The fragility of the Bitcoin peer-to-peer crypto-currency has been thrown into sharp relief when a large sell transaction sent the trade value of Bitcoins to zero. According to the Mt Gox exchange, the sell order came from a compromised account. Mt Gox has taken its exchange offline (however, a screen grab of Bitcoins’ collapse …
Quite revealing really.
Frankly I can't believe it's taken this long. If the value of bitcoins can be reduced to 0 by one large sale that seems pretty significant. It doesn't have to be the result of a hack either. If we assume there's more than one account with that many bitcoins at present (and I'm sure there are plenty) then any one of them selling their bitcoins will crash the currency and wipeout the value of every other user with bitcoins. Seems like a dangerous game to play to me.
it's been quite interesting listening to the bitcoin fanbois talking about how they're going to buy bitcoin because it's a more stable and reliable store of value than normal currency (GYAC - it has been around long enough to be reliable and the volume of trading has been highly unstable) and how it's not just a big trick based on confidence that can fail at any moment (just like Bitcoin has today).
If true this is a clever heist
So the exchange lets you move out a maximum of $1000 worth per day. Which means that if a hacker gains control of an account with lots of bitcoins, all they can do is profit by $1000 before they're noticed and stopped.
Unless, that is, the hacker gains control of enough accounts with enough bitcoins -- and one forum poster suggests that this one was in control of one-thirteenth of the *entire* bitcoin circulation. Then what they can do, is sell, sell, sell, driving the price down -- to a cent, say, or perhaps even to zero -- at which point, they can move out as many bitcoins as they like. Whatever the bitcoin then recovers to, even if it's less than the $17 or so they traded at before, the hacker has made a much healthier illicit profit.
It's working the same way as real-economy trades then?
You have to be rich enough to control a significant share; then do a bit of insider trading to make a profit!
Of course, insider trading is naughty and illegal, just like speeding; so no-one ever, ever does it.
I am not a lawyer, but I think you'll find (at least in the UK) that using a dominant position to influence price is called "market manipulation", not "insider trading". Insider trading involves the use of specific information which is not known to the market but which is "price sensitive".
In the EU, market manipulation is unlawful under the Market Abuse Directive. In the UK, this directive is implemented by Part VIII of the Financial Services and Markets Act 2000 under which offences are civil, not criminal: section 118(5) addresses the type of manipulation described here, but in any event it doesn't apply because Bitcoin is not a "qualifying investment".
In the UK, insider dealing is unlawful both as a civil offence under the same legislation and as a criminal offence under Part V of the Criminal Justice Act 1993.
.... 'Of course, insider trading is naughty and illegal, just like speeding; so no-one ever, ever does it.'.
Not just the tax evaders but the speculators are now in the game.
Comfy chair, check. Popcorn, check. Six-pack chilling in the fridge, check. I am so going to enjoy this.
On a purely practical note.....
........these people have little or no option other than to swallow any losses that occur. In order to have ordinary recourse to the assistance that the law can provide they will have to show that they lost something of value as the result of an illegal act. Now hacking their system is probably illegal but the moment they say that they have lost something of financial value which they almost certainly have not declared on their tax returns they are up the proverbial creek without benefit of toilet paper as far as the IRS is concerned. In other words they cannot ask for the help that any other citizen could ask for. Richly ironic in the circumstances. Now where is that popcorn.
You demonstrate complete ignorance.
If you buy Bitcoins at $1 and they go up in value to $1,000,000 YOU DO NOT HAVE TO PAY TAX ON IT.
You only have to pay tax on any realized profit, not on value. In other words, until you actually sell the bitcoins (or realize the profit in another way) and pocket the $1,000,000 there is no tax to pay.
If somebody steals the Bitcoins when they are worth $1,000,000 you can go to the police. It does not matter if the Bitcoins are now worth $1 again it is still a million dollar theft. Imagine, for example, somebody stealing a Ming vase worth a million dollars and then breaking it. They have still stolen a million dollar vase despite the fact that the pottery shards are worthless.
Declared on tax returns...
Wouldn't Bitcoins count as a comodity? The same as buying an antique varse, so would any increase in value on the Bitcoins be required to be declared? I wouldn't have though so. Maybe at the time you sell it, but while you hold it I don't think you would be taxed on any increase in it's value. Feel free to correct me, but if that's the case then he's done nothing wrong.
Re "You demonstrate complete ignorance"
No, I do not. Whilst it is certainly true that you do not owe tax on *unrealised* profits you still have to declare your assets when filling in your tax form. *You* do not decide whether or not to declare assets on the basis of whether *you* think there is tax due on them. You *have* to declare the whole shite and then the *tax authorities* decide their attitude which you can appeal if you do not agree with them. What you *cannot* do is decide what you *feel* like declaring. If you have failed to declare your Bitcoins, whether *you* think there is tax due on them or not, you have broken the law - end of. Bottom line - ALL assets must be declared, whether *you* think there is tax due on them or not.
Yes, you are still ignorant
at least of US tax code. As an individual, you only have to declare income, profit, etc. There is no requirement to tell the IRS every year what you OWN; they only care when you sell something. They don't even care when you buy something, as long as you can prove what it cost when you sell it.
Now, corporations are a different matter, but I expect most BitCoin users are individuals.
Am I to assume that you are of the opinion that the US tax system is.......
.......the be all and end all of everything? I suggest you consider the fact that the world does not end outside the borders of the United States. I further suggest that you take notice of the fact that this is primarily (all though not exclusively) a *British* website and you might be expected to understand that postings will in general be rooted in (all though not exclusively) British circumstances.
Fred Bauer is correct.
It is also true for UK tax law. Assets do not have to be declared, only income.
For the UK Tax you have to declare any income from dividends/interest/employment/rent etc but at no point do have to say "I have X amount of assets", it is irrelevant for calculating your tax.
I'd think it's fairly obvious we don't really care about the IRS.
And here is the UK SA100 tax return
There is no section for assets. There are no supplemental pages for assets.
ASSETS DO NOT HAVE TO BE DECLARED.
This gives a very interesting insight into our financial systems and how fragile they can be against just a couple of corrupt individuals.
I guess as a general rule whilst "people" maybe concerned over the health of the/a system overall, the individuals within the system are still just worried about accumulating more wealth/power for themselves regardless of the conseqpences.
"our financial systems"
Err, whose financial systems?
There is a parallel here
with the central banking model.
I infer that the Bitcoin market is minute, if such a small transaction can make such a huge difference.
Real-world currency markets have a huge amount of trading, with large sums changing hands for tiny percentage change. And some of the doubtful features of real financial markets, such as futures trading, can be a benefit as they damp out swings. Markets need speculators, buying and selling, to ensure that there is always somebody willing to buy or sell.
Bitcoins seem to be such a simple market that it cannot be stable. The real world markets are so huge that thet can't be understood, even by those who might be able to manipulate them.
Sounds Greek to me
The post is required, and must contain letters.
I think that the US...
housing bubble and derivatives markets proves that even Real-world currencies have been proven to be manipulatable. Whether those currencies have been set up to fail and if so for what reason(s) are the interesting/fun questions.
BitCoins are defective by design.
BitCoins are defective by design. Their backers confuse potential (dubious) value as an investment with usefulness as a currency; the two attributes are inversely proportional. It is NOT a sign of success when your currency, in relation to the Dollar, Euro, Pound, oz gold, whatever shoots up like a rocket.
You want investments to appreciate in value, or, at the least, remain stable. Currency, on the other hand, you want to remain relatively constant in value in relation to something you want to exchange for. (Unstable currency inhibits the credit market. Nobody in their right mind wants to take out a loan in a currency that is subject to annual deflation of several hundred percent... it'd make a loan shark look cheap.)
Keeping the value of currency stable is the primary reason virtually every modern economy uses fiat currency. (Some central banks are better at it than others admittedly.) Fiat currency allows the supply of money to increase (or decrease) with the size of an economy. BitCoins, due to the poorly chosen supply curve are extremely deflationary by design, putting the "currency" into a trap where it MUST massively deflate to be anything more than a niche toy, but that very same predictable attribute prevents their wide adoption.
It's kind of funny... whenever you point out deflation to a BitCoin fan, they invariably point out that it can be subdivided into tiny units, and therefore deflation isn't a problem. As if illiquidity due to unit size is the only issue caused by deflation... (and, due to small trading volumes, the liquidity issue isn't really solved.)
If people want to trade BitCoins as a hobby, more power to them... they just need to realize that when the fad wears off, somebody going to end up holding the bag, and that's likely to happen sooner rather than later. At least Beanie Babies were cute...
(On technical grounds, I also have doubts about the scalability of the system once the BitCoins are subdivided.)
Great post, and very informative. One question I have is if Bitcoins were to be adopted by a significant number of people (say a few tens of millions) would it then become inherently more stable? Presumably it would then take a much larger Sell to cause a run, thereby reducing the chance of said 'Sell' and increasing the overall stability of the ecosystem?
It's tempting to compare Bitcoins to a real-world currency of a very small country - is this a fair comparison from an economic ecosystem perspective?
A fiat currency (virtual or paper; as if there's a difference these days) relies on people believing that it's worth something--so sure, the more people believe, the more stable it will be, and it takes a Soros-sized manipulation to screw around with it as an individual. However, there is still the problem that fiat currencies rely on faith alone... which is why currencies that have been successful in the long term are backed with gold or (less stably) silver--if you get antsy you can (at least in theory) march into the back, plunk down that piece of paper, and get a chunk of precious metal you can take home. The funny thing is that when people know they can do this, they rarely actually do it, but the currency is much more stable. Unfortunately, after World War II the influence of Keynesian economics tempted governments to move away from backed currencies to fiat currencies so they, being the government, could print more money whenever they wanted to buy the votes of the indolent, ignorant, and unproductive, and we are now paying the price, both with the Euro and the dollar.
Before everyone downvotes me, a couple of points: 1) I am aware that both the gold/silver standards and the move away from them are more complicated than what I've just stated--to the point where technically we're not quite at fiat currencies--but the basic principle holds true. 2) I realize that backed currencies are NOT immune from manipulation--just look at the Byzantine devaluations; but at least it takes a government to do it... you don't have Soros moments when your currency represents something real, and government manipulations are very clear to all... much more difficult to pull Fed type smoke and mirrors
@El Cid Campeador
I'd just like to point out that gold is also a fiat currency. It has "value" because people *believe* it has value.
There's no more of an intrinsic value in gold than in the $5 federal reserve note in my pocket. You can't eat it, can't burn it for warmth, nor live in it. (Well, with enough of it I suppose you could construct a shelter but you get the point.)
US debt ceiling
So why doesn't US just print money instead of trying so hard to raise its debt ceiling, or defaulting on its obligations?
@US debt ceiling
Because, strangely enough, the US government CANNOT print money. The Federal Reserve (a wholly private enterprise) prints the money, and lends it to the US government in exchange for bonds and other debt instruments. The detailed workings of this arrangement are beyond me, not least because the Federal Reserve is exempt from normal oversight that might help to explain how the whole tottering house of cards is constructed and sustained.
@@El Cid Campeador
Yes, but Gold, Silver, and Copper have been used successfully for millennia. Fiat currency is a new and I think proven failure as a currency type. Of course, most won't see that until fiat currencies really collapse. The US gov sent trillions of dollars to banks to buoy them when they could have to paid off US household/credit card debt to much greater effect, although that kind and good act wouldn't have further lined the pockets of the already stupendously wealthy.
article not accurate
The value of bitcoin was not driven to 0. All the buy orders on the Mtgox exchange where fulfilled by a large sale (half a million coins not 60 as stated) leaving the price they you could sell at on that exchange at 0. Trades on the exchange are all internal and no actual bitcoin transaction take place. The hacker was only able to transfer out $1000 because due to cash out limits at the exchange.
MtGox has suffered a a CSRF vulnerability, DDOS attack and now account information leaked through SQL injection. None of this has any thing to do with the security or (long term) stability of bitcoins. Mtgox was a one man show run as a hobby. Newer exchanges, notably tradehill, are run by professionally teams with relevant industry experience.
The recent "heist" was the theft of someone unencrypted wallet file. The official bitcoin client should make managing wallet.dat files easier but individuals do not have to "implement personal security better than the likes of Sony, Nintendo or RSA can manage". Simply keeping the bulk of your cash on offline storage such as USB sticks makes it quite safe from theft.
Can someone explain "rollback"
I thought the whole concept of the bitcoin was that a transfer was irrevocable and there were no superusers?
How does the exchange get to rollback transactions?
Bitcoin != MtGox
When you trade on Mt Gox they are acting as your stakeholder. Transactions in the Bitcoin block chain are irreversible, trades on Mt Gox don't enter the block chain until the Bitcoins are withdrawn - until then they are just entries in Mt Gox's ledger.
If someone bough a bunch of coins while the price was through the floor and then withdrew them before Mt Gox was suspended, then presumably Mt Gox will be left holding the loss.
It's the price you pay...
...for participating in an economy regulated by an algorithm.
"regulated by an algorithm"
Very funny. The thing about the bitcoin fanbois I find most amusing is that they all seem to believe this. Bitcoin isn't regulated by an algorithm if not all clients implement the same algorithm. There doesn't seem to be much reason why they should if some players are capable of supplying bitcoin client software to others which is not as advantageous to others as the algorithms they run for themselves. That doesn't stop clients programmed to a different algorithm communicating using the same protocol, which seems to state 1CPU cycle == 1 vote, as far as validation of transaction blocks is concerned, but I'd be very surprised if all clients can do this with equal efficiency.
Try reading about the subject before posting...
Interesting podcast which concentrates mainly on the technical and cryptographic elements rather than the wild hype about the new economy: http://goo.gl/HvYZ2
Essentially, the algorithms and the distributed database (or block chain) go hand in hand: if the integrity of the block chain depended on everybody being honest about the client they were using, it would have long since been debased.
Re: Mr Algorithm
Hello Sir. Please forward me the details of this Mr Algorithm. The security company in Lagos is holding some monies that I need to send him.
Glad I didnt buy £100 worth yesterday :-)
Maybe worth looking in to doing it tomorrow though looks like we are down to $10?
In some ways the bitcoin 'phenomenon' could be looked at as being a trial run for crypto-currency, enabling people to look at the larger picture over time of how unseen events can affect the whole infrastructure of the currency and the currency holders reactions to the events.
Perhaps the biggest 'fault' of the currency is that it can be converted into 'real' money when there are no major banks or organisations that back the currency, as a bartering mechanism for relatively low value services/physical objects the bitcoin appears to be a rather useful thing, it's when someone manages to accumulate a lot of them that it has the potential for things to go completely haywire.
Just my 0.02 bitcoin (I really do have just 0.02 bitcoin, it's a novelty thing :) )
gamblers, screw 'em
Without any real world guarantors bitcoin is little more than gambling.
Gamblers don't get to complain if they get wiped out, that's the nature of the beast.
Normal economics at work
This is nothing unusual but rather a natural consequence of trading in a fairly illiquid commodity. It is this kind of chaos that encourages all kind of financial institutions to promote liquidity in a wide variety of currencies, shares and commodities.
However, I am left with one question, isn't Bitcoin supposed to be decentralised? In which case how can transacations be rolled back? Even if only the currency exchanged are unrolled the question arises as to what happens if someone has already spent the "currency" they have bought?
Illiquid like penny stocks
Bitcoin has certain parallels to a penny stock. A penny stock doesn't trade much and when it does the share price is extremely volatile due to the low number of sellers & buyers. And penny stocks can be the unwitting participants in pump and dump scams where someone buys up large numbers of stocks in the company, and sends out spam that grossly exaggerates the company's future prospects and bottom line (e.g. they're about to sign a huge contract) so that rubes buys the overvalued stock before it collapses.
In this regard Bitcoin is basically behaving in a similar manner and the outcome is likely to be similar too.
As for rolling back transactions, I assume MtGox holds the accounts and matches buyers and sellers. So if persons A is selling coins from their account and person B is buying coins from their account then no actual transaction has occurred on Bitcoin transaction chains. MtGox will still be holding the bitcoins and they don't go any where, just a record on their databases of how many coins are owned by each person. It's only when someone transfers cash or bitcoins out that it comes off MtGox's books.
So I assume they can roll back everthing to prior to the hack and no harm is done. Assuming that their bitcoin wallet wasn't lifted which it may well be. Without regulation / auditing who can say?
See explanation above
Exchange transaction were not settled yet, thus there is nothing special about them being cancelled. It happens all the time on "real" exchanges, although on relatively smaller scale. Also, not matter how decentralized bitcoin is, exchanges are points where it meets fiat currencies and there aren't that many to choose from, really.
This was only going to end one way
It will end up all falling down around them one of two ways;
1) Security is repeatedly compromised and thieves destroy confidence in the currency reducing it's value to zero
2) The currency becomes sufficiently legitimate for Bankers to get involved who then manipulate the exchanges creating speculative bubbles and crashes whilst stuffing their pockets with everybody else's money. Repeated collapses of the exchange destroy confidence in the currency and reduce it's value to zero. Meantime the wunch of bankers demand that taxpayers cover their losses.
Frankly, I'd rather it was people who admit to being thieves who collapse the exchange, there is half a chance of them paying tax on it after laundering, there is no chance of a banker paying tax.
"...first, steal the Bitcoin account, then use a large trade to drive the value down, buy the coins back at the new, lower value, and then try to trade out completely..."
Naked short selling hits the virtual world... I'm surprised its taken this long....
naked short selling is selling assets one doesn't posses (yet)
One compromised account
One, single, compromised account managed to crash the market completely. Wow.
And the reactions to the 'rollback' are understandable. What's done is done. Anyone that bought low (and had half a brain) would have moved the coins out of mtgox as soon as possible. The rest is just compensation to people who lost out.
Also it's amusing that the guy says Bitcoin will be back around 17.5 when the market is restored! Undoing a bunch of trades surely doesn't magically make it worth what it was before...?
This whole thing just shows exactly how shaky the bitcoin economy is. The high value is there simply because the volumes are so damned low. Any one of the early adopters that's sitting on a few thousand 'coins' could destroy the whole thing at a stroke.
One single compromised account...
The NYSE flash crash (at least the government hypothesis, for what that is worth) was due to one single trading firm doing a single 4.1B trade-- certainly much smaller percentage wise than the BitCoin crash.
And many ensuing trades were cancelled. Nothing new there.
MtGox != Bitcoin
The currency wasn't compromised, but the most widely used exchange was. The integrity of the block chain was not compromised. Indeed, the conversion rates at other exchanges stayed pretty much unchanged.
Mt Gox is not a financial grade conversion facility, and the willingness of people to entrust large sums of money to an "exchange" about which so little is known is testament to people's stupidity (and greed). At the same time, the bitcoin block chain will keep running onwards, an interesting little backwater, where both techies and ne'er-do-wells have entries in a fascinating peer-to-peer replicated ledger, whose entries are secured with strong encryption.
This episode may well be the beginning of the end of Mt Gox, but Mt Gox != Bitcoin
how are they going to "roll back" trades? I thought the whole Bitcoins-be-awesome point was untraceable, irreversible transactions?
It is nice to see the bitcoin thing learn one of the fundamental rules of commerce and economics, though : all currencies are based on the concept of barter, of a thing _representing another thing_ you can say "a bitcoin is worth $17" but unless there are daily trade and investitures of bitcoins to establish that as a worth, then all you have is your word, which makes it as shaky and pointless as IPOs on pre-profit web companies. E.G : your bank account is not a statement of some box somewhere in a vault with some money in it. its a statement of how much money you have loaned the bank. the bank invests this, buying and selling with it, on its own behalf, and agrees to gives you services, or interest on your loan or both. Bitcoins aren't.
Scarcity != worth : by the sounds of it the majority of bitcoin 'users' are sitting on large quanitites of this 'currency'; (how is it generated? real currencies suffer inflation by producing more currency backed by governments borrowing against themselves through a variety of means, and back the worth of this inflation through, effectively, fiscal promises) What are bitcoins promised on? This is 'money' that isn't invested in the economy, isn't backed by a government and isn't a market-valued promissory. Its a broken model : considering so many geeks are involved in its creation and administration, Im amazed none of them can do basic math. Wheelbarrow of 'papiermarks', anyone?
I'd use the genius icon, but I dont even have a degree in this shit and it seems painfull obvious that its an accident waiting to happen.
"considering so many geeks are involved in its creation and administration, Im amazed none of them can do basic math"
money is a social phenomen and it has evolved recently quite a lot. Few geeks are know for their social skills so not surprise few understand money. Those who do can't be bothered - they are busy with far more interesting (and usually profitable) things.