Possibility of an economic attack on bitcoin?

[oldschool]

I was thinking of writing an article on my blog 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?

[Rothgar]

1)  Buy low.

2)??

3) Profit!!!

[knight22]

My question is: Will the economic attack be stronger than the troll attack? Will it be more effective?

My opinion is: Let them try. Buy a ton of Bitcoins then flood the market? The only loser is them (and anyone that reacts to their actions).

+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.   

[oldschool]

My question is: Will the economic attack be stronger than the troll attack? Will it be more effective?

My opinion is: Let them try. Buy a ton of Bitcoins then flood the market? The only loser is them (and anyone that reacts to their actions).

+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.

[9c5207677]

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.

[oldschool]

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.

[Etlase2]

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.

[Evolvex]

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.

[Stephen Gornick]

What are peoples feelings on this,

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?

[jgarzik]

Would it be possible for someone or some group to stage an economic attack on the bitcoin network?

Sure.  Absolutely.

While bitcoin is small, as it is today, bitcoin is vulnerable to manipulation just like any 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.

[FreeMoney]

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).

[Melbustus]

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.

[FreeMoney]

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.

[JoelKatz]

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?

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.

[cunicula]

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.

[kjj]

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?

[jgarzik]

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.

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.

[JoelKatz]

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.

[Desolator]

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.

[cunicula]

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.