If Pirate Runs: The Danger of one entity with 500K BTC

[JoelKatz]

No, the only implicit assumption I am making here is that he is able to drive the market up and down because of his clout and larger stash of cash. Each successful cycle would only increase his momentum. A failed cycle would signal the end of the attack. The key success factor is to start with a big enough cash reserve and solid nerves..

The problem is that anyone who understands this strategy can get the same profit he does without any of the expense.

Say the long-term, fair market value of bitcoins is around $10, and that's roughly where they would be if nobody manipulated them. To push coins above $10, you have to buy above $10. Anyone who understands your strategy can make you take a loss as you do this -- as big a loss as they want. To push coins below $10, you have to sell them below $10. Anyone who understands your strategy can make you take a loss as you do this -- as big a loss as they want.

Now, say you succeed. You push the price down to $7 and some people panic sell. Now, you have to compete with everyone who knows what you're doing for a share of the underpriced bitcoins. You have no special way to hog them. And say you push the price up to $13 and some people still buy. Now, you have to compete with everyone who knows what you're doing for a share of the better sale opportunity. You have no special advantage over everyone else.

Now, despite all this, you might still think you could make a profit. Maybe, because you know when and how much you're going to manipulate, that gives you an advantage. But the problem is this -- the further the price is from its natural price, the more it costs to move it and the easier it can return to its natural price. So while going from $10 to $11 might not be that expensive, going from $11 to $12 is much, much worse. Not only do you take twice as much loss on every bitcoin you buy. But more people catch on that the price is significantly higher than it should be and more people are induced to sell.

I personally know several people who are just waiting for such a manipulation to be attempted and have the funds to profit from it. Any manipulator will have to make them as rich as he makes himself, and he will bear all the costs.

Many have tried this strategy. Billions have been lost.

[Matthew N. Wright]

No, the only implicit assumption I am making here is that he is able to drive the market up and down because of his clout and larger stash of cash. Each successful cycle would only increase his momentum. A failed cycle would signal the end of the attack. The key success factor is to start with a big enough cash reserve and solid nerves..

The problem is that anyone who understands this strategy can get the same profit he does without any of the expense.

Say the long-term, fair market value of bitcoins is around $10, and that's roughly where they would be if nobody manipulated them. To push coins above $10, you have to buy above $10. Anyone who understands your strategy can make you take a loss as you do this -- as big a loss as they want. To push coins below $10, you have to sell them below $10. Anyone who understands your strategy can make you take a loss as you do this -- as big a loss as they want.

Now, say you succeed. You push the price down to $7 and some people panic sell. Now, you have to compete with everyone who knows what you're doing for a share of the underpriced bitcoins. You have no special way to hog them. And say you push the price up to $13 and some people still buy. Now, you have to compete with everyone who knows what you're doing for a share of the better sale opportunity. You have no special advantage over everyone else.

Now, despite all this, you might still think you could make a profit. Maybe, because you know when and how much you're going to manipulate, that gives you an advantage. But the problem is this -- the further the price is from its natural price, the most it costs to move it and the easier it can return to its natural price. So while going from $10 to $11 might not be that expensive, going from $11 to $12 is much, much worse. Not only do you take twice as much loss on every bitcoin. But more people catch on that the price is significantly higher than it should be and more people are induced to sell. And the more easily it returns to its regular price.

I personally know several people who are just waiting for such a manipulation to be attempted and have the funds to profit from it. Any manipulator will have to make them as rich as he makes himself, and he will bear all the costs.

Many have tried this strategy. Billions have been lost.

Joel, you made my day using the Bitcoin Magazine cartoon of you as your avatar. ^5

[JoelKatz]

Joel, you made my day using the Bitcoin Magazine cartoon of you as your avatar. ^5

Making your day makes my day. It looks really awesome as an avatar, even more awesome than I expected. Also, you didn't have to quote my entire post to say that.

[Bitcoin Oz]

I dont know to what extent AML/KYC rules on the exchanges push people to deal outside the exchanges. If you need to hand over mt gox all your details its probably worth 10% extra to deal with pirate for large amounts.

[muyuu]

That assumes he's the only one buying, though. He may be able to do this once, but when he tries it again (say next weekend) he'd find it harder to get away with.

No, the only assumption is that he is able to drive the market up and down because of his clout and larger stash of cash.

He'll never reach zero. Firstly, not every bit of fiat on MtGox is on the order book. Secondly, there are exchanges beside MtGox. He'd have to do this across the board, and essentially own every BTC out there at one end of the swing, and own no BTC at the other, then somehow prevent others from jumping in and ruining his plans. Plus, he'd be paying quite a bit of money in fees to the exchanges as well.

If it was that simple, anyone could do it by taking over the stock exchange of a small country... say Bolivia. It can be done, the first time, and with the element of surprise on your side. The second time it becomes orders of magnitude harder. The third time is almost impossible.

There are arbitrage bots.

MtGox USD accounts for about 45% (MtGox USD is about 75% of all MtGox, and all MtGox makes up for about 60% of all exchange transactions) of the whole market volume in the main exchanges. Once the difference beats currency conversion commission and exchange fees, they will find the walls to be much taller than they look like. This doesn't happen if you just touch it, but if you try to go past it.

So you have to factor this, with immediate effect, and then people reloading if they see an opportunity with some delay.

[Piper67]

That assumes he's the only one buying, though. He may be able to do this once, but when he tries it again (say next weekend) he'd find it harder to get away with.

No, the only assumption is that he is able to drive the market up and down because of his clout and larger stash of cash.

He'll never reach zero. Firstly, not every bit of fiat on MtGox is on the order book. Secondly, there are exchanges beside MtGox. He'd have to do this across the board, and essentially own every BTC out there at one end of the swing, and own no BTC at the other, then somehow prevent others from jumping in and ruining his plans. Plus, he'd be paying quite a bit of money in fees to the exchanges as well.

If it was that simple, anyone could do it by taking over the stock exchange of a small country... say Bolivia. It can be done, the first time, and with the element of surprise on your side. The second time it becomes orders of magnitude harder. The third time is almost impossible.

There are arbitrage bots.

MtGox USD accounts for about 45% (MtGox USD is about 75% of all MtGox, and all MtGox makes up for about 60% of all exchange transactions) of the whole market volume in the main exchanges. Once the difference beats currency conversion commission and exchange fees, they will find the walls to be much taller than they look like. This doesn't happen if you just touch it, but if you try to go past it.

So you have to factor this, with immediate effect, and then people reloading if they see an opportunity with some delay.

Well, the saying in Spanish goes "There's no better blind person than he who doesn't want to see". But in case you do want to see, check out Joel's explanation above, as usual a lot more eloquent than mine.

[paulie_w]

i think the op has a good point but from a different angle:

what if "pirate" is just someone or an organization who wants to destroy bitcoin?

due to the stupidity of users, we _COULD_ end up in a situation where a huge percentage of the coin is essentially traded into the hands of... government, private interest (traditional banks) etc.

the message is the same: stop giving it up so cheaply, guys.

[muyuu]

That assumes he's the only one buying, though. He may be able to do this once, but when he tries it again (say next weekend) he'd find it harder to get away with.

No, the only assumption is that he is able to drive the market up and down because of his clout and larger stash of cash.

He'll never reach zero. Firstly, not every bit of fiat on MtGox is on the order book. Secondly, there are exchanges beside MtGox. He'd have to do this across the board, and essentially own every BTC out there at one end of the swing, and own no BTC at the other, then somehow prevent others from jumping in and ruining his plans. Plus, he'd be paying quite a bit of money in fees to the exchanges as well.

If it was that simple, anyone could do it by taking over the stock exchange of a small country... say Bolivia. It can be done, the first time, and with the element of surprise on your side. The second time it becomes orders of magnitude harder. The third time is almost impossible.

There are arbitrage bots.

MtGox USD accounts for about 45% (MtGox USD is about 75% of all MtGox, and all MtGox makes up for about 60% of all exchange transactions) of the whole market volume in the main exchanges. Once the difference beats currency conversion commission and exchange fees, they will find the walls to be much taller than they look like. This doesn't happen if you just touch it, but if you try to go past it.

So you have to factor this, with immediate effect, and then people reloading if they see an opportunity with some delay.

Well, the saying in Spanish goes "There's no better blind person than he who doesn't want to see". But in case you do want to see, check out Joel's explanation above, as usual a lot more eloquent than mine.

It's totally unrelated to what I said. Actually I agree with every bit Joel wrote above, and this point I make only reinforces his point and yours (because there is really a lot more liquidity than what it looks like by checking MtGox's orderbook).

[dbox]

i think the op has a good point but from a different angle:

what if "pirate" is just someone or an organization who wants to destroy bitcoin?

due to the stupidity of users, we _COULD_ end up in a situation where a huge percentage of the coin is essentially traded into the hands of... government, private interest (traditional banks) etc.

the message is the same: stop giving it up so cheaply, guys.

I think the bitcoin community is quite vulnerable to such an attack. And if pirate doesn't pay it could be one...

[Boussac]

No, the only implicit assumption I am making here is that he is able to drive the market up and down because of his clout and larger stash of cash. Each successful cycle would only increase his momentum. A failed cycle would signal the end of the attack. The key success factor is to start with a big enough cash reserve and solid nerves..

The problem is that anyone who understands this strategy can get the same profit he does without any of the expense.

Say the long-term, fair market value of bitcoins is around $10, and that's roughly where they would be if nobody manipulated them.

Nice try but unconvincing. There is no such things as "fair" market value, "rational" investor behavior or "efficient" markets. Please read Mandelbrot or Taleb on Finance to end the belief in Gaussian law applied to irrational behaviors.
It has been shown that, if we had "rational" markets", events like financial crises would happen every 500 000 years instead of every 10-15 years.
Hence you refutation does not hold.

[FreeMoney]

If I'm like "yo, give me your coins and I'll give you a magic cheeseburger" and you do, without ever seeing the magic cheeseburger, then you don't have to worry about wtf I'm going to do with the magic cheeseburger when I don't deliver it.

[JoelKatz]

Nice try but unconvincing. There is no such things as "fair" market value, "rational" investor behavior or "efficient" markets. Please read Mandelbrot or Taleb on Finance to end the belief in Gaussian law applied to irrational behaviors.
It has been shown that, if we had "rational" markets", events like financial crises would happen every 500 000 years instead of every 10-15 years.
Hence you refutation does not hold.

The refutation doesn't rely on any such thing. That was just a simple way to explain it. If it makes you happy, re-read it but everywhere you see, say, $10, mentally substitute "whatever the average  price would have been over the medium-term had the price not been manipulated". Wherever you see, say, $7, substitute "a bit less than what the price would have been had it not been manipulated".

Of course, the argument doesn't work if the price is increasing continuously. But, obviously, anyone can make tons of money in that case.

The point is very simple -- you have to manipulate the price at your own expense, and others can make you take as big a loss as they wish. And you have to split the profit with others. And I know for a fact that there are several well-financed people fully capable of doing both of those things.

[Realpra]

Most investors are rational, they just don't have perfect information.

If someone pushed BTC up to 12 from an average of 10, even rational actors have no way of knowing whether that was a new guy buying into BTC OR a manipulator moving temporarily out of BTC to change the price.

Big investment firms for this reason spend a lot on gathering information and hence their actions come to look more rational than others.


Still I see manipulation as kind of gambling where you can win a little or loose a LOT.

See even when the price was pushed to 15.40 recently by euphoria it was a very weak price and collapsed at a few sells - even if you had orchestrated that you would not have been able to sell that many coins at that price.

[JoelKatz]

If someone pushed BTC up to 12 from an average of 10, even rational actors have no way of knowing whether that was a new guy buying into BTC OR a manipulator moving temporarily out of BTC to change the price.

That is correct. The one advantage that a manipulator has is that he knows the timing and amounts of his manipulations.

See even when the price was pushed to 15.40 recently by euphoria it was a very weak price and collapsed at a few sells - even if you had orchestrated that you would not have been able to sell that many coins at that price.

The price always come back much more easily than it can be pushed. The further the price gets from where it's going back, the more you pay for each Bitcoin you buy or sell to push it further and the bigger the walls you have to break down.

And this is the really important thing -- if you're trying to push the price of Bitcoin from $10 to $9, a well-financed person can make you sell as many bitcoins at $9.10 as he can afford to buy. And any number of people can each do this to you with you taking losses against each one of them. And then if someone panic sells, you'll have to fight them for the $9 Bitcoins. It's never worked.

[Cluster2k]

I used to be skeptical about whether bitcoin could sustain multiple hacks and incompetents acting against its interests.  MtGox hack, exchanges disappearing (Bitomat), Bitcoinica (twice!), now Pirate (promised interest right up until the hour of payout, already 7% higher than 1 week ago).  These acts could have shattered confidence in bitcoin (Pirate's antics have yet to hit Slashdot or popular media...), yet bitcoin remains strong.  

If someone runs with 500k btc there'll be a whole lot of people chasing.  

[goodlord666]

Who's going to break the 1,000,000 BTC barrier??

[Boussac]

everywhere you see, say, $10, mentally substitute "whatever the average  price would have been over the medium-term had the price not been manipulated". Wherever you see, say, $7, substitute "a bit less than what the price would have been had it not been manipulated".

I don't know what you had for breakfast, but I hope you realize this doesn't make sense AT ALL.

Again, the future price is set by the wealthy influential investor not by "rational" investors.

If investors invest without complete, exhaustive, public information about what is it they are buying, they are NOT rational, by definition.

By the way, the pump and dump strategy is a known scheme that has worked many times (ever heard of Enron) even though it's considered a fraud in most jurisdiction.

[FreeMoney]

Who's going to break the 1,000,000 BTC barrier??

Terrible and terribly clever malware is the only way for that imo and it would have to be soonish because there are going to be security developments and just generally more diverse ways of using bitcoin reducing the possible size of any one attack like that.

Thinking more I don't know if even well hidden malware in the main client could get 1M. Attacker has to spring it pretty fast to avoid detection and serious business doesn't upgrade fast, nor careful or lazy individuals. Most people with brand new version will be new or have most coins cold.

[FreeMoney]

But we haven't even hit 500k.

Telling people you'll give them 500k and then not isn't stealing 500k. It's stealing whatever they actually send you which is less.

[JoelKatz]

I don't know what you had for breakfast, but I hope you realize this doesn't make sense AT ALL.

Again, the future price is set by the wealthy influential investor not by "rational" investors.

If investors invest without complete, exhaustive, public information about what is it they are buying, they are NOT rational, by definition.

That doesn't change anything. The argument still applies regardless of what the price does. The only thing the manipulator knows that nobody else knows is what he himself is doing. He still has to push the price up by buying higher than those not trying to manipulate the market or push the price down by selling lower than those not trying to manipulate the market. He still has no special advantage when he tries to buy at the inflated price or sell at the depressed price.

By the way, the pump and dump strategy is a known scheme that has worked many times (ever heard of Enron) even though it's considered a fraud in most jurisdiction.

There's no way Pirate can pump Bitcoins though. It's not like he can cook Bitcoin's books. The only thing Pirate can know about Bitcoins that nobody else knows is what he himself is doing. And there are lots of people who are fundamental, long-term investors in Bitcoins who will buy them up every time there's a panic sell and when sell them any time there's a sudden buying rush.