The five Best Ways To Earn Free Bitcoins

Close up 3D illustration of paneled golden Bitcoins

Albeit many of us may aspire to have an abundance of bitcoins, the truth of the matter is that it’s lighter said than done. Besides converting standard currencies to bitcoins (which in theory isn’t earning them at all), there are many ways to acquire the very sought after crypotocurrency without a cost. There’s a broad range of available options, with some being better than others. Without further ado, here are the five best ways to earn free bitcoins.

Albeit the actual payout may differ inbetween sites, the premise for bitcoin faucets is the same. The user earns “free bitcoins” for either a petite task–such as watching an advertisement or visiting a survey–or even just visiting the website. The payout is typically betweenВ 0.000001 to 0.00001 bitcoin. The amounts are often measured in satoshi or bits, but the actual currency is still bitcoin. Many faucet suggest the capability for a large prize, such as a entire bitcoin. To avoid manhandle of the system, faucets will only permit a user to use the them once during a given amount of time. Most faucets will typically require users to wait anywhere inbetween fifteen minutes to an hour until they can use it again. A utter list of faucets can be found here. Adblock must be disabled to use the faucets, so keep that mind. Some faucets will directly insert the earned bitcoins into your bitcoin wallet, while others wait until you earn a certain amount. Nevertheless, bitcoin faucets can serve as a way to kill time and to leisurely earn lil’ amounts of bitcoin. There’s always a chance to win big, so why not! I wouldn’t recommend quitting your day-job to use faucets all day, but at the same time free money is free money (even if it is only a lil’ amount).

It may be true that the most profitable days of mining are long gone, but that doesn’t mean mining is a accomplish waste. Your best bet to make any bitcoins at all through mining would be through a mining pool. For one, this method doesn’t require the crazy overhead costs of high-powered computers and high electro-stimulation bills. A utter list of mining pools can be found here. Even then, making bitcoins is not effortless. It tends to be more of a hobby these days for the majority of miners, as profit is firmer and firmer to reach. This is due to the enlargening difficulty for the computers to actually solve the equations, as well as quicker and higher-powered computers rivaling against them. This is all very oversimplified, as the more in-depth process can be found here. Nevertheless, the option to mine bitcoins is still available for those who wish to do so.

Albeit this option may not technically be a way to earn them for “free”, as it may take time and work, it is still an increasingly lighter way to earn bitcoins. Along with the growing option for employers to pay their employees in bitcoins, there are uncountable “odd jobs” that permit a person to earn them. One of the best resources to find those jobs is on reddit’s subredditВ /r/Jobs4bitcoins. For those unfamilar with how the page works, users can either suggest puny jobs, or suggest their services. For example, someone may need help designing a brand logo. They can request someone to design it for them and compensate them with bitcoin. The actual jobs have a broad range of matters, but the concept is the same. В The actual details can be worked out inbetween those who make an an agreement, such as the amount and the details of the service. Websites such as WorkForBitcoinsВ are promising, but are often packed with tasks and jobs that lead to spam. Never click a link that seems fishy. You can always encourage your current employer to take bitcoins through services such as Bitpay, which they can in turn pay you with.

Even however it may not be the easiest thing in the world to consistently receive, getting bitcoin tips has been growing in popularity. Services such as ChangeTipВ have permitted for a very convenient way to give and receive “tips” on social media. For example, if I truly liked someone’s tweet, I can instantly peak them a certain amount via changetip. All I need to do is mention @changetip in a reply to the tweet with the amount I want to give, and ChangeTip will automatically liquidate the funds from my account and give them to the other twitter user. It is generally in lil’ amounts, with a peak almost always being under a dollar.

This option has its ups and downs, but as long as it is done decently and correctly, receiving interest В is an effortless way to earn free bitcoins for yourself. It is always significant to reminisce that once bitcoins are sent out of you wallet, there is no way to get them back without the person sending them back to you. Therefore, there is a trust and reliability factor when it comes to lending out bitcoins. Peer to Peer lending websites are typically the most reliable and safest way to earn interest on your bitcoins. With that being said, the website mustВ be a reliable one. Make sure to do background searches on any website you may use to lend money. If it seems like a scam or hasn’t been established for too long, it may be best to take your bitcoins elsewhere. The best and most reliable websites are typically BitLendingClub, Bitbond, BtcJam, and a number of others.

Related video:

The £625m lost forever – the phenomenon of disappearing Bitcoins

The £625m lost forever – the phenomenon of disappearing Bitcoins

By Matthew Sparkes, Deputy Head of Technology

7:00AM GMT twenty three Jan 2015

Unlike banks, Bitcoins are unregulated. If an possessor dies without passing on their password (called a private key), their Bitcoins expire with them. They’ll remain in the ether, visible but unspendable. Nobody to help.

You could imagine them eventually falling prey to brute force attacks – someone guessing key after key until they stumble upon the correct one. But that’s where Bitcoin’s formidable security becomes a problem.

Security experienced Bruce Schneier once ruled out an attempt to crack a 256-bit key, of the type used by Bitcoin, by referring to the laws of physics: such is the magnitude of the problem. Even an impracticably large computer consuming all the energy outputted by the sun couldn’t count the number of possible combinations in several decades.

His mind-bending conclusion was that such an attack “will be infeasible until computers are built from something other than matter and occupy something other than space.”

The brief version? Lost coins stay lost.

Related Articles

We know that only 21m Bitcoins will ever exist, that they will be little by little mined over many years and that 13.7m have been unlocked so far.

We also know that they can be lost through death, elementary carelessness or a hardware failure. But how many have actually been demolished?

Scour the archives of the Bitcoin forums and you’ll find references in the early days of the digital currency to sums worth pennies at the time, but which would now be puny fortunes.

Florida programmer Laszlo Hanyecz famously bought two pizzas in two thousand ten for Ten,000 Bitcoins. At Bitcoin’s peak that pizza would have cost over $10m.

Many of those early adopters gave as much thought to safe storage as a value of pennies warranted: not a lot. So tales of big losses are not uncommon.

Welsh IT worker James Howells famously lost 7,500 Bitcoins in two thousand thirteen when he accidentally threw out an old hard disk containing his private key. It is reportedly under thousands of tonnes of landfill at a waste recycling centre in Pillgwenlly, Newport. Today those coins would be worth over a million pounds.

And there are uncountable smaller, unreported losses. London-based developer David Kitchen mined around fifty coins in 2010, stopping when the noise of the fans on his mining computer in the living room began to annoy him. He stashed the coins on a USB stick and thought little more of it.

Until, that is, the price commenced to soar. Unluckily, by then the USB drive had disappeared.

“At the peak the Bitcoins would have been worth around £50k. I looked, on many occasions, but have never found it. I suspect I didn’t actually lose the USB stick but just overwrote it with a Linux installer or something: the modern equivalent of recording a TV program over a VHS of your wedding,” he told the Telegraph.

To put a figure on the scale of these losses, some clever analysis is needed. Gratefully, as all Bitcoin transactions are public, this can be done by anyone with technical skill and time on their arms.

NVIDIA engineer John Ratcliff calculated in June that “zombie coins”, defined as those which have lay dormant for at least a year and a half, accounted for thirty per cent of all Bitcoins.

Those coins were bought for just a few cents, so the lack of profit-taking despite a comeback of Four,000 per cent seems to rule out the possibility that they’re simply long-term savings.

Historical price rises tended to get some of these zombie coins moving, as media coverage raised awareness, but that pattern has slowed.

As Ratcliff says: “while there can be no way to know with absolute certainty the status of zombie coins, by looking at trends historically over time, it is very likely safe to assume that the vast majority, totalling approximately thirty per cent of all Bitcoins mined to date, are irrevocably lost forever, most having been thrown out because they were worthless at the time or the victim of a hard drive crash.”

At today’s price, and today’s total number of mined Bitcoins, that equates to $948,750,000 or £625,400,000.

The largest loss of all may have been intentional. Bitcoin was invented by a person or group going by the name Satoshi Nakamoto. The identity of Satoshi and his/her/their motive is unknown.

What we do know is that Satoshi mined lots of the early coins. Lots. Detailed analysis suggests that it was around a million. That’s one 23rd of all the Bitcoins that will ever exist.

Today they’re worth $230,000,000, but at the peak price of $1,200 Satoshi was a billionaire.

And that pile of coins accounts for a third of all zombie coins in existence: not a single penny has ever been moved or spent.

Was that an intentional part of the process of getting Bitcoin up-and-running, or is there some cunning plan for their use in the future? We can never know, but we can only assume that after years of accomplish inactivity they are lost.

Many people have inexplicably added to this figure by making “offerings” to Satoshi, sending their own Bitcoins – hundreds of thousands of dollars – to sit atop the stockpile. Take this address, for example, which received the very first fifty Bitcoins ever mined. There are now nine hundred fifty five further transactions on top of it – another 15.Four Bitcoins demolished.

So far we have several millions of Bitcoins lost – around a billion dollars. But that figures keeps creeping upwards. Start-up Counterparty intentionally “burned” Two,130 Bitcoins last year, worth over $1.7m at the time.

The company created a way to piggy-back on Bitcoin’s infrastructure to suggest other financial services, which involved creating its own digital currency called XCP. Many start-ups have done similar things in the past and they often struggled to distribute their fresh currencies fairly.

Counterparty determined to do this by exchanging Bitcoins for XCP but, because there’s no official mechanism to do this, they just passed XCP out to anyone willing to publicly demolish Bitcoin in comeback.

By setting up a wallet with no known private key they were able to “burn” any coins sent to it. The wallet can be seen online, finish with every transaction, but the funds can never be retrieved.

The company’s Ivana Zuber said: “Our primary concern at the time was to give the Counterparty project maximum legitimacy right from the embark and ensure that all fresh XCP coins are distributed fairly and proportionally. We also wished to ensure that Counterparty developers do not love any special privileges.

“Instead of selling off a pile of pre-mined XCP and creating a centralized project with a potential point of failure, we determined to distribute XCP in a public, semi-transparent and fair way and eliminate any speculation on ‘developers getting rich quick’.”

While Counterparty’s destruction at least served a purpose, there are many similar wallets which have been created to demolish Bitcoin for no logical reason at all, such as Bitcoin Eater.

What does this mean for Bitcoin?

The perilous nature of Bitcoin is due to its decentralised, libertarian nature: you’re free from inflation, quantitative easing or state seizure, but you’re also in charge of security and safekeeping.

For individuals it’s obviously bad news to lose Bitcoins, but for the rest of the crypto-currency economy it scarcely causes a ripple. In fact, due to a little drop in supply, other people’s holdings should theoretically see a petite increase in value.

Presently Bitcoin can be divided by eight decimal places, but that can be enhanced when needed by a ordinary update to the source code, so a diminishing supply of coins makes no odds: the entire network could operate by using infinitesimally puny fractions of a single Bitcoin.

As coins are far more valuable now than in the early days it seems unlikely that newly-mined Bitcoin will be treated as carelessly as the early coins, so losses should reduce in the future. But it’s a one-way process so the amount of lost coins will only increase.

The £625m lost forever – the phenomenon of disappearing Bitcoins

The £625m lost forever – the phenomenon of disappearing Bitcoins

By Matthew Sparkes, Deputy Head of Technology

7:00AM GMT twenty three Jan 2015

Unlike banks, Bitcoins are unregulated. If an proprietor dies without passing on their password (called a private key), their Bitcoins expire with them. They’ll remain in the ether, visible but unspendable. Nobody to help.

You could imagine them eventually falling prey to brute force attacks – someone guessing key after key until they stumble upon the correct one. But that’s where Bitcoin’s formidable security becomes a problem.

Security experienced Bruce Schneier once ruled out an attempt to crack a 256-bit key, of the type used by Bitcoin, by referring to the laws of physics: such is the magnitude of the problem. Even an impracticably large computer consuming all the energy outputted by the sun couldn’t count the number of possible combinations in several decades.

His mind-bending conclusion was that such an attack “will be infeasible until computers are built from something other than matter and occupy something other than space.”

The brief version? Lost coins stay lost.

Related Articles

We know that only 21m Bitcoins will ever exist, that they will be little by little mined over many years and that 13.7m have been unlocked so far.

We also know that they can be lost through death, elementary carelessness or a hardware failure. But how many have actually been demolished?

Scour the archives of the Bitcoin forums and you’ll find references in the early days of the digital currency to sums worth pennies at the time, but which would now be petite fortunes.

Florida programmer Laszlo Hanyecz famously bought two pizzas in two thousand ten for Ten,000 Bitcoins. At Bitcoin’s peak that pizza would have cost over $10m.

Many of those early adopters gave as much thought to safe storage as a value of pennies warranted: not a lot. So tales of big losses are not uncommon.

Welsh IT worker James Howells famously lost 7,500 Bitcoins in two thousand thirteen when he accidentally threw out an old hard disk containing his private key. It is reportedly under thousands of tonnes of landfill at a waste recycling centre in Pillgwenlly, Newport. Today those coins would be worth over a million pounds.

And there are uncountable smaller, unreported losses. London-based developer David Kitchen mined around fifty coins in 2010, stopping when the noise of the fans on his mining computer in the living room began to annoy him. He stashed the coins on a USB stick and thought little more of it.

Until, that is, the price commenced to soar. Unluckily, by then the USB drive had disappeared.

“At the peak the Bitcoins would have been worth around £50k. I looked, on many occasions, but have never found it. I suspect I didn’t actually lose the USB stick but just overwrote it with a Linux installer or something: the modern equivalent of recording a TV program over a VHS of your wedding,” he told the Telegraph.

To put a figure on the scale of these losses, some clever analysis is needed. Gratefully, as all Bitcoin transactions are public, this can be done by anyone with technical skill and time on their mitts.

NVIDIA engineer John Ratcliff calculated in June that “zombie coins”, defined as those which have lay dormant for at least a year and a half, accounted for thirty per cent of all Bitcoins.

Those coins were bought for just a few cents, so the lack of profit-taking despite a comeback of Four,000 per cent seems to rule out the possibility that they’re simply long-term savings.

Historical price rises tended to get some of these zombie coins moving, as media coverage raised awareness, but that pattern has slowed.

As Ratcliff says: “while there can be no way to know with absolute certainty the status of zombie coins, by looking at trends historically over time, it is most likely safe to assume that the vast majority, totalling approximately thirty per cent of all Bitcoins mined to date, are irrevocably lost forever, most having been thrown out because they were worthless at the time or the victim of a hard drive crash.”

At today’s price, and today’s total number of mined Bitcoins, that equates to $948,750,000 or £625,400,000.

The thickest loss of all may have been intentional. Bitcoin was invented by a person or group going by the name Satoshi Nakamoto. The identity of Satoshi and his/her/their motive is unknown.

What we do know is that Satoshi mined lots of the early coins. Lots. Detailed analysis suggests that it was around a million. That’s one 23rd of all the Bitcoins that will ever exist.

Today they’re worth $230,000,000, but at the peak price of $1,200 Satoshi was a billionaire.

And that pile of coins accounts for a third of all zombie coins in existence: not a single penny has ever been moved or spent.

Was that an intentional part of the process of getting Bitcoin up-and-running, or is there some cunning plan for their use in the future? We can never know, but we can only assume that after years of accomplish inactivity they are lost.

Many people have inexplicably added to this figure by making “offerings” to Satoshi, sending their own Bitcoins – hundreds of thousands of dollars – to sit atop the stockpile. Take this address, for example, which received the very first fifty Bitcoins ever mined. There are now nine hundred fifty five further transactions on top of it – another 15.Four Bitcoins demolished.

So far we have several millions of Bitcoins lost – around a billion dollars. But that figures keeps creeping upwards. Start-up Counterparty intentionally “burned” Two,130 Bitcoins last year, worth over $1.7m at the time.

The company created a way to piggy-back on Bitcoin’s infrastructure to suggest other financial services, which involved creating its own digital currency called XCP. Many start-ups have done similar things in the past and they often struggled to distribute their fresh currencies fairly.

Counterparty determined to do this by interchanging Bitcoins for XCP but, because there’s no official mechanism to do this, they just transferred XCP out to anyone willing to publicly ruin Bitcoin in come back.

By setting up a wallet with no known private key they were able to “burn” any coins sent to it. The wallet can be seen online, accomplish with every transaction, but the funds can never be retrieved.

The company’s Ivana Zuber said: “Our primary concern at the time was to give the Counterparty project maximum legitimacy right from the embark and ensure that all fresh XCP coins are distributed fairly and proportionally. We also wished to ensure that Counterparty developers do not love any special privileges.

“Instead of selling off a pile of pre-mined XCP and creating a centralized project with a potential point of failure, we determined to distribute XCP in a public, semi-transparent and fair way and eliminate any speculation on ‘developers getting rich quick’.”

While Counterparty’s destruction at least served a purpose, there are many similar wallets which have been created to ruin Bitcoin for no logical reason at all, such as Bitcoin Eater.

What does this mean for Bitcoin?

The perilous nature of Bitcoin is due to its decentralised, libertarian nature: you’re free from inflation, quantitative easing or state seizure, but you’re also in charge of security and safekeeping.

For individuals it’s obviously bad news to lose Bitcoins, but for the rest of the crypto-currency economy it scarcely causes a ripple. In fact, due to a little drop in supply, other people’s holdings should theoretically see a puny increase in value.

Presently Bitcoin can be divided by eight decimal places, but that can be enlargened when needed by a ordinary update to the source code, so a diminishing supply of coins makes no odds: the entire network could operate by using infinitesimally puny fractions of a single Bitcoin.

As coins are far more valuable now than in the early days it seems unlikely that newly-mined Bitcoin will be treated as carelessly as the early coins, so losses should reduce in the future. But it’s a one-way process so the amount of lost coins will only increase.

Related video:

Price manipulation in the Bitcoin ecosystem, VOX, CEPR’s Policy Portal

VOX CEPR’s Policy Portal

Research-based policy analysis and commentary from leading economists

Price manipulation in the Bitcoin ecosystem

Neil Gandal, JT Hamrick, Tyler Moore, Tali Oberman twenty two June two thousand seventeen

The cryptocurrency Bitcoin has attracted widespread interest, in large part due to wild swings in its valuation. This column considers an earlier rise in the Bitcoin price to investigate what is driving the currency’s price spikes. The two thousand thirteen rise was caused by fraudulent trades taking place at the largest Bitcoin currency exchange at the time. This finding has implications for policymakers as they weigh what, if anything, to do about regulating cryptocurrencies in light of the record high Bitcoin valuation that many fear is a bubble.

Related

The digital currency Bitcoin was introduced in 2009. Bitcoin and the many other digital currencies are primarily online currencies. The key currencies are those based primarily on cryptography, and Bitcoin is the leading ‘cryptocurrency’.

Bitcoin has experienced a meteoric rise in popularity since its introduction. While digital currencies were proposed as early as the 1980s, Bitcoin was the very first to catch on. The total value of all Bitcoins in circulation reached $45 billion in June 2017. Its success has inspired scores of contesting cryptocurrencies that go after a similar design. Bitcoin and most other cryptocurrencies do not require a central authority to validate and lodge transactions. Instead, these currencies use cryptography (and an internal incentive system) to control transactions, manage the supply, and prevent fraud. Payments are validated by a decentralised network. Once confirmed, all transactions are stored digitally and recorded in a public ‘blockchain’,’ which can be thought of as a distributed accounting system.

While Bitcoin’s algorithm provides safeguards against ‘counterfeiting’ of the currency, the eco-system is still vulnerable to theft. Users keep keys to their Bitcoins and make transactions with the help of wallets. Exchanges facilitate trade inbetween Bitcoins and fiat currencies, and also permit for storing Bitcoins. Bitcoins can be stolen through wallets or exchanges. Exchanges have been targeted more frequently than wallets because many wallets are located on users’ (local) computers, while exchanges frequently store customer deposits in their own (much larger) wallets.

The supply of most cryptocurrencies increases at a predetermined rate, and cannot be switched by any central authority. There are about fifteen million Bitcoins presently in circulation, with the ultimate number eventually reaching twenty one million. The motionless supply in the long run creates concerns about the deflationary aspect of the currency.

While Bitcoin shows superb promise to disrupt existing payment systems through innovations in its technical design, the Bitcoin ecosystem one has been the frequent target of attacks by financially motivated criminals. Due to the unregulated, decentralised environment in which they operate, cryptocurrencies are under constant threat of attack.

Bitcoin only recently became a subject of research in economics. However, the topic has been of interest for longer in computer science (for early work by computer scientists on incentives, see Babaioff et al. 2012, and Eyal and Sirer 2014.) Numerous researchers have conducted studies in order to document and combat threats such as Ponzi schemes, money laundering, mining botnets, and the theft of cryptocurrency wallets (Moeser et al. 2013, Vasek and Moore 2015, Vasek et al. 2016, Yuxing et al. 2014). Ron and Shamir (2013) attempt to identify suspicious trading activity by building a graph of Bitcoin transactions found in the public ledger. None of these papers can associate individual transactions with specific users of the currency exchanges.

In latest work, we display that the very first time Bitcoin reached an exchange rate of more than $1,000, the meteoric rise was driven by fraud (Gandal et al. 2017). We leverage a unique and very detailed dataset to examine suspicious trading activity that occurred over a ten-month period in two thousand thirteen on Mt. Gox, the leading Bitcoin currency exchange at the time. We very first quantify the extent of the suspicious/fraudulent trading activity and showcase that it constitutes a large fraction of trading on the days the activity occurred. We then showcase how this trading activity affected the exchange rates at Mt. Gox and other leading currency exchanges.

Figure 1 Bitcoin–US dollar exchange rate, with periods of suspicious activity shaded

While it was the superior currency exchange when Bitcoin very first shot to prominence in early 2013, behind the scenes, Tokyo-based Mt. Gox was in trouble. In addition to suffering from repeated denial-of-service attacks and Bitcoin thefts, two unauthorised traders were able to transact on the exchange without spending real money. In the very first case, a trader dubbed ‘Markus’ was credited with Bitcoins by duplicating previously finished transactions. In the 2nd case, a trader dubbed ‘Willy’ bought Bitcoins from traders by ‘crediting’ the sellers’ accounts with fiat currencies that, in many cases, could not be withdrawn. Figure one shows when these fraudulent traders were active, along with the Bitcoin–US dollar exchange rate. Most noteworthy is that Willy’s operation coincided with an unprecedented leap in the price of Bitcoin: from around $150 to over $1000. In early 2014, Mt. Gox collapsed, and the Bitcoin price fell with it. Only recently, in early 2017, has Bitcoin surpassed the levels of the earlier rise.

However, how do we know that the rise was caused by the fraudulent trades? Fortunately for us as researchers, the unauthorised trades did not take place every day. Table one shows the daily switch in the Bitcoin–US dollar exchange rate for various time periods on Mt. Gox. In the two quarters before unauthorised trading commenced, the daily price increase was, on average, positive but relatively puny: a $0.21 increase in the very first period and a $1 increase in the 2nd period. During the third quarter, when unauthorised trading began, the price rose by an average of $Three.15 on the seventeen days in which Markus traded, but fell on average by $0.51 on the seventy five days he did not trade. However, it is during the final quarter, when Willy began trading, that the difference became stark. On the fifty days in which Willy traded, the Bitcoin price rose by an average of $21.85. On the forty one days in which Willy did not make unauthorizsed purchases, the price fell by $0.88 on average. (Table one is very similar for the other leading exchanges as well.)

Table 1 Average daily switch in BTC/USD exchange rate as a function of fraudulent activity Two

In our total paper, we conduct a regression analysis to examine whether other factors such as the relatively numerous and varied attacks on the Mt. Gox exchange could explain the switch in the daily Bitcoin price, both at Mt. Gox and other leading exchanges (Gandal et al. 2017).

The analysis confirms that only Willy’s trading presence affected the price. The estimated coefficient (on the dummy variable for whether Willy was active) is virtually the same ($21.65) as in Table 1. We conclude that the suspicious trading activity of a single actor was the primary cause of the massive spike in the Bitcoin–US dollar exchange rate, in which the rate rose from around $150 to over $1,000 in just two months in late 2013. The fall was almost as precipitous: the Mt. Gox exchange folded due to insolvency in early 2014, and it has taken more than three years for Bitcoin to match the rise triggered by fraudulent transactions.

Why should we care about the Bitcoin manipulation that took place in 2013? After all, the Bitcoin ecosystem is not almost as significant as the Fresh York Stock Exchange. Nonetheless, latest trends indicate that Bitcoin is becoming an significant asset in the financial system.

Trading in cryptocurrency assets has exploded recently. In the case of Bitcoin, during the one year period ending in mid-June 2017, the market capitalisation enlargened massively from around $7 billion to $45 billion; that is an increase of over 500% in one year. The market cap of other cryptocurrencies surged by even more. In the one-year period ending in mid-May 2017, the market value of cryptocurrencies excluding Bitcoin surged from $1.7 billion to more than $29 billion; that is an increase of more than 1,900%. The markets for these other cryptocurrencies are very skinny and subject to manipulation. Given that we now know the Bitcoin price has been artificially inflated by unauthorised trades in the past, we must view the present rise with excellent caution, and not necessarily consider it a ‘healthy bubble’, as recently claimed in The Economist (2017).

As mainstream finance invests in cryptocurrency assets and as countries take steps toward legalising Bitcoin as a payment system (as Japan did in April 2017), it is significant to understand how susceptible cryptocurrency markets are to manipulation. We encourage the nascent cryptocurrency industry to work with regulators and researchers to share anonymised transaction data so that more confidence can be placed in the veracity of exchange rates.

References

Babaioff, M, S Dobzinski, S Oren and A Zohar (2012), “On bitcoin and crimson balloons” in Proceedings of the 13th ACM Conference on Electronic Commerce, pp. 56-73.

Eyal, I and E Sirer (2014), “Majority is not Enough: Bitcoin Mining is Vulnerable”, paper introduced at the Eighteenth International Conference on Financial Cryptography and Data Security, Barbados, 3-7 March.

Gandal, N, J Hamrick, T Moore and T Oberman (2017), “Price Manipulation in the Bitcoin Ecosystem,” CEPR Discussion Paper No. 12061.

Mooser, M, R Bohme and D Breuker (2013), “An inquiry into money laundering devices in the Bitcoin ecosystem”, in Proceedings of the Seventh APWG eCrime Re-searcher’s Summit, pp. 1-14.

Ron, D and A Shamir (2013), “Quantitative analysis of the total Bitcoin transaction graph”, in Financial Cryptography and Data Security, Vol. Seven thousand eight hundred fifty nine of Lecture Notes in Computer Science, pp. 6-24.

Vasek, M and T Moore (2015), “There’s no free lunch, even using Bitcoin: Tracking the popularity and profits of virtual currency scams”, in R Bohme and T Okamoto (eds), Financial Cryptography and Data Security, volume eight thousand nine hundred seventy five of Lecture Notes in Computer Science, pp. 44-61.

Vasek, M, J Bonneau, R Castellucci, C Keith and T Moore (2016), “The Bitcoin brain drain: a brief paper on the use and manhandle of bitcoin brain wallets”, in Financial Cryptography and Data Security, Lecture Notes in Computer Science.

Yuxing Huang, D, H Dharmdasani, S Meiklejohn, V Dave, C Grier, D McCoy, S Savage, N Weaver, A Snoeren and K Levchenko (2014), “Botcoin: Monetizing stolen cycles”, in Proceedings of the Network and Distributed System Security Symposium.

Endnotes

[1] The Bitcoin ecosystem includes the core network for propagating transactions, the blockchain, and many intermediaries such as currency exchanges, mining pools, and payment processors that facilitate trade.

[Two] Markus was primarily active in period Trio, but he was also active a few days during periods 1,Two, and Four. He was not active on the same days as Willy, who was only active in period Four.

Price manipulation in the Bitcoin ecosystem, VOX, CEPR’s Policy Portal

VOX CEPR’s Policy Portal

Research-based policy analysis and commentary from leading economists

Price manipulation in the Bitcoin ecosystem

Neil Gandal, JT Hamrick, Tyler Moore, Tali Oberman twenty two June two thousand seventeen

The cryptocurrency Bitcoin has attracted widespread interest, in large part due to wild swings in its valuation. This column considers an earlier rise in the Bitcoin price to investigate what is driving the currency’s price spikes. The two thousand thirteen rise was caused by fraudulent trades taking place at the largest Bitcoin currency exchange at the time. This finding has implications for policymakers as they weigh what, if anything, to do about regulating cryptocurrencies in light of the record high Bitcoin valuation that many fear is a bubble.

Related

The digital currency Bitcoin was introduced in 2009. Bitcoin and the many other digital currencies are primarily online currencies. The key currencies are those based primarily on cryptography, and Bitcoin is the leading ‘cryptocurrency’.

Bitcoin has experienced a meteoric rise in popularity since its introduction. While digital currencies were proposed as early as the 1980s, Bitcoin was the very first to catch on. The total value of all Bitcoins in circulation reached $45 billion in June 2017. Its success has inspired scores of rivaling cryptocurrencies that go after a similar design. Bitcoin and most other cryptocurrencies do not require a central authority to validate and lodge transactions. Instead, these currencies use cryptography (and an internal incentive system) to control transactions, manage the supply, and prevent fraud. Payments are validated by a decentralised network. Once confirmed, all transactions are stored digitally and recorded in a public ‘blockchain’,’ which can be thought of as a distributed accounting system.

While Bitcoin’s algorithm provides safeguards against ‘counterfeiting’ of the currency, the eco-system is still vulnerable to theft. Users keep keys to their Bitcoins and make transactions with the help of wallets. Exchanges facilitate trade inbetween Bitcoins and fiat currencies, and also permit for storing Bitcoins. Bitcoins can be stolen through wallets or exchanges. Exchanges have been targeted more frequently than wallets because many wallets are located on users’ (local) computers, while exchanges frequently store customer deposits in their own (much larger) wallets.

The supply of most cryptocurrencies increases at a predetermined rate, and cannot be switched by any central authority. There are about fifteen million Bitcoins presently in circulation, with the ultimate number eventually reaching twenty one million. The immovable supply in the long run creates concerns about the deflationary aspect of the currency.

While Bitcoin shows superb promise to disrupt existing payment systems through innovations in its technical design, the Bitcoin ecosystem one has been the frequent target of attacks by financially motivated criminals. Due to the unregulated, decentralised environment in which they operate, cryptocurrencies are under constant threat of attack.

Bitcoin only recently became a subject of research in economics. However, the topic has been of interest for longer in computer science (for early work by computer scientists on incentives, see Babaioff et al. 2012, and Eyal and Sirer 2014.) Numerous researchers have conducted studies in order to document and combat threats such as Ponzi schemes, money laundering, mining botnets, and the theft of cryptocurrency wallets (Moeser et al. 2013, Vasek and Moore 2015, Vasek et al. 2016, Yuxing et al. 2014). Ron and Shamir (2013) attempt to identify suspicious trading activity by building a graph of Bitcoin transactions found in the public ledger. None of these papers can associate individual transactions with specific users of the currency exchanges.

In latest work, we showcase that the very first time Bitcoin reached an exchange rate of more than $1,000, the meteoric rise was driven by fraud (Gandal et al. 2017). We leverage a unique and very detailed dataset to examine suspicious trading activity that occurred over a ten-month period in two thousand thirteen on Mt. Gox, the leading Bitcoin currency exchange at the time. We very first quantify the extent of the suspicious/fraudulent trading activity and showcase that it constitutes a large fraction of trading on the days the activity occurred. We then demonstrate how this trading activity affected the exchange rates at Mt. Gox and other leading currency exchanges.

Figure 1 Bitcoin–US dollar exchange rate, with periods of suspicious activity shaded

While it was the superior currency exchange when Bitcoin very first shot to prominence in early 2013, behind the scenes, Tokyo-based Mt. Gox was in trouble. In addition to suffering from repeated denial-of-service attacks and Bitcoin thefts, two unauthorised traders were able to transact on the exchange without spending real money. In the very first case, a trader dubbed ‘Markus’ was credited with Bitcoins by duplicating previously finished transactions. In the 2nd case, a trader dubbed ‘Willy’ bought Bitcoins from traders by ‘crediting’ the sellers’ accounts with fiat currencies that, in many cases, could not be withdrawn. Figure one shows when these fraudulent traders were active, along with the Bitcoin–US dollar exchange rate. Most noteworthy is that Willy’s operation coincided with an unprecedented leap in the price of Bitcoin: from around $150 to over $1000. In early 2014, Mt. Gox collapsed, and the Bitcoin price fell with it. Only recently, in early 2017, has Bitcoin surpassed the levels of the earlier rise.

However, how do we know that the rise was caused by the fraudulent trades? Fortunately for us as researchers, the unauthorised trades did not take place every day. Table one shows the daily switch in the Bitcoin–US dollar exchange rate for various time periods on Mt. Gox. In the two quarters before unauthorised trading commenced, the daily price increase was, on average, positive but relatively puny: a $0.21 increase in the very first period and a $1 increase in the 2nd period. During the third quarter, when unauthorised trading embarked, the price rose by an average of $Trio.15 on the seventeen days in which Markus traded, but fell on average by $0.51 on the seventy five days he did not trade. However, it is during the final quarter, when Willy began trading, that the difference became stark. On the fifty days in which Willy traded, the Bitcoin price rose by an average of $21.85. On the forty one days in which Willy did not make unauthorizsed purchases, the price fell by $0.88 on average. (Table one is very similar for the other leading exchanges as well.)

Table 1 Average daily switch in BTC/USD exchange rate as a function of fraudulent activity Two

In our utter paper, we conduct a regression analysis to examine whether other factors such as the relatively numerous and varied attacks on the Mt. Gox exchange could explain the switch in the daily Bitcoin price, both at Mt. Gox and other leading exchanges (Gandal et al. 2017).

The analysis confirms that only Willy’s trading presence affected the price. The estimated coefficient (on the dummy variable for whether Willy was active) is virtually the same ($21.65) as in Table 1. We conclude that the suspicious trading activity of a single actor was the primary cause of the massive spike in the Bitcoin–US dollar exchange rate, in which the rate rose from around $150 to over $1,000 in just two months in late 2013. The fall was almost as precipitous: the Mt. Gox exchange folded due to insolvency in early 2014, and it has taken more than three years for Bitcoin to match the rise triggered by fraudulent transactions.

Why should we care about the Bitcoin manipulation that took place in 2013? After all, the Bitcoin ecosystem is not almost as significant as the Fresh York Stock Exchange. Nonetheless, latest trends indicate that Bitcoin is becoming an significant asset in the financial system.

Trading in cryptocurrency assets has exploded recently. In the case of Bitcoin, during the one year period ending in mid-June 2017, the market capitalisation enlargened massively from around $7 billion to $45 billion; that is an increase of over 500% in one year. The market cap of other cryptocurrencies surged by even more. In the one-year period ending in mid-May 2017, the market value of cryptocurrencies excluding Bitcoin surged from $1.7 billion to more than $29 billion; that is an increase of more than 1,900%. The markets for these other cryptocurrencies are very skinny and subject to manipulation. Given that we now know the Bitcoin price has been artificially inflated by unauthorised trades in the past, we must view the present rise with good caution, and not necessarily consider it a ‘healthy bubble’, as recently claimed in The Economist (2017).

As mainstream finance invests in cryptocurrency assets and as countries take steps toward legalising Bitcoin as a payment system (as Japan did in April 2017), it is significant to understand how susceptible cryptocurrency markets are to manipulation. We encourage the nascent cryptocurrency industry to work with regulators and researchers to share anonymised transaction data so that more confidence can be placed in the veracity of exchange rates.

References

Babaioff, M, S Dobzinski, S Oren and A Zohar (2012), “On bitcoin and crimson balloons” in Proceedings of the 13th ACM Conference on Electronic Commerce, pp. 56-73.

Eyal, I and E Sirer (2014), “Majority is not Enough: Bitcoin Mining is Vulnerable”, paper introduced at the Eighteenth International Conference on Financial Cryptography and Data Security, Barbados, 3-7 March.

Gandal, N, J Hamrick, T Moore and T Oberman (2017), “Price Manipulation in the Bitcoin Ecosystem,” CEPR Discussion Paper No. 12061.

Mooser, M, R Bohme and D Breuker (2013), “An inquiry into money laundering implements in the Bitcoin ecosystem”, in Proceedings of the Seventh APWG eCrime Re-searcher’s Summit, pp. 1-14.

Ron, D and A Shamir (2013), “Quantitative analysis of the total Bitcoin transaction graph”, in Financial Cryptography and Data Security, Vol. Seven thousand eight hundred fifty nine of Lecture Notes in Computer Science, pp. 6-24.

Vasek, M and T Moore (2015), “There’s no free lunch, even using Bitcoin: Tracking the popularity and profits of virtual currency scams”, in R Bohme and T Okamoto (eds), Financial Cryptography and Data Security, volume eight thousand nine hundred seventy five of Lecture Notes in Computer Science, pp. 44-61.

Vasek, M, J Bonneau, R Castellucci, C Keith and T Moore (2016), “The Bitcoin brain drain: a brief paper on the use and manhandle of bitcoin brain wallets”, in Financial Cryptography and Data Security, Lecture Notes in Computer Science.

Yuxing Huang, D, H Dharmdasani, S Meiklejohn, V Dave, C Grier, D McCoy, S Savage, N Weaver, A Snoeren and K Levchenko (2014), “Botcoin: Monetizing stolen cycles”, in Proceedings of the Network and Distributed System Security Symposium.

Endnotes

[1] The Bitcoin ecosystem includes the core network for propagating transactions, the blockchain, and many intermediaries such as currency exchanges, mining pools, and payment processors that facilitate trade.

[Two] Markus was primarily active in period Trio, but he was also active a few days during periods 1,Two, and Four. He was not active on the same days as Willy, who was only active in period Four.

Price manipulation in the Bitcoin ecosystem, VOX, CEPR’s Policy Portal

VOX CEPR’s Policy Portal

Research-based policy analysis and commentary from leading economists

Price manipulation in the Bitcoin ecosystem

Neil Gandal, JT Hamrick, Tyler Moore, Tali Oberman twenty two June two thousand seventeen

The cryptocurrency Bitcoin has attracted widespread interest, in large part due to wild swings in its valuation. This column considers an earlier rise in the Bitcoin price to investigate what is driving the currency’s price spikes. The two thousand thirteen rise was caused by fraudulent trades taking place at the largest Bitcoin currency exchange at the time. This finding has implications for policymakers as they weigh what, if anything, to do about regulating cryptocurrencies in light of the record high Bitcoin valuation that many fear is a bubble.

Related

The digital currency Bitcoin was introduced in 2009. Bitcoin and the many other digital currencies are primarily online currencies. The key currencies are those based primarily on cryptography, and Bitcoin is the leading ‘cryptocurrency’.

Bitcoin has experienced a meteoric rise in popularity since its introduction. While digital currencies were proposed as early as the 1980s, Bitcoin was the very first to catch on. The total value of all Bitcoins in circulation reached $45 billion in June 2017. Its success has inspired scores of rivaling cryptocurrencies that go after a similar design. Bitcoin and most other cryptocurrencies do not require a central authority to validate and lodge transactions. Instead, these currencies use cryptography (and an internal incentive system) to control transactions, manage the supply, and prevent fraud. Payments are validated by a decentralised network. Once confirmed, all transactions are stored digitally and recorded in a public ‘blockchain’,’ which can be thought of as a distributed accounting system.

While Bitcoin’s algorithm provides safeguards against ‘counterfeiting’ of the currency, the eco-system is still vulnerable to theft. Users keep keys to their Bitcoins and make transactions with the help of wallets. Exchanges facilitate trade inbetween Bitcoins and fiat currencies, and also permit for storing Bitcoins. Bitcoins can be stolen through wallets or exchanges. Exchanges have been targeted more frequently than wallets because many wallets are located on users’ (local) computers, while exchanges frequently store customer deposits in their own (much larger) wallets.

The supply of most cryptocurrencies increases at a predetermined rate, and cannot be switched by any central authority. There are about fifteen million Bitcoins presently in circulation, with the ultimate number eventually reaching twenty one million. The stationary supply in the long run creates concerns about the deflationary aspect of the currency.

While Bitcoin shows fine promise to disrupt existing payment systems through innovations in its technical design, the Bitcoin ecosystem one has been the frequent target of attacks by financially motivated criminals. Due to the unregulated, decentralised environment in which they operate, cryptocurrencies are under constant threat of attack.

Bitcoin only recently became a subject of research in economics. However, the topic has been of interest for longer in computer science (for early work by computer scientists on incentives, see Babaioff et al. 2012, and Eyal and Sirer 2014.) Numerous researchers have conducted studies in order to document and combat threats such as Ponzi schemes, money laundering, mining botnets, and the theft of cryptocurrency wallets (Moeser et al. 2013, Vasek and Moore 2015, Vasek et al. 2016, Yuxing et al. 2014). Ron and Shamir (2013) attempt to identify suspicious trading activity by building a graph of Bitcoin transactions found in the public ledger. None of these papers can associate individual transactions with specific users of the currency exchanges.

In latest work, we demonstrate that the very first time Bitcoin reached an exchange rate of more than $1,000, the meteoric rise was driven by fraud (Gandal et al. 2017). We leverage a unique and very detailed dataset to examine suspicious trading activity that occurred over a ten-month period in two thousand thirteen on Mt. Gox, the leading Bitcoin currency exchange at the time. We very first quantify the extent of the suspicious/fraudulent trading activity and display that it constitutes a large fraction of trading on the days the activity occurred. We then showcase how this trading activity affected the exchange rates at Mt. Gox and other leading currency exchanges.

Figure 1 Bitcoin–US dollar exchange rate, with periods of suspicious activity shaded

While it was the superior currency exchange when Bitcoin very first shot to prominence in early 2013, behind the scenes, Tokyo-based Mt. Gox was in trouble. In addition to suffering from repeated denial-of-service attacks and Bitcoin thefts, two unauthorised traders were able to transact on the exchange without spending real money. In the very first case, a trader dubbed ‘Markus’ was credited with Bitcoins by duplicating previously finished transactions. In the 2nd case, a trader dubbed ‘Willy’ bought Bitcoins from traders by ‘crediting’ the sellers’ accounts with fiat currencies that, in many cases, could not be withdrawn. Figure one shows when these fraudulent traders were active, along with the Bitcoin–US dollar exchange rate. Most noteworthy is that Willy’s operation coincided with an unprecedented leap in the price of Bitcoin: from around $150 to over $1000. In early 2014, Mt. Gox collapsed, and the Bitcoin price fell with it. Only recently, in early 2017, has Bitcoin surpassed the levels of the earlier rise.

However, how do we know that the rise was caused by the fraudulent trades? Fortunately for us as researchers, the unauthorised trades did not take place every day. Table one shows the daily switch in the Bitcoin–US dollar exchange rate for various time periods on Mt. Gox. In the two quarters before unauthorised trading commenced, the daily price increase was, on average, positive but relatively puny: a $0.21 increase in the very first period and a $1 increase in the 2nd period. During the third quarter, when unauthorised trading embarked, the price rose by an average of $Trio.15 on the seventeen days in which Markus traded, but fell on average by $0.51 on the seventy five days he did not trade. However, it is during the final quarter, when Willy began trading, that the difference became stark. On the fifty days in which Willy traded, the Bitcoin price rose by an average of $21.85. On the forty one days in which Willy did not make unauthorizsed purchases, the price fell by $0.88 on average. (Table one is very similar for the other leading exchanges as well.)

Table 1 Average daily switch in BTC/USD exchange rate as a function of fraudulent activity Two

In our utter paper, we conduct a regression analysis to examine whether other factors such as the relatively numerous and varied attacks on the Mt. Gox exchange could explain the switch in the daily Bitcoin price, both at Mt. Gox and other leading exchanges (Gandal et al. 2017).

The analysis confirms that only Willy’s trading presence affected the price. The estimated coefficient (on the dummy variable for whether Willy was active) is virtually the same ($21.65) as in Table 1. We conclude that the suspicious trading activity of a single actor was the primary cause of the massive spike in the Bitcoin–US dollar exchange rate, in which the rate rose from around $150 to over $1,000 in just two months in late 2013. The fall was almost as precipitous: the Mt. Gox exchange folded due to insolvency in early 2014, and it has taken more than three years for Bitcoin to match the rise triggered by fraudulent transactions.

Why should we care about the Bitcoin manipulation that took place in 2013? After all, the Bitcoin ecosystem is not almost as significant as the Fresh York Stock Exchange. Nonetheless, latest trends indicate that Bitcoin is becoming an significant asset in the financial system.

Trading in cryptocurrency assets has exploded recently. In the case of Bitcoin, during the one year period ending in mid-June 2017, the market capitalisation enhanced massively from around $7 billion to $45 billion; that is an increase of over 500% in one year. The market cap of other cryptocurrencies surged by even more. In the one-year period ending in mid-May 2017, the market value of cryptocurrencies excluding Bitcoin surged from $1.7 billion to more than $29 billion; that is an increase of more than 1,900%. The markets for these other cryptocurrencies are very skinny and subject to manipulation. Given that we now know the Bitcoin price has been artificially inflated by unauthorised trades in the past, we must view the present rise with superb caution, and not necessarily consider it a ‘healthy bubble’, as recently claimed in The Economist (2017).

As mainstream finance invests in cryptocurrency assets and as countries take steps toward legalising Bitcoin as a payment system (as Japan did in April 2017), it is significant to understand how susceptible cryptocurrency markets are to manipulation. We encourage the nascent cryptocurrency industry to work with regulators and researchers to share anonymised transaction data so that more confidence can be placed in the veracity of exchange rates.

References

Babaioff, M, S Dobzinski, S Oren and A Zohar (2012), “On bitcoin and crimson balloons” in Proceedings of the 13th ACM Conference on Electronic Commerce, pp. 56-73.

Eyal, I and E Sirer (2014), “Majority is not Enough: Bitcoin Mining is Vulnerable”, paper introduced at the Eighteenth International Conference on Financial Cryptography and Data Security, Barbados, 3-7 March.

Gandal, N, J Hamrick, T Moore and T Oberman (2017), “Price Manipulation in the Bitcoin Ecosystem,” CEPR Discussion Paper No. 12061.

Mooser, M, R Bohme and D Breuker (2013), “An inquiry into money laundering devices in the Bitcoin ecosystem”, in Proceedings of the Seventh APWG eCrime Re-searcher’s Summit, pp. 1-14.

Ron, D and A Shamir (2013), “Quantitative analysis of the utter Bitcoin transaction graph”, in Financial Cryptography and Data Security, Vol. Seven thousand eight hundred fifty nine of Lecture Notes in Computer Science, pp. 6-24.

Vasek, M and T Moore (2015), “There’s no free lunch, even using Bitcoin: Tracking the popularity and profits of virtual currency scams”, in R Bohme and T Okamoto (eds), Financial Cryptography and Data Security, volume eight thousand nine hundred seventy five of Lecture Notes in Computer Science, pp. 44-61.

Vasek, M, J Bonneau, R Castellucci, C Keith and T Moore (2016), “The Bitcoin brain drain: a brief paper on the use and manhandle of bitcoin brain wallets”, in Financial Cryptography and Data Security, Lecture Notes in Computer Science.

Yuxing Huang, D, H Dharmdasani, S Meiklejohn, V Dave, C Grier, D McCoy, S Savage, N Weaver, A Snoeren and K Levchenko (2014), “Botcoin: Monetizing stolen cycles”, in Proceedings of the Network and Distributed System Security Symposium.

Endnotes

[1] The Bitcoin ecosystem includes the core network for propagating transactions, the blockchain, and many intermediaries such as currency exchanges, mining pools, and payment processors that facilitate trade.

[Two] Markus was primarily active in period Three, but he was also active a few days during periods 1,Two, and Four. He was not active on the same days as Willy, who was only active in period Four.

Price manipulation in the Bitcoin ecosystem, VOX, CEPR’s Policy Portal

VOX CEPR’s Policy Portal

Research-based policy analysis and commentary from leading economists

Price manipulation in the Bitcoin ecosystem

Neil Gandal, JT Hamrick, Tyler Moore, Tali Oberman twenty two June two thousand seventeen

The cryptocurrency Bitcoin has attracted widespread interest, in large part due to wild swings in its valuation. This column considers an earlier rise in the Bitcoin price to investigate what is driving the currency’s price spikes. The two thousand thirteen rise was caused by fraudulent trades taking place at the largest Bitcoin currency exchange at the time. This finding has implications for policymakers as they weigh what, if anything, to do about regulating cryptocurrencies in light of the record high Bitcoin valuation that many fear is a bubble.

Related

The digital currency Bitcoin was introduced in 2009. Bitcoin and the many other digital currencies are primarily online currencies. The key currencies are those based primarily on cryptography, and Bitcoin is the leading ‘cryptocurrency’.

Bitcoin has experienced a meteoric rise in popularity since its introduction. While digital currencies were proposed as early as the 1980s, Bitcoin was the very first to catch on. The total value of all Bitcoins in circulation reached $45 billion in June 2017. Its success has inspired scores of contesting cryptocurrencies that go after a similar design. Bitcoin and most other cryptocurrencies do not require a central authority to validate and lodge transactions. Instead, these currencies use cryptography (and an internal incentive system) to control transactions, manage the supply, and prevent fraud. Payments are validated by a decentralised network. Once confirmed, all transactions are stored digitally and recorded in a public ‘blockchain’,’ which can be thought of as a distributed accounting system.

While Bitcoin’s algorithm provides safeguards against ‘counterfeiting’ of the currency, the eco-system is still vulnerable to theft. Users keep keys to their Bitcoins and make transactions with the help of wallets. Exchanges facilitate trade inbetween Bitcoins and fiat currencies, and also permit for storing Bitcoins. Bitcoins can be stolen through wallets or exchanges. Exchanges have been targeted more frequently than wallets because many wallets are located on users’ (local) computers, while exchanges frequently store customer deposits in their own (much larger) wallets.

The supply of most cryptocurrencies increases at a predetermined rate, and cannot be switched by any central authority. There are about fifteen million Bitcoins presently in circulation, with the ultimate number eventually reaching twenty one million. The stationary supply in the long run creates concerns about the deflationary aspect of the currency.

While Bitcoin shows excellent promise to disrupt existing payment systems through innovations in its technical design, the Bitcoin ecosystem one has been the frequent target of attacks by financially motivated criminals. Due to the unregulated, decentralised environment in which they operate, cryptocurrencies are under constant threat of attack.

Bitcoin only recently became a subject of research in economics. However, the topic has been of interest for longer in computer science (for early work by computer scientists on incentives, see Babaioff et al. 2012, and Eyal and Sirer 2014.) Numerous researchers have conducted studies in order to document and combat threats such as Ponzi schemes, money laundering, mining botnets, and the theft of cryptocurrency wallets (Moeser et al. 2013, Vasek and Moore 2015, Vasek et al. 2016, Yuxing et al. 2014). Ron and Shamir (2013) attempt to identify suspicious trading activity by building a graph of Bitcoin transactions found in the public ledger. None of these papers can associate individual transactions with specific users of the currency exchanges.

In latest work, we display that the very first time Bitcoin reached an exchange rate of more than $1,000, the meteoric rise was driven by fraud (Gandal et al. 2017). We leverage a unique and very detailed dataset to examine suspicious trading activity that occurred over a ten-month period in two thousand thirteen on Mt. Gox, the leading Bitcoin currency exchange at the time. We very first quantify the extent of the suspicious/fraudulent trading activity and demonstrate that it constitutes a large fraction of trading on the days the activity occurred. We then demonstrate how this trading activity affected the exchange rates at Mt. Gox and other leading currency exchanges.

Figure 1 Bitcoin–US dollar exchange rate, with periods of suspicious activity shaded

While it was the superior currency exchange when Bitcoin very first shot to prominence in early 2013, behind the scenes, Tokyo-based Mt. Gox was in trouble. In addition to suffering from repeated denial-of-service attacks and Bitcoin thefts, two unauthorised traders were able to transact on the exchange without spending real money. In the very first case, a trader dubbed ‘Markus’ was credited with Bitcoins by duplicating previously ended transactions. In the 2nd case, a trader dubbed ‘Willy’ bought Bitcoins from traders by ‘crediting’ the sellers’ accounts with fiat currencies that, in many cases, could not be withdrawn. Figure one shows when these fraudulent traders were active, along with the Bitcoin–US dollar exchange rate. Most noteworthy is that Willy’s operation coincided with an unprecedented hop in the price of Bitcoin: from around $150 to over $1000. In early 2014, Mt. Gox collapsed, and the Bitcoin price fell with it. Only recently, in early 2017, has Bitcoin surpassed the levels of the earlier rise.

However, how do we know that the rise was caused by the fraudulent trades? Fortunately for us as researchers, the unauthorised trades did not take place every day. Table one shows the daily switch in the Bitcoin–US dollar exchange rate for various time periods on Mt. Gox. In the two quarters before unauthorised trading commenced, the daily price increase was, on average, positive but relatively petite: a $0.21 increase in the very first period and a $1 increase in the 2nd period. During the third quarter, when unauthorised trading embarked, the price rose by an average of $Trio.15 on the seventeen days in which Markus traded, but fell on average by $0.51 on the seventy five days he did not trade. However, it is during the final quarter, when Willy began trading, that the difference became stark. On the fifty days in which Willy traded, the Bitcoin price rose by an average of $21.85. On the forty one days in which Willy did not make unauthorizsed purchases, the price fell by $0.88 on average. (Table one is very similar for the other leading exchanges as well.)

Table 1 Average daily switch in BTC/USD exchange rate as a function of fraudulent activity Two

In our total paper, we conduct a regression analysis to examine whether other factors such as the relatively numerous and varied attacks on the Mt. Gox exchange could explain the switch in the daily Bitcoin price, both at Mt. Gox and other leading exchanges (Gandal et al. 2017).

The analysis confirms that only Willy’s trading presence affected the price. The estimated coefficient (on the dummy variable for whether Willy was active) is virtually the same ($21.65) as in Table 1. We conclude that the suspicious trading activity of a single actor was the primary cause of the massive spike in the Bitcoin–US dollar exchange rate, in which the rate rose from around $150 to over $1,000 in just two months in late 2013. The fall was almost as precipitous: the Mt. Gox exchange folded due to insolvency in early 2014, and it has taken more than three years for Bitcoin to match the rise triggered by fraudulent transactions.

Why should we care about the Bitcoin manipulation that took place in 2013? After all, the Bitcoin ecosystem is not almost as significant as the Fresh York Stock Exchange. Nonetheless, latest trends indicate that Bitcoin is becoming an significant asset in the financial system.

Trading in cryptocurrency assets has exploded recently. In the case of Bitcoin, during the one year period ending in mid-June 2017, the market capitalisation enlargened massively from around $7 billion to $45 billion; that is an increase of over 500% in one year. The market cap of other cryptocurrencies surged by even more. In the one-year period ending in mid-May 2017, the market value of cryptocurrencies excluding Bitcoin surged from $1.7 billion to more than $29 billion; that is an increase of more than 1,900%. The markets for these other cryptocurrencies are very lean and subject to manipulation. Given that we now know the Bitcoin price has been artificially inflated by unauthorised trades in the past, we must view the present rise with fine caution, and not necessarily consider it a ‘healthy bubble’, as recently claimed in The Economist (2017).

As mainstream finance invests in cryptocurrency assets and as countries take steps toward legalising Bitcoin as a payment system (as Japan did in April 2017), it is significant to understand how susceptible cryptocurrency markets are to manipulation. We encourage the nascent cryptocurrency industry to work with regulators and researchers to share anonymised transaction data so that more confidence can be placed in the veracity of exchange rates.

References

Babaioff, M, S Dobzinski, S Oren and A Zohar (2012), “On bitcoin and crimson balloons” in Proceedings of the 13th ACM Conference on Electronic Commerce, pp. 56-73.

Eyal, I and E Sirer (2014), “Majority is not Enough: Bitcoin Mining is Vulnerable”, paper introduced at the Eighteenth International Conference on Financial Cryptography and Data Security, Barbados, 3-7 March.

Gandal, N, J Hamrick, T Moore and T Oberman (2017), “Price Manipulation in the Bitcoin Ecosystem,” CEPR Discussion Paper No. 12061.

Mooser, M, R Bohme and D Breuker (2013), “An inquiry into money laundering instruments in the Bitcoin ecosystem”, in Proceedings of the Seventh APWG eCrime Re-searcher’s Summit, pp. 1-14.

Ron, D and A Shamir (2013), “Quantitative analysis of the total Bitcoin transaction graph”, in Financial Cryptography and Data Security, Vol. Seven thousand eight hundred fifty nine of Lecture Notes in Computer Science, pp. 6-24.

Vasek, M and T Moore (2015), “There’s no free lunch, even using Bitcoin: Tracking the popularity and profits of virtual currency scams”, in R Bohme and T Okamoto (eds), Financial Cryptography and Data Security, volume eight thousand nine hundred seventy five of Lecture Notes in Computer Science, pp. 44-61.

Vasek, M, J Bonneau, R Castellucci, C Keith and T Moore (2016), “The Bitcoin brain drain: a brief paper on the use and manhandle of bitcoin brain wallets”, in Financial Cryptography and Data Security, Lecture Notes in Computer Science.

Yuxing Huang, D, H Dharmdasani, S Meiklejohn, V Dave, C Grier, D McCoy, S Savage, N Weaver, A Snoeren and K Levchenko (2014), “Botcoin: Monetizing stolen cycles”, in Proceedings of the Network and Distributed System Security Symposium.

Endnotes

[1] The Bitcoin ecosystem includes the core network for propagating transactions, the blockchain, and many intermediaries such as currency exchanges, mining pools, and payment processors that facilitate trade.

[Two] Markus was primarily active in period Trio, but he was also active a few days during periods 1,Two, and Four. He was not active on the same days as Willy, who was only active in period Four.

Price manipulation in the Bitcoin ecosystem, VOX, CEPR’s Policy Portal

VOX CEPR’s Policy Portal

Research-based policy analysis and commentary from leading economists

Price manipulation in the Bitcoin ecosystem

Neil Gandal, JT Hamrick, Tyler Moore, Tali Oberman twenty two June two thousand seventeen

The cryptocurrency Bitcoin has attracted widespread interest, in large part due to wild swings in its valuation. This column considers an earlier rise in the Bitcoin price to investigate what is driving the currency’s price spikes. The two thousand thirteen rise was caused by fraudulent trades taking place at the largest Bitcoin currency exchange at the time. This finding has implications for policymakers as they weigh what, if anything, to do about regulating cryptocurrencies in light of the record high Bitcoin valuation that many fear is a bubble.

Related

The digital currency Bitcoin was introduced in 2009. Bitcoin and the many other digital currencies are primarily online currencies. The key currencies are those based primarily on cryptography, and Bitcoin is the leading ‘cryptocurrency’.

Bitcoin has experienced a meteoric rise in popularity since its introduction. While digital currencies were proposed as early as the 1980s, Bitcoin was the very first to catch on. The total value of all Bitcoins in circulation reached $45 billion in June 2017. Its success has inspired scores of rivaling cryptocurrencies that go after a similar design. Bitcoin and most other cryptocurrencies do not require a central authority to validate and lodge transactions. Instead, these currencies use cryptography (and an internal incentive system) to control transactions, manage the supply, and prevent fraud. Payments are validated by a decentralised network. Once confirmed, all transactions are stored digitally and recorded in a public ‘blockchain’,’ which can be thought of as a distributed accounting system.

While Bitcoin’s algorithm provides safeguards against ‘counterfeiting’ of the currency, the eco-system is still vulnerable to theft. Users keep keys to their Bitcoins and make transactions with the help of wallets. Exchanges facilitate trade inbetween Bitcoins and fiat currencies, and also permit for storing Bitcoins. Bitcoins can be stolen through wallets or exchanges. Exchanges have been targeted more frequently than wallets because many wallets are located on users’ (local) computers, while exchanges frequently store customer deposits in their own (much larger) wallets.

The supply of most cryptocurrencies increases at a predetermined rate, and cannot be switched by any central authority. There are about fifteen million Bitcoins presently in circulation, with the ultimate number eventually reaching twenty one million. The immovable supply in the long run creates concerns about the deflationary aspect of the currency.

While Bitcoin shows excellent promise to disrupt existing payment systems through innovations in its technical design, the Bitcoin ecosystem one has been the frequent target of attacks by financially motivated criminals. Due to the unregulated, decentralised environment in which they operate, cryptocurrencies are under constant threat of attack.

Bitcoin only recently became a subject of research in economics. However, the topic has been of interest for longer in computer science (for early work by computer scientists on incentives, see Babaioff et al. 2012, and Eyal and Sirer 2014.) Numerous researchers have conducted studies in order to document and combat threats such as Ponzi schemes, money laundering, mining botnets, and the theft of cryptocurrency wallets (Moeser et al. 2013, Vasek and Moore 2015, Vasek et al. 2016, Yuxing et al. 2014). Ron and Shamir (2013) attempt to identify suspicious trading activity by building a graph of Bitcoin transactions found in the public ledger. None of these papers can associate individual transactions with specific users of the currency exchanges.

In latest work, we demonstrate that the very first time Bitcoin reached an exchange rate of more than $1,000, the meteoric rise was driven by fraud (Gandal et al. 2017). We leverage a unique and very detailed dataset to examine suspicious trading activity that occurred over a ten-month period in two thousand thirteen on Mt. Gox, the leading Bitcoin currency exchange at the time. We very first quantify the extent of the suspicious/fraudulent trading activity and showcase that it constitutes a large fraction of trading on the days the activity occurred. We then showcase how this trading activity affected the exchange rates at Mt. Gox and other leading currency exchanges.

Figure 1 Bitcoin–US dollar exchange rate, with periods of suspicious activity shaded

While it was the superior currency exchange when Bitcoin very first shot to prominence in early 2013, behind the scenes, Tokyo-based Mt. Gox was in trouble. In addition to suffering from repeated denial-of-service attacks and Bitcoin thefts, two unauthorised traders were able to transact on the exchange without spending real money. In the very first case, a trader dubbed ‘Markus’ was credited with Bitcoins by duplicating previously finished transactions. In the 2nd case, a trader dubbed ‘Willy’ bought Bitcoins from traders by ‘crediting’ the sellers’ accounts with fiat currencies that, in many cases, could not be withdrawn. Figure one shows when these fraudulent traders were active, along with the Bitcoin–US dollar exchange rate. Most noteworthy is that Willy’s operation coincided with an unprecedented leap in the price of Bitcoin: from around $150 to over $1000. In early 2014, Mt. Gox collapsed, and the Bitcoin price fell with it. Only recently, in early 2017, has Bitcoin surpassed the levels of the earlier rise.

However, how do we know that the rise was caused by the fraudulent trades? Fortunately for us as researchers, the unauthorised trades did not take place every day. Table one shows the daily switch in the Bitcoin–US dollar exchange rate for various time periods on Mt. Gox. In the two quarters before unauthorised trading commenced, the daily price increase was, on average, positive but relatively petite: a $0.21 increase in the very first period and a $1 increase in the 2nd period. During the third quarter, when unauthorised trading commenced, the price rose by an average of $Trio.15 on the seventeen days in which Markus traded, but fell on average by $0.51 on the seventy five days he did not trade. However, it is during the final quarter, when Willy began trading, that the difference became stark. On the fifty days in which Willy traded, the Bitcoin price rose by an average of $21.85. On the forty one days in which Willy did not make unauthorizsed purchases, the price fell by $0.88 on average. (Table one is very similar for the other leading exchanges as well.)

Table 1 Average daily switch in BTC/USD exchange rate as a function of fraudulent activity Two

In our utter paper, we conduct a regression analysis to examine whether other factors such as the relatively numerous and varied attacks on the Mt. Gox exchange could explain the switch in the daily Bitcoin price, both at Mt. Gox and other leading exchanges (Gandal et al. 2017).

The analysis confirms that only Willy’s trading presence affected the price. The estimated coefficient (on the dummy variable for whether Willy was active) is virtually the same ($21.65) as in Table 1. We conclude that the suspicious trading activity of a single actor was the primary cause of the massive spike in the Bitcoin–US dollar exchange rate, in which the rate rose from around $150 to over $1,000 in just two months in late 2013. The fall was almost as precipitous: the Mt. Gox exchange folded due to insolvency in early 2014, and it has taken more than three years for Bitcoin to match the rise triggered by fraudulent transactions.

Why should we care about the Bitcoin manipulation that took place in 2013? After all, the Bitcoin ecosystem is not almost as significant as the Fresh York Stock Exchange. Nonetheless, latest trends indicate that Bitcoin is becoming an significant asset in the financial system.

Trading in cryptocurrency assets has exploded recently. In the case of Bitcoin, during the one year period ending in mid-June 2017, the market capitalisation enhanced massively from around $7 billion to $45 billion; that is an increase of over 500% in one year. The market cap of other cryptocurrencies surged by even more. In the one-year period ending in mid-May 2017, the market value of cryptocurrencies excluding Bitcoin surged from $1.7 billion to more than $29 billion; that is an increase of more than 1,900%. The markets for these other cryptocurrencies are very skinny and subject to manipulation. Given that we now know the Bitcoin price has been artificially inflated by unauthorised trades in the past, we must view the present rise with superb caution, and not necessarily consider it a ‘healthy bubble’, as recently claimed in The Economist (2017).

As mainstream finance invests in cryptocurrency assets and as countries take steps toward legalising Bitcoin as a payment system (as Japan did in April 2017), it is significant to understand how susceptible cryptocurrency markets are to manipulation. We encourage the nascent cryptocurrency industry to work with regulators and researchers to share anonymised transaction data so that more confidence can be placed in the veracity of exchange rates.

References

Babaioff, M, S Dobzinski, S Oren and A Zohar (2012), “On bitcoin and crimson balloons” in Proceedings of the 13th ACM Conference on Electronic Commerce, pp. 56-73.

Eyal, I and E Sirer (2014), “Majority is not Enough: Bitcoin Mining is Vulnerable”, paper introduced at the Eighteenth International Conference on Financial Cryptography and Data Security, Barbados, 3-7 March.

Gandal, N, J Hamrick, T Moore and T Oberman (2017), “Price Manipulation in the Bitcoin Ecosystem,” CEPR Discussion Paper No. 12061.

Mooser, M, R Bohme and D Breuker (2013), “An inquiry into money laundering implements in the Bitcoin ecosystem”, in Proceedings of the Seventh APWG eCrime Re-searcher’s Summit, pp. 1-14.

Ron, D and A Shamir (2013), “Quantitative analysis of the utter Bitcoin transaction graph”, in Financial Cryptography and Data Security, Vol. Seven thousand eight hundred fifty nine of Lecture Notes in Computer Science, pp. 6-24.

Vasek, M and T Moore (2015), “There’s no free lunch, even using Bitcoin: Tracking the popularity and profits of virtual currency scams”, in R Bohme and T Okamoto (eds), Financial Cryptography and Data Security, volume eight thousand nine hundred seventy five of Lecture Notes in Computer Science, pp. 44-61.

Vasek, M, J Bonneau, R Castellucci, C Keith and T Moore (2016), “The Bitcoin brain drain: a brief paper on the use and manhandle of bitcoin brain wallets”, in Financial Cryptography and Data Security, Lecture Notes in Computer Science.

Yuxing Huang, D, H Dharmdasani, S Meiklejohn, V Dave, C Grier, D McCoy, S Savage, N Weaver, A Snoeren and K Levchenko (2014), “Botcoin: Monetizing stolen cycles”, in Proceedings of the Network and Distributed System Security Symposium.

Endnotes

[1] The Bitcoin ecosystem includes the core network for propagating transactions, the blockchain, and many intermediaries such as currency exchanges, mining pools, and payment processors that facilitate trade.

[Two] Markus was primarily active in period Trio, but he was also active a few days during periods 1,Two, and Four. He was not active on the same days as Willy, who was only active in period Four.

Price manipulation in the Bitcoin ecosystem, VOX, CEPR’s Policy Portal

VOX CEPR’s Policy Portal

Research-based policy analysis and commentary from leading economists

Price manipulation in the Bitcoin ecosystem

Neil Gandal, JT Hamrick, Tyler Moore, Tali Oberman twenty two June two thousand seventeen

The cryptocurrency Bitcoin has attracted widespread interest, in large part due to wild swings in its valuation. This column considers an earlier rise in the Bitcoin price to investigate what is driving the currency’s price spikes. The two thousand thirteen rise was caused by fraudulent trades taking place at the largest Bitcoin currency exchange at the time. This finding has implications for policymakers as they weigh what, if anything, to do about regulating cryptocurrencies in light of the record high Bitcoin valuation that many fear is a bubble.

Related

The digital currency Bitcoin was introduced in 2009. Bitcoin and the many other digital currencies are primarily online currencies. The key currencies are those based primarily on cryptography, and Bitcoin is the leading ‘cryptocurrency’.

Bitcoin has experienced a meteoric rise in popularity since its introduction. While digital currencies were proposed as early as the 1980s, Bitcoin was the very first to catch on. The total value of all Bitcoins in circulation reached $45 billion in June 2017. Its success has inspired scores of challenging cryptocurrencies that go after a similar design. Bitcoin and most other cryptocurrencies do not require a central authority to validate and lodge transactions. Instead, these currencies use cryptography (and an internal incentive system) to control transactions, manage the supply, and prevent fraud. Payments are validated by a decentralised network. Once confirmed, all transactions are stored digitally and recorded in a public ‘blockchain’,’ which can be thought of as a distributed accounting system.

While Bitcoin’s algorithm provides safeguards against ‘counterfeiting’ of the currency, the eco-system is still vulnerable to theft. Users keep keys to their Bitcoins and make transactions with the help of wallets. Exchanges facilitate trade inbetween Bitcoins and fiat currencies, and also permit for storing Bitcoins. Bitcoins can be stolen through wallets or exchanges. Exchanges have been targeted more frequently than wallets because many wallets are located on users’ (local) computers, while exchanges frequently store customer deposits in their own (much larger) wallets.

The supply of most cryptocurrencies increases at a predetermined rate, and cannot be switched by any central authority. There are about fifteen million Bitcoins presently in circulation, with the ultimate number eventually reaching twenty one million. The stationary supply in the long run creates concerns about the deflationary aspect of the currency.

While Bitcoin shows excellent promise to disrupt existing payment systems through innovations in its technical design, the Bitcoin ecosystem one has been the frequent target of attacks by financially motivated criminals. Due to the unregulated, decentralised environment in which they operate, cryptocurrencies are under constant threat of attack.

Bitcoin only recently became a subject of research in economics. However, the topic has been of interest for longer in computer science (for early work by computer scientists on incentives, see Babaioff et al. 2012, and Eyal and Sirer 2014.) Numerous researchers have conducted studies in order to document and combat threats such as Ponzi schemes, money laundering, mining botnets, and the theft of cryptocurrency wallets (Moeser et al. 2013, Vasek and Moore 2015, Vasek et al. 2016, Yuxing et al. 2014). Ron and Shamir (2013) attempt to identify suspicious trading activity by building a graph of Bitcoin transactions found in the public ledger. None of these papers can associate individual transactions with specific users of the currency exchanges.

In latest work, we demonstrate that the very first time Bitcoin reached an exchange rate of more than $1,000, the meteoric rise was driven by fraud (Gandal et al. 2017). We leverage a unique and very detailed dataset to examine suspicious trading activity that occurred over a ten-month period in two thousand thirteen on Mt. Gox, the leading Bitcoin currency exchange at the time. We very first quantify the extent of the suspicious/fraudulent trading activity and showcase that it constitutes a large fraction of trading on the days the activity occurred. We then showcase how this trading activity affected the exchange rates at Mt. Gox and other leading currency exchanges.

Figure 1 Bitcoin–US dollar exchange rate, with periods of suspicious activity shaded

While it was the superior currency exchange when Bitcoin very first shot to prominence in early 2013, behind the scenes, Tokyo-based Mt. Gox was in trouble. In addition to suffering from repeated denial-of-service attacks and Bitcoin thefts, two unauthorised traders were able to transact on the exchange without spending real money. In the very first case, a trader dubbed ‘Markus’ was credited with Bitcoins by duplicating previously finished transactions. In the 2nd case, a trader dubbed ‘Willy’ bought Bitcoins from traders by ‘crediting’ the sellers’ accounts with fiat currencies that, in many cases, could not be withdrawn. Figure one shows when these fraudulent traders were active, along with the Bitcoin–US dollar exchange rate. Most noteworthy is that Willy’s operation coincided with an unprecedented leap in the price of Bitcoin: from around $150 to over $1000. In early 2014, Mt. Gox collapsed, and the Bitcoin price fell with it. Only recently, in early 2017, has Bitcoin surpassed the levels of the earlier rise.

However, how do we know that the rise was caused by the fraudulent trades? Fortunately for us as researchers, the unauthorised trades did not take place every day. Table one shows the daily switch in the Bitcoin–US dollar exchange rate for various time periods on Mt. Gox. In the two quarters before unauthorised trading commenced, the daily price increase was, on average, positive but relatively petite: a $0.21 increase in the very first period and a $1 increase in the 2nd period. During the third quarter, when unauthorised trading began, the price rose by an average of $Trio.15 on the seventeen days in which Markus traded, but fell on average by $0.51 on the seventy five days he did not trade. However, it is during the final quarter, when Willy began trading, that the difference became stark. On the fifty days in which Willy traded, the Bitcoin price rose by an average of $21.85. On the forty one days in which Willy did not make unauthorizsed purchases, the price fell by $0.88 on average. (Table one is very similar for the other leading exchanges as well.)

Table 1 Average daily switch in BTC/USD exchange rate as a function of fraudulent activity Two

In our utter paper, we conduct a regression analysis to examine whether other factors such as the relatively numerous and varied attacks on the Mt. Gox exchange could explain the switch in the daily Bitcoin price, both at Mt. Gox and other leading exchanges (Gandal et al. 2017).

The analysis confirms that only Willy’s trading presence affected the price. The estimated coefficient (on the dummy variable for whether Willy was active) is virtually the same ($21.65) as in Table 1. We conclude that the suspicious trading activity of a single actor was the primary cause of the massive spike in the Bitcoin–US dollar exchange rate, in which the rate rose from around $150 to over $1,000 in just two months in late 2013. The fall was almost as precipitous: the Mt. Gox exchange folded due to insolvency in early 2014, and it has taken more than three years for Bitcoin to match the rise triggered by fraudulent transactions.

Why should we care about the Bitcoin manipulation that took place in 2013? After all, the Bitcoin ecosystem is not almost as significant as the Fresh York Stock Exchange. Nonetheless, latest trends indicate that Bitcoin is becoming an significant asset in the financial system.

Trading in cryptocurrency assets has exploded recently. In the case of Bitcoin, during the one year period ending in mid-June 2017, the market capitalisation enhanced massively from around $7 billion to $45 billion; that is an increase of over 500% in one year. The market cap of other cryptocurrencies surged by even more. In the one-year period ending in mid-May 2017, the market value of cryptocurrencies excluding Bitcoin surged from $1.7 billion to more than $29 billion; that is an increase of more than 1,900%. The markets for these other cryptocurrencies are very skinny and subject to manipulation. Given that we now know the Bitcoin price has been artificially inflated by unauthorised trades in the past, we must view the present rise with fine caution, and not necessarily consider it a ‘healthy bubble’, as recently claimed in The Economist (2017).

As mainstream finance invests in cryptocurrency assets and as countries take steps toward legalising Bitcoin as a payment system (as Japan did in April 2017), it is significant to understand how susceptible cryptocurrency markets are to manipulation. We encourage the nascent cryptocurrency industry to work with regulators and researchers to share anonymised transaction data so that more confidence can be placed in the veracity of exchange rates.

References

Babaioff, M, S Dobzinski, S Oren and A Zohar (2012), “On bitcoin and crimson balloons” in Proceedings of the 13th ACM Conference on Electronic Commerce, pp. 56-73.

Eyal, I and E Sirer (2014), “Majority is not Enough: Bitcoin Mining is Vulnerable”, paper introduced at the Eighteenth International Conference on Financial Cryptography and Data Security, Barbados, 3-7 March.

Gandal, N, J Hamrick, T Moore and T Oberman (2017), “Price Manipulation in the Bitcoin Ecosystem,” CEPR Discussion Paper No. 12061.

Mooser, M, R Bohme and D Breuker (2013), “An inquiry into money laundering devices in the Bitcoin ecosystem”, in Proceedings of the Seventh APWG eCrime Re-searcher’s Summit, pp. 1-14.

Ron, D and A Shamir (2013), “Quantitative analysis of the total Bitcoin transaction graph”, in Financial Cryptography and Data Security, Vol. Seven thousand eight hundred fifty nine of Lecture Notes in Computer Science, pp. 6-24.

Vasek, M and T Moore (2015), “There’s no free lunch, even using Bitcoin: Tracking the popularity and profits of virtual currency scams”, in R Bohme and T Okamoto (eds), Financial Cryptography and Data Security, volume eight thousand nine hundred seventy five of Lecture Notes in Computer Science, pp. 44-61.

Vasek, M, J Bonneau, R Castellucci, C Keith and T Moore (2016), “The Bitcoin brain drain: a brief paper on the use and manhandle of bitcoin brain wallets”, in Financial Cryptography and Data Security, Lecture Notes in Computer Science.

Yuxing Huang, D, H Dharmdasani, S Meiklejohn, V Dave, C Grier, D McCoy, S Savage, N Weaver, A Snoeren and K Levchenko (2014), “Botcoin: Monetizing stolen cycles”, in Proceedings of the Network and Distributed System Security Symposium.

Endnotes

[1] The Bitcoin ecosystem includes the core network for propagating transactions, the blockchain, and many intermediaries such as currency exchanges, mining pools, and payment processors that facilitate trade.

[Two] Markus was primarily active in period Trio, but he was also active a few days during periods 1,Two, and Four. He was not active on the same days as Willy, who was only active in period Four.

Price manipulation in the Bitcoin ecosystem, VOX, CEPR’s Policy Portal

VOX CEPR’s Policy Portal

Research-based policy analysis and commentary from leading economists

Price manipulation in the Bitcoin ecosystem

Neil Gandal, JT Hamrick, Tyler Moore, Tali Oberman twenty two June two thousand seventeen

The cryptocurrency Bitcoin has attracted widespread interest, in large part due to wild swings in its valuation. This column considers an earlier rise in the Bitcoin price to investigate what is driving the currency’s price spikes. The two thousand thirteen rise was caused by fraudulent trades taking place at the largest Bitcoin currency exchange at the time. This finding has implications for policymakers as they weigh what, if anything, to do about regulating cryptocurrencies in light of the record high Bitcoin valuation that many fear is a bubble.

Related

The digital currency Bitcoin was introduced in 2009. Bitcoin and the many other digital currencies are primarily online currencies. The key currencies are those based primarily on cryptography, and Bitcoin is the leading ‘cryptocurrency’.

Bitcoin has experienced a meteoric rise in popularity since its introduction. While digital currencies were proposed as early as the 1980s, Bitcoin was the very first to catch on. The total value of all Bitcoins in circulation reached $45 billion in June 2017. Its success has inspired scores of rivaling cryptocurrencies that go after a similar design. Bitcoin and most other cryptocurrencies do not require a central authority to validate and lodge transactions. Instead, these currencies use cryptography (and an internal incentive system) to control transactions, manage the supply, and prevent fraud. Payments are validated by a decentralised network. Once confirmed, all transactions are stored digitally and recorded in a public ‘blockchain’,’ which can be thought of as a distributed accounting system.

While Bitcoin’s algorithm provides safeguards against ‘counterfeiting’ of the currency, the eco-system is still vulnerable to theft. Users keep keys to their Bitcoins and make transactions with the help of wallets. Exchanges facilitate trade inbetween Bitcoins and fiat currencies, and also permit for storing Bitcoins. Bitcoins can be stolen through wallets or exchanges. Exchanges have been targeted more frequently than wallets because many wallets are located on users’ (local) computers, while exchanges frequently store customer deposits in their own (much larger) wallets.

The supply of most cryptocurrencies increases at a predetermined rate, and cannot be switched by any central authority. There are about fifteen million Bitcoins presently in circulation, with the ultimate number eventually reaching twenty one million. The motionless supply in the long run creates concerns about the deflationary aspect of the currency.

While Bitcoin shows fine promise to disrupt existing payment systems through innovations in its technical design, the Bitcoin ecosystem one has been the frequent target of attacks by financially motivated criminals. Due to the unregulated, decentralised environment in which they operate, cryptocurrencies are under constant threat of attack.

Bitcoin only recently became a subject of research in economics. However, the topic has been of interest for longer in computer science (for early work by computer scientists on incentives, see Babaioff et al. 2012, and Eyal and Sirer 2014.) Numerous researchers have conducted studies in order to document and combat threats such as Ponzi schemes, money laundering, mining botnets, and the theft of cryptocurrency wallets (Moeser et al. 2013, Vasek and Moore 2015, Vasek et al. 2016, Yuxing et al. 2014). Ron and Shamir (2013) attempt to identify suspicious trading activity by building a graph of Bitcoin transactions found in the public ledger. None of these papers can associate individual transactions with specific users of the currency exchanges.

In latest work, we showcase that the very first time Bitcoin reached an exchange rate of more than $1,000, the meteoric rise was driven by fraud (Gandal et al. 2017). We leverage a unique and very detailed dataset to examine suspicious trading activity that occurred over a ten-month period in two thousand thirteen on Mt. Gox, the leading Bitcoin currency exchange at the time. We very first quantify the extent of the suspicious/fraudulent trading activity and display that it constitutes a large fraction of trading on the days the activity occurred. We then display how this trading activity affected the exchange rates at Mt. Gox and other leading currency exchanges.

Figure 1 Bitcoin–US dollar exchange rate, with periods of suspicious activity shaded

While it was the superior currency exchange when Bitcoin very first shot to prominence in early 2013, behind the scenes, Tokyo-based Mt. Gox was in trouble. In addition to suffering from repeated denial-of-service attacks and Bitcoin thefts, two unauthorised traders were able to transact on the exchange without spending real money. In the very first case, a trader dubbed ‘Markus’ was credited with Bitcoins by duplicating previously finished transactions. In the 2nd case, a trader dubbed ‘Willy’ bought Bitcoins from traders by ‘crediting’ the sellers’ accounts with fiat currencies that, in many cases, could not be withdrawn. Figure one shows when these fraudulent traders were active, along with the Bitcoin–US dollar exchange rate. Most noteworthy is that Willy’s operation coincided with an unprecedented leap in the price of Bitcoin: from around $150 to over $1000. In early 2014, Mt. Gox collapsed, and the Bitcoin price fell with it. Only recently, in early 2017, has Bitcoin surpassed the levels of the earlier rise.

However, how do we know that the rise was caused by the fraudulent trades? Fortunately for us as researchers, the unauthorised trades did not take place every day. Table one shows the daily switch in the Bitcoin–US dollar exchange rate for various time periods on Mt. Gox. In the two quarters before unauthorised trading commenced, the daily price increase was, on average, positive but relatively petite: a $0.21 increase in the very first period and a $1 increase in the 2nd period. During the third quarter, when unauthorised trading began, the price rose by an average of $Three.15 on the seventeen days in which Markus traded, but fell on average by $0.51 on the seventy five days he did not trade. However, it is during the final quarter, when Willy began trading, that the difference became stark. On the fifty days in which Willy traded, the Bitcoin price rose by an average of $21.85. On the forty one days in which Willy did not make unauthorizsed purchases, the price fell by $0.88 on average. (Table one is very similar for the other leading exchanges as well.)

Table 1 Average daily switch in BTC/USD exchange rate as a function of fraudulent activity Two

In our total paper, we conduct a regression analysis to examine whether other factors such as the relatively numerous and varied attacks on the Mt. Gox exchange could explain the switch in the daily Bitcoin price, both at Mt. Gox and other leading exchanges (Gandal et al. 2017).

The analysis confirms that only Willy’s trading presence affected the price. The estimated coefficient (on the dummy variable for whether Willy was active) is virtually the same ($21.65) as in Table 1. We conclude that the suspicious trading activity of a single actor was the primary cause of the massive spike in the Bitcoin–US dollar exchange rate, in which the rate rose from around $150 to over $1,000 in just two months in late 2013. The fall was almost as precipitous: the Mt. Gox exchange folded due to insolvency in early 2014, and it has taken more than three years for Bitcoin to match the rise triggered by fraudulent transactions.

Why should we care about the Bitcoin manipulation that took place in 2013? After all, the Bitcoin ecosystem is not almost as significant as the Fresh York Stock Exchange. Nonetheless, latest trends indicate that Bitcoin is becoming an significant asset in the financial system.

Trading in cryptocurrency assets has exploded recently. In the case of Bitcoin, during the one year period ending in mid-June 2017, the market capitalisation enlargened massively from around $7 billion to $45 billion; that is an increase of over 500% in one year. The market cap of other cryptocurrencies surged by even more. In the one-year period ending in mid-May 2017, the market value of cryptocurrencies excluding Bitcoin surged from $1.7 billion to more than $29 billion; that is an increase of more than 1,900%. The markets for these other cryptocurrencies are very lean and subject to manipulation. Given that we now know the Bitcoin price has been artificially inflated by unauthorised trades in the past, we must view the present rise with excellent caution, and not necessarily consider it a ‘healthy bubble’, as recently claimed in The Economist (2017).

As mainstream finance invests in cryptocurrency assets and as countries take steps toward legalising Bitcoin as a payment system (as Japan did in April 2017), it is significant to understand how susceptible cryptocurrency markets are to manipulation. We encourage the nascent cryptocurrency industry to work with regulators and researchers to share anonymised transaction data so that more confidence can be placed in the veracity of exchange rates.

References

Babaioff, M, S Dobzinski, S Oren and A Zohar (2012), “On bitcoin and crimson balloons” in Proceedings of the 13th ACM Conference on Electronic Commerce, pp. 56-73.

Eyal, I and E Sirer (2014), “Majority is not Enough: Bitcoin Mining is Vulnerable”, paper introduced at the Eighteenth International Conference on Financial Cryptography and Data Security, Barbados, 3-7 March.

Gandal, N, J Hamrick, T Moore and T Oberman (2017), “Price Manipulation in the Bitcoin Ecosystem,” CEPR Discussion Paper No. 12061.

Mooser, M, R Bohme and D Breuker (2013), “An inquiry into money laundering instruments in the Bitcoin ecosystem”, in Proceedings of the Seventh APWG eCrime Re-searcher’s Summit, pp. 1-14.

Ron, D and A Shamir (2013), “Quantitative analysis of the utter Bitcoin transaction graph”, in Financial Cryptography and Data Security, Vol. Seven thousand eight hundred fifty nine of Lecture Notes in Computer Science, pp. 6-24.

Vasek, M and T Moore (2015), “There’s no free lunch, even using Bitcoin: Tracking the popularity and profits of virtual currency scams”, in R Bohme and T Okamoto (eds), Financial Cryptography and Data Security, volume eight thousand nine hundred seventy five of Lecture Notes in Computer Science, pp. 44-61.

Vasek, M, J Bonneau, R Castellucci, C Keith and T Moore (2016), “The Bitcoin brain drain: a brief paper on the use and manhandle of bitcoin brain wallets”, in Financial Cryptography and Data Security, Lecture Notes in Computer Science.

Yuxing Huang, D, H Dharmdasani, S Meiklejohn, V Dave, C Grier, D McCoy, S Savage, N Weaver, A Snoeren and K Levchenko (2014), “Botcoin: Monetizing stolen cycles”, in Proceedings of the Network and Distributed System Security Symposium.

Endnotes

[1] The Bitcoin ecosystem includes the core network for propagating transactions, the blockchain, and many intermediaries such as currency exchanges, mining pools, and payment processors that facilitate trade.

[Two] Markus was primarily active in period Three, but he was also active a few days during periods 1,Two, and Four. He was not active on the same days as Willy, who was only active in period Four.

Price manipulation in the Bitcoin ecosystem, VOX, CEPR’s Policy Portal

VOX CEPR’s Policy Portal

Research-based policy analysis and commentary from leading economists

Price manipulation in the Bitcoin ecosystem

Neil Gandal, JT Hamrick, Tyler Moore, Tali Oberman twenty two June two thousand seventeen

The cryptocurrency Bitcoin has attracted widespread interest, in large part due to wild swings in its valuation. This column considers an earlier rise in the Bitcoin price to investigate what is driving the currency’s price spikes. The two thousand thirteen rise was caused by fraudulent trades taking place at the largest Bitcoin currency exchange at the time. This finding has implications for policymakers as they weigh what, if anything, to do about regulating cryptocurrencies in light of the record high Bitcoin valuation that many fear is a bubble.

Related

The digital currency Bitcoin was introduced in 2009. Bitcoin and the many other digital currencies are primarily online currencies. The key currencies are those based primarily on cryptography, and Bitcoin is the leading ‘cryptocurrency’.

Bitcoin has experienced a meteoric rise in popularity since its introduction. While digital currencies were proposed as early as the 1980s, Bitcoin was the very first to catch on. The total value of all Bitcoins in circulation reached $45 billion in June 2017. Its success has inspired scores of challenging cryptocurrencies that go after a similar design. Bitcoin and most other cryptocurrencies do not require a central authority to validate and lodge transactions. Instead, these currencies use cryptography (and an internal incentive system) to control transactions, manage the supply, and prevent fraud. Payments are validated by a decentralised network. Once confirmed, all transactions are stored digitally and recorded in a public ‘blockchain’,’ which can be thought of as a distributed accounting system.

While Bitcoin’s algorithm provides safeguards against ‘counterfeiting’ of the currency, the eco-system is still vulnerable to theft. Users keep keys to their Bitcoins and make transactions with the help of wallets. Exchanges facilitate trade inbetween Bitcoins and fiat currencies, and also permit for storing Bitcoins. Bitcoins can be stolen through wallets or exchanges. Exchanges have been targeted more frequently than wallets because many wallets are located on users’ (local) computers, while exchanges frequently store customer deposits in their own (much larger) wallets.

The supply of most cryptocurrencies increases at a predetermined rate, and cannot be switched by any central authority. There are about fifteen million Bitcoins presently in circulation, with the ultimate number eventually reaching twenty one million. The immobile supply in the long run creates concerns about the deflationary aspect of the currency.

While Bitcoin shows good promise to disrupt existing payment systems through innovations in its technical design, the Bitcoin ecosystem one has been the frequent target of attacks by financially motivated criminals. Due to the unregulated, decentralised environment in which they operate, cryptocurrencies are under constant threat of attack.

Bitcoin only recently became a subject of research in economics. However, the topic has been of interest for longer in computer science (for early work by computer scientists on incentives, see Babaioff et al. 2012, and Eyal and Sirer 2014.) Numerous researchers have conducted studies in order to document and combat threats such as Ponzi schemes, money laundering, mining botnets, and the theft of cryptocurrency wallets (Moeser et al. 2013, Vasek and Moore 2015, Vasek et al. 2016, Yuxing et al. 2014). Ron and Shamir (2013) attempt to identify suspicious trading activity by building a graph of Bitcoin transactions found in the public ledger. None of these papers can associate individual transactions with specific users of the currency exchanges.

In latest work, we display that the very first time Bitcoin reached an exchange rate of more than $1,000, the meteoric rise was driven by fraud (Gandal et al. 2017). We leverage a unique and very detailed dataset to examine suspicious trading activity that occurred over a ten-month period in two thousand thirteen on Mt. Gox, the leading Bitcoin currency exchange at the time. We very first quantify the extent of the suspicious/fraudulent trading activity and showcase that it constitutes a large fraction of trading on the days the activity occurred. We then demonstrate how this trading activity affected the exchange rates at Mt. Gox and other leading currency exchanges.

Figure 1 Bitcoin–US dollar exchange rate, with periods of suspicious activity shaded

While it was the superior currency exchange when Bitcoin very first shot to prominence in early 2013, behind the scenes, Tokyo-based Mt. Gox was in trouble. In addition to suffering from repeated denial-of-service attacks and Bitcoin thefts, two unauthorised traders were able to transact on the exchange without spending real money. In the very first case, a trader dubbed ‘Markus’ was credited with Bitcoins by duplicating previously finished transactions. In the 2nd case, a trader dubbed ‘Willy’ bought Bitcoins from traders by ‘crediting’ the sellers’ accounts with fiat currencies that, in many cases, could not be withdrawn. Figure one shows when these fraudulent traders were active, along with the Bitcoin–US dollar exchange rate. Most noteworthy is that Willy’s operation coincided with an unprecedented leap in the price of Bitcoin: from around $150 to over $1000. In early 2014, Mt. Gox collapsed, and the Bitcoin price fell with it. Only recently, in early 2017, has Bitcoin surpassed the levels of the earlier rise.

However, how do we know that the rise was caused by the fraudulent trades? Fortunately for us as researchers, the unauthorised trades did not take place every day. Table one shows the daily switch in the Bitcoin–US dollar exchange rate for various time periods on Mt. Gox. In the two quarters before unauthorised trading commenced, the daily price increase was, on average, positive but relatively puny: a $0.21 increase in the very first period and a $1 increase in the 2nd period. During the third quarter, when unauthorised trading embarked, the price rose by an average of $Trio.15 on the seventeen days in which Markus traded, but fell on average by $0.51 on the seventy five days he did not trade. However, it is during the final quarter, when Willy began trading, that the difference became stark. On the fifty days in which Willy traded, the Bitcoin price rose by an average of $21.85. On the forty one days in which Willy did not make unauthorizsed purchases, the price fell by $0.88 on average. (Table one is very similar for the other leading exchanges as well.)

Table 1 Average daily switch in BTC/USD exchange rate as a function of fraudulent activity Two

In our total paper, we conduct a regression analysis to examine whether other factors such as the relatively numerous and varied attacks on the Mt. Gox exchange could explain the switch in the daily Bitcoin price, both at Mt. Gox and other leading exchanges (Gandal et al. 2017).

The analysis confirms that only Willy’s trading presence affected the price. The estimated coefficient (on the dummy variable for whether Willy was active) is virtually the same ($21.65) as in Table 1. We conclude that the suspicious trading activity of a single actor was the primary cause of the massive spike in the Bitcoin–US dollar exchange rate, in which the rate rose from around $150 to over $1,000 in just two months in late 2013. The fall was almost as precipitous: the Mt. Gox exchange folded due to insolvency in early 2014, and it has taken more than three years for Bitcoin to match the rise triggered by fraudulent transactions.

Why should we care about the Bitcoin manipulation that took place in 2013? After all, the Bitcoin ecosystem is not almost as significant as the Fresh York Stock Exchange. Nonetheless, latest trends indicate that Bitcoin is becoming an significant asset in the financial system.

Trading in cryptocurrency assets has exploded recently. In the case of Bitcoin, during the one year period ending in mid-June 2017, the market capitalisation enhanced massively from around $7 billion to $45 billion; that is an increase of over 500% in one year. The market cap of other cryptocurrencies surged by even more. In the one-year period ending in mid-May 2017, the market value of cryptocurrencies excluding Bitcoin surged from $1.7 billion to more than $29 billion; that is an increase of more than 1,900%. The markets for these other cryptocurrencies are very skinny and subject to manipulation. Given that we now know the Bitcoin price has been artificially inflated by unauthorised trades in the past, we must view the present rise with superb caution, and not necessarily consider it a ‘healthy bubble’, as recently claimed in The Economist (2017).

As mainstream finance invests in cryptocurrency assets and as countries take steps toward legalising Bitcoin as a payment system (as Japan did in April 2017), it is significant to understand how susceptible cryptocurrency markets are to manipulation. We encourage the nascent cryptocurrency industry to work with regulators and researchers to share anonymised transaction data so that more confidence can be placed in the veracity of exchange rates.

References

Babaioff, M, S Dobzinski, S Oren and A Zohar (2012), “On bitcoin and crimson balloons” in Proceedings of the 13th ACM Conference on Electronic Commerce, pp. 56-73.

Eyal, I and E Sirer (2014), “Majority is not Enough: Bitcoin Mining is Vulnerable”, paper introduced at the Eighteenth International Conference on Financial Cryptography and Data Security, Barbados, 3-7 March.

Gandal, N, J Hamrick, T Moore and T Oberman (2017), “Price Manipulation in the Bitcoin Ecosystem,” CEPR Discussion Paper No. 12061.

Mooser, M, R Bohme and D Breuker (2013), “An inquiry into money laundering devices in the Bitcoin ecosystem”, in Proceedings of the Seventh APWG eCrime Re-searcher’s Summit, pp. 1-14.

Ron, D and A Shamir (2013), “Quantitative analysis of the total Bitcoin transaction graph”, in Financial Cryptography and Data Security, Vol. Seven thousand eight hundred fifty nine of Lecture Notes in Computer Science, pp. 6-24.

Vasek, M and T Moore (2015), “There’s no free lunch, even using Bitcoin: Tracking the popularity and profits of virtual currency scams”, in R Bohme and T Okamoto (eds), Financial Cryptography and Data Security, volume eight thousand nine hundred seventy five of Lecture Notes in Computer Science, pp. 44-61.

Vasek, M, J Bonneau, R Castellucci, C Keith and T Moore (2016), “The Bitcoin brain drain: a brief paper on the use and manhandle of bitcoin brain wallets”, in Financial Cryptography and Data Security, Lecture Notes in Computer Science.

Yuxing Huang, D, H Dharmdasani, S Meiklejohn, V Dave, C Grier, D McCoy, S Savage, N Weaver, A Snoeren and K Levchenko (2014), “Botcoin: Monetizing stolen cycles”, in Proceedings of the Network and Distributed System Security Symposium.

Endnotes

[1] The Bitcoin ecosystem includes the core network for propagating transactions, the blockchain, and many intermediaries such as currency exchanges, mining pools, and payment processors that facilitate trade.

[Two] Markus was primarily active in period Three, but he was also active a few days during periods 1,Two, and Four. He was not active on the same days as Willy, who was only active in period Four.

Price manipulation in the Bitcoin ecosystem, VOX, CEPR’s Policy Portal

VOX CEPR’s Policy Portal

Research-based policy analysis and commentary from leading economists

Price manipulation in the Bitcoin ecosystem

Neil Gandal, JT Hamrick, Tyler Moore, Tali Oberman twenty two June two thousand seventeen

The cryptocurrency Bitcoin has attracted widespread interest, in large part due to wild swings in its valuation. This column considers an earlier rise in the Bitcoin price to investigate what is driving the currency’s price spikes. The two thousand thirteen rise was caused by fraudulent trades taking place at the largest Bitcoin currency exchange at the time. This finding has implications for policymakers as they weigh what, if anything, to do about regulating cryptocurrencies in light of the record high Bitcoin valuation that many fear is a bubble.

Related

The digital currency Bitcoin was introduced in 2009. Bitcoin and the many other digital currencies are primarily online currencies. The key currencies are those based primarily on cryptography, and Bitcoin is the leading ‘cryptocurrency’.

Bitcoin has experienced a meteoric rise in popularity since its introduction. While digital currencies were proposed as early as the 1980s, Bitcoin was the very first to catch on. The total value of all Bitcoins in circulation reached $45 billion in June 2017. Its success has inspired scores of rivaling cryptocurrencies that go after a similar design. Bitcoin and most other cryptocurrencies do not require a central authority to validate and lodge transactions. Instead, these currencies use cryptography (and an internal incentive system) to control transactions, manage the supply, and prevent fraud. Payments are validated by a decentralised network. Once confirmed, all transactions are stored digitally and recorded in a public ‘blockchain’,’ which can be thought of as a distributed accounting system.

While Bitcoin’s algorithm provides safeguards against ‘counterfeiting’ of the currency, the eco-system is still vulnerable to theft. Users keep keys to their Bitcoins and make transactions with the help of wallets. Exchanges facilitate trade inbetween Bitcoins and fiat currencies, and also permit for storing Bitcoins. Bitcoins can be stolen through wallets or exchanges. Exchanges have been targeted more frequently than wallets because many wallets are located on users’ (local) computers, while exchanges frequently store customer deposits in their own (much larger) wallets.

The supply of most cryptocurrencies increases at a predetermined rate, and cannot be switched by any central authority. There are about fifteen million Bitcoins presently in circulation, with the ultimate number eventually reaching twenty one million. The stationary supply in the long run creates concerns about the deflationary aspect of the currency.

While Bitcoin shows good promise to disrupt existing payment systems through innovations in its technical design, the Bitcoin ecosystem one has been the frequent target of attacks by financially motivated criminals. Due to the unregulated, decentralised environment in which they operate, cryptocurrencies are under constant threat of attack.

Bitcoin only recently became a subject of research in economics. However, the topic has been of interest for longer in computer science (for early work by computer scientists on incentives, see Babaioff et al. 2012, and Eyal and Sirer 2014.) Numerous researchers have conducted studies in order to document and combat threats such as Ponzi schemes, money laundering, mining botnets, and the theft of cryptocurrency wallets (Moeser et al. 2013, Vasek and Moore 2015, Vasek et al. 2016, Yuxing et al. 2014). Ron and Shamir (2013) attempt to identify suspicious trading activity by building a graph of Bitcoin transactions found in the public ledger. None of these papers can associate individual transactions with specific users of the currency exchanges.

In latest work, we showcase that the very first time Bitcoin reached an exchange rate of more than $1,000, the meteoric rise was driven by fraud (Gandal et al. 2017). We leverage a unique and very detailed dataset to examine suspicious trading activity that occurred over a ten-month period in two thousand thirteen on Mt. Gox, the leading Bitcoin currency exchange at the time. We very first quantify the extent of the suspicious/fraudulent trading activity and demonstrate that it constitutes a large fraction of trading on the days the activity occurred. We then showcase how this trading activity affected the exchange rates at Mt. Gox and other leading currency exchanges.

Figure 1 Bitcoin–US dollar exchange rate, with periods of suspicious activity shaded

While it was the superior currency exchange when Bitcoin very first shot to prominence in early 2013, behind the scenes, Tokyo-based Mt. Gox was in trouble. In addition to suffering from repeated denial-of-service attacks and Bitcoin thefts, two unauthorised traders were able to transact on the exchange without spending real money. In the very first case, a trader dubbed ‘Markus’ was credited with Bitcoins by duplicating previously finished transactions. In the 2nd case, a trader dubbed ‘Willy’ bought Bitcoins from traders by ‘crediting’ the sellers’ accounts with fiat currencies that, in many cases, could not be withdrawn. Figure one shows when these fraudulent traders were active, along with the Bitcoin–US dollar exchange rate. Most noteworthy is that Willy’s operation coincided with an unprecedented leap in the price of Bitcoin: from around $150 to over $1000. In early 2014, Mt. Gox collapsed, and the Bitcoin price fell with it. Only recently, in early 2017, has Bitcoin surpassed the levels of the earlier rise.

However, how do we know that the rise was caused by the fraudulent trades? Fortunately for us as researchers, the unauthorised trades did not take place every day. Table one shows the daily switch in the Bitcoin–US dollar exchange rate for various time periods on Mt. Gox. In the two quarters before unauthorised trading commenced, the daily price increase was, on average, positive but relatively petite: a $0.21 increase in the very first period and a $1 increase in the 2nd period. During the third quarter, when unauthorised trading began, the price rose by an average of $Three.15 on the seventeen days in which Markus traded, but fell on average by $0.51 on the seventy five days he did not trade. However, it is during the final quarter, when Willy began trading, that the difference became stark. On the fifty days in which Willy traded, the Bitcoin price rose by an average of $21.85. On the forty one days in which Willy did not make unauthorizsed purchases, the price fell by $0.88 on average. (Table one is very similar for the other leading exchanges as well.)

Table 1 Average daily switch in BTC/USD exchange rate as a function of fraudulent activity Two

In our total paper, we conduct a regression analysis to examine whether other factors such as the relatively numerous and varied attacks on the Mt. Gox exchange could explain the switch in the daily Bitcoin price, both at Mt. Gox and other leading exchanges (Gandal et al. 2017).

The analysis confirms that only Willy’s trading presence affected the price. The estimated coefficient (on the dummy variable for whether Willy was active) is virtually the same ($21.65) as in Table 1. We conclude that the suspicious trading activity of a single actor was the primary cause of the massive spike in the Bitcoin–US dollar exchange rate, in which the rate rose from around $150 to over $1,000 in just two months in late 2013. The fall was almost as precipitous: the Mt. Gox exchange folded due to insolvency in early 2014, and it has taken more than three years for Bitcoin to match the rise triggered by fraudulent transactions.

Why should we care about the Bitcoin manipulation that took place in 2013? After all, the Bitcoin ecosystem is not almost as significant as the Fresh York Stock Exchange. Nonetheless, latest trends indicate that Bitcoin is becoming an significant asset in the financial system.

Trading in cryptocurrency assets has exploded recently. In the case of Bitcoin, during the one year period ending in mid-June 2017, the market capitalisation enlargened massively from around $7 billion to $45 billion; that is an increase of over 500% in one year. The market cap of other cryptocurrencies surged by even more. In the one-year period ending in mid-May 2017, the market value of cryptocurrencies excluding Bitcoin surged from $1.7 billion to more than $29 billion; that is an increase of more than 1,900%. The markets for these other cryptocurrencies are very lean and subject to manipulation. Given that we now know the Bitcoin price has been artificially inflated by unauthorised trades in the past, we must view the present rise with superb caution, and not necessarily consider it a ‘healthy bubble’, as recently claimed in The Economist (2017).

As mainstream finance invests in cryptocurrency assets and as countries take steps toward legalising Bitcoin as a payment system (as Japan did in April 2017), it is significant to understand how susceptible cryptocurrency markets are to manipulation. We encourage the nascent cryptocurrency industry to work with regulators and researchers to share anonymised transaction data so that more confidence can be placed in the veracity of exchange rates.

References

Babaioff, M, S Dobzinski, S Oren and A Zohar (2012), “On bitcoin and crimson balloons” in Proceedings of the 13th ACM Conference on Electronic Commerce, pp. 56-73.

Eyal, I and E Sirer (2014), “Majority is not Enough: Bitcoin Mining is Vulnerable”, paper introduced at the Eighteenth International Conference on Financial Cryptography and Data Security, Barbados, 3-7 March.

Gandal, N, J Hamrick, T Moore and T Oberman (2017), “Price Manipulation in the Bitcoin Ecosystem,” CEPR Discussion Paper No. 12061.

Mooser, M, R Bohme and D Breuker (2013), “An inquiry into money laundering contraptions in the Bitcoin ecosystem”, in Proceedings of the Seventh APWG eCrime Re-searcher’s Summit, pp. 1-14.

Ron, D and A Shamir (2013), “Quantitative analysis of the utter Bitcoin transaction graph”, in Financial Cryptography and Data Security, Vol. Seven thousand eight hundred fifty nine of Lecture Notes in Computer Science, pp. 6-24.

Vasek, M and T Moore (2015), “There’s no free lunch, even using Bitcoin: Tracking the popularity and profits of virtual currency scams”, in R Bohme and T Okamoto (eds), Financial Cryptography and Data Security, volume eight thousand nine hundred seventy five of Lecture Notes in Computer Science, pp. 44-61.

Vasek, M, J Bonneau, R Castellucci, C Keith and T Moore (2016), “The Bitcoin brain drain: a brief paper on the use and manhandle of bitcoin brain wallets”, in Financial Cryptography and Data Security, Lecture Notes in Computer Science.

Yuxing Huang, D, H Dharmdasani, S Meiklejohn, V Dave, C Grier, D McCoy, S Savage, N Weaver, A Snoeren and K Levchenko (2014), “Botcoin: Monetizing stolen cycles”, in Proceedings of the Network and Distributed System Security Symposium.

Endnotes

[1] The Bitcoin ecosystem includes the core network for propagating transactions, the blockchain, and many intermediaries such as currency exchanges, mining pools, and payment processors that facilitate trade.

[Two] Markus was primarily active in period Three, but he was also active a few days during periods 1,Two, and Four. He was not active on the same days as Willy, who was only active in period Four.

Price manipulation in the Bitcoin ecosystem, VOX, CEPR’s Policy Portal

VOX CEPR’s Policy Portal

Research-based policy analysis and commentary from leading economists

Price manipulation in the Bitcoin ecosystem

Neil Gandal, JT Hamrick, Tyler Moore, Tali Oberman twenty two June two thousand seventeen

The cryptocurrency Bitcoin has attracted widespread interest, in large part due to wild swings in its valuation. This column considers an earlier rise in the Bitcoin price to investigate what is driving the currency’s price spikes. The two thousand thirteen rise was caused by fraudulent trades taking place at the largest Bitcoin currency exchange at the time. This finding has implications for policymakers as they weigh what, if anything, to do about regulating cryptocurrencies in light of the record high Bitcoin valuation that many fear is a bubble.

Related

The digital currency Bitcoin was introduced in 2009. Bitcoin and the many other digital currencies are primarily online currencies. The key currencies are those based primarily on cryptography, and Bitcoin is the leading ‘cryptocurrency’.

Bitcoin has experienced a meteoric rise in popularity since its introduction. While digital currencies were proposed as early as the 1980s, Bitcoin was the very first to catch on. The total value of all Bitcoins in circulation reached $45 billion in June 2017. Its success has inspired scores of contesting cryptocurrencies that go after a similar design. Bitcoin and most other cryptocurrencies do not require a central authority to validate and lodge transactions. Instead, these currencies use cryptography (and an internal incentive system) to control transactions, manage the supply, and prevent fraud. Payments are validated by a decentralised network. Once confirmed, all transactions are stored digitally and recorded in a public ‘blockchain’,’ which can be thought of as a distributed accounting system.

While Bitcoin’s algorithm provides safeguards against ‘counterfeiting’ of the currency, the eco-system is still vulnerable to theft. Users keep keys to their Bitcoins and make transactions with the help of wallets. Exchanges facilitate trade inbetween Bitcoins and fiat currencies, and also permit for storing Bitcoins. Bitcoins can be stolen through wallets or exchanges. Exchanges have been targeted more frequently than wallets because many wallets are located on users’ (local) computers, while exchanges frequently store customer deposits in their own (much larger) wallets.

The supply of most cryptocurrencies increases at a predetermined rate, and cannot be switched by any central authority. There are about fifteen million Bitcoins presently in circulation, with the ultimate number eventually reaching twenty one million. The immobile supply in the long run creates concerns about the deflationary aspect of the currency.

While Bitcoin shows excellent promise to disrupt existing payment systems through innovations in its technical design, the Bitcoin ecosystem one has been the frequent target of attacks by financially motivated criminals. Due to the unregulated, decentralised environment in which they operate, cryptocurrencies are under constant threat of attack.

Bitcoin only recently became a subject of research in economics. However, the topic has been of interest for longer in computer science (for early work by computer scientists on incentives, see Babaioff et al. 2012, and Eyal and Sirer 2014.) Numerous researchers have conducted studies in order to document and combat threats such as Ponzi schemes, money laundering, mining botnets, and the theft of cryptocurrency wallets (Moeser et al. 2013, Vasek and Moore 2015, Vasek et al. 2016, Yuxing et al. 2014). Ron and Shamir (2013) attempt to identify suspicious trading activity by building a graph of Bitcoin transactions found in the public ledger. None of these papers can associate individual transactions with specific users of the currency exchanges.

In latest work, we demonstrate that the very first time Bitcoin reached an exchange rate of more than $1,000, the meteoric rise was driven by fraud (Gandal et al. 2017). We leverage a unique and very detailed dataset to examine suspicious trading activity that occurred over a ten-month period in two thousand thirteen on Mt. Gox, the leading Bitcoin currency exchange at the time. We very first quantify the extent of the suspicious/fraudulent trading activity and showcase that it constitutes a large fraction of trading on the days the activity occurred. We then demonstrate how this trading activity affected the exchange rates at Mt. Gox and other leading currency exchanges.

Figure 1 Bitcoin–US dollar exchange rate, with periods of suspicious activity shaded

While it was the superior currency exchange when Bitcoin very first shot to prominence in early 2013, behind the scenes, Tokyo-based Mt. Gox was in trouble. In addition to suffering from repeated denial-of-service attacks and Bitcoin thefts, two unauthorised traders were able to transact on the exchange without spending real money. In the very first case, a trader dubbed ‘Markus’ was credited with Bitcoins by duplicating previously ended transactions. In the 2nd case, a trader dubbed ‘Willy’ bought Bitcoins from traders by ‘crediting’ the sellers’ accounts with fiat currencies that, in many cases, could not be withdrawn. Figure one shows when these fraudulent traders were active, along with the Bitcoin–US dollar exchange rate. Most noteworthy is that Willy’s operation coincided with an unprecedented hop in the price of Bitcoin: from around $150 to over $1000. In early 2014, Mt. Gox collapsed, and the Bitcoin price fell with it. Only recently, in early 2017, has Bitcoin surpassed the levels of the earlier rise.

However, how do we know that the rise was caused by the fraudulent trades? Fortunately for us as researchers, the unauthorised trades did not take place every day. Table one shows the daily switch in the Bitcoin–US dollar exchange rate for various time periods on Mt. Gox. In the two quarters before unauthorised trading commenced, the daily price increase was, on average, positive but relatively puny: a $0.21 increase in the very first period and a $1 increase in the 2nd period. During the third quarter, when unauthorised trading embarked, the price rose by an average of $Three.15 on the seventeen days in which Markus traded, but fell on average by $0.51 on the seventy five days he did not trade. However, it is during the final quarter, when Willy began trading, that the difference became stark. On the fifty days in which Willy traded, the Bitcoin price rose by an average of $21.85. On the forty one days in which Willy did not make unauthorizsed purchases, the price fell by $0.88 on average. (Table one is very similar for the other leading exchanges as well.)

Table 1 Average daily switch in BTC/USD exchange rate as a function of fraudulent activity Two

In our total paper, we conduct a regression analysis to examine whether other factors such as the relatively numerous and varied attacks on the Mt. Gox exchange could explain the switch in the daily Bitcoin price, both at Mt. Gox and other leading exchanges (Gandal et al. 2017).

The analysis confirms that only Willy’s trading presence affected the price. The estimated coefficient (on the dummy variable for whether Willy was active) is virtually the same ($21.65) as in Table 1. We conclude that the suspicious trading activity of a single actor was the primary cause of the massive spike in the Bitcoin–US dollar exchange rate, in which the rate rose from around $150 to over $1,000 in just two months in late 2013. The fall was almost as precipitous: the Mt. Gox exchange folded due to insolvency in early 2014, and it has taken more than three years for Bitcoin to match the rise triggered by fraudulent transactions.

Why should we care about the Bitcoin manipulation that took place in 2013? After all, the Bitcoin ecosystem is not almost as significant as the Fresh York Stock Exchange. Nonetheless, latest trends indicate that Bitcoin is becoming an significant asset in the financial system.

Trading in cryptocurrency assets has exploded recently. In the case of Bitcoin, during the one year period ending in mid-June 2017, the market capitalisation enhanced massively from around $7 billion to $45 billion; that is an increase of over 500% in one year. The market cap of other cryptocurrencies surged by even more. In the one-year period ending in mid-May 2017, the market value of cryptocurrencies excluding Bitcoin surged from $1.7 billion to more than $29 billion; that is an increase of more than 1,900%. The markets for these other cryptocurrencies are very lean and subject to manipulation. Given that we now know the Bitcoin price has been artificially inflated by unauthorised trades in the past, we must view the present rise with superb caution, and not necessarily consider it a ‘healthy bubble’, as recently claimed in The Economist (2017).

As mainstream finance invests in cryptocurrency assets and as countries take steps toward legalising Bitcoin as a payment system (as Japan did in April 2017), it is significant to understand how susceptible cryptocurrency markets are to manipulation. We encourage the nascent cryptocurrency industry to work with regulators and researchers to share anonymised transaction data so that more confidence can be placed in the veracity of exchange rates.

References

Babaioff, M, S Dobzinski, S Oren and A Zohar (2012), “On bitcoin and crimson balloons” in Proceedings of the 13th ACM Conference on Electronic Commerce, pp. 56-73.

Eyal, I and E Sirer (2014), “Majority is not Enough: Bitcoin Mining is Vulnerable”, paper introduced at the Eighteenth International Conference on Financial Cryptography and Data Security, Barbados, 3-7 March.

Gandal, N, J Hamrick, T Moore and T Oberman (2017), “Price Manipulation in the Bitcoin Ecosystem,” CEPR Discussion Paper No. 12061.

Mooser, M, R Bohme and D Breuker (2013), “An inquiry into money laundering devices in the Bitcoin ecosystem”, in Proceedings of the Seventh APWG eCrime Re-searcher’s Summit, pp. 1-14.

Ron, D and A Shamir (2013), “Quantitative analysis of the total Bitcoin transaction graph”, in Financial Cryptography and Data Security, Vol. Seven thousand eight hundred fifty nine of Lecture Notes in Computer Science, pp. 6-24.

Vasek, M and T Moore (2015), “There’s no free lunch, even using Bitcoin: Tracking the popularity and profits of virtual currency scams”, in R Bohme and T Okamoto (eds), Financial Cryptography and Data Security, volume eight thousand nine hundred seventy five of Lecture Notes in Computer Science, pp. 44-61.

Vasek, M, J Bonneau, R Castellucci, C Keith and T Moore (2016), “The Bitcoin brain drain: a brief paper on the use and manhandle of bitcoin brain wallets”, in Financial Cryptography and Data Security, Lecture Notes in Computer Science.

Yuxing Huang, D, H Dharmdasani, S Meiklejohn, V Dave, C Grier, D McCoy, S Savage, N Weaver, A Snoeren and K Levchenko (2014), “Botcoin: Monetizing stolen cycles”, in Proceedings of the Network and Distributed System Security Symposium.

Endnotes

[1] The Bitcoin ecosystem includes the core network for propagating transactions, the blockchain, and many intermediaries such as currency exchanges, mining pools, and payment processors that facilitate trade.

[Two] Markus was primarily active in period Three, but he was also active a few days during periods 1,Two, and Four. He was not active on the same days as Willy, who was only active in period Four.

Price manipulation in the Bitcoin ecosystem, VOX, CEPR’s Policy Portal

VOX CEPR’s Policy Portal

Research-based policy analysis and commentary from leading economists

Price manipulation in the Bitcoin ecosystem

Neil Gandal, JT Hamrick, Tyler Moore, Tali Oberman twenty two June two thousand seventeen

The cryptocurrency Bitcoin has attracted widespread interest, in large part due to wild swings in its valuation. This column considers an earlier rise in the Bitcoin price to investigate what is driving the currency’s price spikes. The two thousand thirteen rise was caused by fraudulent trades taking place at the largest Bitcoin currency exchange at the time. This finding has implications for policymakers as they weigh what, if anything, to do about regulating cryptocurrencies in light of the record high Bitcoin valuation that many fear is a bubble.

Related

The digital currency Bitcoin was introduced in 2009. Bitcoin and the many other digital currencies are primarily online currencies. The key currencies are those based primarily on cryptography, and Bitcoin is the leading ‘cryptocurrency’.

Bitcoin has experienced a meteoric rise in popularity since its introduction. While digital currencies were proposed as early as the 1980s, Bitcoin was the very first to catch on. The total value of all Bitcoins in circulation reached $45 billion in June 2017. Its success has inspired scores of contesting cryptocurrencies that go after a similar design. Bitcoin and most other cryptocurrencies do not require a central authority to validate and lodge transactions. Instead, these currencies use cryptography (and an internal incentive system) to control transactions, manage the supply, and prevent fraud. Payments are validated by a decentralised network. Once confirmed, all transactions are stored digitally and recorded in a public ‘blockchain’,’ which can be thought of as a distributed accounting system.

While Bitcoin’s algorithm provides safeguards against ‘counterfeiting’ of the currency, the eco-system is still vulnerable to theft. Users keep keys to their Bitcoins and make transactions with the help of wallets. Exchanges facilitate trade inbetween Bitcoins and fiat currencies, and also permit for storing Bitcoins. Bitcoins can be stolen through wallets or exchanges. Exchanges have been targeted more frequently than wallets because many wallets are located on users’ (local) computers, while exchanges frequently store customer deposits in their own (much larger) wallets.

The supply of most cryptocurrencies increases at a predetermined rate, and cannot be switched by any central authority. There are about fifteen million Bitcoins presently in circulation, with the ultimate number eventually reaching twenty one million. The motionless supply in the long run creates concerns about the deflationary aspect of the currency.

While Bitcoin shows good promise to disrupt existing payment systems through innovations in its technical design, the Bitcoin ecosystem one has been the frequent target of attacks by financially motivated criminals. Due to the unregulated, decentralised environment in which they operate, cryptocurrencies are under constant threat of attack.

Bitcoin only recently became a subject of research in economics. However, the topic has been of interest for longer in computer science (for early work by computer scientists on incentives, see Babaioff et al. 2012, and Eyal and Sirer 2014.) Numerous researchers have conducted studies in order to document and combat threats such as Ponzi schemes, money laundering, mining botnets, and the theft of cryptocurrency wallets (Moeser et al. 2013, Vasek and Moore 2015, Vasek et al. 2016, Yuxing et al. 2014). Ron and Shamir (2013) attempt to identify suspicious trading activity by building a graph of Bitcoin transactions found in the public ledger. None of these papers can associate individual transactions with specific users of the currency exchanges.

In latest work, we showcase that the very first time Bitcoin reached an exchange rate of more than $1,000, the meteoric rise was driven by fraud (Gandal et al. 2017). We leverage a unique and very detailed dataset to examine suspicious trading activity that occurred over a ten-month period in two thousand thirteen on Mt. Gox, the leading Bitcoin currency exchange at the time. We very first quantify the extent of the suspicious/fraudulent trading activity and showcase that it constitutes a large fraction of trading on the days the activity occurred. We then demonstrate how this trading activity affected the exchange rates at Mt. Gox and other leading currency exchanges.

Figure 1 Bitcoin–US dollar exchange rate, with periods of suspicious activity shaded

While it was the superior currency exchange when Bitcoin very first shot to prominence in early 2013, behind the scenes, Tokyo-based Mt. Gox was in trouble. In addition to suffering from repeated denial-of-service attacks and Bitcoin thefts, two unauthorised traders were able to transact on the exchange without spending real money. In the very first case, a trader dubbed ‘Markus’ was credited with Bitcoins by duplicating previously finished transactions. In the 2nd case, a trader dubbed ‘Willy’ bought Bitcoins from traders by ‘crediting’ the sellers’ accounts with fiat currencies that, in many cases, could not be withdrawn. Figure one shows when these fraudulent traders were active, along with the Bitcoin–US dollar exchange rate. Most noteworthy is that Willy’s operation coincided with an unprecedented hop in the price of Bitcoin: from around $150 to over $1000. In early 2014, Mt. Gox collapsed, and the Bitcoin price fell with it. Only recently, in early 2017, has Bitcoin surpassed the levels of the earlier rise.

However, how do we know that the rise was caused by the fraudulent trades? Fortunately for us as researchers, the unauthorised trades did not take place every day. Table one shows the daily switch in the Bitcoin–US dollar exchange rate for various time periods on Mt. Gox. In the two quarters before unauthorised trading commenced, the daily price increase was, on average, positive but relatively petite: a $0.21 increase in the very first period and a $1 increase in the 2nd period. During the third quarter, when unauthorised trading began, the price rose by an average of $Three.15 on the seventeen days in which Markus traded, but fell on average by $0.51 on the seventy five days he did not trade. However, it is during the final quarter, when Willy began trading, that the difference became stark. On the fifty days in which Willy traded, the Bitcoin price rose by an average of $21.85. On the forty one days in which Willy did not make unauthorizsed purchases, the price fell by $0.88 on average. (Table one is very similar for the other leading exchanges as well.)

Table 1 Average daily switch in BTC/USD exchange rate as a function of fraudulent activity Two

In our utter paper, we conduct a regression analysis to examine whether other factors such as the relatively numerous and varied attacks on the Mt. Gox exchange could explain the switch in the daily Bitcoin price, both at Mt. Gox and other leading exchanges (Gandal et al. 2017).

The analysis confirms that only Willy’s trading presence affected the price. The estimated coefficient (on the dummy variable for whether Willy was active) is virtually the same ($21.65) as in Table 1. We conclude that the suspicious trading activity of a single actor was the primary cause of the massive spike in the Bitcoin–US dollar exchange rate, in which the rate rose from around $150 to over $1,000 in just two months in late 2013. The fall was almost as precipitous: the Mt. Gox exchange folded due to insolvency in early 2014, and it has taken more than three years for Bitcoin to match the rise triggered by fraudulent transactions.

Why should we care about the Bitcoin manipulation that took place in 2013? After all, the Bitcoin ecosystem is not almost as significant as the Fresh York Stock Exchange. Nonetheless, latest trends indicate that Bitcoin is becoming an significant asset in the financial system.

Trading in cryptocurrency assets has exploded recently. In the case of Bitcoin, during the one year period ending in mid-June 2017, the market capitalisation enhanced massively from around $7 billion to $45 billion; that is an increase of over 500% in one year. The market cap of other cryptocurrencies surged by even more. In the one-year period ending in mid-May 2017, the market value of cryptocurrencies excluding Bitcoin surged from $1.7 billion to more than $29 billion; that is an increase of more than 1,900%. The markets for these other cryptocurrencies are very lean and subject to manipulation. Given that we now know the Bitcoin price has been artificially inflated by unauthorised trades in the past, we must view the present rise with excellent caution, and not necessarily consider it a ‘healthy bubble’, as recently claimed in The Economist (2017).

As mainstream finance invests in cryptocurrency assets and as countries take steps toward legalising Bitcoin as a payment system (as Japan did in April 2017), it is significant to understand how susceptible cryptocurrency markets are to manipulation. We encourage the nascent cryptocurrency industry to work with regulators and researchers to share anonymised transaction data so that more confidence can be placed in the veracity of exchange rates.

References

Babaioff, M, S Dobzinski, S Oren and A Zohar (2012), “On bitcoin and crimson balloons” in Proceedings of the 13th ACM Conference on Electronic Commerce, pp. 56-73.

Eyal, I and E Sirer (2014), “Majority is not Enough: Bitcoin Mining is Vulnerable”, paper introduced at the Eighteenth International Conference on Financial Cryptography and Data Security, Barbados, 3-7 March.

Gandal, N, J Hamrick, T Moore and T Oberman (2017), “Price Manipulation in the Bitcoin Ecosystem,” CEPR Discussion Paper No. 12061.

Mooser, M, R Bohme and D Breuker (2013), “An inquiry into money laundering implements in the Bitcoin ecosystem”, in Proceedings of the Seventh APWG eCrime Re-searcher’s Summit, pp. 1-14.

Ron, D and A Shamir (2013), “Quantitative analysis of the utter Bitcoin transaction graph”, in Financial Cryptography and Data Security, Vol. Seven thousand eight hundred fifty nine of Lecture Notes in Computer Science, pp. 6-24.

Vasek, M and T Moore (2015), “There’s no free lunch, even using Bitcoin: Tracking the popularity and profits of virtual currency scams”, in R Bohme and T Okamoto (eds), Financial Cryptography and Data Security, volume eight thousand nine hundred seventy five of Lecture Notes in Computer Science, pp. 44-61.

Vasek, M, J Bonneau, R Castellucci, C Keith and T Moore (2016), “The Bitcoin brain drain: a brief paper on the use and manhandle of bitcoin brain wallets”, in Financial Cryptography and Data Security, Lecture Notes in Computer Science.

Yuxing Huang, D, H Dharmdasani, S Meiklejohn, V Dave, C Grier, D McCoy, S Savage, N Weaver, A Snoeren and K Levchenko (2014), “Botcoin: Monetizing stolen cycles”, in Proceedings of the Network and Distributed System Security Symposium.

Endnotes

[1] The Bitcoin ecosystem includes the core network for propagating transactions, the blockchain, and many intermediaries such as currency exchanges, mining pools, and payment processors that facilitate trade.

[Two] Markus was primarily active in period Trio, but he was also active a few days during periods 1,Two, and Four. He was not active on the same days as Willy, who was only active in period Four.

Price manipulation in the Bitcoin ecosystem, VOX, CEPR’s Policy Portal

VOX CEPR’s Policy Portal

Research-based policy analysis and commentary from leading economists

Price manipulation in the Bitcoin ecosystem

Neil Gandal, JT Hamrick, Tyler Moore, Tali Oberman twenty two June two thousand seventeen

The cryptocurrency Bitcoin has attracted widespread interest, in large part due to wild swings in its valuation. This column considers an earlier rise in the Bitcoin price to investigate what is driving the currency’s price spikes. The two thousand thirteen rise was caused by fraudulent trades taking place at the largest Bitcoin currency exchange at the time. This finding has implications for policymakers as they weigh what, if anything, to do about regulating cryptocurrencies in light of the record high Bitcoin valuation that many fear is a bubble.

Related

The digital currency Bitcoin was introduced in 2009. Bitcoin and the many other digital currencies are primarily online currencies. The key currencies are those based primarily on cryptography, and Bitcoin is the leading ‘cryptocurrency’.

Bitcoin has experienced a meteoric rise in popularity since its introduction. While digital currencies were proposed as early as the 1980s, Bitcoin was the very first to catch on. The total value of all Bitcoins in circulation reached $45 billion in June 2017. Its success has inspired scores of rivaling cryptocurrencies that go after a similar design. Bitcoin and most other cryptocurrencies do not require a central authority to validate and lodge transactions. Instead, these currencies use cryptography (and an internal incentive system) to control transactions, manage the supply, and prevent fraud. Payments are validated by a decentralised network. Once confirmed, all transactions are stored digitally and recorded in a public ‘blockchain’,’ which can be thought of as a distributed accounting system.

While Bitcoin’s algorithm provides safeguards against ‘counterfeiting’ of the currency, the eco-system is still vulnerable to theft. Users keep keys to their Bitcoins and make transactions with the help of wallets. Exchanges facilitate trade inbetween Bitcoins and fiat currencies, and also permit for storing Bitcoins. Bitcoins can be stolen through wallets or exchanges. Exchanges have been targeted more frequently than wallets because many wallets are located on users’ (local) computers, while exchanges frequently store customer deposits in their own (much larger) wallets.

The supply of most cryptocurrencies increases at a predetermined rate, and cannot be switched by any central authority. There are about fifteen million Bitcoins presently in circulation, with the ultimate number eventually reaching twenty one million. The immobilized supply in the long run creates concerns about the deflationary aspect of the currency.

While Bitcoin shows fine promise to disrupt existing payment systems through innovations in its technical design, the Bitcoin ecosystem one has been the frequent target of attacks by financially motivated criminals. Due to the unregulated, decentralised environment in which they operate, cryptocurrencies are under constant threat of attack.

Bitcoin only recently became a subject of research in economics. However, the topic has been of interest for longer in computer science (for early work by computer scientists on incentives, see Babaioff et al. 2012, and Eyal and Sirer 2014.) Numerous researchers have conducted studies in order to document and combat threats such as Ponzi schemes, money laundering, mining botnets, and the theft of cryptocurrency wallets (Moeser et al. 2013, Vasek and Moore 2015, Vasek et al. 2016, Yuxing et al. 2014). Ron and Shamir (2013) attempt to identify suspicious trading activity by building a graph of Bitcoin transactions found in the public ledger. None of these papers can associate individual transactions with specific users of the currency exchanges.

In latest work, we showcase that the very first time Bitcoin reached an exchange rate of more than $1,000, the meteoric rise was driven by fraud (Gandal et al. 2017). We leverage a unique and very detailed dataset to examine suspicious trading activity that occurred over a ten-month period in two thousand thirteen on Mt. Gox, the leading Bitcoin currency exchange at the time. We very first quantify the extent of the suspicious/fraudulent trading activity and showcase that it constitutes a large fraction of trading on the days the activity occurred. We then display how this trading activity affected the exchange rates at Mt. Gox and other leading currency exchanges.

Figure 1 Bitcoin–US dollar exchange rate, with periods of suspicious activity shaded

While it was the superior currency exchange when Bitcoin very first shot to prominence in early 2013, behind the scenes, Tokyo-based Mt. Gox was in trouble. In addition to suffering from repeated denial-of-service attacks and Bitcoin thefts, two unauthorised traders were able to transact on the exchange without spending real money. In the very first case, a trader dubbed ‘Markus’ was credited with Bitcoins by duplicating previously ended transactions. In the 2nd case, a trader dubbed ‘Willy’ bought Bitcoins from traders by ‘crediting’ the sellers’ accounts with fiat currencies that, in many cases, could not be withdrawn. Figure one shows when these fraudulent traders were active, along with the Bitcoin–US dollar exchange rate. Most noteworthy is that Willy’s operation coincided with an unprecedented leap in the price of Bitcoin: from around $150 to over $1000. In early 2014, Mt. Gox collapsed, and the Bitcoin price fell with it. Only recently, in early 2017, has Bitcoin surpassed the levels of the earlier rise.

However, how do we know that the rise was caused by the fraudulent trades? Fortunately for us as researchers, the unauthorised trades did not take place every day. Table one shows the daily switch in the Bitcoin–US dollar exchange rate for various time periods on Mt. Gox. In the two quarters before unauthorised trading commenced, the daily price increase was, on average, positive but relatively puny: a $0.21 increase in the very first period and a $1 increase in the 2nd period. During the third quarter, when unauthorised trading embarked, the price rose by an average of $Trio.15 on the seventeen days in which Markus traded, but fell on average by $0.51 on the seventy five days he did not trade. However, it is during the final quarter, when Willy began trading, that the difference became stark. On the fifty days in which Willy traded, the Bitcoin price rose by an average of $21.85. On the forty one days in which Willy did not make unauthorizsed purchases, the price fell by $0.88 on average. (Table one is very similar for the other leading exchanges as well.)

Table 1 Average daily switch in BTC/USD exchange rate as a function of fraudulent activity Two

In our total paper, we conduct a regression analysis to examine whether other factors such as the relatively numerous and varied attacks on the Mt. Gox exchange could explain the switch in the daily Bitcoin price, both at Mt. Gox and other leading exchanges (Gandal et al. 2017).

The analysis confirms that only Willy’s trading presence affected the price. The estimated coefficient (on the dummy variable for whether Willy was active) is virtually the same ($21.65) as in Table 1. We conclude that the suspicious trading activity of a single actor was the primary cause of the massive spike in the Bitcoin–US dollar exchange rate, in which the rate rose from around $150 to over $1,000 in just two months in late 2013. The fall was almost as precipitous: the Mt. Gox exchange folded due to insolvency in early 2014, and it has taken more than three years for Bitcoin to match the rise triggered by fraudulent transactions.

Why should we care about the Bitcoin manipulation that took place in 2013? After all, the Bitcoin ecosystem is not almost as significant as the Fresh York Stock Exchange. Nonetheless, latest trends indicate that Bitcoin is becoming an significant asset in the financial system.

Trading in cryptocurrency assets has exploded recently. In the case of Bitcoin, during the one year period ending in mid-June 2017, the market capitalisation enlargened massively from around $7 billion to $45 billion; that is an increase of over 500% in one year. The market cap of other cryptocurrencies surged by even more. In the one-year period ending in mid-May 2017, the market value of cryptocurrencies excluding Bitcoin surged from $1.7 billion to more than $29 billion; that is an increase of more than 1,900%. The markets for these other cryptocurrencies are very lean and subject to manipulation. Given that we now know the Bitcoin price has been artificially inflated by unauthorised trades in the past, we must view the present rise with good caution, and not necessarily consider it a ‘healthy bubble’, as recently claimed in The Economist (2017).

As mainstream finance invests in cryptocurrency assets and as countries take steps toward legalising Bitcoin as a payment system (as Japan did in April 2017), it is significant to understand how susceptible cryptocurrency markets are to manipulation. We encourage the nascent cryptocurrency industry to work with regulators and researchers to share anonymised transaction data so that more confidence can be placed in the veracity of exchange rates.

References

Babaioff, M, S Dobzinski, S Oren and A Zohar (2012), “On bitcoin and crimson balloons” in Proceedings of the 13th ACM Conference on Electronic Commerce, pp. 56-73.

Eyal, I and E Sirer (2014), “Majority is not Enough: Bitcoin Mining is Vulnerable”, paper introduced at the Eighteenth International Conference on Financial Cryptography and Data Security, Barbados, 3-7 March.

Gandal, N, J Hamrick, T Moore and T Oberman (2017), “Price Manipulation in the Bitcoin Ecosystem,” CEPR Discussion Paper No. 12061.

Mooser, M, R Bohme and D Breuker (2013), “An inquiry into money laundering devices in the Bitcoin ecosystem”, in Proceedings of the Seventh APWG eCrime Re-searcher’s Summit, pp. 1-14.

Ron, D and A Shamir (2013), “Quantitative analysis of the total Bitcoin transaction graph”, in Financial Cryptography and Data Security, Vol. Seven thousand eight hundred fifty nine of Lecture Notes in Computer Science, pp. 6-24.

Vasek, M and T Moore (2015), “There’s no free lunch, even using Bitcoin: Tracking the popularity and profits of virtual currency scams”, in R Bohme and T Okamoto (eds), Financial Cryptography and Data Security, volume eight thousand nine hundred seventy five of Lecture Notes in Computer Science, pp. 44-61.

Vasek, M, J Bonneau, R Castellucci, C Keith and T Moore (2016), “The Bitcoin brain drain: a brief paper on the use and manhandle of bitcoin brain wallets”, in Financial Cryptography and Data Security, Lecture Notes in Computer Science.

Yuxing Huang, D, H Dharmdasani, S Meiklejohn, V Dave, C Grier, D McCoy, S Savage, N Weaver, A Snoeren and K Levchenko (2014), “Botcoin: Monetizing stolen cycles”, in Proceedings of the Network and Distributed System Security Symposium.

Endnotes

[1] The Bitcoin ecosystem includes the core network for propagating transactions, the blockchain, and many intermediaries such as currency exchanges, mining pools, and payment processors that facilitate trade.

[Two] Markus was primarily active in period Three, but he was also active a few days during periods 1,Two, and Four. He was not active on the same days as Willy, who was only active in period Four.

Price manipulation in the Bitcoin ecosystem, VOX, CEPR’s Policy Portal

VOX CEPR’s Policy Portal

Research-based policy analysis and commentary from leading economists

Price manipulation in the Bitcoin ecosystem

Neil Gandal, JT Hamrick, Tyler Moore, Tali Oberman twenty two June two thousand seventeen

The cryptocurrency Bitcoin has attracted widespread interest, in large part due to wild swings in its valuation. This column considers an earlier rise in the Bitcoin price to investigate what is driving the currency’s price spikes. The two thousand thirteen rise was caused by fraudulent trades taking place at the largest Bitcoin currency exchange at the time. This finding has implications for policymakers as they weigh what, if anything, to do about regulating cryptocurrencies in light of the record high Bitcoin valuation that many fear is a bubble.

Related

The digital currency Bitcoin was introduced in 2009. Bitcoin and the many other digital currencies are primarily online currencies. The key currencies are those based primarily on cryptography, and Bitcoin is the leading ‘cryptocurrency’.

Bitcoin has experienced a meteoric rise in popularity since its introduction. While digital currencies were proposed as early as the 1980s, Bitcoin was the very first to catch on. The total value of all Bitcoins in circulation reached $45 billion in June 2017. Its success has inspired scores of challenging cryptocurrencies that go after a similar design. Bitcoin and most other cryptocurrencies do not require a central authority to validate and lodge transactions. Instead, these currencies use cryptography (and an internal incentive system) to control transactions, manage the supply, and prevent fraud. Payments are validated by a decentralised network. Once confirmed, all transactions are stored digitally and recorded in a public ‘blockchain’,’ which can be thought of as a distributed accounting system.

While Bitcoin’s algorithm provides safeguards against ‘counterfeiting’ of the currency, the eco-system is still vulnerable to theft. Users keep keys to their Bitcoins and make transactions with the help of wallets. Exchanges facilitate trade inbetween Bitcoins and fiat currencies, and also permit for storing Bitcoins. Bitcoins can be stolen through wallets or exchanges. Exchanges have been targeted more frequently than wallets because many wallets are located on users’ (local) computers, while exchanges frequently store customer deposits in their own (much larger) wallets.

The supply of most cryptocurrencies increases at a predetermined rate, and cannot be switched by any central authority. There are about fifteen million Bitcoins presently in circulation, with the ultimate number eventually reaching twenty one million. The immobile supply in the long run creates concerns about the deflationary aspect of the currency.

While Bitcoin shows good promise to disrupt existing payment systems through innovations in its technical design, the Bitcoin ecosystem one has been the frequent target of attacks by financially motivated criminals. Due to the unregulated, decentralised environment in which they operate, cryptocurrencies are under constant threat of attack.

Bitcoin only recently became a subject of research in economics. However, the topic has been of interest for longer in computer science (for early work by computer scientists on incentives, see Babaioff et al. 2012, and Eyal and Sirer 2014.) Numerous researchers have conducted studies in order to document and combat threats such as Ponzi schemes, money laundering, mining botnets, and the theft of cryptocurrency wallets (Moeser et al. 2013, Vasek and Moore 2015, Vasek et al. 2016, Yuxing et al. 2014). Ron and Shamir (2013) attempt to identify suspicious trading activity by building a graph of Bitcoin transactions found in the public ledger. None of these papers can associate individual transactions with specific users of the currency exchanges.

In latest work, we demonstrate that the very first time Bitcoin reached an exchange rate of more than $1,000, the meteoric rise was driven by fraud (Gandal et al. 2017). We leverage a unique and very detailed dataset to examine suspicious trading activity that occurred over a ten-month period in two thousand thirteen on Mt. Gox, the leading Bitcoin currency exchange at the time. We very first quantify the extent of the suspicious/fraudulent trading activity and display that it constitutes a large fraction of trading on the days the activity occurred. We then demonstrate how this trading activity affected the exchange rates at Mt. Gox and other leading currency exchanges.

Figure 1 Bitcoin–US dollar exchange rate, with periods of suspicious activity shaded

While it was the superior currency exchange when Bitcoin very first shot to prominence in early 2013, behind the scenes, Tokyo-based Mt. Gox was in trouble. In addition to suffering from repeated denial-of-service attacks and Bitcoin thefts, two unauthorised traders were able to transact on the exchange without spending real money. In the very first case, a trader dubbed ‘Markus’ was credited with Bitcoins by duplicating previously finished transactions. In the 2nd case, a trader dubbed ‘Willy’ bought Bitcoins from traders by ‘crediting’ the sellers’ accounts with fiat currencies that, in many cases, could not be withdrawn. Figure one shows when these fraudulent traders were active, along with the Bitcoin–US dollar exchange rate. Most noteworthy is that Willy’s operation coincided with an unprecedented hop in the price of Bitcoin: from around $150 to over $1000. In early 2014, Mt. Gox collapsed, and the Bitcoin price fell with it. Only recently, in early 2017, has Bitcoin surpassed the levels of the earlier rise.

However, how do we know that the rise was caused by the fraudulent trades? Fortunately for us as researchers, the unauthorised trades did not take place every day. Table one shows the daily switch in the Bitcoin–US dollar exchange rate for various time periods on Mt. Gox. In the two quarters before unauthorised trading commenced, the daily price increase was, on average, positive but relatively puny: a $0.21 increase in the very first period and a $1 increase in the 2nd period. During the third quarter, when unauthorised trading embarked, the price rose by an average of $Trio.15 on the seventeen days in which Markus traded, but fell on average by $0.51 on the seventy five days he did not trade. However, it is during the final quarter, when Willy began trading, that the difference became stark. On the fifty days in which Willy traded, the Bitcoin price rose by an average of $21.85. On the forty one days in which Willy did not make unauthorizsed purchases, the price fell by $0.88 on average. (Table one is very similar for the other leading exchanges as well.)

Table 1 Average daily switch in BTC/USD exchange rate as a function of fraudulent activity Two

In our utter paper, we conduct a regression analysis to examine whether other factors such as the relatively numerous and varied attacks on the Mt. Gox exchange could explain the switch in the daily Bitcoin price, both at Mt. Gox and other leading exchanges (Gandal et al. 2017).

The analysis confirms that only Willy’s trading presence affected the price. The estimated coefficient (on the dummy variable for whether Willy was active) is virtually the same ($21.65) as in Table 1. We conclude that the suspicious trading activity of a single actor was the primary cause of the massive spike in the Bitcoin–US dollar exchange rate, in which the rate rose from around $150 to over $1,000 in just two months in late 2013. The fall was almost as precipitous: the Mt. Gox exchange folded due to insolvency in early 2014, and it has taken more than three years for Bitcoin to match the rise triggered by fraudulent transactions.

Why should we care about the Bitcoin manipulation that took place in 2013? After all, the Bitcoin ecosystem is not almost as significant as the Fresh York Stock Exchange. Nonetheless, latest trends indicate that Bitcoin is becoming an significant asset in the financial system.

Trading in cryptocurrency assets has exploded recently. In the case of Bitcoin, during the one year period ending in mid-June 2017, the market capitalisation enhanced massively from around $7 billion to $45 billion; that is an increase of over 500% in one year. The market cap of other cryptocurrencies surged by even more. In the one-year period ending in mid-May 2017, the market value of cryptocurrencies excluding Bitcoin surged from $1.7 billion to more than $29 billion; that is an increase of more than 1,900%. The markets for these other cryptocurrencies are very lean and subject to manipulation. Given that we now know the Bitcoin price has been artificially inflated by unauthorised trades in the past, we must view the present rise with good caution, and not necessarily consider it a ‘healthy bubble’, as recently claimed in The Economist (2017).

As mainstream finance invests in cryptocurrency assets and as countries take steps toward legalising Bitcoin as a payment system (as Japan did in April 2017), it is significant to understand how susceptible cryptocurrency markets are to manipulation. We encourage the nascent cryptocurrency industry to work with regulators and researchers to share anonymised transaction data so that more confidence can be placed in the veracity of exchange rates.

References

Babaioff, M, S Dobzinski, S Oren and A Zohar (2012), “On bitcoin and crimson balloons” in Proceedings of the 13th ACM Conference on Electronic Commerce, pp. 56-73.

Eyal, I and E Sirer (2014), “Majority is not Enough: Bitcoin Mining is Vulnerable”, paper introduced at the Eighteenth International Conference on Financial Cryptography and Data Security, Barbados, 3-7 March.

Gandal, N, J Hamrick, T Moore and T Oberman (2017), “Price Manipulation in the Bitcoin Ecosystem,” CEPR Discussion Paper No. 12061.

Mooser, M, R Bohme and D Breuker (2013), “An inquiry into money laundering instruments in the Bitcoin ecosystem”, in Proceedings of the Seventh APWG eCrime Re-searcher’s Summit, pp. 1-14.

Ron, D and A Shamir (2013), “Quantitative analysis of the total Bitcoin transaction graph”, in Financial Cryptography and Data Security, Vol. Seven thousand eight hundred fifty nine of Lecture Notes in Computer Science, pp. 6-24.

Vasek, M and T Moore (2015), “There’s no free lunch, even using Bitcoin: Tracking the popularity and profits of virtual currency scams”, in R Bohme and T Okamoto (eds), Financial Cryptography and Data Security, volume eight thousand nine hundred seventy five of Lecture Notes in Computer Science, pp. 44-61.

Vasek, M, J Bonneau, R Castellucci, C Keith and T Moore (2016), “The Bitcoin brain drain: a brief paper on the use and manhandle of bitcoin brain wallets”, in Financial Cryptography and Data Security, Lecture Notes in Computer Science.

Yuxing Huang, D, H Dharmdasani, S Meiklejohn, V Dave, C Grier, D McCoy, S Savage, N Weaver, A Snoeren and K Levchenko (2014), “Botcoin: Monetizing stolen cycles”, in Proceedings of the Network and Distributed System Security Symposium.

Endnotes

[1] The Bitcoin ecosystem includes the core network for propagating transactions, the blockchain, and many intermediaries such as currency exchanges, mining pools, and payment processors that facilitate trade.

[Two] Markus was primarily active in period Trio, but he was also active a few days during periods 1,Two, and Four. He was not active on the same days as Willy, who was only active in period Four.

Price manipulation in the Bitcoin ecosystem, VOX, CEPR’s Policy Portal

VOX CEPR’s Policy Portal

Research-based policy analysis and commentary from leading economists

Price manipulation in the Bitcoin ecosystem

Neil Gandal, JT Hamrick, Tyler Moore, Tali Oberman twenty two June two thousand seventeen

The cryptocurrency Bitcoin has attracted widespread interest, in large part due to wild swings in its valuation. This column considers an earlier rise in the Bitcoin price to investigate what is driving the currency’s price spikes. The two thousand thirteen rise was caused by fraudulent trades taking place at the largest Bitcoin currency exchange at the time. This finding has implications for policymakers as they weigh what, if anything, to do about regulating cryptocurrencies in light of the record high Bitcoin valuation that many fear is a bubble.

Related

The digital currency Bitcoin was introduced in 2009. Bitcoin and the many other digital currencies are primarily online currencies. The key currencies are those based primarily on cryptography, and Bitcoin is the leading ‘cryptocurrency’.

Bitcoin has experienced a meteoric rise in popularity since its introduction. While digital currencies were proposed as early as the 1980s, Bitcoin was the very first to catch on. The total value of all Bitcoins in circulation reached $45 billion in June 2017. Its success has inspired scores of challenging cryptocurrencies that go after a similar design. Bitcoin and most other cryptocurrencies do not require a central authority to validate and lodge transactions. Instead, these currencies use cryptography (and an internal incentive system) to control transactions, manage the supply, and prevent fraud. Payments are validated by a decentralised network. Once confirmed, all transactions are stored digitally and recorded in a public ‘blockchain’,’ which can be thought of as a distributed accounting system.

While Bitcoin’s algorithm provides safeguards against ‘counterfeiting’ of the currency, the eco-system is still vulnerable to theft. Users keep keys to their Bitcoins and make transactions with the help of wallets. Exchanges facilitate trade inbetween Bitcoins and fiat currencies, and also permit for storing Bitcoins. Bitcoins can be stolen through wallets or exchanges. Exchanges have been targeted more frequently than wallets because many wallets are located on users’ (local) computers, while exchanges frequently store customer deposits in their own (much larger) wallets.

The supply of most cryptocurrencies increases at a predetermined rate, and cannot be switched by any central authority. There are about fifteen million Bitcoins presently in circulation, with the ultimate number eventually reaching twenty one million. The immobile supply in the long run creates concerns about the deflationary aspect of the currency.

While Bitcoin shows superb promise to disrupt existing payment systems through innovations in its technical design, the Bitcoin ecosystem one has been the frequent target of attacks by financially motivated criminals. Due to the unregulated, decentralised environment in which they operate, cryptocurrencies are under constant threat of attack.

Bitcoin only recently became a subject of research in economics. However, the topic has been of interest for longer in computer science (for early work by computer scientists on incentives, see Babaioff et al. 2012, and Eyal and Sirer 2014.) Numerous researchers have conducted studies in order to document and combat threats such as Ponzi schemes, money laundering, mining botnets, and the theft of cryptocurrency wallets (Moeser et al. 2013, Vasek and Moore 2015, Vasek et al. 2016, Yuxing et al. 2014). Ron and Shamir (2013) attempt to identify suspicious trading activity by building a graph of Bitcoin transactions found in the public ledger. None of these papers can associate individual transactions with specific users of the currency exchanges.

In latest work, we demonstrate that the very first time Bitcoin reached an exchange rate of more than $1,000, the meteoric rise was driven by fraud (Gandal et al. 2017). We leverage a unique and very detailed dataset to examine suspicious trading activity that occurred over a ten-month period in two thousand thirteen on Mt. Gox, the leading Bitcoin currency exchange at the time. We very first quantify the extent of the suspicious/fraudulent trading activity and showcase that it constitutes a large fraction of trading on the days the activity occurred. We then demonstrate how this trading activity affected the exchange rates at Mt. Gox and other leading currency exchanges.

Figure 1 Bitcoin–US dollar exchange rate, with periods of suspicious activity shaded

While it was the superior currency exchange when Bitcoin very first shot to prominence in early 2013, behind the scenes, Tokyo-based Mt. Gox was in trouble. In addition to suffering from repeated denial-of-service attacks and Bitcoin thefts, two unauthorised traders were able to transact on the exchange without spending real money. In the very first case, a trader dubbed ‘Markus’ was credited with Bitcoins by duplicating previously finished transactions. In the 2nd case, a trader dubbed ‘Willy’ bought Bitcoins from traders by ‘crediting’ the sellers’ accounts with fiat currencies that, in many cases, could not be withdrawn. Figure one shows when these fraudulent traders were active, along with the Bitcoin–US dollar exchange rate. Most noteworthy is that Willy’s operation coincided with an unprecedented hop in the price of Bitcoin: from around $150 to over $1000. In early 2014, Mt. Gox collapsed, and the Bitcoin price fell with it. Only recently, in early 2017, has Bitcoin surpassed the levels of the earlier rise.

However, how do we know that the rise was caused by the fraudulent trades? Fortunately for us as researchers, the unauthorised trades did not take place every day. Table one shows the daily switch in the Bitcoin–US dollar exchange rate for various time periods on Mt. Gox. In the two quarters before unauthorised trading commenced, the daily price increase was, on average, positive but relatively puny: a $0.21 increase in the very first period and a $1 increase in the 2nd period. During the third quarter, when unauthorised trading began, the price rose by an average of $Three.15 on the seventeen days in which Markus traded, but fell on average by $0.51 on the seventy five days he did not trade. However, it is during the final quarter, when Willy began trading, that the difference became stark. On the fifty days in which Willy traded, the Bitcoin price rose by an average of $21.85. On the forty one days in which Willy did not make unauthorizsed purchases, the price fell by $0.88 on average. (Table one is very similar for the other leading exchanges as well.)

Table 1 Average daily switch in BTC/USD exchange rate as a function of fraudulent activity Two

In our utter paper, we conduct a regression analysis to examine whether other factors such as the relatively numerous and varied attacks on the Mt. Gox exchange could explain the switch in the daily Bitcoin price, both at Mt. Gox and other leading exchanges (Gandal et al. 2017).

The analysis confirms that only Willy’s trading presence affected the price. The estimated coefficient (on the dummy variable for whether Willy was active) is virtually the same ($21.65) as in Table 1. We conclude that the suspicious trading activity of a single actor was the primary cause of the massive spike in the Bitcoin–US dollar exchange rate, in which the rate rose from around $150 to over $1,000 in just two months in late 2013. The fall was almost as precipitous: the Mt. Gox exchange folded due to insolvency in early 2014, and it has taken more than three years for Bitcoin to match the rise triggered by fraudulent transactions.

Why should we care about the Bitcoin manipulation that took place in 2013? After all, the Bitcoin ecosystem is not almost as significant as the Fresh York Stock Exchange. Nonetheless, latest trends indicate that Bitcoin is becoming an significant asset in the financial system.

Trading in cryptocurrency assets has exploded recently. In the case of Bitcoin, during the one year period ending in mid-June 2017, the market capitalisation enlargened massively from around $7 billion to $45 billion; that is an increase of over 500% in one year. The market cap of other cryptocurrencies surged by even more. In the one-year period ending in mid-May 2017, the market value of cryptocurrencies excluding Bitcoin surged from $1.7 billion to more than $29 billion; that is an increase of more than 1,900%. The markets for these other cryptocurrencies are very lean and subject to manipulation. Given that we now know the Bitcoin price has been artificially inflated by unauthorised trades in the past, we must view the present rise with good caution, and not necessarily consider it a ‘healthy bubble’, as recently claimed in The Economist (2017).

As mainstream finance invests in cryptocurrency assets and as countries take steps toward legalising Bitcoin as a payment system (as Japan did in April 2017), it is significant to understand how susceptible cryptocurrency markets are to manipulation. We encourage the nascent cryptocurrency industry to work with regulators and researchers to share anonymised transaction data so that more confidence can be placed in the veracity of exchange rates.

References

Babaioff, M, S Dobzinski, S Oren and A Zohar (2012), “On bitcoin and crimson balloons” in Proceedings of the 13th ACM Conference on Electronic Commerce, pp. 56-73.

Eyal, I and E Sirer (2014), “Majority is not Enough: Bitcoin Mining is Vulnerable”, paper introduced at the Eighteenth International Conference on Financial Cryptography and Data Security, Barbados, 3-7 March.

Gandal, N, J Hamrick, T Moore and T Oberman (2017), “Price Manipulation in the Bitcoin Ecosystem,” CEPR Discussion Paper No. 12061.

Mooser, M, R Bohme and D Breuker (2013), “An inquiry into money laundering instruments in the Bitcoin ecosystem”, in Proceedings of the Seventh APWG eCrime Re-searcher’s Summit, pp. 1-14.

Ron, D and A Shamir (2013), “Quantitative analysis of the total Bitcoin transaction graph”, in Financial Cryptography and Data Security, Vol. Seven thousand eight hundred fifty nine of Lecture Notes in Computer Science, pp. 6-24.

Vasek, M and T Moore (2015), “There’s no free lunch, even using Bitcoin: Tracking the popularity and profits of virtual currency scams”, in R Bohme and T Okamoto (eds), Financial Cryptography and Data Security, volume eight thousand nine hundred seventy five of Lecture Notes in Computer Science, pp. 44-61.

Vasek, M, J Bonneau, R Castellucci, C Keith and T Moore (2016), “The Bitcoin brain drain: a brief paper on the use and manhandle of bitcoin brain wallets”, in Financial Cryptography and Data Security, Lecture Notes in Computer Science.

Yuxing Huang, D, H Dharmdasani, S Meiklejohn, V Dave, C Grier, D McCoy, S Savage, N Weaver, A Snoeren and K Levchenko (2014), “Botcoin: Monetizing stolen cycles”, in Proceedings of the Network and Distributed System Security Symposium.

Endnotes

[1] The Bitcoin ecosystem includes the core network for propagating transactions, the blockchain, and many intermediaries such as currency exchanges, mining pools, and payment processors that facilitate trade.

[Two] Markus was primarily active in period Trio, but he was also active a few days during periods 1,Two, and Four. He was not active on the same days as Willy, who was only active in period Four.

Price manipulation in the Bitcoin ecosystem, VOX, CEPR’s Policy Portal

VOX CEPR’s Policy Portal

Research-based policy analysis and commentary from leading economists

Price manipulation in the Bitcoin ecosystem

Neil Gandal, JT Hamrick, Tyler Moore, Tali Oberman twenty two June two thousand seventeen

The cryptocurrency Bitcoin has attracted widespread interest, in large part due to wild swings in its valuation. This column considers an earlier rise in the Bitcoin price to investigate what is driving the currency’s price spikes. The two thousand thirteen rise was caused by fraudulent trades taking place at the largest Bitcoin currency exchange at the time. This finding has implications for policymakers as they weigh what, if anything, to do about regulating cryptocurrencies in light of the record high Bitcoin valuation that many fear is a bubble.

Related

The digital currency Bitcoin was introduced in 2009. Bitcoin and the many other digital currencies are primarily online currencies. The key currencies are those based primarily on cryptography, and Bitcoin is the leading ‘cryptocurrency’.

Bitcoin has experienced a meteoric rise in popularity since its introduction. While digital currencies were proposed as early as the 1980s, Bitcoin was the very first to catch on. The total value of all Bitcoins in circulation reached $45 billion in June 2017. Its success has inspired scores of challenging cryptocurrencies that go after a similar design. Bitcoin and most other cryptocurrencies do not require a central authority to validate and lodge transactions. Instead, these currencies use cryptography (and an internal incentive system) to control transactions, manage the supply, and prevent fraud. Payments are validated by a decentralised network. Once confirmed, all transactions are stored digitally and recorded in a public ‘blockchain’,’ which can be thought of as a distributed accounting system.

While Bitcoin’s algorithm provides safeguards against ‘counterfeiting’ of the currency, the eco-system is still vulnerable to theft. Users keep keys to their Bitcoins and make transactions with the help of wallets. Exchanges facilitate trade inbetween Bitcoins and fiat currencies, and also permit for storing Bitcoins. Bitcoins can be stolen through wallets or exchanges. Exchanges have been targeted more frequently than wallets because many wallets are located on users’ (local) computers, while exchanges frequently store customer deposits in their own (much larger) wallets.

The supply of most cryptocurrencies increases at a predetermined rate, and cannot be switched by any central authority. There are about fifteen million Bitcoins presently in circulation, with the ultimate number eventually reaching twenty one million. The immobile supply in the long run creates concerns about the deflationary aspect of the currency.

While Bitcoin shows superb promise to disrupt existing payment systems through innovations in its technical design, the Bitcoin ecosystem one has been the frequent target of attacks by financially motivated criminals. Due to the unregulated, decentralised environment in which they operate, cryptocurrencies are under constant threat of attack.

Bitcoin only recently became a subject of research in economics. However, the topic has been of interest for longer in computer science (for early work by computer scientists on incentives, see Babaioff et al. 2012, and Eyal and Sirer 2014.) Numerous researchers have conducted studies in order to document and combat threats such as Ponzi schemes, money laundering, mining botnets, and the theft of cryptocurrency wallets (Moeser et al. 2013, Vasek and Moore 2015, Vasek et al. 2016, Yuxing et al. 2014). Ron and Shamir (2013) attempt to identify suspicious trading activity by building a graph of Bitcoin transactions found in the public ledger. None of these papers can associate individual transactions with specific users of the currency exchanges.

In latest work, we demonstrate that the very first time Bitcoin reached an exchange rate of more than $1,000, the meteoric rise was driven by fraud (Gandal et al. 2017). We leverage a unique and very detailed dataset to examine suspicious trading activity that occurred over a ten-month period in two thousand thirteen on Mt. Gox, the leading Bitcoin currency exchange at the time. We very first quantify the extent of the suspicious/fraudulent trading activity and display that it constitutes a large fraction of trading on the days the activity occurred. We then demonstrate how this trading activity affected the exchange rates at Mt. Gox and other leading currency exchanges.

Figure 1 Bitcoin–US dollar exchange rate, with periods of suspicious activity shaded

While it was the superior currency exchange when Bitcoin very first shot to prominence in early 2013, behind the scenes, Tokyo-based Mt. Gox was in trouble. In addition to suffering from repeated denial-of-service attacks and Bitcoin thefts, two unauthorised traders were able to transact on the exchange without spending real money. In the very first case, a trader dubbed ‘Markus’ was credited with Bitcoins by duplicating previously ended transactions. In the 2nd case, a trader dubbed ‘Willy’ bought Bitcoins from traders by ‘crediting’ the sellers’ accounts with fiat currencies that, in many cases, could not be withdrawn. Figure one shows when these fraudulent traders were active, along with the Bitcoin–US dollar exchange rate. Most noteworthy is that Willy’s operation coincided with an unprecedented hop in the price of Bitcoin: from around $150 to over $1000. In early 2014, Mt. Gox collapsed, and the Bitcoin price fell with it. Only recently, in early 2017, has Bitcoin surpassed the levels of the earlier rise.

However, how do we know that the rise was caused by the fraudulent trades? Fortunately for us as researchers, the unauthorised trades did not take place every day. Table one shows the daily switch in the Bitcoin–US dollar exchange rate for various time periods on Mt. Gox. In the two quarters before unauthorised trading commenced, the daily price increase was, on average, positive but relatively puny: a $0.21 increase in the very first period and a $1 increase in the 2nd period. During the third quarter, when unauthorised trading began, the price rose by an average of $Three.15 on the seventeen days in which Markus traded, but fell on average by $0.51 on the seventy five days he did not trade. However, it is during the final quarter, when Willy began trading, that the difference became stark. On the fifty days in which Willy traded, the Bitcoin price rose by an average of $21.85. On the forty one days in which Willy did not make unauthorizsed purchases, the price fell by $0.88 on average. (Table one is very similar for the other leading exchanges as well.)

Table 1 Average daily switch in BTC/USD exchange rate as a function of fraudulent activity Two

In our total paper, we conduct a regression analysis to examine whether other factors such as the relatively numerous and varied attacks on the Mt. Gox exchange could explain the switch in the daily Bitcoin price, both at Mt. Gox and other leading exchanges (Gandal et al. 2017).

The analysis confirms that only Willy’s trading presence affected the price. The estimated coefficient (on the dummy variable for whether Willy was active) is virtually the same ($21.65) as in Table 1. We conclude that the suspicious trading activity of a single actor was the primary cause of the massive spike in the Bitcoin–US dollar exchange rate, in which the rate rose from around $150 to over $1,000 in just two months in late 2013. The fall was almost as precipitous: the Mt. Gox exchange folded due to insolvency in early 2014, and it has taken more than three years for Bitcoin to match the rise triggered by fraudulent transactions.

Why should we care about the Bitcoin manipulation that took place in 2013? After all, the Bitcoin ecosystem is not almost as significant as the Fresh York Stock Exchange. Nonetheless, latest trends indicate that Bitcoin is becoming an significant asset in the financial system.

Trading in cryptocurrency assets has exploded recently. In the case of Bitcoin, during the one year period ending in mid-June 2017, the market capitalisation enlargened massively from around $7 billion to $45 billion; that is an increase of over 500% in one year. The market cap of other cryptocurrencies surged by even more. In the one-year period ending in mid-May 2017, the market value of cryptocurrencies excluding Bitcoin surged from $1.7 billion to more than $29 billion; that is an increase of more than 1,900%. The markets for these other cryptocurrencies are very lean and subject to manipulation. Given that we now know the Bitcoin price has been artificially inflated by unauthorised trades in the past, we must view the present rise with good caution, and not necessarily consider it a ‘healthy bubble’, as recently claimed in The Economist (2017).

As mainstream finance invests in cryptocurrency assets and as countries take steps toward legalising Bitcoin as a payment system (as Japan did in April 2017), it is significant to understand how susceptible cryptocurrency markets are to manipulation. We encourage the nascent cryptocurrency industry to work with regulators and researchers to share anonymised transaction data so that more confidence can be placed in the veracity of exchange rates.

References

Babaioff, M, S Dobzinski, S Oren and A Zohar (2012), “On bitcoin and crimson balloons” in Proceedings of the 13th ACM Conference on Electronic Commerce, pp. 56-73.

Eyal, I and E Sirer (2014), “Majority is not Enough: Bitcoin Mining is Vulnerable”, paper introduced at the Eighteenth International Conference on Financial Cryptography and Data Security, Barbados, 3-7 March.

Gandal, N, J Hamrick, T Moore and T Oberman (2017), “Price Manipulation in the Bitcoin Ecosystem,” CEPR Discussion Paper No. 12061.

Mooser, M, R Bohme and D Breuker (2013), “An inquiry into money laundering instruments in the Bitcoin ecosystem”, in Proceedings of the Seventh APWG eCrime Re-searcher’s Summit, pp. 1-14.

Ron, D and A Shamir (2013), “Quantitative analysis of the utter Bitcoin transaction graph”, in Financial Cryptography and Data Security, Vol. Seven thousand eight hundred fifty nine of Lecture Notes in Computer Science, pp. 6-24.

Vasek, M and T Moore (2015), “There’s no free lunch, even using Bitcoin: Tracking the popularity and profits of virtual currency scams”, in R Bohme and T Okamoto (eds), Financial Cryptography and Data Security, volume eight thousand nine hundred seventy five of Lecture Notes in Computer Science, pp. 44-61.

Vasek, M, J Bonneau, R Castellucci, C Keith and T Moore (2016), “The Bitcoin brain drain: a brief paper on the use and manhandle of bitcoin brain wallets”, in Financial Cryptography and Data Security, Lecture Notes in Computer Science.

Yuxing Huang, D, H Dharmdasani, S Meiklejohn, V Dave, C Grier, D McCoy, S Savage, N Weaver, A Snoeren and K Levchenko (2014), “Botcoin: Monetizing stolen cycles”, in Proceedings of the Network and Distributed System Security Symposium.

Endnotes

[1] The Bitcoin ecosystem includes the core network for propagating transactions, the blockchain, and many intermediaries such as currency exchanges, mining pools, and payment processors that facilitate trade.

[Two] Markus was primarily active in period Trio, but he was also active a few days during periods 1,Two, and Four. He was not active on the same days as Willy, who was only active in period Four.

Price manipulation in the Bitcoin ecosystem, VOX, CEPR’s Policy Portal

VOX CEPR’s Policy Portal

Research-based policy analysis and commentary from leading economists

Price manipulation in the Bitcoin ecosystem

Neil Gandal, JT Hamrick, Tyler Moore, Tali Oberman twenty two June two thousand seventeen

The cryptocurrency Bitcoin has attracted widespread interest, in large part due to wild swings in its valuation. This column considers an earlier rise in the Bitcoin price to investigate what is driving the currency’s price spikes. The two thousand thirteen rise was caused by fraudulent trades taking place at the largest Bitcoin currency exchange at the time. This finding has implications for policymakers as they weigh what, if anything, to do about regulating cryptocurrencies in light of the record high Bitcoin valuation that many fear is a bubble.

Related

The digital currency Bitcoin was introduced in 2009. Bitcoin and the many other digital currencies are primarily online currencies. The key currencies are those based primarily on cryptography, and Bitcoin is the leading ‘cryptocurrency’.

Bitcoin has experienced a meteoric rise in popularity since its introduction. While digital currencies were proposed as early as the 1980s, Bitcoin was the very first to catch on. The total value of all Bitcoins in circulation reached $45 billion in June 2017. Its success has inspired scores of challenging cryptocurrencies that go after a similar design. Bitcoin and most other cryptocurrencies do not require a central authority to validate and lodge transactions. Instead, these currencies use cryptography (and an internal incentive system) to control transactions, manage the supply, and prevent fraud. Payments are validated by a decentralised network. Once confirmed, all transactions are stored digitally and recorded in a public ‘blockchain’,’ which can be thought of as a distributed accounting system.

While Bitcoin’s algorithm provides safeguards against ‘counterfeiting’ of the currency, the eco-system is still vulnerable to theft. Users keep keys to their Bitcoins and make transactions with the help of wallets. Exchanges facilitate trade inbetween Bitcoins and fiat currencies, and also permit for storing Bitcoins. Bitcoins can be stolen through wallets or exchanges. Exchanges have been targeted more frequently than wallets because many wallets are located on users’ (local) computers, while exchanges frequently store customer deposits in their own (much larger) wallets.

The supply of most cryptocurrencies increases at a predetermined rate, and cannot be switched by any central authority. There are about fifteen million Bitcoins presently in circulation, with the ultimate number eventually reaching twenty one million. The motionless supply in the long run creates concerns about the deflationary aspect of the currency.

While Bitcoin shows fine promise to disrupt existing payment systems through innovations in its technical design, the Bitcoin ecosystem one has been the frequent target of attacks by financially motivated criminals. Due to the unregulated, decentralised environment in which they operate, cryptocurrencies are under constant threat of attack.

Bitcoin only recently became a subject of research in economics. However, the topic has been of interest for longer in computer science (for early work by computer scientists on incentives, see Babaioff et al. 2012, and Eyal and Sirer 2014.) Numerous researchers have conducted studies in order to document and combat threats such as Ponzi schemes, money laundering, mining botnets, and the theft of cryptocurrency wallets (Moeser et al. 2013, Vasek and Moore 2015, Vasek et al. 2016, Yuxing et al. 2014). Ron and Shamir (2013) attempt to identify suspicious trading activity by building a graph of Bitcoin transactions found in the public ledger. None of these papers can associate individual transactions with specific users of the currency exchanges.

In latest work, we showcase that the very first time Bitcoin reached an exchange rate of more than $1,000, the meteoric rise was driven by fraud (Gandal et al. 2017). We leverage a unique and very detailed dataset to examine suspicious trading activity that occurred over a ten-month period in two thousand thirteen on Mt. Gox, the leading Bitcoin currency exchange at the time. We very first quantify the extent of the suspicious/fraudulent trading activity and showcase that it constitutes a large fraction of trading on the days the activity occurred. We then display how this trading activity affected the exchange rates at Mt. Gox and other leading currency exchanges.

Figure 1 Bitcoin–US dollar exchange rate, with periods of suspicious activity shaded

While it was the superior currency exchange when Bitcoin very first shot to prominence in early 2013, behind the scenes, Tokyo-based Mt. Gox was in trouble. In addition to suffering from repeated denial-of-service attacks and Bitcoin thefts, two unauthorised traders were able to transact on the exchange without spending real money. In the very first case, a trader dubbed ‘Markus’ was credited with Bitcoins by duplicating previously ended transactions. In the 2nd case, a trader dubbed ‘Willy’ bought Bitcoins from traders by ‘crediting’ the sellers’ accounts with fiat currencies that, in many cases, could not be withdrawn. Figure one shows when these fraudulent traders were active, along with the Bitcoin–US dollar exchange rate. Most noteworthy is that Willy’s operation coincided with an unprecedented hop in the price of Bitcoin: from around $150 to over $1000. In early 2014, Mt. Gox collapsed, and the Bitcoin price fell with it. Only recently, in early 2017, has Bitcoin surpassed the levels of the earlier rise.

However, how do we know that the rise was caused by the fraudulent trades? Fortunately for us as researchers, the unauthorised trades did not take place every day. Table one shows the daily switch in the Bitcoin–US dollar exchange rate for various time periods on Mt. Gox. In the two quarters before unauthorised trading commenced, the daily price increase was, on average, positive but relatively puny: a $0.21 increase in the very first period and a $1 increase in the 2nd period. During the third quarter, when unauthorised trading commenced, the price rose by an average of $Three.15 on the seventeen days in which Markus traded, but fell on average by $0.51 on the seventy five days he did not trade. However, it is during the final quarter, when Willy began trading, that the difference became stark. On the fifty days in which Willy traded, the Bitcoin price rose by an average of $21.85. On the forty one days in which Willy did not make unauthorizsed purchases, the price fell by $0.88 on average. (Table one is very similar for the other leading exchanges as well.)

Table 1 Average daily switch in BTC/USD exchange rate as a function of fraudulent activity Two

In our total paper, we conduct a regression analysis to examine whether other factors such as the relatively numerous and varied attacks on the Mt. Gox exchange could explain the switch in the daily Bitcoin price, both at Mt. Gox and other leading exchanges (Gandal et al. 2017).

The analysis confirms that only Willy’s trading presence affected the price. The estimated coefficient (on the dummy variable for whether Willy was active) is virtually the same ($21.65) as in Table 1. We conclude that the suspicious trading activity of a single actor was the primary cause of the massive spike in the Bitcoin–US dollar exchange rate, in which the rate rose from around $150 to over $1,000 in just two months in late 2013. The fall was almost as precipitous: the Mt. Gox exchange folded due to insolvency in early 2014, and it has taken more than three years for Bitcoin to match the rise triggered by fraudulent transactions.

Why should we care about the Bitcoin manipulation that took place in 2013? After all, the Bitcoin ecosystem is not almost as significant as the Fresh York Stock Exchange. Nonetheless, latest trends indicate that Bitcoin is becoming an significant asset in the financial system.

Trading in cryptocurrency assets has exploded recently. In the case of Bitcoin, during the one year period ending in mid-June 2017, the market capitalisation enlargened massively from around $7 billion to $45 billion; that is an increase of over 500% in one year. The market cap of other cryptocurrencies surged by even more. In the one-year period ending in mid-May 2017, the market value of cryptocurrencies excluding Bitcoin surged from $1.7 billion to more than $29 billion; that is an increase of more than 1,900%. The markets for these other cryptocurrencies are very skinny and subject to manipulation. Given that we now know the Bitcoin price has been artificially inflated by unauthorised trades in the past, we must view the present rise with superb caution, and not necessarily consider it a ‘healthy bubble’, as recently claimed in The Economist (2017).

As mainstream finance invests in cryptocurrency assets and as countries take steps toward legalising Bitcoin as a payment system (as Japan did in April 2017), it is significant to understand how susceptible cryptocurrency markets are to manipulation. We encourage the nascent cryptocurrency industry to work with regulators and researchers to share anonymised transaction data so that more confidence can be placed in the veracity of exchange rates.

References

Babaioff, M, S Dobzinski, S Oren and A Zohar (2012), “On bitcoin and crimson balloons” in Proceedings of the 13th ACM Conference on Electronic Commerce, pp. 56-73.

Eyal, I and E Sirer (2014), “Majority is not Enough: Bitcoin Mining is Vulnerable”, paper introduced at the Eighteenth International Conference on Financial Cryptography and Data Security, Barbados, 3-7 March.

Gandal, N, J Hamrick, T Moore and T Oberman (2017), “Price Manipulation in the Bitcoin Ecosystem,” CEPR Discussion Paper No. 12061.

Mooser, M, R Bohme and D Breuker (2013), “An inquiry into money laundering implements in the Bitcoin ecosystem”, in Proceedings of the Seventh APWG eCrime Re-searcher’s Summit, pp. 1-14.

Ron, D and A Shamir (2013), “Quantitative analysis of the total Bitcoin transaction graph”, in Financial Cryptography and Data Security, Vol. Seven thousand eight hundred fifty nine of Lecture Notes in Computer Science, pp. 6-24.

Vasek, M and T Moore (2015), “There’s no free lunch, even using Bitcoin: Tracking the popularity and profits of virtual currency scams”, in R Bohme and T Okamoto (eds), Financial Cryptography and Data Security, volume eight thousand nine hundred seventy five of Lecture Notes in Computer Science, pp. 44-61.

Vasek, M, J Bonneau, R Castellucci, C Keith and T Moore (2016), “The Bitcoin brain drain: a brief paper on the use and manhandle of bitcoin brain wallets”, in Financial Cryptography and Data Security, Lecture Notes in Computer Science.

Yuxing Huang, D, H Dharmdasani, S Meiklejohn, V Dave, C Grier, D McCoy, S Savage, N Weaver, A Snoeren and K Levchenko (2014), “Botcoin: Monetizing stolen cycles”, in Proceedings of the Network and Distributed System Security Symposium.

Endnotes

[1] The Bitcoin ecosystem includes the core network for propagating transactions, the blockchain, and many intermediaries such as currency exchanges, mining pools, and payment processors that facilitate trade.

[Two] Markus was primarily active in period Trio, but he was also active a few days during periods 1,Two, and Four. He was not active on the same days as Willy, who was only active in period Four.

Price manipulation in the Bitcoin ecosystem, VOX, CEPR’s Policy Portal

VOX CEPR’s Policy Portal

Research-based policy analysis and commentary from leading economists

Price manipulation in the Bitcoin ecosystem

Neil Gandal, JT Hamrick, Tyler Moore, Tali Oberman twenty two June two thousand seventeen

The cryptocurrency Bitcoin has attracted widespread interest, in large part due to wild swings in its valuation. This column considers an earlier rise in the Bitcoin price to investigate what is driving the currency’s price spikes. The two thousand thirteen rise was caused by fraudulent trades taking place at the largest Bitcoin currency exchange at the time. This finding has implications for policymakers as they weigh what, if anything, to do about regulating cryptocurrencies in light of the record high Bitcoin valuation that many fear is a bubble.

Related

The digital currency Bitcoin was introduced in 2009. Bitcoin and the many other digital currencies are primarily online currencies. The key currencies are those based primarily on cryptography, and Bitcoin is the leading ‘cryptocurrency’.

Bitcoin has experienced a meteoric rise in popularity since its introduction. While digital currencies were proposed as early as the 1980s, Bitcoin was the very first to catch on. The total value of all Bitcoins in circulation reached $45 billion in June 2017. Its success has inspired scores of rivaling cryptocurrencies that go after a similar design. Bitcoin and most other cryptocurrencies do not require a central authority to validate and lodge transactions. Instead, these currencies use cryptography (and an internal incentive system) to control transactions, manage the supply, and prevent fraud. Payments are validated by a decentralised network. Once confirmed, all transactions are stored digitally and recorded in a public ‘blockchain’,’ which can be thought of as a distributed accounting system.

While Bitcoin’s algorithm provides safeguards against ‘counterfeiting’ of the currency, the eco-system is still vulnerable to theft. Users keep keys to their Bitcoins and make transactions with the help of wallets. Exchanges facilitate trade inbetween Bitcoins and fiat currencies, and also permit for storing Bitcoins. Bitcoins can be stolen through wallets or exchanges. Exchanges have been targeted more frequently than wallets because many wallets are located on users’ (local) computers, while exchanges frequently store customer deposits in their own (much larger) wallets.

The supply of most cryptocurrencies increases at a predetermined rate, and cannot be switched by any central authority. There are about fifteen million Bitcoins presently in circulation, with the ultimate number eventually reaching twenty one million. The immobile supply in the long run creates concerns about the deflationary aspect of the currency.

While Bitcoin shows excellent promise to disrupt existing payment systems through innovations in its technical design, the Bitcoin ecosystem one has been the frequent target of attacks by financially motivated criminals. Due to the unregulated, decentralised environment in which they operate, cryptocurrencies are under constant threat of attack.

Bitcoin only recently became a subject of research in economics. However, the topic has been of interest for longer in computer science (for early work by computer scientists on incentives, see Babaioff et al. 2012, and Eyal and Sirer 2014.) Numerous researchers have conducted studies in order to document and combat threats such as Ponzi schemes, money laundering, mining botnets, and the theft of cryptocurrency wallets (Moeser et al. 2013, Vasek and Moore 2015, Vasek et al. 2016, Yuxing et al. 2014). Ron and Shamir (2013) attempt to identify suspicious trading activity by building a graph of Bitcoin transactions found in the public ledger. None of these papers can associate individual transactions with specific users of the currency exchanges.

In latest work, we showcase that the very first time Bitcoin reached an exchange rate of more than $1,000, the meteoric rise was driven by fraud (Gandal et al. 2017). We leverage a unique and very detailed dataset to examine suspicious trading activity that occurred over a ten-month period in two thousand thirteen on Mt. Gox, the leading Bitcoin currency exchange at the time. We very first quantify the extent of the suspicious/fraudulent trading activity and demonstrate that it constitutes a large fraction of trading on the days the activity occurred. We then showcase how this trading activity affected the exchange rates at Mt. Gox and other leading currency exchanges.

Figure 1 Bitcoin–US dollar exchange rate, with periods of suspicious activity shaded

While it was the superior currency exchange when Bitcoin very first shot to prominence in early 2013, behind the scenes, Tokyo-based Mt. Gox was in trouble. In addition to suffering from repeated denial-of-service attacks and Bitcoin thefts, two unauthorised traders were able to transact on the exchange without spending real money. In the very first case, a trader dubbed ‘Markus’ was credited with Bitcoins by duplicating previously finished transactions. In the 2nd case, a trader dubbed ‘Willy’ bought Bitcoins from traders by ‘crediting’ the sellers’ accounts with fiat currencies that, in many cases, could not be withdrawn. Figure one shows when these fraudulent traders were active, along with the Bitcoin–US dollar exchange rate. Most noteworthy is that Willy’s operation coincided with an unprecedented hop in the price of Bitcoin: from around $150 to over $1000. In early 2014, Mt. Gox collapsed, and the Bitcoin price fell with it. Only recently, in early 2017, has Bitcoin surpassed the levels of the earlier rise.

However, how do we know that the rise was caused by the fraudulent trades? Fortunately for us as researchers, the unauthorised trades did not take place every day. Table one shows the daily switch in the Bitcoin–US dollar exchange rate for various time periods on Mt. Gox. In the two quarters before unauthorised trading commenced, the daily price increase was, on average, positive but relatively petite: a $0.21 increase in the very first period and a $1 increase in the 2nd period. During the third quarter, when unauthorised trading began, the price rose by an average of $Three.15 on the seventeen days in which Markus traded, but fell on average by $0.51 on the seventy five days he did not trade. However, it is during the final quarter, when Willy began trading, that the difference became stark. On the fifty days in which Willy traded, the Bitcoin price rose by an average of $21.85. On the forty one days in which Willy did not make unauthorizsed purchases, the price fell by $0.88 on average. (Table one is very similar for the other leading exchanges as well.)

Table 1 Average daily switch in BTC/USD exchange rate as a function of fraudulent activity Two

In our total paper, we conduct a regression analysis to examine whether other factors such as the relatively numerous and varied attacks on the Mt. Gox exchange could explain the switch in the daily Bitcoin price, both at Mt. Gox and other leading exchanges (Gandal et al. 2017).

The analysis confirms that only Willy’s trading presence affected the price. The estimated coefficient (on the dummy variable for whether Willy was active) is virtually the same ($21.65) as in Table 1. We conclude that the suspicious trading activity of a single actor was the primary cause of the massive spike in the Bitcoin–US dollar exchange rate, in which the rate rose from around $150 to over $1,000 in just two months in late 2013. The fall was almost as precipitous: the Mt. Gox exchange folded due to insolvency in early 2014, and it has taken more than three years for Bitcoin to match the rise triggered by fraudulent transactions.

Why should we care about the Bitcoin manipulation that took place in 2013? After all, the Bitcoin ecosystem is not almost as significant as the Fresh York Stock Exchange. Nonetheless, latest trends indicate that Bitcoin is becoming an significant asset in the financial system.

Trading in cryptocurrency assets has exploded recently. In the case of Bitcoin, during the one year period ending in mid-June 2017, the market capitalisation enhanced massively from around $7 billion to $45 billion; that is an increase of over 500% in one year. The market cap of other cryptocurrencies surged by even more. In the one-year period ending in mid-May 2017, the market value of cryptocurrencies excluding Bitcoin surged from $1.7 billion to more than $29 billion; that is an increase of more than 1,900%. The markets for these other cryptocurrencies are very skinny and subject to manipulation. Given that we now know the Bitcoin price has been artificially inflated by unauthorised trades in the past, we must view the present rise with superb caution, and not necessarily consider it a ‘healthy bubble’, as recently claimed in The Economist (2017).

As mainstream finance invests in cryptocurrency assets and as countries take steps toward legalising Bitcoin as a payment system (as Japan did in April 2017), it is significant to understand how susceptible cryptocurrency markets are to manipulation. We encourage the nascent cryptocurrency industry to work with regulators and researchers to share anonymised transaction data so that more confidence can be placed in the veracity of exchange rates.

References

Babaioff, M, S Dobzinski, S Oren and A Zohar (2012), “On bitcoin and crimson balloons” in Proceedings of the 13th ACM Conference on Electronic Commerce, pp. 56-73.

Eyal, I and E Sirer (2014), “Majority is not Enough: Bitcoin Mining is Vulnerable”, paper introduced at the Eighteenth International Conference on Financial Cryptography and Data Security, Barbados, 3-7 March.

Gandal, N, J Hamrick, T Moore and T Oberman (2017), “Price Manipulation in the Bitcoin Ecosystem,” CEPR Discussion Paper No. 12061.

Mooser, M, R Bohme and D Breuker (2013), “An inquiry into money laundering implements in the Bitcoin ecosystem”, in Proceedings of the Seventh APWG eCrime Re-searcher’s Summit, pp. 1-14.

Ron, D and A Shamir (2013), “Quantitative analysis of the utter Bitcoin transaction graph”, in Financial Cryptography and Data Security, Vol. Seven thousand eight hundred fifty nine of Lecture Notes in Computer Science, pp. 6-24.

Vasek, M and T Moore (2015), “There’s no free lunch, even using Bitcoin: Tracking the popularity and profits of virtual currency scams”, in R Bohme and T Okamoto (eds), Financial Cryptography and Data Security, volume eight thousand nine hundred seventy five of Lecture Notes in Computer Science, pp. 44-61.

Vasek, M, J Bonneau, R Castellucci, C Keith and T Moore (2016), “The Bitcoin brain drain: a brief paper on the use and manhandle of bitcoin brain wallets”, in Financial Cryptography and Data Security, Lecture Notes in Computer Science.

Yuxing Huang, D, H Dharmdasani, S Meiklejohn, V Dave, C Grier, D McCoy, S Savage, N Weaver, A Snoeren and K Levchenko (2014), “Botcoin: Monetizing stolen cycles”, in Proceedings of the Network and Distributed System Security Symposium.

Endnotes

[1] The Bitcoin ecosystem includes the core network for propagating transactions, the blockchain, and many intermediaries such as currency exchanges, mining pools, and payment processors that facilitate trade.

[Two] Markus was primarily active in period Trio, but he was also active a few days during periods 1,Two, and Four. He was not active on the same days as Willy, who was only active in period Four.

Price manipulation in the Bitcoin ecosystem, VOX, CEPR’s Policy Portal

VOX CEPR’s Policy Portal

Research-based policy analysis and commentary from leading economists

Price manipulation in the Bitcoin ecosystem

Neil Gandal, JT Hamrick, Tyler Moore, Tali Oberman twenty two June two thousand seventeen

The cryptocurrency Bitcoin has attracted widespread interest, in large part due to wild swings in its valuation. This column considers an earlier rise in the Bitcoin price to investigate what is driving the currency’s price spikes. The two thousand thirteen rise was caused by fraudulent trades taking place at the largest Bitcoin currency exchange at the time. This finding has implications for policymakers as they weigh what, if anything, to do about regulating cryptocurrencies in light of the record high Bitcoin valuation that many fear is a bubble.

Related

The digital currency Bitcoin was introduced in 2009. Bitcoin and the many other digital currencies are primarily online currencies. The key currencies are those based primarily on cryptography, and Bitcoin is the leading ‘cryptocurrency’.

Bitcoin has experienced a meteoric rise in popularity since its introduction. While digital currencies were proposed as early as the 1980s, Bitcoin was the very first to catch on. The total value of all Bitcoins in circulation reached $45 billion in June 2017. Its success has inspired scores of rivaling cryptocurrencies that go after a similar design. Bitcoin and most other cryptocurrencies do not require a central authority to validate and lodge transactions. Instead, these currencies use cryptography (and an internal incentive system) to control transactions, manage the supply, and prevent fraud. Payments are validated by a decentralised network. Once confirmed, all transactions are stored digitally and recorded in a public ‘blockchain’,’ which can be thought of as a distributed accounting system.

While Bitcoin’s algorithm provides safeguards against ‘counterfeiting’ of the currency, the eco-system is still vulnerable to theft. Users keep keys to their Bitcoins and make transactions with the help of wallets. Exchanges facilitate trade inbetween Bitcoins and fiat currencies, and also permit for storing Bitcoins. Bitcoins can be stolen through wallets or exchanges. Exchanges have been targeted more frequently than wallets because many wallets are located on users’ (local) computers, while exchanges frequently store customer deposits in their own (much larger) wallets.

The supply of most cryptocurrencies increases at a predetermined rate, and cannot be switched by any central authority. There are about fifteen million Bitcoins presently in circulation, with the ultimate number eventually reaching twenty one million. The immovable supply in the long run creates concerns about the deflationary aspect of the currency.

While Bitcoin shows fine promise to disrupt existing payment systems through innovations in its technical design, the Bitcoin ecosystem one has been the frequent target of attacks by financially motivated criminals. Due to the unregulated, decentralised environment in which they operate, cryptocurrencies are under constant threat of attack.

Bitcoin only recently became a subject of research in economics. However, the topic has been of interest for longer in computer science (for early work by computer scientists on incentives, see Babaioff et al. 2012, and Eyal and Sirer 2014.) Numerous researchers have conducted studies in order to document and combat threats such as Ponzi schemes, money laundering, mining botnets, and the theft of cryptocurrency wallets (Moeser et al. 2013, Vasek and Moore 2015, Vasek et al. 2016, Yuxing et al. 2014). Ron and Shamir (2013) attempt to identify suspicious trading activity by building a graph of Bitcoin transactions found in the public ledger. None of these papers can associate individual transactions with specific users of the currency exchanges.

In latest work, we display that the very first time Bitcoin reached an exchange rate of more than $1,000, the meteoric rise was driven by fraud (Gandal et al. 2017). We leverage a unique and very detailed dataset to examine suspicious trading activity that occurred over a ten-month period in two thousand thirteen on Mt. Gox, the leading Bitcoin currency exchange at the time. We very first quantify the extent of the suspicious/fraudulent trading activity and showcase that it constitutes a large fraction of trading on the days the activity occurred. We then demonstrate how this trading activity affected the exchange rates at Mt. Gox and other leading currency exchanges.

Figure 1 Bitcoin–US dollar exchange rate, with periods of suspicious activity shaded

While it was the superior currency exchange when Bitcoin very first shot to prominence in early 2013, behind the scenes, Tokyo-based Mt. Gox was in trouble. In addition to suffering from repeated denial-of-service attacks and Bitcoin thefts, two unauthorised traders were able to transact on the exchange without spending real money. In the very first case, a trader dubbed ‘Markus’ was credited with Bitcoins by duplicating previously ended transactions. In the 2nd case, a trader dubbed ‘Willy’ bought Bitcoins from traders by ‘crediting’ the sellers’ accounts with fiat currencies that, in many cases, could not be withdrawn. Figure one shows when these fraudulent traders were active, along with the Bitcoin–US dollar exchange rate. Most noteworthy is that Willy’s operation coincided with an unprecedented leap in the price of Bitcoin: from around $150 to over $1000. In early 2014, Mt. Gox collapsed, and the Bitcoin price fell with it. Only recently, in early 2017, has Bitcoin surpassed the levels of the earlier rise.

However, how do we know that the rise was caused by the fraudulent trades? Fortunately for us as researchers, the unauthorised trades did not take place every day. Table one shows the daily switch in the Bitcoin–US dollar exchange rate for various time periods on Mt. Gox. In the two quarters before unauthorised trading commenced, the daily price increase was, on average, positive but relatively puny: a $0.21 increase in the very first period and a $1 increase in the 2nd period. During the third quarter, when unauthorised trading commenced, the price rose by an average of $Trio.15 on the seventeen days in which Markus traded, but fell on average by $0.51 on the seventy five days he did not trade. However, it is during the final quarter, when Willy began trading, that the difference became stark. On the fifty days in which Willy traded, the Bitcoin price rose by an average of $21.85. On the forty one days in which Willy did not make unauthorizsed purchases, the price fell by $0.88 on average. (Table one is very similar for the other leading exchanges as well.)

Table 1 Average daily switch in BTC/USD exchange rate as a function of fraudulent activity Two

In our utter paper, we conduct a regression analysis to examine whether other factors such as the relatively numerous and varied attacks on the Mt. Gox exchange could explain the switch in the daily Bitcoin price, both at Mt. Gox and other leading exchanges (Gandal et al. 2017).

The analysis confirms that only Willy’s trading presence affected the price. The estimated coefficient (on the dummy variable for whether Willy was active) is virtually the same ($21.65) as in Table 1. We conclude that the suspicious trading activity of a single actor was the primary cause of the massive spike in the Bitcoin–US dollar exchange rate, in which the rate rose from around $150 to over $1,000 in just two months in late 2013. The fall was almost as precipitous: the Mt. Gox exchange folded due to insolvency in early 2014, and it has taken more than three years for Bitcoin to match the rise triggered by fraudulent transactions.

Why should we care about the Bitcoin manipulation that took place in 2013? After all, the Bitcoin ecosystem is not almost as significant as the Fresh York Stock Exchange. Nonetheless, latest trends indicate that Bitcoin is becoming an significant asset in the financial system.

Trading in cryptocurrency assets has exploded recently. In the case of Bitcoin, during the one year period ending in mid-June 2017, the market capitalisation enlargened massively from around $7 billion to $45 billion; that is an increase of over 500% in one year. The market cap of other cryptocurrencies surged by even more. In the one-year period ending in mid-May 2017, the market value of cryptocurrencies excluding Bitcoin surged from $1.7 billion to more than $29 billion; that is an increase of more than 1,900%. The markets for these other cryptocurrencies are very skinny and subject to manipulation. Given that we now know the Bitcoin price has been artificially inflated by unauthorised trades in the past, we must view the present rise with superb caution, and not necessarily consider it a ‘healthy bubble’, as recently claimed in The Economist (2017).

As mainstream finance invests in cryptocurrency assets and as countries take steps toward legalising Bitcoin as a payment system (as Japan did in April 2017), it is significant to understand how susceptible cryptocurrency markets are to manipulation. We encourage the nascent cryptocurrency industry to work with regulators and researchers to share anonymised transaction data so that more confidence can be placed in the veracity of exchange rates.

References

Babaioff, M, S Dobzinski, S Oren and A Zohar (2012), “On bitcoin and crimson balloons” in Proceedings of the 13th ACM Conference on Electronic Commerce, pp. 56-73.

Eyal, I and E Sirer (2014), “Majority is not Enough: Bitcoin Mining is Vulnerable”, paper introduced at the Eighteenth International Conference on Financial Cryptography and Data Security, Barbados, 3-7 March.

Gandal, N, J Hamrick, T Moore and T Oberman (2017), “Price Manipulation in the Bitcoin Ecosystem,” CEPR Discussion Paper No. 12061.

Mooser, M, R Bohme and D Breuker (2013), “An inquiry into money laundering devices in the Bitcoin ecosystem”, in Proceedings of the Seventh APWG eCrime Re-searcher’s Summit, pp. 1-14.

Ron, D and A Shamir (2013), “Quantitative analysis of the utter Bitcoin transaction graph”, in Financial Cryptography and Data Security, Vol. Seven thousand eight hundred fifty nine of Lecture Notes in Computer Science, pp. 6-24.

Vasek, M and T Moore (2015), “There’s no free lunch, even using Bitcoin: Tracking the popularity and profits of virtual currency scams”, in R Bohme and T Okamoto (eds), Financial Cryptography and Data Security, volume eight thousand nine hundred seventy five of Lecture Notes in Computer Science, pp. 44-61.

Vasek, M, J Bonneau, R Castellucci, C Keith and T Moore (2016), “The Bitcoin brain drain: a brief paper on the use and manhandle of bitcoin brain wallets”, in Financial Cryptography and Data Security, Lecture Notes in Computer Science.

Yuxing Huang, D, H Dharmdasani, S Meiklejohn, V Dave, C Grier, D McCoy, S Savage, N Weaver, A Snoeren and K Levchenko (2014), “Botcoin: Monetizing stolen cycles”, in Proceedings of the Network and Distributed System Security Symposium.

Endnotes

[1] The Bitcoin ecosystem includes the core network for propagating transactions, the blockchain, and many intermediaries such as currency exchanges, mining pools, and payment processors that facilitate trade.

[Two] Markus was primarily active in period Three, but he was also active a few days during periods 1,Two, and Four. He was not active on the same days as Willy, who was only active in period Four.

Price manipulation in the Bitcoin ecosystem, VOX, CEPR’s Policy Portal

VOX CEPR’s Policy Portal

Research-based policy analysis and commentary from leading economists

Price manipulation in the Bitcoin ecosystem

Neil Gandal, JT Hamrick, Tyler Moore, Tali Oberman twenty two June two thousand seventeen

The cryptocurrency Bitcoin has attracted widespread interest, in large part due to wild swings in its valuation. This column considers an earlier rise in the Bitcoin price to investigate what is driving the currency’s price spikes. The two thousand thirteen rise was caused by fraudulent trades taking place at the largest Bitcoin currency exchange at the time. This finding has implications for policymakers as they weigh what, if anything, to do about regulating cryptocurrencies in light of the record high Bitcoin valuation that many fear is a bubble.

Related

The digital currency Bitcoin was introduced in 2009. Bitcoin and the many other digital currencies are primarily online currencies. The key currencies are those based primarily on cryptography, and Bitcoin is the leading ‘cryptocurrency’.

Bitcoin has experienced a meteoric rise in popularity since its introduction. While digital currencies were proposed as early as the 1980s, Bitcoin was the very first to catch on. The total value of all Bitcoins in circulation reached $45 billion in June 2017. Its success has inspired scores of contesting cryptocurrencies that go after a similar design. Bitcoin and most other cryptocurrencies do not require a central authority to validate and lodge transactions. Instead, these currencies use cryptography (and an internal incentive system) to control transactions, manage the supply, and prevent fraud. Payments are validated by a decentralised network. Once confirmed, all transactions are stored digitally and recorded in a public ‘blockchain’,’ which can be thought of as a distributed accounting system.

While Bitcoin’s algorithm provides safeguards against ‘counterfeiting’ of the currency, the eco-system is still vulnerable to theft. Users keep keys to their Bitcoins and make transactions with the help of wallets. Exchanges facilitate trade inbetween Bitcoins and fiat currencies, and also permit for storing Bitcoins. Bitcoins can be stolen through wallets or exchanges. Exchanges have been targeted more frequently than wallets because many wallets are located on users’ (local) computers, while exchanges frequently store customer deposits in their own (much larger) wallets.

The supply of most cryptocurrencies increases at a predetermined rate, and cannot be switched by any central authority. There are about fifteen million Bitcoins presently in circulation, with the ultimate number eventually reaching twenty one million. The stationary supply in the long run creates concerns about the deflationary aspect of the currency.

While Bitcoin shows superb promise to disrupt existing payment systems through innovations in its technical design, the Bitcoin ecosystem one has been the frequent target of attacks by financially motivated criminals. Due to the unregulated, decentralised environment in which they operate, cryptocurrencies are under constant threat of attack.

Bitcoin only recently became a subject of research in economics. However, the topic has been of interest for longer in computer science (for early work by computer scientists on incentives, see Babaioff et al. 2012, and Eyal and Sirer 2014.) Numerous researchers have conducted studies in order to document and combat threats such as Ponzi schemes, money laundering, mining botnets, and the theft of cryptocurrency wallets (Moeser et al. 2013, Vasek and Moore 2015, Vasek et al. 2016, Yuxing et al. 2014). Ron and Shamir (2013) attempt to identify suspicious trading activity by building a graph of Bitcoin transactions found in the public ledger. None of these papers can associate individual transactions with specific users of the currency exchanges.

In latest work, we display that the very first time Bitcoin reached an exchange rate of more than $1,000, the meteoric rise was driven by fraud (Gandal et al. 2017). We leverage a unique and very detailed dataset to examine suspicious trading activity that occurred over a ten-month period in two thousand thirteen on Mt. Gox, the leading Bitcoin currency exchange at the time. We very first quantify the extent of the suspicious/fraudulent trading activity and showcase that it constitutes a large fraction of trading on the days the activity occurred. We then display how this trading activity affected the exchange rates at Mt. Gox and other leading currency exchanges.

Figure 1 Bitcoin–US dollar exchange rate, with periods of suspicious activity shaded

While it was the superior currency exchange when Bitcoin very first shot to prominence in early 2013, behind the scenes, Tokyo-based Mt. Gox was in trouble. In addition to suffering from repeated denial-of-service attacks and Bitcoin thefts, two unauthorised traders were able to transact on the exchange without spending real money. In the very first case, a trader dubbed ‘Markus’ was credited with Bitcoins by duplicating previously finished transactions. In the 2nd case, a trader dubbed ‘Willy’ bought Bitcoins from traders by ‘crediting’ the sellers’ accounts with fiat currencies that, in many cases, could not be withdrawn. Figure one shows when these fraudulent traders were active, along with the Bitcoin–US dollar exchange rate. Most noteworthy is that Willy’s operation coincided with an unprecedented leap in the price of Bitcoin: from around $150 to over $1000. In early 2014, Mt. Gox collapsed, and the Bitcoin price fell with it. Only recently, in early 2017, has Bitcoin surpassed the levels of the earlier rise.

However, how do we know that the rise was caused by the fraudulent trades? Fortunately for us as researchers, the unauthorised trades did not take place every day. Table one shows the daily switch in the Bitcoin–US dollar exchange rate for various time periods on Mt. Gox. In the two quarters before unauthorised trading commenced, the daily price increase was, on average, positive but relatively petite: a $0.21 increase in the very first period and a $1 increase in the 2nd period. During the third quarter, when unauthorised trading began, the price rose by an average of $Three.15 on the seventeen days in which Markus traded, but fell on average by $0.51 on the seventy five days he did not trade. However, it is during the final quarter, when Willy began trading, that the difference became stark. On the fifty days in which Willy traded, the Bitcoin price rose by an average of $21.85. On the forty one days in which Willy did not make unauthorizsed purchases, the price fell by $0.88 on average. (Table one is very similar for the other leading exchanges as well.)

Table 1 Average daily switch in BTC/USD exchange rate as a function of fraudulent activity Two

In our utter paper, we conduct a regression analysis to examine whether other factors such as the relatively numerous and varied attacks on the Mt. Gox exchange could explain the switch in the daily Bitcoin price, both at Mt. Gox and other leading exchanges (Gandal et al. 2017).

The analysis confirms that only Willy’s trading presence affected the price. The estimated coefficient (on the dummy variable for whether Willy was active) is virtually the same ($21.65) as in Table 1. We conclude that the suspicious trading activity of a single actor was the primary cause of the massive spike in the Bitcoin–US dollar exchange rate, in which the rate rose from around $150 to over $1,000 in just two months in late 2013. The fall was almost as precipitous: the Mt. Gox exchange folded due to insolvency in early 2014, and it has taken more than three years for Bitcoin to match the rise triggered by fraudulent transactions.

Why should we care about the Bitcoin manipulation that took place in 2013? After all, the Bitcoin ecosystem is not almost as significant as the Fresh York Stock Exchange. Nonetheless, latest trends indicate that Bitcoin is becoming an significant asset in the financial system.

Trading in cryptocurrency assets has exploded recently. In the case of Bitcoin, during the one year period ending in mid-June 2017, the market capitalisation enhanced massively from around $7 billion to $45 billion; that is an increase of over 500% in one year. The market cap of other cryptocurrencies surged by even more. In the one-year period ending in mid-May 2017, the market value of cryptocurrencies excluding Bitcoin surged from $1.7 billion to more than $29 billion; that is an increase of more than 1,900%. The markets for these other cryptocurrencies are very skinny and subject to manipulation. Given that we now know the Bitcoin price has been artificially inflated by unauthorised trades in the past, we must view the present rise with good caution, and not necessarily consider it a ‘healthy bubble’, as recently claimed in The Economist (2017).

As mainstream finance invests in cryptocurrency assets and as countries take steps toward legalising Bitcoin as a payment system (as Japan did in April 2017), it is significant to understand how susceptible cryptocurrency markets are to manipulation. We encourage the nascent cryptocurrency industry to work with regulators and researchers to share anonymised transaction data so that more confidence can be placed in the veracity of exchange rates.

References

Babaioff, M, S Dobzinski, S Oren and A Zohar (2012), “On bitcoin and crimson balloons” in Proceedings of the 13th ACM Conference on Electronic Commerce, pp. 56-73.

Eyal, I and E Sirer (2014), “Majority is not Enough: Bitcoin Mining is Vulnerable”, paper introduced at the Eighteenth International Conference on Financial Cryptography and Data Security, Barbados, 3-7 March.

Gandal, N, J Hamrick, T Moore and T Oberman (2017), “Price Manipulation in the Bitcoin Ecosystem,” CEPR Discussion Paper No. 12061.

Mooser, M, R Bohme and D Breuker (2013), “An inquiry into money laundering implements in the Bitcoin ecosystem”, in Proceedings of the Seventh APWG eCrime Re-searcher’s Summit, pp. 1-14.

Ron, D and A Shamir (2013), “Quantitative analysis of the utter Bitcoin transaction graph”, in Financial Cryptography and Data Security, Vol. Seven thousand eight hundred fifty nine of Lecture Notes in Computer Science, pp. 6-24.

Vasek, M and T Moore (2015), “There’s no free lunch, even using Bitcoin: Tracking the popularity and profits of virtual currency scams”, in R Bohme and T Okamoto (eds), Financial Cryptography and Data Security, volume eight thousand nine hundred seventy five of Lecture Notes in Computer Science, pp. 44-61.

Vasek, M, J Bonneau, R Castellucci, C Keith and T Moore (2016), “The Bitcoin brain drain: a brief paper on the use and manhandle of bitcoin brain wallets”, in Financial Cryptography and Data Security, Lecture Notes in Computer Science.

Yuxing Huang, D, H Dharmdasani, S Meiklejohn, V Dave, C Grier, D McCoy, S Savage, N Weaver, A Snoeren and K Levchenko (2014), “Botcoin: Monetizing stolen cycles”, in Proceedings of the Network and Distributed System Security Symposium.

Endnotes

[1] The Bitcoin ecosystem includes the core network for propagating transactions, the blockchain, and many intermediaries such as currency exchanges, mining pools, and payment processors that facilitate trade.

[Two] Markus was primarily active in period Three, but he was also active a few days during periods 1,Two, and Four. He was not active on the same days as Willy, who was only active in period Four.

Price manipulation in the Bitcoin ecosystem, VOX, CEPR’s Policy Portal

VOX CEPR’s Policy Portal

Research-based policy analysis and commentary from leading economists

Price manipulation in the Bitcoin ecosystem

Neil Gandal, JT Hamrick, Tyler Moore, Tali Oberman twenty two June two thousand seventeen

The cryptocurrency Bitcoin has attracted widespread interest, in large part due to wild swings in its valuation. This column considers an earlier rise in the Bitcoin price to investigate what is driving the currency’s price spikes. The two thousand thirteen rise was caused by fraudulent trades taking place at the largest Bitcoin currency exchange at the time. This finding has implications for policymakers as they weigh what, if anything, to do about regulating cryptocurrencies in light of the record high Bitcoin valuation that many fear is a bubble.

Related

The digital currency Bitcoin was introduced in 2009. Bitcoin and the many other digital currencies are primarily online currencies. The key currencies are those based primarily on cryptography, and Bitcoin is the leading ‘cryptocurrency’.

Bitcoin has experienced a meteoric rise in popularity since its introduction. While digital currencies were proposed as early as the 1980s, Bitcoin was the very first to catch on. The total value of all Bitcoins in circulation reached $45 billion in June 2017. Its success has inspired scores of challenging cryptocurrencies that go after a similar design. Bitcoin and most other cryptocurrencies do not require a central authority to validate and lodge transactions. Instead, these currencies use cryptography (and an internal incentive system) to control transactions, manage the supply, and prevent fraud. Payments are validated by a decentralised network. Once confirmed, all transactions are stored digitally and recorded in a public ‘blockchain’,’ which can be thought of as a distributed accounting system.

While Bitcoin’s algorithm provides safeguards against ‘counterfeiting’ of the currency, the eco-system is still vulnerable to theft. Users keep keys to their Bitcoins and make transactions with the help of wallets. Exchanges facilitate trade inbetween Bitcoins and fiat currencies, and also permit for storing Bitcoins. Bitcoins can be stolen through wallets or exchanges. Exchanges have been targeted more frequently than wallets because many wallets are located on users’ (local) computers, while exchanges frequently store customer deposits in their own (much larger) wallets.

The supply of most cryptocurrencies increases at a predetermined rate, and cannot be switched by any central authority. There are about fifteen million Bitcoins presently in circulation, with the ultimate number eventually reaching twenty one million. The motionless supply in the long run creates concerns about the deflationary aspect of the currency.

While Bitcoin shows good promise to disrupt existing payment systems through innovations in its technical design, the Bitcoin ecosystem one has been the frequent target of attacks by financially motivated criminals. Due to the unregulated, decentralised environment in which they operate, cryptocurrencies are under constant threat of attack.

Bitcoin only recently became a subject of research in economics. However, the topic has been of interest for longer in computer science (for early work by computer scientists on incentives, see Babaioff et al. 2012, and Eyal and Sirer 2014.) Numerous researchers have conducted studies in order to document and combat threats such as Ponzi schemes, money laundering, mining botnets, and the theft of cryptocurrency wallets (Moeser et al. 2013, Vasek and Moore 2015, Vasek et al. 2016, Yuxing et al. 2014). Ron and Shamir (2013) attempt to identify suspicious trading activity by building a graph of Bitcoin transactions found in the public ledger. None of these papers can associate individual transactions with specific users of the currency exchanges.

In latest work, we display that the very first time Bitcoin reached an exchange rate of more than $1,000, the meteoric rise was driven by fraud (Gandal et al. 2017). We leverage a unique and very detailed dataset to examine suspicious trading activity that occurred over a ten-month period in two thousand thirteen on Mt. Gox, the leading Bitcoin currency exchange at the time. We very first quantify the extent of the suspicious/fraudulent trading activity and demonstrate that it constitutes a large fraction of trading on the days the activity occurred. We then showcase how this trading activity affected the exchange rates at Mt. Gox and other leading currency exchanges.

Figure 1 Bitcoin–US dollar exchange rate, with periods of suspicious activity shaded

While it was the superior currency exchange when Bitcoin very first shot to prominence in early 2013, behind the scenes, Tokyo-based Mt. Gox was in trouble. In addition to suffering from repeated denial-of-service attacks and Bitcoin thefts, two unauthorised traders were able to transact on the exchange without spending real money. In the very first case, a trader dubbed ‘Markus’ was credited with Bitcoins by duplicating previously ended transactions. In the 2nd case, a trader dubbed ‘Willy’ bought Bitcoins from traders by ‘crediting’ the sellers’ accounts with fiat currencies that, in many cases, could not be withdrawn. Figure one shows when these fraudulent traders were active, along with the Bitcoin–US dollar exchange rate. Most noteworthy is that Willy’s operation coincided with an unprecedented leap in the price of Bitcoin: from around $150 to over $1000. In early 2014, Mt. Gox collapsed, and the Bitcoin price fell with it. Only recently, in early 2017, has Bitcoin surpassed the levels of the earlier rise.

However, how do we know that the rise was caused by the fraudulent trades? Fortunately for us as researchers, the unauthorised trades did not take place every day. Table one shows the daily switch in the Bitcoin–US dollar exchange rate for various time periods on Mt. Gox. In the two quarters before unauthorised trading commenced, the daily price increase was, on average, positive but relatively petite: a $0.21 increase in the very first period and a $1 increase in the 2nd period. During the third quarter, when unauthorised trading embarked, the price rose by an average of $Trio.15 on the seventeen days in which Markus traded, but fell on average by $0.51 on the seventy five days he did not trade. However, it is during the final quarter, when Willy began trading, that the difference became stark. On the fifty days in which Willy traded, the Bitcoin price rose by an average of $21.85. On the forty one days in which Willy did not make unauthorizsed purchases, the price fell by $0.88 on average. (Table one is very similar for the other leading exchanges as well.)

Table 1 Average daily switch in BTC/USD exchange rate as a function of fraudulent activity Two

In our utter paper, we conduct a regression analysis to examine whether other factors such as the relatively numerous and varied attacks on the Mt. Gox exchange could explain the switch in the daily Bitcoin price, both at Mt. Gox and other leading exchanges (Gandal et al. 2017).

The analysis confirms that only Willy’s trading presence affected the price. The estimated coefficient (on the dummy variable for whether Willy was active) is virtually the same ($21.65) as in Table 1. We conclude that the suspicious trading activity of a single actor was the primary cause of the massive spike in the Bitcoin–US dollar exchange rate, in which the rate rose from around $150 to over $1,000 in just two months in late 2013. The fall was almost as precipitous: the Mt. Gox exchange folded due to insolvency in early 2014, and it has taken more than three years for Bitcoin to match the rise triggered by fraudulent transactions.

Why should we care about the Bitcoin manipulation that took place in 2013? After all, the Bitcoin ecosystem is not almost as significant as the Fresh York Stock Exchange. Nonetheless, latest trends indicate that Bitcoin is becoming an significant asset in the financial system.

Trading in cryptocurrency assets has exploded recently. In the case of Bitcoin, during the one year period ending in mid-June 2017, the market capitalisation enhanced massively from around $7 billion to $45 billion; that is an increase of over 500% in one year. The market cap of other cryptocurrencies surged by even more. In the one-year period ending in mid-May 2017, the market value of cryptocurrencies excluding Bitcoin surged from $1.7 billion to more than $29 billion; that is an increase of more than 1,900%. The markets for these other cryptocurrencies are very skinny and subject to manipulation. Given that we now know the Bitcoin price has been artificially inflated by unauthorised trades in the past, we must view the present rise with good caution, and not necessarily consider it a ‘healthy bubble’, as recently claimed in The Economist (2017).

As mainstream finance invests in cryptocurrency assets and as countries take steps toward legalising Bitcoin as a payment system (as Japan did in April 2017), it is significant to understand how susceptible cryptocurrency markets are to manipulation. We encourage the nascent cryptocurrency industry to work with regulators and researchers to share anonymised transaction data so that more confidence can be placed in the veracity of exchange rates.

References

Babaioff, M, S Dobzinski, S Oren and A Zohar (2012), “On bitcoin and crimson balloons” in Proceedings of the 13th ACM Conference on Electronic Commerce, pp. 56-73.

Eyal, I and E Sirer (2014), “Majority is not Enough: Bitcoin Mining is Vulnerable”, paper introduced at the Eighteenth International Conference on Financial Cryptography and Data Security, Barbados, 3-7 March.

Gandal, N, J Hamrick, T Moore and T Oberman (2017), “Price Manipulation in the Bitcoin Ecosystem,” CEPR Discussion Paper No. 12061.

Mooser, M, R Bohme and D Breuker (2013), “An inquiry into money laundering contraptions in the Bitcoin ecosystem”, in Proceedings of the Seventh APWG eCrime Re-searcher’s Summit, pp. 1-14.

Ron, D and A Shamir (2013), “Quantitative analysis of the utter Bitcoin transaction graph”, in Financial Cryptography and Data Security, Vol. Seven thousand eight hundred fifty nine of Lecture Notes in Computer Science, pp. 6-24.

Vasek, M and T Moore (2015), “There’s no free lunch, even using Bitcoin: Tracking the popularity and profits of virtual currency scams”, in R Bohme and T Okamoto (eds), Financial Cryptography and Data Security, volume eight thousand nine hundred seventy five of Lecture Notes in Computer Science, pp. 44-61.

Vasek, M, J Bonneau, R Castellucci, C Keith and T Moore (2016), “The Bitcoin brain drain: a brief paper on the use and manhandle of bitcoin brain wallets”, in Financial Cryptography and Data Security, Lecture Notes in Computer Science.

Yuxing Huang, D, H Dharmdasani, S Meiklejohn, V Dave, C Grier, D McCoy, S Savage, N Weaver, A Snoeren and K Levchenko (2014), “Botcoin: Monetizing stolen cycles”, in Proceedings of the Network and Distributed System Security Symposium.

Endnotes

[1] The Bitcoin ecosystem includes the core network for propagating transactions, the blockchain, and many intermediaries such as currency exchanges, mining pools, and payment processors that facilitate trade.

[Two] Markus was primarily active in period Three, but he was also active a few days during periods 1,Two, and Four. He was not active on the same days as Willy, who was only active in period Four.

Price manipulation in the Bitcoin ecosystem, VOX, CEPR’s Policy Portal

VOX CEPR’s Policy Portal

Research-based policy analysis and commentary from leading economists

Price manipulation in the Bitcoin ecosystem

Neil Gandal, JT Hamrick, Tyler Moore, Tali Oberman twenty two June two thousand seventeen

The cryptocurrency Bitcoin has attracted widespread interest, in large part due to wild swings in its valuation. This column considers an earlier rise in the Bitcoin price to investigate what is driving the currency’s price spikes. The two thousand thirteen rise was caused by fraudulent trades taking place at the largest Bitcoin currency exchange at the time. This finding has implications for policymakers as they weigh what, if anything, to do about regulating cryptocurrencies in light of the record high Bitcoin valuation that many fear is a bubble.

Related

The digital currency Bitcoin was introduced in 2009. Bitcoin and the many other digital currencies are primarily online currencies. The key currencies are those based primarily on cryptography, and Bitcoin is the leading ‘cryptocurrency’.

Bitcoin has experienced a meteoric rise in popularity since its introduction. While digital currencies were proposed as early as the 1980s, Bitcoin was the very first to catch on. The total value of all Bitcoins in circulation reached $45 billion in June 2017. Its success has inspired scores of contesting cryptocurrencies that go after a similar design. Bitcoin and most other cryptocurrencies do not require a central authority to validate and lodge transactions. Instead, these currencies use cryptography (and an internal incentive system) to control transactions, manage the supply, and prevent fraud. Payments are validated by a decentralised network. Once confirmed, all transactions are stored digitally and recorded in a public ‘blockchain’,’ which can be thought of as a distributed accounting system.

While Bitcoin’s algorithm provides safeguards against ‘counterfeiting’ of the currency, the eco-system is still vulnerable to theft. Users keep keys to their Bitcoins and make transactions with the help of wallets. Exchanges facilitate trade inbetween Bitcoins and fiat currencies, and also permit for storing Bitcoins. Bitcoins can be stolen through wallets or exchanges. Exchanges have been targeted more frequently than wallets because many wallets are located on users’ (local) computers, while exchanges frequently store customer deposits in their own (much larger) wallets.

The supply of most cryptocurrencies increases at a predetermined rate, and cannot be switched by any central authority. There are about fifteen million Bitcoins presently in circulation, with the ultimate number eventually reaching twenty one million. The stationary supply in the long run creates concerns about the deflationary aspect of the currency.

While Bitcoin shows superb promise to disrupt existing payment systems through innovations in its technical design, the Bitcoin ecosystem one has been the frequent target of attacks by financially motivated criminals. Due to the unregulated, decentralised environment in which they operate, cryptocurrencies are under constant threat of attack.

Bitcoin only recently became a subject of research in economics. However, the topic has been of interest for longer in computer science (for early work by computer scientists on incentives, see Babaioff et al. 2012, and Eyal and Sirer 2014.) Numerous researchers have conducted studies in order to document and combat threats such as Ponzi schemes, money laundering, mining botnets, and the theft of cryptocurrency wallets (Moeser et al. 2013, Vasek and Moore 2015, Vasek et al. 2016, Yuxing et al. 2014). Ron and Shamir (2013) attempt to identify suspicious trading activity by building a graph of Bitcoin transactions found in the public ledger. None of these papers can associate individual transactions with specific users of the currency exchanges.

In latest work, we demonstrate that the very first time Bitcoin reached an exchange rate of more than $1,000, the meteoric rise was driven by fraud (Gandal et al. 2017). We leverage a unique and very detailed dataset to examine suspicious trading activity that occurred over a ten-month period in two thousand thirteen on Mt. Gox, the leading Bitcoin currency exchange at the time. We very first quantify the extent of the suspicious/fraudulent trading activity and demonstrate that it constitutes a large fraction of trading on the days the activity occurred. We then demonstrate how this trading activity affected the exchange rates at Mt. Gox and other leading currency exchanges.

Figure 1 Bitcoin–US dollar exchange rate, with periods of suspicious activity shaded

While it was the superior currency exchange when Bitcoin very first shot to prominence in early 2013, behind the scenes, Tokyo-based Mt. Gox was in trouble. In addition to suffering from repeated denial-of-service attacks and Bitcoin thefts, two unauthorised traders were able to transact on the exchange without spending real money. In the very first case, a trader dubbed ‘Markus’ was credited with Bitcoins by duplicating previously ended transactions. In the 2nd case, a trader dubbed ‘Willy’ bought Bitcoins from traders by ‘crediting’ the sellers’ accounts with fiat currencies that, in many cases, could not be withdrawn. Figure one shows when these fraudulent traders were active, along with the Bitcoin–US dollar exchange rate. Most noteworthy is that Willy’s operation coincided with an unprecedented leap in the price of Bitcoin: from around $150 to over $1000. In early 2014, Mt. Gox collapsed, and the Bitcoin price fell with it. Only recently, in early 2017, has Bitcoin surpassed the levels of the earlier rise.

However, how do we know that the rise was caused by the fraudulent trades? Fortunately for us as researchers, the unauthorised trades did not take place every day. Table one shows the daily switch in the Bitcoin–US dollar exchange rate for various time periods on Mt. Gox. In the two quarters before unauthorised trading commenced, the daily price increase was, on average, positive but relatively puny: a $0.21 increase in the very first period and a $1 increase in the 2nd period. During the third quarter, when unauthorised trading embarked, the price rose by an average of $Three.15 on the seventeen days in which Markus traded, but fell on average by $0.51 on the seventy five days he did not trade. However, it is during the final quarter, when Willy began trading, that the difference became stark. On the fifty days in which Willy traded, the Bitcoin price rose by an average of $21.85. On the forty one days in which Willy did not make unauthorizsed purchases, the price fell by $0.88 on average. (Table one is very similar for the other leading exchanges as well.)

Table 1 Average daily switch in BTC/USD exchange rate as a function of fraudulent activity Two

In our utter paper, we conduct a regression analysis to examine whether other factors such as the relatively numerous and varied attacks on the Mt. Gox exchange could explain the switch in the daily Bitcoin price, both at Mt. Gox and other leading exchanges (Gandal et al. 2017).

The analysis confirms that only Willy’s trading presence affected the price. The estimated coefficient (on the dummy variable for whether Willy was active) is virtually the same ($21.65) as in Table 1. We conclude that the suspicious trading activity of a single actor was the primary cause of the massive spike in the Bitcoin–US dollar exchange rate, in which the rate rose from around $150 to over $1,000 in just two months in late 2013. The fall was almost as precipitous: the Mt. Gox exchange folded due to insolvency in early 2014, and it has taken more than three years for Bitcoin to match the rise triggered by fraudulent transactions.

Why should we care about the Bitcoin manipulation that took place in 2013? After all, the Bitcoin ecosystem is not almost as significant as the Fresh York Stock Exchange. Nonetheless, latest trends indicate that Bitcoin is becoming an significant asset in the financial system.

Trading in cryptocurrency assets has exploded recently. In the case of Bitcoin, during the one year period ending in mid-June 2017, the market capitalisation enhanced massively from around $7 billion to $45 billion; that is an increase of over 500% in one year. The market cap of other cryptocurrencies surged by even more. In the one-year period ending in mid-May 2017, the market value of cryptocurrencies excluding Bitcoin surged from $1.7 billion to more than $29 billion; that is an increase of more than 1,900%. The markets for these other cryptocurrencies are very skinny and subject to manipulation. Given that we now know the Bitcoin price has been artificially inflated by unauthorised trades in the past, we must view the present rise with superb caution, and not necessarily consider it a ‘healthy bubble’, as recently claimed in The Economist (2017).

As mainstream finance invests in cryptocurrency assets and as countries take steps toward legalising Bitcoin as a payment system (as Japan did in April 2017), it is significant to understand how susceptible cryptocurrency markets are to manipulation. We encourage the nascent cryptocurrency industry to work with regulators and researchers to share anonymised transaction data so that more confidence can be placed in the veracity of exchange rates.

References

Babaioff, M, S Dobzinski, S Oren and A Zohar (2012), “On bitcoin and crimson balloons” in Proceedings of the 13th ACM Conference on Electronic Commerce, pp. 56-73.

Eyal, I and E Sirer (2014), “Majority is not Enough: Bitcoin Mining is Vulnerable”, paper introduced at the Eighteenth International Conference on Financial Cryptography and Data Security, Barbados, 3-7 March.

Gandal, N, J Hamrick, T Moore and T Oberman (2017), “Price Manipulation in the Bitcoin Ecosystem,” CEPR Discussion Paper No. 12061.

Mooser, M, R Bohme and D Breuker (2013), “An inquiry into money laundering contraptions in the Bitcoin ecosystem”, in Proceedings of the Seventh APWG eCrime Re-searcher’s Summit, pp. 1-14.

Ron, D and A Shamir (2013), “Quantitative analysis of the total Bitcoin transaction graph”, in Financial Cryptography and Data Security, Vol. Seven thousand eight hundred fifty nine of Lecture Notes in Computer Science, pp. 6-24.

Vasek, M and T Moore (2015), “There’s no free lunch, even using Bitcoin: Tracking the popularity and profits of virtual currency scams”, in R Bohme and T Okamoto (eds), Financial Cryptography and Data Security, volume eight thousand nine hundred seventy five of Lecture Notes in Computer Science, pp. 44-61.

Vasek, M, J Bonneau, R Castellucci, C Keith and T Moore (2016), “The Bitcoin brain drain: a brief paper on the use and manhandle of bitcoin brain wallets”, in Financial Cryptography and Data Security, Lecture Notes in Computer Science.

Yuxing Huang, D, H Dharmdasani, S Meiklejohn, V Dave, C Grier, D McCoy, S Savage, N Weaver, A Snoeren and K Levchenko (2014), “Botcoin: Monetizing stolen cycles”, in Proceedings of the Network and Distributed System Security Symposium.

Endnotes

[1] The Bitcoin ecosystem includes the core network for propagating transactions, the blockchain, and many intermediaries such as currency exchanges, mining pools, and payment processors that facilitate trade.

[Two] Markus was primarily active in period Trio, but he was also active a few days during periods 1,Two, and Four. He was not active on the same days as Willy, who was only active in period Four.

Price manipulation in the Bitcoin ecosystem, VOX, CEPR’s Policy Portal

VOX CEPR’s Policy Portal

Research-based policy analysis and commentary from leading economists

Price manipulation in the Bitcoin ecosystem

Neil Gandal, JT Hamrick, Tyler Moore, Tali Oberman twenty two June two thousand seventeen

The cryptocurrency Bitcoin has attracted widespread interest, in large part due to wild swings in its valuation. This column considers an earlier rise in the Bitcoin price to investigate what is driving the currency’s price spikes. The two thousand thirteen rise was caused by fraudulent trades taking place at the largest Bitcoin currency exchange at the time. This finding has implications for policymakers as they weigh what, if anything, to do about regulating cryptocurrencies in light of the record high Bitcoin valuation that many fear is a bubble.

Related

The digital currency Bitcoin was introduced in 2009. Bitcoin and the many other digital currencies are primarily online currencies. The key currencies are those based primarily on cryptography, and Bitcoin is the leading ‘cryptocurrency’.

Bitcoin has experienced a meteoric rise in popularity since its introduction. While digital currencies were proposed as early as the 1980s, Bitcoin was the very first to catch on. The total value of all Bitcoins in circulation reached $45 billion in June 2017. Its success has inspired scores of challenging cryptocurrencies that go after a similar design. Bitcoin and most other cryptocurrencies do not require a central authority to validate and lodge transactions. Instead, these currencies use cryptography (and an internal incentive system) to control transactions, manage the supply, and prevent fraud. Payments are validated by a decentralised network. Once confirmed, all transactions are stored digitally and recorded in a public ‘blockchain’,’ which can be thought of as a distributed accounting system.

While Bitcoin’s algorithm provides safeguards against ‘counterfeiting’ of the currency, the eco-system is still vulnerable to theft. Users keep keys to their Bitcoins and make transactions with the help of wallets. Exchanges facilitate trade inbetween Bitcoins and fiat currencies, and also permit for storing Bitcoins. Bitcoins can be stolen through wallets or exchanges. Exchanges have been targeted more frequently than wallets because many wallets are located on users’ (local) computers, while exchanges frequently store customer deposits in their own (much larger) wallets.

The supply of most cryptocurrencies increases at a predetermined rate, and cannot be switched by any central authority. There are about fifteen million Bitcoins presently in circulation, with the ultimate number eventually reaching twenty one million. The stationary supply in the long run creates concerns about the deflationary aspect of the currency.

While Bitcoin shows superb promise to disrupt existing payment systems through innovations in its technical design, the Bitcoin ecosystem one has been the frequent target of attacks by financially motivated criminals. Due to the unregulated, decentralised environment in which they operate, cryptocurrencies are under constant threat of attack.

Bitcoin only recently became a subject of research in economics. However, the topic has been of interest for longer in computer science (for early work by computer scientists on incentives, see Babaioff et al. 2012, and Eyal and Sirer 2014.) Numerous researchers have conducted studies in order to document and combat threats such as Ponzi schemes, money laundering, mining botnets, and the theft of cryptocurrency wallets (Moeser et al. 2013, Vasek and Moore 2015, Vasek et al. 2016, Yuxing et al. 2014). Ron and Shamir (2013) attempt to identify suspicious trading activity by building a graph of Bitcoin transactions found in the public ledger. None of these papers can associate individual transactions with specific users of the currency exchanges.

In latest work, we display that the very first time Bitcoin reached an exchange rate of more than $1,000, the meteoric rise was driven by fraud (Gandal et al. 2017). We leverage a unique and very detailed dataset to examine suspicious trading activity that occurred over a ten-month period in two thousand thirteen on Mt. Gox, the leading Bitcoin currency exchange at the time. We very first quantify the extent of the suspicious/fraudulent trading activity and showcase that it constitutes a large fraction of trading on the days the activity occurred. We then display how this trading activity affected the exchange rates at Mt. Gox and other leading currency exchanges.

Figure 1 Bitcoin–US dollar exchange rate, with periods of suspicious activity shaded

While it was the superior currency exchange when Bitcoin very first shot to prominence in early 2013, behind the scenes, Tokyo-based Mt. Gox was in trouble. In addition to suffering from repeated denial-of-service attacks and Bitcoin thefts, two unauthorised traders were able to transact on the exchange without spending real money. In the very first case, a trader dubbed ‘Markus’ was credited with Bitcoins by duplicating previously ended transactions. In the 2nd case, a trader dubbed ‘Willy’ bought Bitcoins from traders by ‘crediting’ the sellers’ accounts with fiat currencies that, in many cases, could not be withdrawn. Figure one shows when these fraudulent traders were active, along with the Bitcoin–US dollar exchange rate. Most noteworthy is that Willy’s operation coincided with an unprecedented leap in the price of Bitcoin: from around $150 to over $1000. In early 2014, Mt. Gox collapsed, and the Bitcoin price fell with it. Only recently, in early 2017, has Bitcoin surpassed the levels of the earlier rise.

However, how do we know that the rise was caused by the fraudulent trades? Fortunately for us as researchers, the unauthorised trades did not take place every day. Table one shows the daily switch in the Bitcoin–US dollar exchange rate for various time periods on Mt. Gox. In the two quarters before unauthorised trading commenced, the daily price increase was, on average, positive but relatively petite: a $0.21 increase in the very first period and a $1 increase in the 2nd period. During the third quarter, when unauthorised trading commenced, the price rose by an average of $Three.15 on the seventeen days in which Markus traded, but fell on average by $0.51 on the seventy five days he did not trade. However, it is during the final quarter, when Willy began trading, that the difference became stark. On the fifty days in which Willy traded, the Bitcoin price rose by an average of $21.85. On the forty one days in which Willy did not make unauthorizsed purchases, the price fell by $0.88 on average. (Table one is very similar for the other leading exchanges as well.)

Table 1 Average daily switch in BTC/USD exchange rate as a function of fraudulent activity Two

In our total paper, we conduct a regression analysis to examine whether other factors such as the relatively numerous and varied attacks on the Mt. Gox exchange could explain the switch in the daily Bitcoin price, both at Mt. Gox and other leading exchanges (Gandal et al. 2017).

The analysis confirms that only Willy’s trading presence affected the price. The estimated coefficient (on the dummy variable for whether Willy was active) is virtually the same ($21.65) as in Table 1. We conclude that the suspicious trading activity of a single actor was the primary cause of the massive spike in the Bitcoin–US dollar exchange rate, in which the rate rose from around $150 to over $1,000 in just two months in late 2013. The fall was almost as precipitous: the Mt. Gox exchange folded due to insolvency in early 2014, and it has taken more than three years for Bitcoin to match the rise triggered by fraudulent transactions.

Why should we care about the Bitcoin manipulation that took place in 2013? After all, the Bitcoin ecosystem is not almost as significant as the Fresh York Stock Exchange. Nonetheless, latest trends indicate that Bitcoin is becoming an significant asset in the financial system.

Trading in cryptocurrency assets has exploded recently. In the case of Bitcoin, during the one year period ending in mid-June 2017, the market capitalisation enhanced massively from around $7 billion to $45 billion; that is an increase of over 500% in one year. The market cap of other cryptocurrencies surged by even more. In the one-year period ending in mid-May 2017, the market value of cryptocurrencies excluding Bitcoin surged from $1.7 billion to more than $29 billion; that is an increase of more than 1,900%. The markets for these other cryptocurrencies are very skinny and subject to manipulation. Given that we now know the Bitcoin price has been artificially inflated by unauthorised trades in the past, we must view the present rise with excellent caution, and not necessarily consider it a ‘healthy bubble’, as recently claimed in The Economist (2017).

As mainstream finance invests in cryptocurrency assets and as countries take steps toward legalising Bitcoin as a payment system (as Japan did in April 2017), it is significant to understand how susceptible cryptocurrency markets are to manipulation. We encourage the nascent cryptocurrency industry to work with regulators and researchers to share anonymised transaction data so that more confidence can be placed in the veracity of exchange rates.

References

Babaioff, M, S Dobzinski, S Oren and A Zohar (2012), “On bitcoin and crimson balloons” in Proceedings of the 13th ACM Conference on Electronic Commerce, pp. 56-73.

Eyal, I and E Sirer (2014), “Majority is not Enough: Bitcoin Mining is Vulnerable”, paper introduced at the Eighteenth International Conference on Financial Cryptography and Data Security, Barbados, 3-7 March.

Gandal, N, J Hamrick, T Moore and T Oberman (2017), “Price Manipulation in the Bitcoin Ecosystem,” CEPR Discussion Paper No. 12061.

Mooser, M, R Bohme and D Breuker (2013), “An inquiry into money laundering implements in the Bitcoin ecosystem”, in Proceedings of the Seventh APWG eCrime Re-searcher’s Summit, pp. 1-14.

Ron, D and A Shamir (2013), “Quantitative analysis of the total Bitcoin transaction graph”, in Financial Cryptography and Data Security, Vol. Seven thousand eight hundred fifty nine of Lecture Notes in Computer Science, pp. 6-24.

Vasek, M and T Moore (2015), “There’s no free lunch, even using Bitcoin: Tracking the popularity and profits of virtual currency scams”, in R Bohme and T Okamoto (eds), Financial Cryptography and Data Security, volume eight thousand nine hundred seventy five of Lecture Notes in Computer Science, pp. 44-61.

Vasek, M, J Bonneau, R Castellucci, C Keith and T Moore (2016), “The Bitcoin brain drain: a brief paper on the use and manhandle of bitcoin brain wallets”, in Financial Cryptography and Data Security, Lecture Notes in Computer Science.

Yuxing Huang, D, H Dharmdasani, S Meiklejohn, V Dave, C Grier, D McCoy, S Savage, N Weaver, A Snoeren and K Levchenko (2014), “Botcoin: Monetizing stolen cycles”, in Proceedings of the Network and Distributed System Security Symposium.

Endnotes

[1] The Bitcoin ecosystem includes the core network for propagating transactions, the blockchain, and many intermediaries such as currency exchanges, mining pools, and payment processors that facilitate trade.

[Two] Markus was primarily active in period Trio, but he was also active a few days during periods 1,Two, and Four. He was not active on the same days as Willy, who was only active in period Four.

Price manipulation in the Bitcoin ecosystem, VOX, CEPR’s Policy Portal

VOX CEPR’s Policy Portal

Research-based policy analysis and commentary from leading economists

Price manipulation in the Bitcoin ecosystem

Neil Gandal, JT Hamrick, Tyler Moore, Tali Oberman twenty two June two thousand seventeen

The cryptocurrency Bitcoin has attracted widespread interest, in large part due to wild swings in its valuation. This column considers an earlier rise in the Bitcoin price to investigate what is driving the currency’s price spikes. The two thousand thirteen rise was caused by fraudulent trades taking place at the largest Bitcoin currency exchange at the time. This finding has implications for policymakers as they weigh what, if anything, to do about regulating cryptocurrencies in light of the record high Bitcoin valuation that many fear is a bubble.

Related

The digital currency Bitcoin was introduced in 2009. Bitcoin and the many other digital currencies are primarily online currencies. The key currencies are those based primarily on cryptography, and Bitcoin is the leading ‘cryptocurrency’.

Bitcoin has experienced a meteoric rise in popularity since its introduction. While digital currencies were proposed as early as the 1980s, Bitcoin was the very first to catch on. The total value of all Bitcoins in circulation reached $45 billion in June 2017. Its success has inspired scores of challenging cryptocurrencies that go after a similar design. Bitcoin and most other cryptocurrencies do not require a central authority to validate and lodge transactions. Instead, these currencies use cryptography (and an internal incentive system) to control transactions, manage the supply, and prevent fraud. Payments are validated by a decentralised network. Once confirmed, all transactions are stored digitally and recorded in a public ‘blockchain’,’ which can be thought of as a distributed accounting system.

While Bitcoin’s algorithm provides safeguards against ‘counterfeiting’ of the currency, the eco-system is still vulnerable to theft. Users keep keys to their Bitcoins and make transactions with the help of wallets. Exchanges facilitate trade inbetween Bitcoins and fiat currencies, and also permit for storing Bitcoins. Bitcoins can be stolen through wallets or exchanges. Exchanges have been targeted more frequently than wallets because many wallets are located on users’ (local) computers, while exchanges frequently store customer deposits in their own (much larger) wallets.

The supply of most cryptocurrencies increases at a predetermined rate, and cannot be switched by any central authority. There are about fifteen million Bitcoins presently in circulation, with the ultimate number eventually reaching twenty one million. The stationary supply in the long run creates concerns about the deflationary aspect of the currency.

While Bitcoin shows superb promise to disrupt existing payment systems through innovations in its technical design, the Bitcoin ecosystem one has been the frequent target of attacks by financially motivated criminals. Due to the unregulated, decentralised environment in which they operate, cryptocurrencies are under constant threat of attack.

Bitcoin only recently became a subject of research in economics. However, the topic has been of interest for longer in computer science (for early work by computer scientists on incentives, see Babaioff et al. 2012, and Eyal and Sirer 2014.) Numerous researchers have conducted studies in order to document and combat threats such as Ponzi schemes, money laundering, mining botnets, and the theft of cryptocurrency wallets (Moeser et al. 2013, Vasek and Moore 2015, Vasek et al. 2016, Yuxing et al. 2014). Ron and Shamir (2013) attempt to identify suspicious trading activity by building a graph of Bitcoin transactions found in the public ledger. None of these papers can associate individual transactions with specific users of the currency exchanges.

In latest work, we demonstrate that the very first time Bitcoin reached an exchange rate of more than $1,000, the meteoric rise was driven by fraud (Gandal et al. 2017). We leverage a unique and very detailed dataset to examine suspicious trading activity that occurred over a ten-month period in two thousand thirteen on Mt. Gox, the leading Bitcoin currency exchange at the time. We very first quantify the extent of the suspicious/fraudulent trading activity and display that it constitutes a large fraction of trading on the days the activity occurred. We then showcase how this trading activity affected the exchange rates at Mt. Gox and other leading currency exchanges.

Figure 1 Bitcoin–US dollar exchange rate, with periods of suspicious activity shaded

While it was the superior currency exchange when Bitcoin very first shot to prominence in early 2013, behind the scenes, Tokyo-based Mt. Gox was in trouble. In addition to suffering from repeated denial-of-service attacks and Bitcoin thefts, two unauthorised traders were able to transact on the exchange without spending real money. In the very first case, a trader dubbed ‘Markus’ was credited with Bitcoins by duplicating previously ended transactions. In the 2nd case, a trader dubbed ‘Willy’ bought Bitcoins from traders by ‘crediting’ the sellers’ accounts with fiat currencies that, in many cases, could not be withdrawn. Figure one shows when these fraudulent traders were active, along with the Bitcoin–US dollar exchange rate. Most noteworthy is that Willy’s operation coincided with an unprecedented hop in the price of Bitcoin: from around $150 to over $1000. In early 2014, Mt. Gox collapsed, and the Bitcoin price fell with it. Only recently, in early 2017, has Bitcoin surpassed the levels of the earlier rise.

However, how do we know that the rise was caused by the fraudulent trades? Fortunately for us as researchers, the unauthorised trades did not take place every day. Table one shows the daily switch in the Bitcoin–US dollar exchange rate for various time periods on Mt. Gox. In the two quarters before unauthorised trading commenced, the daily price increase was, on average, positive but relatively petite: a $0.21 increase in the very first period and a $1 increase in the 2nd period. During the third quarter, when unauthorised trading commenced, the price rose by an average of $Trio.15 on the seventeen days in which Markus traded, but fell on average by $0.51 on the seventy five days he did not trade. However, it is during the final quarter, when Willy began trading, that the difference became stark. On the fifty days in which Willy traded, the Bitcoin price rose by an average of $21.85. On the forty one days in which Willy did not make unauthorizsed purchases, the price fell by $0.88 on average. (Table one is very similar for the other leading exchanges as well.)

Table 1 Average daily switch in BTC/USD exchange rate as a function of fraudulent activity Two

In our total paper, we conduct a regression analysis to examine whether other factors such as the relatively numerous and varied attacks on the Mt. Gox exchange could explain the switch in the daily Bitcoin price, both at Mt. Gox and other leading exchanges (Gandal et al. 2017).

The analysis confirms that only Willy’s trading presence affected the price. The estimated coefficient (on the dummy variable for whether Willy was active) is virtually the same ($21.65) as in Table 1. We conclude that the suspicious trading activity of a single actor was the primary cause of the massive spike in the Bitcoin–US dollar exchange rate, in which the rate rose from around $150 to over $1,000 in just two months in late 2013. The fall was almost as precipitous: the Mt. Gox exchange folded due to insolvency in early 2014, and it has taken more than three years for Bitcoin to match the rise triggered by fraudulent transactions.

Why should we care about the Bitcoin manipulation that took place in 2013? After all, the Bitcoin ecosystem is not almost as significant as the Fresh York Stock Exchange. Nonetheless, latest trends indicate that Bitcoin is becoming an significant asset in the financial system.

Trading in cryptocurrency assets has exploded recently. In the case of Bitcoin, during the one year period ending in mid-June 2017, the market capitalisation enlargened massively from around $7 billion to $45 billion; that is an increase of over 500% in one year. The market cap of other cryptocurrencies surged by even more. In the one-year period ending in mid-May 2017, the market value of cryptocurrencies excluding Bitcoin surged from $1.7 billion to more than $29 billion; that is an increase of more than 1,900%. The markets for these other cryptocurrencies are very lean and subject to manipulation. Given that we now know the Bitcoin price has been artificially inflated by unauthorised trades in the past, we must view the present rise with superb caution, and not necessarily consider it a ‘healthy bubble’, as recently claimed in The Economist (2017).

As mainstream finance invests in cryptocurrency assets and as countries take steps toward legalising Bitcoin as a payment system (as Japan did in April 2017), it is significant to understand how susceptible cryptocurrency markets are to manipulation. We encourage the nascent cryptocurrency industry to work with regulators and researchers to share anonymised transaction data so that more confidence can be placed in the veracity of exchange rates.

References

Babaioff, M, S Dobzinski, S Oren and A Zohar (2012), “On bitcoin and crimson balloons” in Proceedings of the 13th ACM Conference on Electronic Commerce, pp. 56-73.

Eyal, I and E Sirer (2014), “Majority is not Enough: Bitcoin Mining is Vulnerable”, paper introduced at the Eighteenth International Conference on Financial Cryptography and Data Security, Barbados, 3-7 March.

Gandal, N, J Hamrick, T Moore and T Oberman (2017), “Price Manipulation in the Bitcoin Ecosystem,” CEPR Discussion Paper No. 12061.

Mooser, M, R Bohme and D Breuker (2013), “An inquiry into money laundering implements in the Bitcoin ecosystem”, in Proceedings of the Seventh APWG eCrime Re-searcher’s Summit, pp. 1-14.

Ron, D and A Shamir (2013), “Quantitative analysis of the total Bitcoin transaction graph”, in Financial Cryptography and Data Security, Vol. Seven thousand eight hundred fifty nine of Lecture Notes in Computer Science, pp. 6-24.

Vasek, M and T Moore (2015), “There’s no free lunch, even using Bitcoin: Tracking the popularity and profits of virtual currency scams”, in R Bohme and T Okamoto (eds), Financial Cryptography and Data Security, volume eight thousand nine hundred seventy five of Lecture Notes in Computer Science, pp. 44-61.

Vasek, M, J Bonneau, R Castellucci, C Keith and T Moore (2016), “The Bitcoin brain drain: a brief paper on the use and manhandle of bitcoin brain wallets”, in Financial Cryptography and Data Security, Lecture Notes in Computer Science.

Yuxing Huang, D, H Dharmdasani, S Meiklejohn, V Dave, C Grier, D McCoy, S Savage, N Weaver, A Snoeren and K Levchenko (2014), “Botcoin: Monetizing stolen cycles”, in Proceedings of the Network and Distributed System Security Symposium.

Endnotes

[1] The Bitcoin ecosystem includes the core network for propagating transactions, the blockchain, and many intermediaries such as currency exchanges, mining pools, and payment processors that facilitate trade.

[Two] Markus was primarily active in period Three, but he was also active a few days during periods 1,Two, and Four. He was not active on the same days as Willy, who was only active in period Four.

Price manipulation in the Bitcoin ecosystem, VOX, CEPR’s Policy Portal

VOX CEPR’s Policy Portal

Research-based policy analysis and commentary from leading economists

Price manipulation in the Bitcoin ecosystem

Neil Gandal, JT Hamrick, Tyler Moore, Tali Oberman twenty two June two thousand seventeen

The cryptocurrency Bitcoin has attracted widespread interest, in large part due to wild swings in its valuation. This column considers an earlier rise in the Bitcoin price to investigate what is driving the currency’s price spikes. The two thousand thirteen rise was caused by fraudulent trades taking place at the largest Bitcoin currency exchange at the time. This finding has implications for policymakers as they weigh what, if anything, to do about regulating cryptocurrencies in light of the record high Bitcoin valuation that many fear is a bubble.

Related

The digital currency Bitcoin was introduced in 2009. Bitcoin and the many other digital currencies are primarily online currencies. The key currencies are those based primarily on cryptography, and Bitcoin is the leading ‘cryptocurrency’.

Bitcoin has experienced a meteoric rise in popularity since its introduction. While digital currencies were proposed as early as the 1980s, Bitcoin was the very first to catch on. The total value of all Bitcoins in circulation reached $45 billion in June 2017. Its success has inspired scores of rivaling cryptocurrencies that go after a similar design. Bitcoin and most other cryptocurrencies do not require a central authority to validate and lodge transactions. Instead, these currencies use cryptography (and an internal incentive system) to control transactions, manage the supply, and prevent fraud. Payments are validated by a decentralised network. Once confirmed, all transactions are stored digitally and recorded in a public ‘blockchain’,’ which can be thought of as a distributed accounting system.

While Bitcoin’s algorithm provides safeguards against ‘counterfeiting’ of the currency, the eco-system is still vulnerable to theft. Users keep keys to their Bitcoins and make transactions with the help of wallets. Exchanges facilitate trade inbetween Bitcoins and fiat currencies, and also permit for storing Bitcoins. Bitcoins can be stolen through wallets or exchanges. Exchanges have been targeted more frequently than wallets because many wallets are located on users’ (local) computers, while exchanges frequently store customer deposits in their own (much larger) wallets.

The supply of most cryptocurrencies increases at a predetermined rate, and cannot be switched by any central authority. There are about fifteen million Bitcoins presently in circulation, with the ultimate number eventually reaching twenty one million. The motionless supply in the long run creates concerns about the deflationary aspect of the currency.

While Bitcoin shows superb promise to disrupt existing payment systems through innovations in its technical design, the Bitcoin ecosystem one has been the frequent target of attacks by financially motivated criminals. Due to the unregulated, decentralised environment in which they operate, cryptocurrencies are under constant threat of attack.

Bitcoin only recently became a subject of research in economics. However, the topic has been of interest for longer in computer science (for early work by computer scientists on incentives, see Babaioff et al. 2012, and Eyal and Sirer 2014.) Numerous researchers have conducted studies in order to document and combat threats such as Ponzi schemes, money laundering, mining botnets, and the theft of cryptocurrency wallets (Moeser et al. 2013, Vasek and Moore 2015, Vasek et al. 2016, Yuxing et al. 2014). Ron and Shamir (2013) attempt to identify suspicious trading activity by building a graph of Bitcoin transactions found in the public ledger. None of these papers can associate individual transactions with specific users of the currency exchanges.

In latest work, we display that the very first time Bitcoin reached an exchange rate of more than $1,000, the meteoric rise was driven by fraud (Gandal et al. 2017). We leverage a unique and very detailed dataset to examine suspicious trading activity that occurred over a ten-month period in two thousand thirteen on Mt. Gox, the leading Bitcoin currency exchange at the time. We very first quantify the extent of the suspicious/fraudulent trading activity and showcase that it constitutes a large fraction of trading on the days the activity occurred. We then showcase how this trading activity affected the exchange rates at Mt. Gox and other leading currency exchanges.

Figure 1 Bitcoin–US dollar exchange rate, with periods of suspicious activity shaded

While it was the superior currency exchange when Bitcoin very first shot to prominence in early 2013, behind the scenes, Tokyo-based Mt. Gox was in trouble. In addition to suffering from repeated denial-of-service attacks and Bitcoin thefts, two unauthorised traders were able to transact on the exchange without spending real money. In the very first case, a trader dubbed ‘Markus’ was credited with Bitcoins by duplicating previously finished transactions. In the 2nd case, a trader dubbed ‘Willy’ bought Bitcoins from traders by ‘crediting’ the sellers’ accounts with fiat currencies that, in many cases, could not be withdrawn. Figure one shows when these fraudulent traders were active, along with the Bitcoin–US dollar exchange rate. Most noteworthy is that Willy’s operation coincided with an unprecedented leap in the price of Bitcoin: from around $150 to over $1000. In early 2014, Mt. Gox collapsed, and the Bitcoin price fell with it. Only recently, in early 2017, has Bitcoin surpassed the levels of the earlier rise.

However, how do we know that the rise was caused by the fraudulent trades? Fortunately for us as researchers, the unauthorised trades did not take place every day. Table one shows the daily switch in the Bitcoin–US dollar exchange rate for various time periods on Mt. Gox. In the two quarters before unauthorised trading commenced, the daily price increase was, on average, positive but relatively puny: a $0.21 increase in the very first period and a $1 increase in the 2nd period. During the third quarter, when unauthorised trading embarked, the price rose by an average of $Three.15 on the seventeen days in which Markus traded, but fell on average by $0.51 on the seventy five days he did not trade. However, it is during the final quarter, when Willy began trading, that the difference became stark. On the fifty days in which Willy traded, the Bitcoin price rose by an average of $21.85. On the forty one days in which Willy did not make unauthorizsed purchases, the price fell by $0.88 on average. (Table one is very similar for the other leading exchanges as well.)

Table 1 Average daily switch in BTC/USD exchange rate as a function of fraudulent activity Two

In our total paper, we conduct a regression analysis to examine whether other factors such as the relatively numerous and varied attacks on the Mt. Gox exchange could explain the switch in the daily Bitcoin price, both at Mt. Gox and other leading exchanges (Gandal et al. 2017).

The analysis confirms that only Willy’s trading presence affected the price. The estimated coefficient (on the dummy variable for whether Willy was active) is virtually the same ($21.65) as in Table 1. We conclude that the suspicious trading activity of a single actor was the primary cause of the massive spike in the Bitcoin–US dollar exchange rate, in which the rate rose from around $150 to over $1,000 in just two months in late 2013. The fall was almost as precipitous: the Mt. Gox exchange folded due to insolvency in early 2014, and it has taken more than three years for Bitcoin to match the rise triggered by fraudulent transactions.

Why should we care about the Bitcoin manipulation that took place in 2013? After all, the Bitcoin ecosystem is not almost as significant as the Fresh York Stock Exchange. Nonetheless, latest trends indicate that Bitcoin is becoming an significant asset in the financial system.

Trading in cryptocurrency assets has exploded recently. In the case of Bitcoin, during the one year period ending in mid-June 2017, the market capitalisation enhanced massively from around $7 billion to $45 billion; that is an increase of over 500% in one year. The market cap of other cryptocurrencies surged by even more. In the one-year period ending in mid-May 2017, the market value of cryptocurrencies excluding Bitcoin surged from $1.7 billion to more than $29 billion; that is an increase of more than 1,900%. The markets for these other cryptocurrencies are very skinny and subject to manipulation. Given that we now know the Bitcoin price has been artificially inflated by unauthorised trades in the past, we must view the present rise with good caution, and not necessarily consider it a ‘healthy bubble’, as recently claimed in The Economist (2017).

As mainstream finance invests in cryptocurrency assets and as countries take steps toward legalising Bitcoin as a payment system (as Japan did in April 2017), it is significant to understand how susceptible cryptocurrency markets are to manipulation. We encourage the nascent cryptocurrency industry to work with regulators and researchers to share anonymised transaction data so that more confidence can be placed in the veracity of exchange rates.

References

Babaioff, M, S Dobzinski, S Oren and A Zohar (2012), “On bitcoin and crimson balloons” in Proceedings of the 13th ACM Conference on Electronic Commerce, pp. 56-73.

Eyal, I and E Sirer (2014), “Majority is not Enough: Bitcoin Mining is Vulnerable”, paper introduced at the Eighteenth International Conference on Financial Cryptography and Data Security, Barbados, 3-7 March.

Gandal, N, J Hamrick, T Moore and T Oberman (2017), “Price Manipulation in the Bitcoin Ecosystem,” CEPR Discussion Paper No. 12061.

Mooser, M, R Bohme and D Breuker (2013), “An inquiry into money laundering implements in the Bitcoin ecosystem”, in Proceedings of the Seventh APWG eCrime Re-searcher’s Summit, pp. 1-14.

Ron, D and A Shamir (2013), “Quantitative analysis of the utter Bitcoin transaction graph”, in Financial Cryptography and Data Security, Vol. Seven thousand eight hundred fifty nine of Lecture Notes in Computer Science, pp. 6-24.

Vasek, M and T Moore (2015), “There’s no free lunch, even using Bitcoin: Tracking the popularity and profits of virtual currency scams”, in R Bohme and T Okamoto (eds), Financial Cryptography and Data Security, volume eight thousand nine hundred seventy five of Lecture Notes in Computer Science, pp. 44-61.

Vasek, M, J Bonneau, R Castellucci, C Keith and T Moore (2016), “The Bitcoin brain drain: a brief paper on the use and manhandle of bitcoin brain wallets”, in Financial Cryptography and Data Security, Lecture Notes in Computer Science.

Yuxing Huang, D, H Dharmdasani, S Meiklejohn, V Dave, C Grier, D McCoy, S Savage, N Weaver, A Snoeren and K Levchenko (2014), “Botcoin: Monetizing stolen cycles”, in Proceedings of the Network and Distributed System Security Symposium.

Endnotes

[1] The Bitcoin ecosystem includes the core network for propagating transactions, the blockchain, and many intermediaries such as currency exchanges, mining pools, and payment processors that facilitate trade.

[Two] Markus was primarily active in period Trio, but he was also active a few days during periods 1,Two, and Four. He was not active on the same days as Willy, who was only active in period Four.

Price manipulation in the Bitcoin ecosystem, VOX, CEPR’s Policy Portal

VOX CEPR’s Policy Portal

Research-based policy analysis and commentary from leading economists

Price manipulation in the Bitcoin ecosystem

Neil Gandal, JT Hamrick, Tyler Moore, Tali Oberman twenty two June two thousand seventeen

The cryptocurrency Bitcoin has attracted widespread interest, in large part due to wild swings in its valuation. This column considers an earlier rise in the Bitcoin price to investigate what is driving the currency’s price spikes. The two thousand thirteen rise was caused by fraudulent trades taking place at the largest Bitcoin currency exchange at the time. This finding has implications for policymakers as they weigh what, if anything, to do about regulating cryptocurrencies in light of the record high Bitcoin valuation that many fear is a bubble.

Related

The digital currency Bitcoin was introduced in 2009. Bitcoin and the many other digital currencies are primarily online currencies. The key currencies are those based primarily on cryptography, and Bitcoin is the leading ‘cryptocurrency’.

Bitcoin has experienced a meteoric rise in popularity since its introduction. While digital currencies were proposed as early as the 1980s, Bitcoin was the very first to catch on. The total value of all Bitcoins in circulation reached $45 billion in June 2017. Its success has inspired scores of challenging cryptocurrencies that go after a similar design. Bitcoin and most other cryptocurrencies do not require a central authority to validate and lodge transactions. Instead, these currencies use cryptography (and an internal incentive system) to control transactions, manage the supply, and prevent fraud. Payments are validated by a decentralised network. Once confirmed, all transactions are stored digitally and recorded in a public ‘blockchain’,’ which can be thought of as a distributed accounting system.

While Bitcoin’s algorithm provides safeguards against ‘counterfeiting’ of the currency, the eco-system is still vulnerable to theft. Users keep keys to their Bitcoins and make transactions with the help of wallets. Exchanges facilitate trade inbetween Bitcoins and fiat currencies, and also permit for storing Bitcoins. Bitcoins can be stolen through wallets or exchanges. Exchanges have been targeted more frequently than wallets because many wallets are located on users’ (local) computers, while exchanges frequently store customer deposits in their own (much larger) wallets.

The supply of most cryptocurrencies increases at a predetermined rate, and cannot be switched by any central authority. There are about fifteen million Bitcoins presently in circulation, with the ultimate number eventually reaching twenty one million. The immovable supply in the long run creates concerns about the deflationary aspect of the currency.

While Bitcoin shows excellent promise to disrupt existing payment systems through innovations in its technical design, the Bitcoin ecosystem one has been the frequent target of attacks by financially motivated criminals. Due to the unregulated, decentralised environment in which they operate, cryptocurrencies are under constant threat of attack.

Bitcoin only recently became a subject of research in economics. However, the topic has been of interest for longer in computer science (for early work by computer scientists on incentives, see Babaioff et al. 2012, and Eyal and Sirer 2014.) Numerous researchers have conducted studies in order to document and combat threats such as Ponzi schemes, money laundering, mining botnets, and the theft of cryptocurrency wallets (Moeser et al. 2013, Vasek and Moore 2015, Vasek et al. 2016, Yuxing et al. 2014). Ron and Shamir (2013) attempt to identify suspicious trading activity by building a graph of Bitcoin transactions found in the public ledger. None of these papers can associate individual transactions with specific users of the currency exchanges.

In latest work, we showcase that the very first time Bitcoin reached an exchange rate of more than $1,000, the meteoric rise was driven by fraud (Gandal et al. 2017). We leverage a unique and very detailed dataset to examine suspicious trading activity that occurred over a ten-month period in two thousand thirteen on Mt. Gox, the leading Bitcoin currency exchange at the time. We very first quantify the extent of the suspicious/fraudulent trading activity and showcase that it constitutes a large fraction of trading on the days the activity occurred. We then showcase how this trading activity affected the exchange rates at Mt. Gox and other leading currency exchanges.

Figure 1 Bitcoin–US dollar exchange rate, with periods of suspicious activity shaded

While it was the superior currency exchange when Bitcoin very first shot to prominence in early 2013, behind the scenes, Tokyo-based Mt. Gox was in trouble. In addition to suffering from repeated denial-of-service attacks and Bitcoin thefts, two unauthorised traders were able to transact on the exchange without spending real money. In the very first case, a trader dubbed ‘Markus’ was credited with Bitcoins by duplicating previously ended transactions. In the 2nd case, a trader dubbed ‘Willy’ bought Bitcoins from traders by ‘crediting’ the sellers’ accounts with fiat currencies that, in many cases, could not be withdrawn. Figure one shows when these fraudulent traders were active, along with the Bitcoin–US dollar exchange rate. Most noteworthy is that Willy’s operation coincided with an unprecedented hop in the price of Bitcoin: from around $150 to over $1000. In early 2014, Mt. Gox collapsed, and the Bitcoin price fell with it. Only recently, in early 2017, has Bitcoin surpassed the levels of the earlier rise.

However, how do we know that the rise was caused by the fraudulent trades? Fortunately for us as researchers, the unauthorised trades did not take place every day. Table one shows the daily switch in the Bitcoin–US dollar exchange rate for various time periods on Mt. Gox. In the two quarters before unauthorised trading commenced, the daily price increase was, on average, positive but relatively puny: a $0.21 increase in the very first period and a $1 increase in the 2nd period. During the third quarter, when unauthorised trading began, the price rose by an average of $Three.15 on the seventeen days in which Markus traded, but fell on average by $0.51 on the seventy five days he did not trade. However, it is during the final quarter, when Willy began trading, that the difference became stark. On the fifty days in which Willy traded, the Bitcoin price rose by an average of $21.85. On the forty one days in which Willy did not make unauthorizsed purchases, the price fell by $0.88 on average. (Table one is very similar for the other leading exchanges as well.)

Table 1 Average daily switch in BTC/USD exchange rate as a function of fraudulent activity Two

In our utter paper, we conduct a regression analysis to examine whether other factors such as the relatively numerous and varied attacks on the Mt. Gox exchange could explain the switch in the daily Bitcoin price, both at Mt. Gox and other leading exchanges (Gandal et al. 2017).

The analysis confirms that only Willy’s trading presence affected the price. The estimated coefficient (on the dummy variable for whether Willy was active) is virtually the same ($21.65) as in Table 1. We conclude that the suspicious trading activity of a single actor was the primary cause of the massive spike in the Bitcoin–US dollar exchange rate, in which the rate rose from around $150 to over $1,000 in just two months in late 2013. The fall was almost as precipitous: the Mt. Gox exchange folded due to insolvency in early 2014, and it has taken more than three years for Bitcoin to match the rise triggered by fraudulent transactions.

Why should we care about the Bitcoin manipulation that took place in 2013? After all, the Bitcoin ecosystem is not almost as significant as the Fresh York Stock Exchange. Nonetheless, latest trends indicate that Bitcoin is becoming an significant asset in the financial system.

Trading in cryptocurrency assets has exploded recently. In the case of Bitcoin, during the one year period ending in mid-June 2017, the market capitalisation enhanced massively from around $7 billion to $45 billion; that is an increase of over 500% in one year. The market cap of other cryptocurrencies surged by even more. In the one-year period ending in mid-May 2017, the market value of cryptocurrencies excluding Bitcoin surged from $1.7 billion to more than $29 billion; that is an increase of more than 1,900%. The markets for these other cryptocurrencies are very skinny and subject to manipulation. Given that we now know the Bitcoin price has been artificially inflated by unauthorised trades in the past, we must view the present rise with good caution, and not necessarily consider it a ‘healthy bubble’, as recently claimed in The Economist (2017).

As mainstream finance invests in cryptocurrency assets and as countries take steps toward legalising Bitcoin as a payment system (as Japan did in April 2017), it is significant to understand how susceptible cryptocurrency markets are to manipulation. We encourage the nascent cryptocurrency industry to work with regulators and researchers to share anonymised transaction data so that more confidence can be placed in the veracity of exchange rates.

References

Babaioff, M, S Dobzinski, S Oren and A Zohar (2012), “On bitcoin and crimson balloons” in Proceedings of the 13th ACM Conference on Electronic Commerce, pp. 56-73.

Eyal, I and E Sirer (2014), “Majority is not Enough: Bitcoin Mining is Vulnerable”, paper introduced at the Eighteenth International Conference on Financial Cryptography and Data Security, Barbados, 3-7 March.

Gandal, N, J Hamrick, T Moore and T Oberman (2017), “Price Manipulation in the Bitcoin Ecosystem,” CEPR Discussion Paper No. 12061.

Mooser, M, R Bohme and D Breuker (2013), “An inquiry into money laundering implements in the Bitcoin ecosystem”, in Proceedings of the Seventh APWG eCrime Re-searcher’s Summit, pp. 1-14.

Ron, D and A Shamir (2013), “Quantitative analysis of the total Bitcoin transaction graph”, in Financial Cryptography and Data Security, Vol. Seven thousand eight hundred fifty nine of Lecture Notes in Computer Science, pp. 6-24.

Vasek, M and T Moore (2015), “There’s no free lunch, even using Bitcoin: Tracking the popularity and profits of virtual currency scams”, in R Bohme and T Okamoto (eds), Financial Cryptography and Data Security, volume eight thousand nine hundred seventy five of Lecture Notes in Computer Science, pp. 44-61.

Vasek, M, J Bonneau, R Castellucci, C Keith and T Moore (2016), “The Bitcoin brain drain: a brief paper on the use and manhandle of bitcoin brain wallets”, in Financial Cryptography and Data Security, Lecture Notes in Computer Science.

Yuxing Huang, D, H Dharmdasani, S Meiklejohn, V Dave, C Grier, D McCoy, S Savage, N Weaver, A Snoeren and K Levchenko (2014), “Botcoin: Monetizing stolen cycles”, in Proceedings of the Network and Distributed System Security Symposium.

Endnotes

[1] The Bitcoin ecosystem includes the core network for propagating transactions, the blockchain, and many intermediaries such as currency exchanges, mining pools, and payment processors that facilitate trade.

[Two] Markus was primarily active in period Trio, but he was also active a few days during periods 1,Two, and Four. He was not active on the same days as Willy, who was only active in period Four.

Price manipulation in the Bitcoin ecosystem, VOX, CEPR’s Policy Portal

VOX CEPR’s Policy Portal

Research-based policy analysis and commentary from leading economists

Price manipulation in the Bitcoin ecosystem

Neil Gandal, JT Hamrick, Tyler Moore, Tali Oberman twenty two June two thousand seventeen

The cryptocurrency Bitcoin has attracted widespread interest, in large part due to wild swings in its valuation. This column considers an earlier rise in the Bitcoin price to investigate what is driving the currency’s price spikes. The two thousand thirteen rise was caused by fraudulent trades taking place at the largest Bitcoin currency exchange at the time. This finding has implications for policymakers as they weigh what, if anything, to do about regulating cryptocurrencies in light of the record high Bitcoin valuation that many fear is a bubble.

Related

The digital currency Bitcoin was introduced in 2009. Bitcoin and the many other digital currencies are primarily online currencies. The key currencies are those based primarily on cryptography, and Bitcoin is the leading ‘cryptocurrency’.

Bitcoin has experienced a meteoric rise in popularity since its introduction. While digital currencies were proposed as early as the 1980s, Bitcoin was the very first to catch on. The total value of all Bitcoins in circulation reached $45 billion in June 2017. Its success has inspired scores of rivaling cryptocurrencies that go after a similar design. Bitcoin and most other cryptocurrencies do not require a central authority to validate and lodge transactions. Instead, these currencies use cryptography (and an internal incentive system) to control transactions, manage the supply, and prevent fraud. Payments are validated by a decentralised network. Once confirmed, all transactions are stored digitally and recorded in a public ‘blockchain’,’ which can be thought of as a distributed accounting system.

While Bitcoin’s algorithm provides safeguards against ‘counterfeiting’ of the currency, the eco-system is still vulnerable to theft. Users keep keys to their Bitcoins and make transactions with the help of wallets. Exchanges facilitate trade inbetween Bitcoins and fiat currencies, and also permit for storing Bitcoins. Bitcoins can be stolen through wallets or exchanges. Exchanges have been targeted more frequently than wallets because many wallets are located on users’ (local) computers, while exchanges frequently store customer deposits in their own (much larger) wallets.

The supply of most cryptocurrencies increases at a predetermined rate, and cannot be switched by any central authority. There are about fifteen million Bitcoins presently in circulation, with the ultimate number eventually reaching twenty one million. The motionless supply in the long run creates concerns about the deflationary aspect of the currency.

While Bitcoin shows excellent promise to disrupt existing payment systems through innovations in its technical design, the Bitcoin ecosystem one has been the frequent target of attacks by financially motivated criminals. Due to the unregulated, decentralised environment in which they operate, cryptocurrencies are under constant threat of attack.

Bitcoin only recently became a subject of research in economics. However, the topic has been of interest for longer in computer science (for early work by computer scientists on incentives, see Babaioff et al. 2012, and Eyal and Sirer 2014.) Numerous researchers have conducted studies in order to document and combat threats such as Ponzi schemes, money laundering, mining botnets, and the theft of cryptocurrency wallets (Moeser et al. 2013, Vasek and Moore 2015, Vasek et al. 2016, Yuxing et al. 2014). Ron and Shamir (2013) attempt to identify suspicious trading activity by building a graph of Bitcoin transactions found in the public ledger. None of these papers can associate individual transactions with specific users of the currency exchanges.

In latest work, we display that the very first time Bitcoin reached an exchange rate of more than $1,000, the meteoric rise was driven by fraud (Gandal et al. 2017). We leverage a unique and very detailed dataset to examine suspicious trading activity that occurred over a ten-month period in two thousand thirteen on Mt. Gox, the leading Bitcoin currency exchange at the time. We very first quantify the extent of the suspicious/fraudulent trading activity and showcase that it constitutes a large fraction of trading on the days the activity occurred. We then display how this trading activity affected the exchange rates at Mt. Gox and other leading currency exchanges.

Figure 1 Bitcoin–US dollar exchange rate, with periods of suspicious activity shaded

While it was the superior currency exchange when Bitcoin very first shot to prominence in early 2013, behind the scenes, Tokyo-based Mt. Gox was in trouble. In addition to suffering from repeated denial-of-service attacks and Bitcoin thefts, two unauthorised traders were able to transact on the exchange without spending real money. In the very first case, a trader dubbed ‘Markus’ was credited with Bitcoins by duplicating previously ended transactions. In the 2nd case, a trader dubbed ‘Willy’ bought Bitcoins from traders by ‘crediting’ the sellers’ accounts with fiat currencies that, in many cases, could not be withdrawn. Figure one shows when these fraudulent traders were active, along with the Bitcoin–US dollar exchange rate. Most noteworthy is that Willy’s operation coincided with an unprecedented hop in the price of Bitcoin: from around $150 to over $1000. In early 2014, Mt. Gox collapsed, and the Bitcoin price fell with it. Only recently, in early 2017, has Bitcoin surpassed the levels of the earlier rise.

However, how do we know that the rise was caused by the fraudulent trades? Fortunately for us as researchers, the unauthorised trades did not take place every day. Table one shows the daily switch in the Bitcoin–US dollar exchange rate for various time periods on Mt. Gox. In the two quarters before unauthorised trading commenced, the daily price increase was, on average, positive but relatively puny: a $0.21 increase in the very first period and a $1 increase in the 2nd period. During the third quarter, when unauthorised trading commenced, the price rose by an average of $Trio.15 on the seventeen days in which Markus traded, but fell on average by $0.51 on the seventy five days he did not trade. However, it is during the final quarter, when Willy began trading, that the difference became stark. On the fifty days in which Willy traded, the Bitcoin price rose by an average of $21.85. On the forty one days in which Willy did not make unauthorizsed purchases, the price fell by $0.88 on average. (Table one is very similar for the other leading exchanges as well.)

Table 1 Average daily switch in BTC/USD exchange rate as a function of fraudulent activity Two

In our utter paper, we conduct a regression analysis to examine whether other factors such as the relatively numerous and varied attacks on the Mt. Gox exchange could explain the switch in the daily Bitcoin price, both at Mt. Gox and other leading exchanges (Gandal et al. 2017).

The analysis confirms that only Willy’s trading presence affected the price. The estimated coefficient (on the dummy variable for whether Willy was active) is virtually the same ($21.65) as in Table 1. We conclude that the suspicious trading activity of a single actor was the primary cause of the massive spike in the Bitcoin–US dollar exchange rate, in which the rate rose from around $150 to over $1,000 in just two months in late 2013. The fall was almost as precipitous: the Mt. Gox exchange folded due to insolvency in early 2014, and it has taken more than three years for Bitcoin to match the rise triggered by fraudulent transactions.

Why should we care about the Bitcoin manipulation that took place in 2013? After all, the Bitcoin ecosystem is not almost as significant as the Fresh York Stock Exchange. Nonetheless, latest trends indicate that Bitcoin is becoming an significant asset in the financial system.

Trading in cryptocurrency assets has exploded recently. In the case of Bitcoin, during the one year period ending in mid-June 2017, the market capitalisation enlargened massively from around $7 billion to $45 billion; that is an increase of over 500% in one year. The market cap of other cryptocurrencies surged by even more. In the one-year period ending in mid-May 2017, the market value of cryptocurrencies excluding Bitcoin surged from $1.7 billion to more than $29 billion; that is an increase of more than 1,900%. The markets for these other cryptocurrencies are very lean and subject to manipulation. Given that we now know the Bitcoin price has been artificially inflated by unauthorised trades in the past, we must view the present rise with fine caution, and not necessarily consider it a ‘healthy bubble’, as recently claimed in The Economist (2017).

As mainstream finance invests in cryptocurrency assets and as countries take steps toward legalising Bitcoin as a payment system (as Japan did in April 2017), it is significant to understand how susceptible cryptocurrency markets are to manipulation. We encourage the nascent cryptocurrency industry to work with regulators and researchers to share anonymised transaction data so that more confidence can be placed in the veracity of exchange rates.

References

Babaioff, M, S Dobzinski, S Oren and A Zohar (2012), “On bitcoin and crimson balloons” in Proceedings of the 13th ACM Conference on Electronic Commerce, pp. 56-73.

Eyal, I and E Sirer (2014), “Majority is not Enough: Bitcoin Mining is Vulnerable”, paper introduced at the Eighteenth International Conference on Financial Cryptography and Data Security, Barbados, 3-7 March.

Gandal, N, J Hamrick, T Moore and T Oberman (2017), “Price Manipulation in the Bitcoin Ecosystem,” CEPR Discussion Paper No. 12061.

Mooser, M, R Bohme and D Breuker (2013), “An inquiry into money laundering instruments in the Bitcoin ecosystem”, in Proceedings of the Seventh APWG eCrime Re-searcher’s Summit, pp. 1-14.

Ron, D and A Shamir (2013), “Quantitative analysis of the utter Bitcoin transaction graph”, in Financial Cryptography and Data Security, Vol. Seven thousand eight hundred fifty nine of Lecture Notes in Computer Science, pp. 6-24.

Vasek, M and T Moore (2015), “There’s no free lunch, even using Bitcoin: Tracking the popularity and profits of virtual currency scams”, in R Bohme and T Okamoto (eds), Financial Cryptography and Data Security, volume eight thousand nine hundred seventy five of Lecture Notes in Computer Science, pp. 44-61.

Vasek, M, J Bonneau, R Castellucci, C Keith and T Moore (2016), “The Bitcoin brain drain: a brief paper on the use and manhandle of bitcoin brain wallets”, in Financial Cryptography and Data Security, Lecture Notes in Computer Science.

Yuxing Huang, D, H Dharmdasani, S Meiklejohn, V Dave, C Grier, D McCoy, S Savage, N Weaver, A Snoeren and K Levchenko (2014), “Botcoin: Monetizing stolen cycles”, in Proceedings of the Network and Distributed System Security Symposium.

Endnotes

[1] The Bitcoin ecosystem includes the core network for propagating transactions, the blockchain, and many intermediaries such as currency exchanges, mining pools, and payment processors that facilitate trade.

[Two] Markus was primarily active in period Trio, but he was also active a few days during periods 1,Two, and Four. He was not active on the same days as Willy, who was only active in period Four.

Price manipulation in the Bitcoin ecosystem, VOX, CEPR’s Policy Portal

VOX CEPR’s Policy Portal

Research-based policy analysis and commentary from leading economists

Price manipulation in the Bitcoin ecosystem

Neil Gandal, JT Hamrick, Tyler Moore, Tali Oberman twenty two June two thousand seventeen

The cryptocurrency Bitcoin has attracted widespread interest, in large part due to wild swings in its valuation. This column considers an earlier rise in the Bitcoin price to investigate what is driving the currency’s price spikes. The two thousand thirteen rise was caused by fraudulent trades taking place at the largest Bitcoin currency exchange at the time. This finding has implications for policymakers as they weigh what, if anything, to do about regulating cryptocurrencies in light of the record high Bitcoin valuation that many fear is a bubble.

Related

The digital currency Bitcoin was introduced in 2009. Bitcoin and the many other digital currencies are primarily online currencies. The key currencies are those based primarily on cryptography, and Bitcoin is the leading ‘cryptocurrency’.

Bitcoin has experienced a meteoric rise in popularity since its introduction. While digital currencies were proposed as early as the 1980s, Bitcoin was the very first to catch on. The total value of all Bitcoins in circulation reached $45 billion in June 2017. Its success has inspired scores of challenging cryptocurrencies that go after a similar design. Bitcoin and most other cryptocurrencies do not require a central authority to validate and lodge transactions. Instead, these currencies use cryptography (and an internal incentive system) to control transactions, manage the supply, and prevent fraud. Payments are validated by a decentralised network. Once confirmed, all transactions are stored digitally and recorded in a public ‘blockchain’,’ which can be thought of as a distributed accounting system.

While Bitcoin’s algorithm provides safeguards against ‘counterfeiting’ of the currency, the eco-system is still vulnerable to theft. Users keep keys to their Bitcoins and make transactions with the help of wallets. Exchanges facilitate trade inbetween Bitcoins and fiat currencies, and also permit for storing Bitcoins. Bitcoins can be stolen through wallets or exchanges. Exchanges have been targeted more frequently than wallets because many wallets are located on users’ (local) computers, while exchanges frequently store customer deposits in their own (much larger) wallets.

The supply of most cryptocurrencies increases at a predetermined rate, and cannot be switched by any central authority. There are about fifteen million Bitcoins presently in circulation, with the ultimate number eventually reaching twenty one million. The immovable supply in the long run creates concerns about the deflationary aspect of the currency.

While Bitcoin shows excellent promise to disrupt existing payment systems through innovations in its technical design, the Bitcoin ecosystem one has been the frequent target of attacks by financially motivated criminals. Due to the unregulated, decentralised environment in which they operate, cryptocurrencies are under constant threat of attack.

Bitcoin only recently became a subject of research in economics. However, the topic has been of interest for longer in computer science (for early work by computer scientists on incentives, see Babaioff et al. 2012, and Eyal and Sirer 2014.) Numerous researchers have conducted studies in order to document and combat threats such as Ponzi schemes, money laundering, mining botnets, and the theft of cryptocurrency wallets (Moeser et al. 2013, Vasek and Moore 2015, Vasek et al. 2016, Yuxing et al. 2014). Ron and Shamir (2013) attempt to identify suspicious trading activity by building a graph of Bitcoin transactions found in the public ledger. None of these papers can associate individual transactions with specific users of the currency exchanges.

In latest work, we demonstrate that the very first time Bitcoin reached an exchange rate of more than $1,000, the meteoric rise was driven by fraud (Gandal et al. 2017). We leverage a unique and very detailed dataset to examine suspicious trading activity that occurred over a ten-month period in two thousand thirteen on Mt. Gox, the leading Bitcoin currency exchange at the time. We very first quantify the extent of the suspicious/fraudulent trading activity and display that it constitutes a large fraction of trading on the days the activity occurred. We then demonstrate how this trading activity affected the exchange rates at Mt. Gox and other leading currency exchanges.

Figure 1 Bitcoin–US dollar exchange rate, with periods of suspicious activity shaded

While it was the superior currency exchange when Bitcoin very first shot to prominence in early 2013, behind the scenes, Tokyo-based Mt. Gox was in trouble. In addition to suffering from repeated denial-of-service attacks and Bitcoin thefts, two unauthorised traders were able to transact on the exchange without spending real money. In the very first case, a trader dubbed ‘Markus’ was credited with Bitcoins by duplicating previously finished transactions. In the 2nd case, a trader dubbed ‘Willy’ bought Bitcoins from traders by ‘crediting’ the sellers’ accounts with fiat currencies that, in many cases, could not be withdrawn. Figure one shows when these fraudulent traders were active, along with the Bitcoin–US dollar exchange rate. Most noteworthy is that Willy’s operation coincided with an unprecedented hop in the price of Bitcoin: from around $150 to over $1000. In early 2014, Mt. Gox collapsed, and the Bitcoin price fell with it. Only recently, in early 2017, has Bitcoin surpassed the levels of the earlier rise.

However, how do we know that the rise was caused by the fraudulent trades? Fortunately for us as researchers, the unauthorised trades did not take place every day. Table one shows the daily switch in the Bitcoin–US dollar exchange rate for various time periods on Mt. Gox. In the two quarters before unauthorised trading commenced, the daily price increase was, on average, positive but relatively puny: a $0.21 increase in the very first period and a $1 increase in the 2nd period. During the third quarter, when unauthorised trading commenced, the price rose by an average of $Three.15 on the seventeen days in which Markus traded, but fell on average by $0.51 on the seventy five days he did not trade. However, it is during the final quarter, when Willy began trading, that the difference became stark. On the fifty days in which Willy traded, the Bitcoin price rose by an average of $21.85. On the forty one days in which Willy did not make unauthorizsed purchases, the price fell by $0.88 on average. (Table one is very similar for the other leading exchanges as well.)

Table 1 Average daily switch in BTC/USD exchange rate as a function of fraudulent activity Two

In our total paper, we conduct a regression analysis to examine whether other factors such as the relatively numerous and varied attacks on the Mt. Gox exchange could explain the switch in the daily Bitcoin price, both at Mt. Gox and other leading exchanges (Gandal et al. 2017).

The analysis confirms that only Willy’s trading presence affected the price. The estimated coefficient (on the dummy variable for whether Willy was active) is virtually the same ($21.65) as in Table 1. We conclude that the suspicious trading activity of a single actor was the primary cause of the massive spike in the Bitcoin–US dollar exchange rate, in which the rate rose from around $150 to over $1,000 in just two months in late 2013. The fall was almost as precipitous: the Mt. Gox exchange folded due to insolvency in early 2014, and it has taken more than three years for Bitcoin to match the rise triggered by fraudulent transactions.

Why should we care about the Bitcoin manipulation that took place in 2013? After all, the Bitcoin ecosystem is not almost as significant as the Fresh York Stock Exchange. Nonetheless, latest trends indicate that Bitcoin is becoming an significant asset in the financial system.

Trading in cryptocurrency assets has exploded recently. In the case of Bitcoin, during the one year period ending in mid-June 2017, the market capitalisation enlargened massively from around $7 billion to $45 billion; that is an increase of over 500% in one year. The market cap of other cryptocurrencies surged by even more. In the one-year period ending in mid-May 2017, the market value of cryptocurrencies excluding Bitcoin surged from $1.7 billion to more than $29 billion; that is an increase of more than 1,900%. The markets for these other cryptocurrencies are very skinny and subject to manipulation. Given that we now know the Bitcoin price has been artificially inflated by unauthorised trades in the past, we must view the present rise with excellent caution, and not necessarily consider it a ‘healthy bubble’, as recently claimed in The Economist (2017).

As mainstream finance invests in cryptocurrency assets and as countries take steps toward legalising Bitcoin as a payment system (as Japan did in April 2017), it is significant to understand how susceptible cryptocurrency markets are to manipulation. We encourage the nascent cryptocurrency industry to work with regulators and researchers to share anonymised transaction data so that more confidence can be placed in the veracity of exchange rates.

References

Babaioff, M, S Dobzinski, S Oren and A Zohar (2012), “On bitcoin and crimson balloons” in Proceedings of the 13th ACM Conference on Electronic Commerce, pp. 56-73.

Eyal, I and E Sirer (2014), “Majority is not Enough: Bitcoin Mining is Vulnerable”, paper introduced at the Eighteenth International Conference on Financial Cryptography and Data Security, Barbados, 3-7 March.

Gandal, N, J Hamrick, T Moore and T Oberman (2017), “Price Manipulation in the Bitcoin Ecosystem,” CEPR Discussion Paper No. 12061.

Mooser, M, R Bohme and D Breuker (2013), “An inquiry into money laundering implements in the Bitcoin ecosystem”, in Proceedings of the Seventh APWG eCrime Re-searcher’s Summit, pp. 1-14.

Ron, D and A Shamir (2013), “Quantitative analysis of the total Bitcoin transaction graph”, in Financial Cryptography and Data Security, Vol. Seven thousand eight hundred fifty nine of Lecture Notes in Computer Science, pp. 6-24.

Vasek, M and T Moore (2015), “There’s no free lunch, even using Bitcoin: Tracking the popularity and profits of virtual currency scams”, in R Bohme and T Okamoto (eds), Financial Cryptography and Data Security, volume eight thousand nine hundred seventy five of Lecture Notes in Computer Science, pp. 44-61.

Vasek, M, J Bonneau, R Castellucci, C Keith and T Moore (2016), “The Bitcoin brain drain: a brief paper on the use and manhandle of bitcoin brain wallets”, in Financial Cryptography and Data Security, Lecture Notes in Computer Science.

Yuxing Huang, D, H Dharmdasani, S Meiklejohn, V Dave, C Grier, D McCoy, S Savage, N Weaver, A Snoeren and K Levchenko (2014), “Botcoin: Monetizing stolen cycles”, in Proceedings of the Network and Distributed System Security Symposium.

Endnotes

[1] The Bitcoin ecosystem includes the core network for propagating transactions, the blockchain, and many intermediaries such as currency exchanges, mining pools, and payment processors that facilitate trade.

[Two] Markus was primarily active in period Three, but he was also active a few days during periods 1,Two, and Four. He was not active on the same days as Willy, who was only active in period Four.

Price manipulation in the Bitcoin ecosystem, VOX, CEPR’s Policy Portal

VOX CEPR’s Policy Portal

Research-based policy analysis and commentary from leading economists

Price manipulation in the Bitcoin ecosystem

Neil Gandal, JT Hamrick, Tyler Moore, Tali Oberman twenty two June two thousand seventeen

The cryptocurrency Bitcoin has attracted widespread interest, in large part due to wild swings in its valuation. This column considers an earlier rise in the Bitcoin price to investigate what is driving the currency’s price spikes. The two thousand thirteen rise was caused by fraudulent trades taking place at the largest Bitcoin currency exchange at the time. This finding has implications for policymakers as they weigh what, if anything, to do about regulating cryptocurrencies in light of the record high Bitcoin valuation that many fear is a bubble.

Related

The digital currency Bitcoin was introduced in 2009. Bitcoin and the many other digital currencies are primarily online currencies. The key currencies are those based primarily on cryptography, and Bitcoin is the leading ‘cryptocurrency’.

Bitcoin has experienced a meteoric rise in popularity since its introduction. While digital currencies were proposed as early as the 1980s, Bitcoin was the very first to catch on. The total value of all Bitcoins in circulation reached $45 billion in June 2017. Its success has inspired scores of rivaling cryptocurrencies that go after a similar design. Bitcoin and most other cryptocurrencies do not require a central authority to validate and lodge transactions. Instead, these currencies use cryptography (and an internal incentive system) to control transactions, manage the supply, and prevent fraud. Payments are validated by a decentralised network. Once confirmed, all transactions are stored digitally and recorded in a public ‘blockchain’,’ which can be thought of as a distributed accounting system.

While Bitcoin’s algorithm provides safeguards against ‘counterfeiting’ of the currency, the eco-system is still vulnerable to theft. Users keep keys to their Bitcoins and make transactions with the help of wallets. Exchanges facilitate trade inbetween Bitcoins and fiat currencies, and also permit for storing Bitcoins. Bitcoins can be stolen through wallets or exchanges. Exchanges have been targeted more frequently than wallets because many wallets are located on users’ (local) computers, while exchanges frequently store customer deposits in their own (much larger) wallets.

The supply of most cryptocurrencies increases at a predetermined rate, and cannot be switched by any central authority. There are about fifteen million Bitcoins presently in circulation, with the ultimate number eventually reaching twenty one million. The stationary supply in the long run creates concerns about the deflationary aspect of the currency.

While Bitcoin shows superb promise to disrupt existing payment systems through innovations in its technical design, the Bitcoin ecosystem one has been the frequent target of attacks by financially motivated criminals. Due to the unregulated, decentralised environment in which they operate, cryptocurrencies are under constant threat of attack.

Bitcoin only recently became a subject of research in economics. However, the topic has been of interest for longer in computer science (for early work by computer scientists on incentives, see Babaioff et al. 2012, and Eyal and Sirer 2014.) Numerous researchers have conducted studies in order to document and combat threats such as Ponzi schemes, money laundering, mining botnets, and the theft of cryptocurrency wallets (Moeser et al. 2013, Vasek and Moore 2015, Vasek et al. 2016, Yuxing et al. 2014). Ron and Shamir (2013) attempt to identify suspicious trading activity by building a graph of Bitcoin transactions found in the public ledger. None of these papers can associate individual transactions with specific users of the currency exchanges.

In latest work, we demonstrate that the very first time Bitcoin reached an exchange rate of more than $1,000, the meteoric rise was driven by fraud (Gandal et al. 2017). We leverage a unique and very detailed dataset to examine suspicious trading activity that occurred over a ten-month period in two thousand thirteen on Mt. Gox, the leading Bitcoin currency exchange at the time. We very first quantify the extent of the suspicious/fraudulent trading activity and display that it constitutes a large fraction of trading on the days the activity occurred. We then demonstrate how this trading activity affected the exchange rates at Mt. Gox and other leading currency exchanges.

Figure 1 Bitcoin–US dollar exchange rate, with periods of suspicious activity shaded

While it was the superior currency exchange when Bitcoin very first shot to prominence in early 2013, behind the scenes, Tokyo-based Mt. Gox was in trouble. In addition to suffering from repeated denial-of-service attacks and Bitcoin thefts, two unauthorised traders were able to transact on the exchange without spending real money. In the very first case, a trader dubbed ‘Markus’ was credited with Bitcoins by duplicating previously ended transactions. In the 2nd case, a trader dubbed ‘Willy’ bought Bitcoins from traders by ‘crediting’ the sellers’ accounts with fiat currencies that, in many cases, could not be withdrawn. Figure one shows when these fraudulent traders were active, along with the Bitcoin–US dollar exchange rate. Most noteworthy is that Willy’s operation coincided with an unprecedented leap in the price of Bitcoin: from around $150 to over $1000. In early 2014, Mt. Gox collapsed, and the Bitcoin price fell with it. Only recently, in early 2017, has Bitcoin surpassed the levels of the earlier rise.

However, how do we know that the rise was caused by the fraudulent trades? Fortunately for us as researchers, the unauthorised trades did not take place every day. Table one shows the daily switch in the Bitcoin–US dollar exchange rate for various time periods on Mt. Gox. In the two quarters before unauthorised trading commenced, the daily price increase was, on average, positive but relatively petite: a $0.21 increase in the very first period and a $1 increase in the 2nd period. During the third quarter, when unauthorised trading began, the price rose by an average of $Three.15 on the seventeen days in which Markus traded, but fell on average by $0.51 on the seventy five days he did not trade. However, it is during the final quarter, when Willy began trading, that the difference became stark. On the fifty days in which Willy traded, the Bitcoin price rose by an average of $21.85. On the forty one days in which Willy did not make unauthorizsed purchases, the price fell by $0.88 on average. (Table one is very similar for the other leading exchanges as well.)

Table 1 Average daily switch in BTC/USD exchange rate as a function of fraudulent activity Two

In our total paper, we conduct a regression analysis to examine whether other factors such as the relatively numerous and varied attacks on the Mt. Gox exchange could explain the switch in the daily Bitcoin price, both at Mt. Gox and other leading exchanges (Gandal et al. 2017).

The analysis confirms that only Willy’s trading presence affected the price. The estimated coefficient (on the dummy variable for whether Willy was active) is virtually the same ($21.65) as in Table 1. We conclude that the suspicious trading activity of a single actor was the primary cause of the massive spike in the Bitcoin–US dollar exchange rate, in which the rate rose from around $150 to over $1,000 in just two months in late 2013. The fall was almost as precipitous: the Mt. Gox exchange folded due to insolvency in early 2014, and it has taken more than three years for Bitcoin to match the rise triggered by fraudulent transactions.

Why should we care about the Bitcoin manipulation that took place in 2013? After all, the Bitcoin ecosystem is not almost as significant as the Fresh York Stock Exchange. Nonetheless, latest trends indicate that Bitcoin is becoming an significant asset in the financial system.

Trading in cryptocurrency assets has exploded recently. In the case of Bitcoin, during the one year period ending in mid-June 2017, the market capitalisation enhanced massively from around $7 billion to $45 billion; that is an increase of over 500% in one year. The market cap of other cryptocurrencies surged by even more. In the one-year period ending in mid-May 2017, the market value of cryptocurrencies excluding Bitcoin surged from $1.7 billion to more than $29 billion; that is an increase of more than 1,900%. The markets for these other cryptocurrencies are very skinny and subject to manipulation. Given that we now know the Bitcoin price has been artificially inflated by unauthorised trades in the past, we must view the present rise with good caution, and not necessarily consider it a ‘healthy bubble’, as recently claimed in The Economist (2017).

As mainstream finance invests in cryptocurrency assets and as countries take steps toward legalising Bitcoin as a payment system (as Japan did in April 2017), it is significant to understand how susceptible cryptocurrency markets are to manipulation. We encourage the nascent cryptocurrency industry to work with regulators and researchers to share anonymised transaction data so that more confidence can be placed in the veracity of exchange rates.

References

Babaioff, M, S Dobzinski, S Oren and A Zohar (2012), “On bitcoin and crimson balloons” in Proceedings of the 13th ACM Conference on Electronic Commerce, pp. 56-73.

Eyal, I and E Sirer (2014), “Majority is not Enough: Bitcoin Mining is Vulnerable”, paper introduced at the Eighteenth International Conference on Financial Cryptography and Data Security, Barbados, 3-7 March.

Gandal, N, J Hamrick, T Moore and T Oberman (2017), “Price Manipulation in the Bitcoin Ecosystem,” CEPR Discussion Paper No. 12061.

Mooser, M, R Bohme and D Breuker (2013), “An inquiry into money laundering instruments in the Bitcoin ecosystem”, in Proceedings of the Seventh APWG eCrime Re-searcher’s Summit, pp. 1-14.

Ron, D and A Shamir (2013), “Quantitative analysis of the total Bitcoin transaction graph”, in Financial Cryptography and Data Security, Vol. Seven thousand eight hundred fifty nine of Lecture Notes in Computer Science, pp. 6-24.

Vasek, M and T Moore (2015), “There’s no free lunch, even using Bitcoin: Tracking the popularity and profits of virtual currency scams”, in R Bohme and T Okamoto (eds), Financial Cryptography and Data Security, volume eight thousand nine hundred seventy five of Lecture Notes in Computer Science, pp. 44-61.

Vasek, M, J Bonneau, R Castellucci, C Keith and T Moore (2016), “The Bitcoin brain drain: a brief paper on the use and manhandle of bitcoin brain wallets”, in Financial Cryptography and Data Security, Lecture Notes in Computer Science.

Yuxing Huang, D, H Dharmdasani, S Meiklejohn, V Dave, C Grier, D McCoy, S Savage, N Weaver, A Snoeren and K Levchenko (2014), “Botcoin: Monetizing stolen cycles”, in Proceedings of the Network and Distributed System Security Symposium.

Endnotes

[1] The Bitcoin ecosystem includes the core network for propagating transactions, the blockchain, and many intermediaries such as currency exchanges, mining pools, and payment processors that facilitate trade.

[Two] Markus was primarily active in period Three, but he was also active a few days during periods 1,Two, and Four. He was not active on the same days as Willy, who was only active in period Four.

Price manipulation in the Bitcoin ecosystem, VOX, CEPR’s Policy Portal

VOX CEPR’s Policy Portal

Research-based policy analysis and commentary from leading economists

Price manipulation in the Bitcoin ecosystem

Neil Gandal, JT Hamrick, Tyler Moore, Tali Oberman twenty two June two thousand seventeen

The cryptocurrency Bitcoin has attracted widespread interest, in large part due to wild swings in its valuation. This column considers an earlier rise in the Bitcoin price to investigate what is driving the currency’s price spikes. The two thousand thirteen rise was caused by fraudulent trades taking place at the largest Bitcoin currency exchange at the time. This finding has implications for policymakers as they weigh what, if anything, to do about regulating cryptocurrencies in light of the record high Bitcoin valuation that many fear is a bubble.

Related

The digital currency Bitcoin was introduced in 2009. Bitcoin and the many other digital currencies are primarily online currencies. The key currencies are those based primarily on cryptography, and Bitcoin is the leading ‘cryptocurrency’.

Bitcoin has experienced a meteoric rise in popularity since its introduction. While digital currencies were proposed as early as the 1980s, Bitcoin was the very first to catch on. The total value of all Bitcoins in circulation reached $45 billion in June 2017. Its success has inspired scores of rivaling cryptocurrencies that go after a similar design. Bitcoin and most other cryptocurrencies do not require a central authority to validate and lodge transactions. Instead, these currencies use cryptography (and an internal incentive system) to control transactions, manage the supply, and prevent fraud. Payments are validated by a decentralised network. Once confirmed, all transactions are stored digitally and recorded in a public ‘blockchain’,’ which can be thought of as a distributed accounting system.

While Bitcoin’s algorithm provides safeguards against ‘counterfeiting’ of the currency, the eco-system is still vulnerable to theft. Users keep keys to their Bitcoins and make transactions with the help of wallets. Exchanges facilitate trade inbetween Bitcoins and fiat currencies, and also permit for storing Bitcoins. Bitcoins can be stolen through wallets or exchanges. Exchanges have been targeted more frequently than wallets because many wallets are located on users’ (local) computers, while exchanges frequently store customer deposits in their own (much larger) wallets.

The supply of most cryptocurrencies increases at a predetermined rate, and cannot be switched by any central authority. There are about fifteen million Bitcoins presently in circulation, with the ultimate number eventually reaching twenty one million. The motionless supply in the long run creates concerns about the deflationary aspect of the currency.

While Bitcoin shows superb promise to disrupt existing payment systems through innovations in its technical design, the Bitcoin ecosystem one has been the frequent target of attacks by financially motivated criminals. Due to the unregulated, decentralised environment in which they operate, cryptocurrencies are under constant threat of attack.

Bitcoin only recently became a subject of research in economics. However, the topic has been of interest for longer in computer science (for early work by computer scientists on incentives, see Babaioff et al. 2012, and Eyal and Sirer 2014.) Numerous researchers have conducted studies in order to document and combat threats such as Ponzi schemes, money laundering, mining botnets, and the theft of cryptocurrency wallets (Moeser et al. 2013, Vasek and Moore 2015, Vasek et al. 2016, Yuxing et al. 2014). Ron and Shamir (2013) attempt to identify suspicious trading activity by building a graph of Bitcoin transactions found in the public ledger. None of these papers can associate individual transactions with specific users of the currency exchanges.

In latest work, we display that the very first time Bitcoin reached an exchange rate of more than $1,000, the meteoric rise was driven by fraud (Gandal et al. 2017). We leverage a unique and very detailed dataset to examine suspicious trading activity that occurred over a ten-month period in two thousand thirteen on Mt. Gox, the leading Bitcoin currency exchange at the time. We very first quantify the extent of the suspicious/fraudulent trading activity and demonstrate that it constitutes a large fraction of trading on the days the activity occurred. We then display how this trading activity affected the exchange rates at Mt. Gox and other leading currency exchanges.

Figure 1 Bitcoin–US dollar exchange rate, with periods of suspicious activity shaded

While it was the superior currency exchange when Bitcoin very first shot to prominence in early 2013, behind the scenes, Tokyo-based Mt. Gox was in trouble. In addition to suffering from repeated denial-of-service attacks and Bitcoin thefts, two unauthorised traders were able to transact on the exchange without spending real money. In the very first case, a trader dubbed ‘Markus’ was credited with Bitcoins by duplicating previously ended transactions. In the 2nd case, a trader dubbed ‘Willy’ bought Bitcoins from traders by ‘crediting’ the sellers’ accounts with fiat currencies that, in many cases, could not be withdrawn. Figure one shows when these fraudulent traders were active, along with the Bitcoin–US dollar exchange rate. Most noteworthy is that Willy’s operation coincided with an unprecedented hop in the price of Bitcoin: from around $150 to over $1000. In early 2014, Mt. Gox collapsed, and the Bitcoin price fell with it. Only recently, in early 2017, has Bitcoin surpassed the levels of the earlier rise.

However, how do we know that the rise was caused by the fraudulent trades? Fortunately for us as researchers, the unauthorised trades did not take place every day. Table one shows the daily switch in the Bitcoin–US dollar exchange rate for various time periods on Mt. Gox. In the two quarters before unauthorised trading commenced, the daily price increase was, on average, positive but relatively petite: a $0.21 increase in the very first period and a $1 increase in the 2nd period. During the third quarter, when unauthorised trading embarked, the price rose by an average of $Trio.15 on the seventeen days in which Markus traded, but fell on average by $0.51 on the seventy five days he did not trade. However, it is during the final quarter, when Willy began trading, that the difference became stark. On the fifty days in which Willy traded, the Bitcoin price rose by an average of $21.85. On the forty one days in which Willy did not make unauthorizsed purchases, the price fell by $0.88 on average. (Table one is very similar for the other leading exchanges as well.)

Table 1 Average daily switch in BTC/USD exchange rate as a function of fraudulent activity Two

In our total paper, we conduct a regression analysis to examine whether other factors such as the relatively numerous and varied attacks on the Mt. Gox exchange could explain the switch in the daily Bitcoin price, both at Mt. Gox and other leading exchanges (Gandal et al. 2017).

The analysis confirms that only Willy’s trading presence affected the price. The estimated coefficient (on the dummy variable for whether Willy was active) is virtually the same ($21.65) as in Table 1. We conclude that the suspicious trading activity of a single actor was the primary cause of the massive spike in the Bitcoin–US dollar exchange rate, in which the rate rose from around $150 to over $1,000 in just two months in late 2013. The fall was almost as precipitous: the Mt. Gox exchange folded due to insolvency in early 2014, and it has taken more than three years for Bitcoin to match the rise triggered by fraudulent transactions.

Why should we care about the Bitcoin manipulation that took place in 2013? After all, the Bitcoin ecosystem is not almost as significant as the Fresh York Stock Exchange. Nonetheless, latest trends indicate that Bitcoin is becoming an significant asset in the financial system.

Trading in cryptocurrency assets has exploded recently. In the case of Bitcoin, during the one year period ending in mid-June 2017, the market capitalisation enlargened massively from around $7 billion to $45 billion; that is an increase of over 500% in one year. The market cap of other cryptocurrencies surged by even more. In the one-year period ending in mid-May 2017, the market value of cryptocurrencies excluding Bitcoin surged from $1.7 billion to more than $29 billion; that is an increase of more than 1,900%. The markets for these other cryptocurrencies are very lean and subject to manipulation. Given that we now know the Bitcoin price has been artificially inflated by unauthorised trades in the past, we must view the present rise with excellent caution, and not necessarily consider it a ‘healthy bubble’, as recently claimed in The Economist (2017).

As mainstream finance invests in cryptocurrency assets and as countries take steps toward legalising Bitcoin as a payment system (as Japan did in April 2017), it is significant to understand how susceptible cryptocurrency markets are to manipulation. We encourage the nascent cryptocurrency industry to work with regulators and researchers to share anonymised transaction data so that more confidence can be placed in the veracity of exchange rates.

References

Babaioff, M, S Dobzinski, S Oren and A Zohar (2012), “On bitcoin and crimson balloons” in Proceedings of the 13th ACM Conference on Electronic Commerce, pp. 56-73.

Eyal, I and E Sirer (2014), “Majority is not Enough: Bitcoin Mining is Vulnerable”, paper introduced at the Eighteenth International Conference on Financial Cryptography and Data Security, Barbados, 3-7 March.

Gandal, N, J Hamrick, T Moore and T Oberman (2017), “Price Manipulation in the Bitcoin Ecosystem,” CEPR Discussion Paper No. 12061.

Mooser, M, R Bohme and D Breuker (2013), “An inquiry into money laundering devices in the Bitcoin ecosystem”, in Proceedings of the Seventh APWG eCrime Re-searcher’s Summit, pp. 1-14.

Ron, D and A Shamir (2013), “Quantitative analysis of the utter Bitcoin transaction graph”, in Financial Cryptography and Data Security, Vol. Seven thousand eight hundred fifty nine of Lecture Notes in Computer Science, pp. 6-24.

Vasek, M and T Moore (2015), “There’s no free lunch, even using Bitcoin: Tracking the popularity and profits of virtual currency scams”, in R Bohme and T Okamoto (eds), Financial Cryptography and Data Security, volume eight thousand nine hundred seventy five of Lecture Notes in Computer Science, pp. 44-61.

Vasek, M, J Bonneau, R Castellucci, C Keith and T Moore (2016), “The Bitcoin brain drain: a brief paper on the use and manhandle of bitcoin brain wallets”, in Financial Cryptography and Data Security, Lecture Notes in Computer Science.

Yuxing Huang, D, H Dharmdasani, S Meiklejohn, V Dave, C Grier, D McCoy, S Savage, N Weaver, A Snoeren and K Levchenko (2014), “Botcoin: Monetizing stolen cycles”, in Proceedings of the Network and Distributed System Security Symposium.

Endnotes

[1] The Bitcoin ecosystem includes the core network for propagating transactions, the blockchain, and many intermediaries such as currency exchanges, mining pools, and payment processors that facilitate trade.

[Two] Markus was primarily active in period Three, but he was also active a few days during periods 1,Two, and Four. He was not active on the same days as Willy, who was only active in period Four.

Related video:

How to accept Bitcoin, for petite businesses – Bitcoin Wiki

How to accept Bitcoin, for puny businesses

It has been suggested that this article is merged with Merchant Howto.

This guide is intended for petite business owners who wish to help promote Bitcoin by accepting it as payment for goods and services. It’s written with the assumption that you operate a regular business that sells goods or services for regular national currency such as dollars, and that you wish to accept Bitcoin as another legal way to pay, and that you intend to pay taxes on your Bitcoin income just like any other income.

With Bitcoin being touted as a way to conduct anonymous transactions and as way to challenge with government currency, many petite business owners wonder what’s the right way to accept and account Bitcoin, or if it’s legal or ethical, or whether and how they should pay taxes on income received through Bitcoin.

Bitcoin has been formally recognized by some governments and authorities as a “currency”, but in practice, Bitcoin is no different than accepting payment in other forms such as cash or gold or scrip or bounty cards or foreign currency. We think that it is pretty much the same as the local businesses of Good Barrington, Massachusetts choosing to accept their locally-printed “Berkshire Bucks” to support their local economy.

Contents

Beginning to accept Bitcoin for transactions

Accepting Bitcoin at a petite business is best commenced in whichever manner keeps the accounting ordinary for you. This will vary by the type of business you are operating.

Begin with a sign

If you expect that the number of people interested in using Bitcoin is petite, you might simply commence by posting a sign or a note: “We Accept Bitcoin”, and ask people to contact you directly in order to make a payment. Even if hardly anybody uses Bitcoin as a payment method, you’re helping Bitcoin in two ways: one, by enhancing awareness, and two, by making your customers more willing to accept Bitcoin as payment from others in the future, because now they know somewhere they can spend it.

Accepting Payment

If you sell things in a brick and mortar shop, customers can pay using hardware terminals, touch screen apps or elementary wallet addresses through QR Codes.

For an online website, accepting Bitcoin should be implemented by a competent programmer and you should run a total knot, especially if you sell larger-ticket items.

Brainy Phone or Tablet

You can use a dedicated app or webapp that generates a QR code on the fly including the amount. Many wallets directly support QR code scanning for payment.

Accounting

When a customer makes a payment, you might simply issue a credit to their account. Ideally, you want to come in it in a way that suggests you received a payment. If on the other palm, you’re providing “discounts” for Bitcoins, but then you are selling the Bitcoins for currency and then counting that as income, then chances are good that your calculation of income is making up for it. Ask your accountant.

Businesses that suggest bounty cards

If your business sells bounty cards or bounty certificates, you may find that the easiest way to accept Bitcoin is to accept it only for the purchase of bounty cards, and then require the bounty cards to be used for actual purchases of goods or services. This way, the accounting practices you already have in place for processing bounty cards can be put to use. The accounting for Bitcoins would then be minimized to tracking sales of a single SKU.

This method is also ideal for retail food establishments and convenience stores, where the payment of Bitcoins through a mobile phone for a petite daily food purchase might be cumbersome or disruptive, especially in front of a line of other customers. Bitcoins in this case would be best used to reload prepaid cards that can then be swiped at point-of-sale.

If you don’t accept bounty cards, but you already accept credit cards through a swipe terminal, consider the possibility that you could add a retail bounty card system through the swipe terminal you already own. Many point-of-sale terminals, including ones from VeriFone®, are designed around the capability to support numerous applications on the same terminal. Bounty cards are also very profitable because of “breakage”, or in other words, the fact that a significant percentage of them never get redeemed.

You could consider adding a private label bounty card program from a provider who specializes in this, not just as a jumpstart to accepting Bitcoins, but as an extra boost to income. A private label bounty card service provider necessarily have to treat your funds – they can simply provide a solution that keeps track of the balance on the cards on your behalf, including features that permit users to check their balances by phone or by web. Such a solution, of course, is also what makes the cards swipeable through the card reader.

Businesses that mail invoices

Does your business send out invoices to customers? Adding one line may make a phat influence for the Bitcoin economy. Perhaps you list it as a payment option just after Visa, MasterCard, and American Express, even if that means your customer must call or e-mail to make a payment.

If you have access to the programming expertise such that you can generate Bitcoin addresses programmatically, consider generating a brand fresh Bitcoin address for each invoice, and print it on the invoice. When a Bitcoin payment arrives, you’ll automatically know where it should arrive.

Customers might wonder how much BTC they should pay in order to please an invoice in utter. Your invoice should suggest an amount.

You might be able to anticipate the possibility that even however a Bitcoin address can be printed on an invoice or payment stub, that they are very cumbersome for most people to type, especially being a mix of uppercase and lowercase letters. However, you should very likely still do it anyway. The customer is very likely going to want some paper trail for his payment. Providing him a pre-printed payment stub with a pre-printed address will please that, because the customer can independently and publicly prove through Block Explorer that the payment took place.

Does your business have a website? On your invoice, consider permitting them to go to a special URL to get the address to make a Bitcoin payment just by typing in their invoice number. This way, they can see the Bitcoin address, copy and paste it directly into their Bitcoin client.

Use a brand fresh address for each invoice whenever possible, and use it only once. This benefits the customer as it eliminates any ambiguity as to which customer is making which payment and for which invoice.

Avoiding fraud

You should also consider the possible risk that fraudsters could send counterfeit invoices to your customers, and entice them to make a payment to a Bitcoin address they control, instead of you. While that isn’t likely in general – it depends on how well a fraudster could find out who your customers are in the very first place – it would certainly be an unpleasant situation if it ever happened. One way you could control that is, whenever possible, never let people attempt to type Bitcoin addresses off payment stubs – instead, force people to get the utter Bitcoin address from your website via secure SSL. But, still print most of the address on the payment stub (perhaps with four or five characters starred out), so that the customer’s need for a paper trail can be sated, so they can prove they paid if there is ever a dispute. Merchants can also use the IP address geolocation to understand the close proximity of users. There is automated solution such as FraudLabs Pro that automates the screening of Bitcoin transactions to determine risk level.

Setting Prices

When a business accepts bitcoins for payment, there generally is the need to convert them to the currencies used for paying suppliers, employees and shareholders. Some merchants set prices based on the current market rate at the time the price quote is introduced to the customer

Bitcoin Prices lists the exchange rate for many currencies on numerous exchanges.

When prices are determined using an automated process, the current market rate can be based on either a current price or on a weighted average basis.

When bitcoin funds for purchases are received, some merchants instantly exchange those proceeds into the preferred currency used. Hedging for each transaction can almost entirely eliminate exchange rate risk that the business is exposed to when accepting bitcoins for payment.

Contract

A sales contract might be used to ensure that specific terms are met to lessen the chances of a misunderstanding. For example, the party sending payment is responsible for paying any transaction fee that might be necessary. A contract might specify that a transaction fee must be paid and what amount, so as to prevent the situation where the transaction is considered a low priority transaction and thus isn’t confirmed quickly.

Other items that might be addressed in a contract:

  • Requirement and treating of escrow through an escrow service.
  • Jurisdiction for disputes.
  • Refund policy (particularly with the exchange rate being volatile)

Paying taxes on Bitcoin income

Tax compliance is a topic of concern for puny businesses. We aren’t accountants or lawyers, and can’t give legal or accounting advice.

But in many respects, Bitcoin transactions work very much like cash. Just like Bitcoin, cash is anonymous and doesn’t leave a paper trail, yet is widely used in commerce every day.

Ask yourself how you would treat a cash transaction. Do you accept cash transactions? Do you normally pay taxes on cash transactions? The response for Bitcoin should most likely be the same.

As for how to determine what a Bitcoin transaction is worth: the IRS, as far as we know, has never issued a guide mentioning how to value Bitcoin transactions. But they have rules and guidelines on how to value transactions made in foreign currency or “cash equivalents”. We imagine the accounting would be similar.

With Bitcoins, there’s likely to be some difference inbetween the value of BTC when you received them as payment, versus when you go to exchange them for another currency like USD, should you determine to do so. This script, likewise, would be no different if you accepted foreign currency or gold as payment. Under some screenplays, it might make sense to book the dollar value of BTC income as it is received, and then to book any difference incurred when it is exchanged for fiat currency. Under others, it might make sense to book the entire thing at the time of exchange.

Perhaps you might talk to your accountant. You don’t need to get into a discussion with your accountant about block chains and private keys or the philosophy behind a decentralized currency. By comparing the fundamentals of Bitcoins to accounting concepts already well understood by the public, you can most likely get all the answers you need. What would you ask your accountant if you determined that you desired to accept Berkshire Bucks or 1-ounce gold coins as payment?

How to accept Bitcoin, for petite businesses – Bitcoin Wiki

How to accept Bitcoin, for petite businesses

It has been suggested that this article is merged with Merchant Howto.

This guide is intended for puny business owners who wish to help promote Bitcoin by accepting it as payment for goods and services. It’s written with the assumption that you operate a regular business that sells goods or services for regular national currency such as dollars, and that you wish to accept Bitcoin as another legal way to pay, and that you intend to pay taxes on your Bitcoin income just like any other income.

With Bitcoin being touted as a way to conduct anonymous transactions and as way to contest with government currency, many petite business owners wonder what’s the right way to accept and account Bitcoin, or if it’s legal or ethical, or whether and how they should pay taxes on income received through Bitcoin.

Bitcoin has been formally recognized by some governments and authorities as a “currency”, but in practice, Bitcoin is no different than accepting payment in other forms such as cash or gold or scrip or bounty cards or foreign currency. We think that it is pretty much the same as the local businesses of Superb Barrington, Massachusetts choosing to accept their locally-printed “Berkshire Bucks” to support their local economy.

Contents

Embarking to accept Bitcoin for transactions

Accepting Bitcoin at a petite business is best commenced in whichever manner keeps the accounting elementary for you. This will vary by the type of business you are operating.

Embark with a sign

If you expect that the number of people interested in using Bitcoin is puny, you might simply embark by posting a sign or a note: “We Accept Bitcoin”, and ask people to contact you directly in order to make a payment. Even if hardly anybody uses Bitcoin as a payment method, you’re helping Bitcoin in two ways: one, by enhancing awareness, and two, by making your customers more willing to accept Bitcoin as payment from others in the future, because now they know somewhere they can spend it.

Accepting Payment

If you sell things in a brick and mortar shop, customers can pay using hardware terminals, touch screen apps or elementary wallet addresses through QR Codes.

For an online website, accepting Bitcoin should be implemented by a competent programmer and you should run a total knot, especially if you sell larger-ticket items.

Brainy Phone or Tablet

You can use a dedicated app or webapp that generates a QR code on the fly including the amount. Many wallets directly support QR code scanning for payment.

Accounting

When a customer makes a payment, you might simply issue a credit to their account. Ideally, you want to come in it in a way that suggests you received a payment. If on the other palm, you’re providing “discounts” for Bitcoins, but then you are selling the Bitcoins for currency and then counting that as income, then chances are good that your calculation of income is making up for it. Ask your accountant.

Businesses that suggest bounty cards

If your business sells bounty cards or bounty certificates, you may find that the easiest way to accept Bitcoin is to accept it only for the purchase of bounty cards, and then require the bounty cards to be used for actual purchases of goods or services. This way, the accounting practices you already have in place for processing bounty cards can be put to use. The accounting for Bitcoins would then be minimized to tracking sales of a single SKU.

This method is also ideal for retail food establishments and convenience stores, where the payment of Bitcoins through a mobile phone for a petite daily food purchase might be cumbersome or disruptive, especially in front of a line of other customers. Bitcoins in this case would be best used to reload prepaid cards that can then be swiped at point-of-sale.

If you don’t accept bounty cards, but you already accept credit cards through a swipe terminal, consider the possibility that you could add a retail bounty card system through the swipe terminal you already own. Many point-of-sale terminals, including ones from VeriFone®, are designed around the capability to support numerous applications on the same terminal. Bounty cards are also very profitable because of “breakage”, or in other words, the fact that a significant percentage of them never get redeemed.

You could consider adding a private label bounty card program from a provider who specializes in this, not just as a jumpstart to accepting Bitcoins, but as an extra boost to income. A private label bounty card service provider necessarily have to treat your funds – they can simply provide a solution that keeps track of the balance on the cards on your behalf, including features that permit users to check their balances by phone or by web. Such a solution, of course, is also what makes the cards swipeable through the card reader.

Businesses that mail invoices

Does your business send out invoices to customers? Adding one line may make a big influence for the Bitcoin economy. Perhaps you list it as a payment option just after Visa, MasterCard, and American Express, even if that means your customer must call or e-mail to make a payment.

If you have access to the programming expertise such that you can generate Bitcoin addresses programmatically, consider generating a brand fresh Bitcoin address for each invoice, and print it on the invoice. When a Bitcoin payment arrives, you’ll automatically know where it should arrive.

Customers might wonder how much BTC they should pay in order to please an invoice in total. Your invoice should suggest an amount.

You might be able to anticipate the possibility that even tho’ a Bitcoin address can be printed on an invoice or payment stub, that they are very cumbersome for most people to type, especially being a mix of uppercase and lowercase letters. However, you should most likely still do it anyway. The customer is most likely going to want some paper trail for his payment. Providing him a pre-printed payment stub with a pre-printed address will sate that, because the customer can independently and publicly prove through Block Explorer that the payment took place.

Does your business have a website? On your invoice, consider permitting them to go to a special URL to get the address to make a Bitcoin payment just by typing in their invoice number. This way, they can see the Bitcoin address, copy and paste it directly into their Bitcoin client.

Use a brand fresh address for each invoice whenever possible, and use it only once. This benefits the customer as it eliminates any ambiguity as to which customer is making which payment and for which invoice.

Avoiding fraud

You should also consider the possible risk that fraudsters could send counterfeit invoices to your customers, and entice them to make a payment to a Bitcoin address they control, instead of you. While that isn’t likely in general – it depends on how well a fraudster could find out who your customers are in the very first place – it would certainly be an unpleasant situation if it ever happened. One way you could control that is, whenever possible, never let people attempt to type Bitcoin addresses off payment stubs – instead, force people to get the utter Bitcoin address from your website via secure SSL. But, still print most of the address on the payment stub (perhaps with four or five characters starred out), so that the customer’s need for a paper trail can be sated, so they can prove they paid if there is ever a dispute. Merchants can also use the IP address geolocation to understand the close proximity of users. There is automated solution such as FraudLabs Pro that automates the screening of Bitcoin transactions to determine risk level.

Setting Prices

When a business accepts bitcoins for payment, there generally is the need to convert them to the currencies used for paying suppliers, employees and shareholders. Some merchants set prices based on the current market rate at the time the price quote is introduced to the customer

Bitcoin Prices lists the exchange rate for many currencies on numerous exchanges.

When prices are determined using an automated process, the current market rate can be based on either a current price or on a weighted average basis.

When bitcoin funds for purchases are received, some merchants instantly exchange those proceeds into the preferred currency used. Hedging for each transaction can almost entirely eliminate exchange rate risk that the business is exposed to when accepting bitcoins for payment.

Contract

A sales contract might be used to ensure that specific terms are met to lessen the chances of a misunderstanding. For example, the party sending payment is responsible for paying any transaction fee that might be necessary. A contract might specify that a transaction fee must be paid and what amount, so as to prevent the situation where the transaction is considered a low priority transaction and thus isn’t confirmed quickly.

Other items that might be addressed in a contract:

  • Requirement and treating of escrow through an escrow service.
  • Jurisdiction for disputes.
  • Refund policy (particularly with the exchange rate being volatile)

Paying taxes on Bitcoin income

Tax compliance is a topic of concern for puny businesses. We aren’t accountants or lawyers, and can’t give legal or accounting advice.

But in many respects, Bitcoin transactions work very much like cash. Just like Bitcoin, cash is anonymous and doesn’t leave a paper trail, yet is widely used in commerce every day.

Ask yourself how you would treat a cash transaction. Do you accept cash transactions? Do you normally pay taxes on cash transactions? The response for Bitcoin should very likely be the same.

As for how to determine what a Bitcoin transaction is worth: the IRS, as far as we know, has never issued a guide mentioning how to value Bitcoin transactions. But they have rules and guidelines on how to value transactions made in foreign currency or “cash equivalents”. We imagine the accounting would be similar.

With Bitcoins, there’s likely to be some difference inbetween the value of BTC when you received them as payment, versus when you go to exchange them for another currency like USD, should you determine to do so. This screenplay, likewise, would be no different if you accepted foreign currency or gold as payment. Under some screenplays, it might make sense to book the dollar value of BTC income as it is received, and then to book any difference incurred when it is exchanged for fiat currency. Under others, it might make sense to book the entire thing at the time of exchange.

Perhaps you might talk to your accountant. You don’t need to get into a discussion with your accountant about block chains and private keys or the philosophy behind a decentralized currency. By comparing the fundamentals of Bitcoins to accounting concepts already well understood by the public, you can most likely get all the answers you need. What would you ask your accountant if you determined that you wished to accept Berkshire Bucks or 1-ounce gold coins as payment?

How to accept Bitcoin, for petite businesses – Bitcoin Wiki

How to accept Bitcoin, for puny businesses

It has been suggested that this article is merged with Merchant Howto.

This guide is intended for puny business owners who wish to help promote Bitcoin by accepting it as payment for goods and services. It’s written with the assumption that you operate a regular business that sells goods or services for regular national currency such as dollars, and that you wish to accept Bitcoin as another legal way to pay, and that you intend to pay taxes on your Bitcoin income just like any other income.

With Bitcoin being touted as a way to conduct anonymous transactions and as way to contest with government currency, many petite business owners wonder what’s the right way to accept and account Bitcoin, or if it’s legal or ethical, or whether and how they should pay taxes on income received through Bitcoin.

Bitcoin has been formally recognized by some governments and authorities as a “currency”, but in practice, Bitcoin is no different than accepting payment in other forms such as cash or gold or scrip or bounty cards or foreign currency. We think that it is pretty much the same as the local businesses of Good Barrington, Massachusetts choosing to accept their locally-printed “Berkshire Bucks” to support their local economy.

Contents

Kicking off to accept Bitcoin for transactions

Accepting Bitcoin at a petite business is best commenced in whichever manner keeps the accounting ordinary for you. This will vary by the type of business you are operating.

Commence with a sign

If you expect that the number of people interested in using Bitcoin is puny, you might simply embark by posting a sign or a note: “We Accept Bitcoin”, and ask people to contact you directly in order to make a payment. Even if hardly anybody uses Bitcoin as a payment method, you’re helping Bitcoin in two ways: one, by enhancing awareness, and two, by making your customers more willing to accept Bitcoin as payment from others in the future, because now they know somewhere they can spend it.

Accepting Payment

If you sell things in a brick and mortar shop, customers can pay using hardware terminals, touch screen apps or elementary wallet addresses through QR Codes.

For an online website, accepting Bitcoin should be implemented by a competent programmer and you should run a total knot, especially if you sell larger-ticket items.

Clever Phone or Tablet

You can use a dedicated app or webapp that generates a QR code on the fly including the amount. Many wallets directly support QR code scanning for payment.

Accounting

When a customer makes a payment, you might simply issue a credit to their account. Ideally, you want to come in it in a way that suggests you received a payment. If on the other mitt, you’re providing “discounts” for Bitcoins, but then you are selling the Bitcoins for currency and then counting that as income, then chances are good that your calculation of income is making up for it. Ask your accountant.

Businesses that suggest bounty cards

If your business sells bounty cards or bounty certificates, you may find that the easiest way to accept Bitcoin is to accept it only for the purchase of bounty cards, and then require the bounty cards to be used for actual purchases of goods or services. This way, the accounting practices you already have in place for processing bounty cards can be put to use. The accounting for Bitcoins would then be minimized to tracking sales of a single SKU.

This method is also ideal for retail food establishments and convenience stores, where the payment of Bitcoins through a mobile phone for a petite daily food purchase might be cumbersome or disruptive, especially in front of a line of other customers. Bitcoins in this case would be best used to reload prepaid cards that can then be swiped at point-of-sale.

If you don’t accept bounty cards, but you already accept credit cards through a swipe terminal, consider the possibility that you could add a retail bounty card system through the swipe terminal you already own. Many point-of-sale terminals, including ones from VeriFone®, are designed around the capability to support numerous applications on the same terminal. Bounty cards are also very profitable because of “breakage”, or in other words, the fact that a significant percentage of them never get redeemed.

You could consider adding a private label bounty card program from a provider who specializes in this, not just as a jumpstart to accepting Bitcoins, but as an extra boost to income. A private label bounty card service provider necessarily have to treat your funds – they can simply provide a solution that keeps track of the balance on the cards on your behalf, including features that permit users to check their balances by phone or by web. Such a solution, of course, is also what makes the cards swipeable through the card reader.

Businesses that mail invoices

Does your business send out invoices to customers? Adding one line may make a gigantic influence for the Bitcoin economy. Perhaps you list it as a payment option just after Visa, MasterCard, and American Express, even if that means your customer must call or e-mail to make a payment.

If you have access to the programming expertise such that you can generate Bitcoin addresses programmatically, consider generating a brand fresh Bitcoin address for each invoice, and print it on the invoice. When a Bitcoin payment arrives, you’ll automatically know where it should arrive.

Customers might wonder how much BTC they should pay in order to sate an invoice in utter. Your invoice should suggest an amount.

You might be able to anticipate the possibility that even however a Bitcoin address can be printed on an invoice or payment stub, that they are very cumbersome for most people to type, especially being a mix of uppercase and lowercase letters. However, you should very likely still do it anyway. The customer is very likely going to want some paper trail for his payment. Providing him a pre-printed payment stub with a pre-printed address will please that, because the customer can independently and publicly prove through Block Explorer that the payment took place.

Does your business have a website? On your invoice, consider permitting them to go to a special URL to get the address to make a Bitcoin payment just by typing in their invoice number. This way, they can see the Bitcoin address, copy and paste it directly into their Bitcoin client.

Use a brand fresh address for each invoice whenever possible, and use it only once. This benefits the customer as it eliminates any ambiguity as to which customer is making which payment and for which invoice.

Avoiding fraud

You should also consider the possible risk that fraudsters could send counterfeit invoices to your customers, and entice them to make a payment to a Bitcoin address they control, instead of you. While that isn’t likely in general – it depends on how well a fraudster could find out who your customers are in the very first place – it would certainly be an unpleasant situation if it ever happened. One way you could control that is, whenever possible, never let people attempt to type Bitcoin addresses off payment stubs – instead, force people to get the total Bitcoin address from your website via secure SSL. But, still print most of the address on the payment stub (perhaps with four or five characters starred out), so that the customer’s need for a paper trail can be sated, so they can prove they paid if there is ever a dispute. Merchants can also use the IP address geolocation to understand the close proximity of users. There is automated solution such as FraudLabs Pro that automates the screening of Bitcoin transactions to determine risk level.

Setting Prices

When a business accepts bitcoins for payment, there generally is the need to convert them to the currencies used for paying suppliers, employees and shareholders. Some merchants set prices based on the current market rate at the time the price quote is introduced to the customer

Bitcoin Prices lists the exchange rate for many currencies on numerous exchanges.

When prices are determined using an automated process, the current market rate can be based on either a current price or on a weighted average basis.

When bitcoin funds for purchases are received, some merchants instantly exchange those proceeds into the preferred currency used. Hedging for each transaction can almost entirely eliminate exchange rate risk that the business is exposed to when accepting bitcoins for payment.

Contract

A sales contract might be used to ensure that specific terms are met to lessen the chances of a misunderstanding. For example, the party sending payment is responsible for paying any transaction fee that might be necessary. A contract might specify that a transaction fee must be paid and what amount, so as to prevent the situation where the transaction is considered a low priority transaction and thus isn’t confirmed quickly.

Other items that might be addressed in a contract:

  • Requirement and treating of escrow through an escrow service.
  • Jurisdiction for disputes.
  • Refund policy (particularly with the exchange rate being volatile)

Paying taxes on Bitcoin income

Tax compliance is a topic of concern for petite businesses. We aren’t accountants or lawyers, and can’t give legal or accounting advice.

But in many respects, Bitcoin transactions work very much like cash. Just like Bitcoin, cash is anonymous and doesn’t leave a paper trail, yet is widely used in commerce every day.

Ask yourself how you would treat a cash transaction. Do you accept cash transactions? Do you normally pay taxes on cash transactions? The response for Bitcoin should very likely be the same.

As for how to determine what a Bitcoin transaction is worth: the IRS, as far as we know, has never issued a guide mentioning how to value Bitcoin transactions. But they have rules and guidelines on how to value transactions made in foreign currency or “cash equivalents”. We imagine the accounting would be similar.

With Bitcoins, there’s likely to be some difference inbetween the value of BTC when you received them as payment, versus when you go to exchange them for another currency like USD, should you determine to do so. This script, likewise, would be no different if you accepted foreign currency or gold as payment. Under some screenplays, it might make sense to book the dollar value of BTC income as it is received, and then to book any difference incurred when it is exchanged for fiat currency. Under others, it might make sense to book the entire thing at the time of exchange.

Perhaps you might talk to your accountant. You don’t need to get into a discussion with your accountant about block chains and private keys or the philosophy behind a decentralized currency. By comparing the fundamentals of Bitcoins to accounting concepts already well understood by the public, you can very likely get all the answers you need. What would you ask your accountant if you determined that you wished to accept Berkshire Bucks or 1-ounce gold coins as payment?

How to accept Bitcoin, for puny businesses – Bitcoin Wiki

How to accept Bitcoin, for puny businesses

It has been suggested that this article is merged with Merchant Howto.

This guide is intended for petite business owners who wish to help promote Bitcoin by accepting it as payment for goods and services. It’s written with the assumption that you operate a regular business that sells goods or services for regular national currency such as dollars, and that you wish to accept Bitcoin as another legal way to pay, and that you intend to pay taxes on your Bitcoin income just like any other income.

With Bitcoin being touted as a way to conduct anonymous transactions and as way to challenge with government currency, many puny business owners wonder what’s the right way to accept and account Bitcoin, or if it’s legal or ethical, or whether and how they should pay taxes on income received through Bitcoin.

Bitcoin has been formally recognized by some governments and authorities as a “currency”, but in practice, Bitcoin is no different than accepting payment in other forms such as cash or gold or scrip or bounty cards or foreign currency. We think that it is pretty much the same as the local businesses of Superb Barrington, Massachusetts choosing to accept their locally-printed “Berkshire Bucks” to support their local economy.

Contents

Beginning to accept Bitcoin for transactions

Accepting Bitcoin at a petite business is best embarked in whichever manner keeps the accounting elementary for you. This will vary by the type of business you are operating.

Commence with a sign

If you expect that the number of people interested in using Bitcoin is puny, you might simply begin by posting a sign or a note: “We Accept Bitcoin”, and ask people to contact you directly in order to make a payment. Even if hardly anybody uses Bitcoin as a payment method, you’re helping Bitcoin in two ways: one, by enlargening awareness, and two, by making your customers more willing to accept Bitcoin as payment from others in the future, because now they know somewhere they can spend it.

Accepting Payment

If you sell things in a brick and mortar shop, customers can pay using hardware terminals, touch screen apps or ordinary wallet addresses through QR Codes.

For an online website, accepting Bitcoin should be implemented by a competent programmer and you should run a utter knot, especially if you sell larger-ticket items.

Wise Phone or Tablet

You can use a dedicated app or webapp that generates a QR code on the fly including the amount. Many wallets directly support QR code scanning for payment.

Accounting

When a customer makes a payment, you might simply issue a credit to their account. Ideally, you want to inject it in a way that suggests you received a payment. If on the other forearm, you’re providing “discounts” for Bitcoins, but then you are selling the Bitcoins for currency and then counting that as income, then chances are good that your calculation of income is making up for it. Ask your accountant.

Businesses that suggest bounty cards

If your business sells bounty cards or bounty certificates, you may find that the easiest way to accept Bitcoin is to accept it only for the purchase of bounty cards, and then require the bounty cards to be used for actual purchases of goods or services. This way, the accounting practices you already have in place for processing bounty cards can be put to use. The accounting for Bitcoins would then be minimized to tracking sales of a single SKU.

This method is also ideal for retail food establishments and convenience stores, where the payment of Bitcoins through a mobile phone for a petite daily food purchase might be cumbersome or disruptive, especially in front of a line of other customers. Bitcoins in this case would be best used to reload prepaid cards that can then be swiped at point-of-sale.

If you don’t accept bounty cards, but you already accept credit cards through a swipe terminal, consider the possibility that you could add a retail bounty card system through the swipe terminal you already own. Many point-of-sale terminals, including ones from VeriFone®, are designed around the capability to support numerous applications on the same terminal. Bounty cards are also very profitable because of “breakage”, or in other words, the fact that a significant percentage of them never get redeemed.

You could consider adding a private label bounty card program from a provider who specializes in this, not just as a jumpstart to accepting Bitcoins, but as an extra boost to income. A private label bounty card service provider necessarily have to treat your funds – they can simply provide a solution that keeps track of the balance on the cards on your behalf, including features that permit users to check their balances by phone or by web. Such a solution, of course, is also what makes the cards swipeable through the card reader.

Businesses that mail invoices

Does your business send out invoices to customers? Adding one line may make a big influence for the Bitcoin economy. Perhaps you list it as a payment option just after Visa, MasterCard, and American Express, even if that means your customer must call or e-mail to make a payment.

If you have access to the programming expertise such that you can generate Bitcoin addresses programmatically, consider generating a brand fresh Bitcoin address for each invoice, and print it on the invoice. When a Bitcoin payment arrives, you’ll automatically know where it should arrive.

Customers might wonder how much BTC they should pay in order to please an invoice in total. Your invoice should suggest an amount.

You might be able to anticipate the possibility that even tho’ a Bitcoin address can be printed on an invoice or payment stub, that they are very cumbersome for most people to type, especially being a mix of uppercase and lowercase letters. However, you should most likely still do it anyway. The customer is very likely going to want some paper trail for his payment. Providing him a pre-printed payment stub with a pre-printed address will please that, because the customer can independently and publicly prove through Block Explorer that the payment took place.

Does your business have a website? On your invoice, consider permitting them to go to a special URL to get the address to make a Bitcoin payment just by typing in their invoice number. This way, they can see the Bitcoin address, copy and paste it directly into their Bitcoin client.

Use a brand fresh address for each invoice whenever possible, and use it only once. This benefits the customer as it eliminates any ambiguity as to which customer is making which payment and for which invoice.

Avoiding fraud

You should also consider the possible risk that fraudsters could send counterfeit invoices to your customers, and entice them to make a payment to a Bitcoin address they control, instead of you. While that isn’t likely in general – it depends on how well a fraudster could find out who your customers are in the very first place – it would certainly be an unpleasant situation if it ever happened. One way you could control that is, whenever possible, never let people attempt to type Bitcoin addresses off payment stubs – instead, force people to get the utter Bitcoin address from your website via secure SSL. But, still print most of the address on the payment stub (perhaps with four or five characters starred out), so that the customer’s need for a paper trail can be sated, so they can prove they paid if there is ever a dispute. Merchants can also use the IP address geolocation to understand the close proximity of users. There is automated solution such as FraudLabs Pro that automates the screening of Bitcoin transactions to determine risk level.

Setting Prices

When a business accepts bitcoins for payment, there generally is the need to convert them to the currencies used for paying suppliers, employees and shareholders. Some merchants set prices based on the current market rate at the time the price quote is introduced to the customer

Bitcoin Prices lists the exchange rate for many currencies on numerous exchanges.

When prices are determined using an automated process, the current market rate can be based on either a current price or on a weighted average basis.

When bitcoin funds for purchases are received, some merchants instantly exchange those proceeds into the preferred currency used. Hedging for each transaction can almost entirely eliminate exchange rate risk that the business is exposed to when accepting bitcoins for payment.

Contract

A sales contract might be used to ensure that specific terms are met to lessen the chances of a misunderstanding. For example, the party sending payment is responsible for paying any transaction fee that might be necessary. A contract might specify that a transaction fee must be paid and what amount, so as to prevent the situation where the transaction is considered a low priority transaction and thus isn’t confirmed quickly.

Other items that might be addressed in a contract:

  • Requirement and treating of escrow through an escrow service.
  • Jurisdiction for disputes.
  • Refund policy (particularly with the exchange rate being volatile)

Paying taxes on Bitcoin income

Tax compliance is a topic of concern for puny businesses. We aren’t accountants or lawyers, and can’t give legal or accounting advice.

But in many respects, Bitcoin transactions work very much like cash. Just like Bitcoin, cash is anonymous and doesn’t leave a paper trail, yet is widely used in commerce every day.

Ask yourself how you would treat a cash transaction. Do you accept cash transactions? Do you normally pay taxes on cash transactions? The reaction for Bitcoin should most likely be the same.

As for how to determine what a Bitcoin transaction is worth: the IRS, as far as we know, has never issued a guide mentioning how to value Bitcoin transactions. But they have rules and guidelines on how to value transactions made in foreign currency or “cash equivalents”. We imagine the accounting would be similar.

With Bitcoins, there’s likely to be some difference inbetween the value of BTC when you received them as payment, versus when you go to exchange them for another currency like USD, should you determine to do so. This script, likewise, would be no different if you accepted foreign currency or gold as payment. Under some screenplays, it might make sense to book the dollar value of BTC income as it is received, and then to book any difference incurred when it is exchanged for fiat currency. Under others, it might make sense to book the entire thing at the time of exchange.

Perhaps you might talk to your accountant. You don’t need to get into a discussion with your accountant about block chains and private keys or the philosophy behind a decentralized currency. By comparing the fundamentals of Bitcoins to accounting concepts already well understood by the public, you can very likely get all the answers you need. What would you ask your accountant if you determined that you wished to accept Berkshire Bucks or 1-ounce gold coins as payment?

Related video:

http://www.youtube.com/watch?v=tKJkiQXcosA

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