Bitcoin Forum

I was thinking of writing an article on my blog (http://btc411.com) on the possibility of an economic attack on bitcoin and wanted peoples opinions from the community...

Would it be possible for someone or some group to stage an economic attack on the bitcoin network?  We have all seen people speculate on what would happen if Pirateat40(scammer) or knightmb(legit, I felt bad grouping them together) had cashed out all of their bitcoins at once and flooded the market with them.  A lot of people believe that it would cause a massive bitcoin sell-off and cause the price to crash.

Now what if a group or government slowly bought up a few million dollars worth of bitcoin, stabilizing the market or slowly causing it to rise, and then flooded the exchanges with hundreds of thousands of bitcoins?  Would this be a feasible attack from either a very wealthy group or a government that wanted to take down bitcoin?  Could someone that was very wealthy possibly do this in an effort to have the entire bitcoin economy collapse, and then come in and buy up a ton of bitcoins at rock bottom prices in hopes it would bounce back?  Could a competing digital currency use this to collapse bitcoin and hope that their currency would take over and they'd become rich off of being early adopters?

What are peoples feelings on this, and do you think it is at all possible?  If it is possible, do you believe there is any way to prevent it?

1)  Buy low.

2)???????????

3) Profit!!!

+1

I don't think the government will have enough money do make such a threat in a couple of years. Even now, people still use bitcoin despite it volatility so there is no threat at all on the bitcoin protocol.   

Look at the amount of money the US government spends on the war on drugs every year, look at the money it spends on top secret projects.  I think it would be a long shot that they would attack the bitcoin network, but I think it would definitely be possible for them to do if you got someone who said it was the answer to shutting down silkroad or the answer to disrupting a currency they thought could cause problems with national security or other things.

Besides, this is a hypothetical discussion on what the risks could be if someone were to do this.  This would be much easier to achieve than the 51% attack and people have discussed it.  Why not think of possible attacks before they happen?  People used to think using airplanes as weapons couldn't happen...  This isn't meant to bring out all the trolls, this is meant as a real discussion on the possibility of an attack on the network.

Just one large sell off wouldn't be enough. I could see continously high volatility as detrimental to bitcoin's health, I could see people/companies leaving bitcoin because of that. So far high volatility has been accepted as growing pains of a young bitcoin economy thus high volatility doesn't mean alot at this stage.

I don't see bitcoin ever becoming worthless because of that and I don't see a competitor to bitcoin yet either.

On the other hand I don't know how feasible a high volatility attack would be on bitcoin once the economy has grown. How costly would it be? For how long could it be sustained? Would exchanges stop trades to prevent a crash? Other governments might step in to protect companies in their countries that depend on bitcoin - such an economic attack might attract more serious consequences in a later stage of the bitcoin economy.

All very good points.  I wonder if another large crash in the market would slow down the adoption of bitcoin to the point that we'd never fully get off the ground with too many people remembering the high volatility early on.

It's certainly possible, of course. You're asking if there's a way to prevent the problem of a limited supply commodity. How the economy will react is certainly up for debate, but it definitely makes things bad for business.

The solution is to have a non-limited supply, but you won't see much love for that around here.

I've wondered about this a little, it could turn out in a few years to be one of the few ways bitcoin can be attacked, although at that point I'd hope the economy would of grown enough to sustain it.

As mentioned tho, people still use bitcoin regardless. If there gonna attack it, they better hurry up and give it there best shot.

Do you think the incidences of DDoS attacks on one or more exchanges, the forum, the wiki, payment processors (e.g., BitPay), mining pools, etc., just as a rally seems to be building are all complete coincidences?

Sure.  Absolutely.

While bitcoin is small, as it is today, bitcoin is vulnerable to manipulation just like any penny stock (http://en.wikipedia.org/wiki/Penny_stock).

A large buyer can cause the price to rocket through the roof.  A large seller cause drive the price to pennies.

There are stories aplenty about hedge fund traders, daytraders and others manipulating the price of a stock, simply because they had the funds that gave them the financial ability to do so.

Continuously high volatility means automatic payments to anyone paying attention, it's like a free money injection from people who hate bitcoin to people who like it (or are just rational).

To a degree... If you're range-trading, but bullish on bitcoin long-term, it's always tough to execute the sell side. And, as with anything you range-trade, you may be successful 100 times, but then the market gaps up or down big-time while you're on the wrong side of the transaction, wiping out the profits from your 100 small wins; ie, tail-risk.

Sure, in a normal market those are going to roughly balance for the average skill trader, but in a market where someone is paying to increase volatility that money goes to the reasonable traders. It's awesome when someone sits down at the poker table with a boat load of taxpayer money, you don't have to be better than average to win anymore.

If people just buy and sell Bitcoins among each other, that's a zero sum game. If someone does that manipulation at a loss (which is what you're suggesting, they have to keep selling even as the price drops way below what they paid) that means they're making every other Bitcoin investor on average richer. It wouldn't be much of an "attack" to make Bitcoin investing a sure thing any idiot could profit at.

Agree with JoelKatz here.

However, they could invest money in ASICs and shutdown the network. The attack would largely pay for itself. If someone wealthy wants to shutdown bitcoin right now or in the future, they could do it easily.

Do what now?

No, it would not pay for itself.   And that is an important economic incentive.

If you "shut down the network" then bitcoins have no value.  The attacks costs a lot, for little direct monetary return.

You can spend money and crash the value, or spend money and crash the network.  But make no mistake:  you are burning money that will not come back to you.

I agree. This is why it's important the community develop ASICs.

Say Bitcoin was an existential threat to the NSA or the Federal reserve. They could easily invest $50,000,000 in ASICs and make Bitcoins worthless. It's possible the community might find some defense of this, but it's far from a sure thing. However, if the community is using ASICs, a huge advantage a well-funded adversary would have goes away.

price crashes were very easy to do like 1.75-2.25 years ago-ish, cuz there weren't very many users or coins.  Now selling off 35,000 BTC at once would crash the price down to $11.00 on just the MTGox exchange. That "big hack" on that other exchange or whatever only lost 22,000 BTC.  So without hacking something pretty darn huge and someone pretty darn rich,

The real problem are the basic BSA regulations.  It's very hard to steal over $1000 and get it into USD fast and easy.  There are some side companies that do it less legally as far as US laws go than the big guys but then they don't have the resources to dish out like a million dollars, lol.  So you hit limits EVERYWHERE these days, making it stupid to steal.  It's like credit cards.  You can't even use mine 500 miles away for a purchase over $200 or something without tripping a big fraud alert so stealing my number is pointless.

I'm not going to argue about the costs/profitability of acquiring 51% hashing power. Been there done that. We'll have to wait for an empirical test to resolve the argument.

My takeaway message is that DoS'ing the network strictly dominates manipulating price as an attack approach. As Joel notes, manipulating price would likely be counterproductive for the attacker.

I disagree that it is a "zero sum game" when people are trading bitcoins among themselves. If a new higher price stabilizes on a small amount of activity the new people buying haven't lost anything they're storing value at a higher price and other holders of Bitcoin make money relative to fiat. This of course could also be a very negative sum with a price drop stabalizing.

Ever since Zhou Tong used the phrase (correctly referring to the gambling on Bitcoinica) in his leaving Bitcoinica thread it's taken off as a meme being used to describe the Bitcoin market which it doesn't apply to in any way!

It wouldn't seem so, but they've done it with gold and silver.  And they can continue to do it, even "at a loss", because 1) printing money doesn't cost them anything, it costs other countries, and 2) the profits derived from maintaining a monopoly on currency are many times greater than the markets for gold, silver, or Bitcoins.

You may enjoy http://citeseerx.ist.psu.edu/viewdoc/summary?doi=10.1.1.73.4707
I believe he did real life empirical examples to prove it as well (or something).

Sad to see this topic up yet again...if I write a concise primer on basic economics can I get it pinned somewhere, I wonder?

The one sentence explanation: the words 'buy' and 'sell' actually mean the same thing (as the word 'trade').

Translated:
Now what if a group or government slowly sold a few million dollars for BTC, stabilizing the market wouldnt this be the opposite of..oh forget it reaching even the most unwilling dollar-buyers by saying "Ill give you any USD you want for your 1 BTC, please trade some to me!"....and then decided to buy dollars (with BTC) instead, reaching even the most unwilling dollar-sellers by saying "Ill give you any amount of BTC for 1 USD, please trade some to me!".

Hopefully this example clarifies: this is a get-poor-quick scheme for crazies.

I agree. But this doesn't really hurt gold or silver. In fact, it tends to make them better investments.

Better investments, but worse currencies.

True.

These attack speculations always come back to the same thing for me: the more serious the attack, the more the attacker has to be sure that it will succeed unambiguously. Otherwise, "bitcoin survives heavily resourced/funded attack" becomes the salient point. Price can easily recover, and there's no logical reason why it should not very quickly be deemed even more valuable, simply on the basis that it has now been proven against such attacks.

Basically, Satoshi gave the protocol a bit of a "if you come after me, make sure you kill me" dynamic

It seems a lot of people did not read my original post clearly...

I did not say anything anywhere about stealing bitcoins or money.  My main point also has nothing to do with economic gain directly related to the attack in this hypothetical situation.  My thoughts were more of if someone had a reason outside of bitcoin to take down bitcoin, or even if Carlos Helu decided "oh I'm bored this Sunday, lets wipe out a currency."  Someone worth 69 Billion USD could easily place an attack like this without noticing a hit financially.  A government could easily place an attack on this level also.

My questions weren't what do you think the chances of this happening are, we all know they are slim to none.  My questions to the community were simply "what do you think would happen if someone did carry out an attack like this on bitcoin?" and "would there be a way to prevent an attack like this from happening?"

Yes, whoever placed the attack would lose money in terms of bitcoins, this is obvious.  I did not ask if anyone thought it would be a good financial decision to place an attack like this.  People who do bad things don't always do it just to try and get away with some money.

Congress can create money out of thin air.  If the attack was possible, but merely costly, we'd already be doing it.

Think gold and oil and houses, the stuff the government is always whining is overpriced.

@ Mods: This threads needs to goto $Economics

Why?  It's a discussion on what could possibly happen from an attack.  Some of the discussion can be on the economic outcomes, but it is a discussion on an attack.  Do people not read the posts in this forum?

All that would have to happen is people would have to learn to recognize it. Then they could make it cost the manipulator as much as they want to manipulate the currency as little as they want. It would gradually cost more and more to destabilize the currency, and so long as the "attacker" continued to do it, everyone else would get richer and richer as he gets poorer and poorer. It would render Bitcoins temporarily less useful as a medium of exchange, but nobody would care. They would be too busy getting filthy rich speculating.

The only way to manipulate a currency  like Bitcoin is to buy it at a too-high price or sell it at a too-low price.

About the original topic:

Bitcoin sometimes reminds me of this comic book:
https://en.wikipedia.org/wiki/Obelix_and_Co. (https://en.wikipedia.org/wiki/Obelix_and_Co.)

It seems especially appropriate in the context of this discussion. You should read it.

shutting down bitcoin is like shutting down internet it grows and grows and it will get stronger and more secure if you ask me.. ;) but lots of sh!t is going on right now...intersago vs $, GLBSE down, GPUMAX down, ASIC?/? ect. ect. ect..cheers :D

+1

I think there are traders doing this every day.
I refuse to buy high and sell low. The fundamental value is not in the exchange rate but in the technology (what it enables). Only people who understand the true value of the system will value saving acquiring holding Bitcoins knowing what they are.  I look forward to the day they trade at $1,00 as much as I look forward to them trading @ $300.

Bitcoins value is in the technology not the exchange rate.