What's wrong with Bitcoin?

[ComputerScientist]

Bitcoin and similar technologies may have a significant role to play in the future, and the technology is legitimately elegant and adeptly applies several modern strains of cryptographical research.

The recent speculative runup in the main Bitcoin block chain, however, is insane and entirely unfounded. I can't promise that people buying Bitcoins now will lose money, for no one can easily predict where a bubble will end, but the grandiose claims of most of the people in the official Bitcoin forums are absurd and border on the illegal fraud that is explicitly disclaimed by people like Rezin777. Investors would be well advised not to risk their money here. There are several significant reasons for this:

1. Most of the exchanges between Bitcoin and other currencies are illegal or, at the very least, unlicensed and illegitimate. They likely run afoul of US securities laws and US banking laws. This is not just a pub-style bull session about law; it is the result of a reasoned consideration informed by legal experts, though of course it does not constitute legal advice to you. Speaking generally, though, individual users of these exchanges risk having their assets and accounts frozen, risk running afoul of money-laundering laws, and generally risk losing even more than they put into the system.

2. Related, given that the exchanges are entirely unregulated, they can themselves be manipulating the market. Given that Bitcoin is touted as a distributed currency, it is ironic that there is absolutely no check on "Mt. Gox," the major Bitcoin exchange, through which $200,000/day is (unbelievably) passing.

3. The Bitcoin protocol itself is not robust against denial-of-service and other attacks. Many on the official Bitcoin forums have noticed this, and some have spelled out the attack vector in detail, but in short, a persistent denial-of-service attack that shuts down Bitcoin entirely can be mounted trivially for about $700,000 and can very likely be mounted with more sophistication at a substantially lower cost. Indeed, the Google employee who (in a personal capacity) wrote a Java version of part of the Bitcoin client has recognized publicly that any sophisticated analyst could shut down Bitcoin at will, and he explicitly opposed calls for tests of the system's security by the general public. The system has created the impression of security, but it is not secure. What ARE secure and robust are the ideas behind the protocol; it is likely that something like Bitcoin will survive, in some form, in the future. But the main block chain, in which everyone's presumed "wealth" inheres, is of questionable soundness. (To say that more simply: Bitcoin as an idea might survive, but it is far less likely that your "bitcoins" will.)

4. Given that technological attacks are possible, a corollary is that economic attacks in the style of securities fraud are possible as well. If you can disrupt the network at will, you can easily disrupt the network in a strategic way in order to profit from the disruption's effect on the market. Much unsophisticated analysis of Bitcoin rests on the premise that attacks aren't worthwhile to mount because it would be more profitable, with massive computing resources, to "mine" for Bitcoins, but that entirely neglects (1) the economic motivations that come from market manipulation and (2) ideological, political, regulatory, and commercial competition to the main Bitcoin block chain, which makes attacks relatively more attractive for many parties.

5. To the extent the official Bitcoin forums have informed investors' views of Bitcoin, they have likely misled the public. This is interesting from a legal perspective because it amounts to fraud without the individualized intent of fraud (can a mob "defraud" someone when no individual person in the mob is consciously telling a lie from which he or she expects to profit?), but several features of the official forum stand out immediately to informed readers. These are largely tangents, but they may help paint a more accurate picture of the current users of Bitcoin than the official forums would:

a. While I said at the outset that Bitcoin is legitimately interesting from a technological standpoint, it is not as creative or novel as most of the adopters seem to think. Judging from the official forums, the typical adopter is someone with a modicum, but no more, of technical and theoretical experience. (Perhaps of note: those who are leading the ongoing "development" of Bitcoin are little different; they are not sophisticated or creative technological thinkers, and they struggle even with the details of the present protocol. What this means for an investor is that Bitcoin is not practically resilient even to those attacks to which it might respond in theory, such as a compromise of the hash function it mainly uses or the development of a new "mining" technology that cheapens various attack vectors.) To paint the picture very broadly: these people know how to run Linux, compile programs on it, and maybe write a few lines of code; they can also evaluate at a very general level the claims of a cryptosystem. But all except about five people on the official forums have no specific mathematical or systems training, and so the general discussion and enthusiasm creates the impression in a novice that Bitcoin is far sounder than it is.

b. More obviously, the official forum is filled with disturbing and juvenile, extreme anarchism. Comments like "I reject all systems of human morality and law" are common. Uses of Bitcoin to encourage trading in illegal goods and services are routine; even "assassination markets" are encouraged. Bitcoin as a virtual currency probably does not threaten governments the way that some novices initially imagine upon hearing about the technology, but when the only people buying Bitcoins are (1) engaging in illegal activities, (2) anarchist teenagers who want to promote the technology for ideological reasons, and (3) speculators, sound investors like those in the Fatwallet crowd would be well advised to stay away. To a mainstream community of investors, however, the deranged rants that are commonplace among early Bitcoin adopters are perhaps reason alone to hesitate to adopt the technology.

6. Probably less significantly, but still interestingly, the Bitcoin block chain has now been demonstrated by at least two good analysts to be able to store arbitrary data "steganographically." This means that the Bitcoin block chain can contain arbitrary contraband, so that merely by running the Bitcoin client, you may (at least theoretically) be propagating child pornography, Wikileaks, and other material in the style of Freenet and other distributed storage systems. This is more theoretical than practical at the moment, but it is disconcerting. How popular would VISA cards be if (say) 4% of them contained contraband information encoded in the holograms on the front of the cards?

NOTHING IN THIS MESSAGE CONTAINS INDIVIDUALIZED LEGAL OR INVESTMENT ADVICE. My motives for writing this are a distaste for fraud, even when that fraud is not consciously propagated. As a researcher, I also have privately made proposals that address some of the technical drawbacks of Bitcoin, but I have no vested interest in seeing Bitcoin as a technology either succeed or fail.

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[kiba]

Bitcoin and similar technologies may have a significant role to play in the future, and the technology is legitimately elegant and adeptly applies several modern strains of cryptographical research.

The recent speculative runup in the main Bitcoin block chain, however, is insane and entirely unfounded. I can't promise that people buying Bitcoins now will lose money, for no one can easily predict where a bubble will end, but the grandiose claims of most of the people in the official Bitcoin forums are absurd and border on the illegal fraud that is explicitly disclaimed by people like Rezin777. Investors would be well advised not to risk their money here. There are several significant reasons for this:

Did I hear yet another claim of "Bitcoin bubble"?

http://bitcoinweekly.com/articles/comic-reaction-after-dramatic-rise-of-bitcoin-s-value

[clouds]

Repost from here 8 days ago:
http://www.fatwallet.com/forums/finance/1090435/m15945892/#m15945892

And already discussed a bit here:
http://forum.bitcoin.org/index.php?topic=8248.msg120599#msg120599

[rezin777]

Welcome to the forums! 

[m4rkiz]

1. Most of the exchanges between Bitcoin and other currencies are illegal or, at the very least, unlicensed and illegitimate.

that is simply not true

and if you opening with a lie \ lack of knowledge like that i really don't want to read any further

how is purchasing btc different than purchasing a pair of shorts online?
IF you sell it and actually make some money, you should pay income tax in most countries \ cases, but paying taxes has nothing to do with bitcoin being legal or not

[m4rkiz]

Probably less significantly, but still interestingly, the Bitcoin block chain has now been demonstrated by at least two good analysts to be able to store arbitrary data "steganographically." This means that the Bitcoin block chain can contain arbitrary contraband, so that merely by running the Bitcoin client, you may (at least theoretically) be propagating child pornography, Wikileaks, and other material in the style of Freenet and other distributed storage systems.

as i mentioned in comment you (?) deleted:

WHO CARES?

there is zilions ways to do that, starting from drawing dicks on dollar bills, through paypal \ bank transfer descriptions and ending on embedding hidden content in websites... you can't see any porn in chain, you would have to decode it

How popular would VISA cards be if (say) 4% of them contained contraband information encoded in the holograms on the front of the cards?

my guess? exactly the same - because joe sixpack don't give a f#ck that:
"if you change those two dots, scan this qrcode and swap those three letters it will be hyperlink to picture of a big dick"

no average user will ever know that blockchain even exist (or for that matter locate, decode or use any information from blocks) who cares if there is DICKDICKPUSSY recorded into magnetic strip of one's VISA card?

[JohnDoe]

Oh look, yet another wizard who knows the Real Value of Bitcoin™.

[zef]

I enjoyed reading your points on the fatwallet forums, CS. I just want to address a few of your concerns that sort of stick out to me.

Point 1. I think you will find it difficult convincing many here that regulation, licencing and legislation from some central authority adds legitimacy to anything.  

Point 2. Again you need to prove the assertion that regulation lowers the chance of manipulation or corruption, rather than increases it.  I mean that rhetorically of course, because that would be a long debate off topic.

Point 3. Technically speaking, it is possible that bitcoin is unsound, or limited in some way. If you could expand on your points here, i would be interested.

Point 4. Again, if you could expand on specific ways to do this, i, and im sure everyone else would be interested.  I think most would agree its in the realm of possibility,  but you could make similar claims about any technology.

Point 5. This is more of a philosophical or personal point, which again could be a long off topic conversation.

Point 6. Interesting, but I don't find it relevant.

[Vladimir]

1. Yep, probably it is the case for most exchanges. Didn't you know that Bitcoin is very young?

2. I do not see anything unbelievable in 200k$/day passing on some days at mtgox. Lots of private deals are happening too, probably. Manipulating the market? Even if this is true, it is just growth pain. Bitcoin is bad because exchanges are bad!  With with your approach you could as well criticise linux kernel for bugs in sendmail and bind.

3. A million USD to temporarily disrupt the network, and push some panicking speculators to sell some coins. So where is a big news here? This can be done at much lower cost to 'blue chip' companies, to paypal, visa, mastercard and others. Did you see all those news about Sony being taken down by Anonymous? Note that market cap of bitcoin is a fraction of percent of those troglodytes.

4. See above.

5. Mob fraud? It is something new and bordering on libel. People are just excited and for a good reason.

a. What else did you expect from a predominantly geek crowd of teenagers and twentysomethngs? No "sophisticated or creative technological thinkers"? Do you expect those "thinkers" to spend all their time posing here?

b. Yep, mostly juvenile. Yep, extreme. Fat wallet investors better stay away for now. You will be able to buy bitcoins from teenage millionaires with less risks a few years down the road.

6.Irrelevant.

[elewton]

I find point 6 to be extremely relevant.  There will be some groups for whom it would be advantageous for Bitcoin to fail.  Many of these groups are capable of influencing the police and public.
If child porn is spammed onto the blockchain.  I can well believe that the protection of minors is plenty of excuse to target miners.

[Timo Y]

2. Related, given that the exchanges are entirely unregulated, they can themselves be manipulating the market.

Tell us something new.  Anybody can manipulate the market if they own enough BTC. Anybody can manipulate any commodity market if they own enough of the commodity.  There is nothing unique to Bitcoin about this.  DeBeers and diamonds comes to mind.  
 
If that bothers you, don't invest in Bitcoin.

3. The Bitcoin protocol itself is not robust against denial-of-service and other attacks.

Tell us something new.  That's why it's called beta software.

If that bothers you, don't invest in Bitcoin.

Bitcoin as an idea might survive, but it is far less likely that your "bitcoins" will.)

Agreed. But  I think that anybody who invests a large amount of money in BTC has researched the technology beforehand and is well aware of this.  If they haven't, then they are fools, bluntly put.

economic attacks in the style of securities fraud are possible as well.

Securities fraud??
Bitcoin is a commodity, not a security.  Why? Because owning Bitcoin doesn't involve guarantees or contractual obligations.  It's just a number stored on your computer.

5. To the extent the official Bitcoin forums have informed investors' views of Bitcoin, they have likely misled the public.

No such thing as "official" Bitcoin forums. That's kind of the point with a decentralised project. bitcoin.org is just a website run by an individual who is involved with the project, that's all.

And do you realise that the Bitcoin forums are the public?

So I guess the public is misleading the public?

But all except about five people on the official forums have no specific mathematical or systems training, and so the general discussion and enthusiasm creates the impression in a novice that Bitcoin is far sounder than it is.

Agreed. We should stress more often that Bitcoin is still beta, also on wesuecoins.com

b. More obviously, the official forum is filled with disturbing and juvenile, extreme anarchism.

Libertarians prefer to use the word "consistent" rather than "extreme", to describe their system of ethics.  They would counter that inconsistency is juvenile.  But I agree, some people on this forum are very idealistic.

To a mainstream community of investors, however, the deranged rants that are commonplace among early Bitcoin adopters are perhaps reason alone to hesitate to adopt the technology.

I don't get this type of reasoning. Why do you care what other people are doing with their bitcoins? I mean, there are lots of deranged people who buy carrots. Does that stop you from buying carrots?

6. Probably less significantly, but still interestingly, the Bitcoin block chain has now been demonstrated by at least two good analysts to be able to store arbitrary data "steganographically."

Does it take "at least two good analysts" to demonstrate that the sky is blue?

Obviously the block chain can store data steganographically.  Anything that can store data, can store data steganographically.

This means that the Bitcoin block chain can contain arbitrary contraband, so that merely by running the Bitcoin client, you may (at least theoretically) be propagating child pornography,

Some evil biotechnologist could (theoretically) encode child pornography in a carrot's DNA.  That means that every time you buy a carrot you may (at least theoretically) be propagating child pornography.  

OMG! We should all stop eating carrots!

NOTHING IN THIS MESSAGE CONTAINS INDIVIDUALIZED LEGAL OR INVESTMENT ADVICE.

You're contradicting yourself now.

Your own words from the beginning of your post:

Investors would be well advised not to risk their money here.

So I guess that wasn't advice at all but just a brainstorm?  Thanks for letting me know, I was just about to take it.

[zby]

Welcome to the forum - I've read your post at fatwallet - and my intuition is that you are mostly right about the threats, but I don't think  anyone of them has the power to bring the project completely down.  Sure there are many of them and I agree that they are probably treated too lightly here - but this is how projects start - you cannot start from defence.

[benjamindees]

Great, an anonymous grad student gives himself the pseudonym "ComputerScientist" and then makes a bunch of libelous attacks.  I'll be sure to take this seriously.

Was cryptographic currency going to be the subject of your thesis?  Is the job market looking a little thin?  Were you hoping to be a quant on Wall St.?  Does the prospect of paying off those student loans look a little daunting now?

illegal or, at the very least, unlicensed and illegitimate

Do you have any clue what these words mean, or are you just grasping at straws?

They likely run afoul of US securities laws

Bitcoin is not a security.  So, probably not.

Comments like "I reject all systems of human morality and law" are common.

Unsurprisingly, a search reveals the only place this phrase appears is in your post.

even "assassination markets" are encouraged.

I don't see anyone on this site encouraging this.  Do you have a quote or citation?

Of course the US military has tried (without authorization from Congress) to create assassination markets before.  And since the CIA seems to have developed an interest in Bitcoin, it's entirely possible that the US government could create such a market.  Would you consider that illegal or illegitimate?

http://en.wikipedia.org/wiki/Policy_Analysis_Market
http://hanson.gmu.edu/policyanalysismarket.html

Otherwise, the thrust of your argument seems to be that Bitcoin is not immune to attack.  So, in the interest of debate, could you kindly give an example of a system that is immune to attack?

Because this whole rant sounds just a little bit like sour grapes to me.

"Waah, waaah.  These people don't have training and licenses.  They can't make legitimate software!"

[Timo Y]

I find point 6 to be extremely relevant.  There will be some groups for whom it would be advantageous for Bitcoin to fail.  Many of these groups are capable of influencing the police and public.

Planting kiddie porn to incriminate your enemy?  Sounds like a brilliant plan that could definitely never backfire.

Seriously?  Do you really think that those "groups" you are talking about would do something so stupid? 

[jon_smark]

Welcome to the forums, ComputerScientist!  I hope this will be just the first of many posts from you.  You are bound to get some flack from the crazy libertarians, but do not let them discourage you from engaging in the discussion...

You make some very good points, and overall I would agree with the tone of your message.  However, I cannot make an unconditional endorsement of your post, because there's also one point where I strongly disagree:

5. To the extent the official Bitcoin forums have informed investors' views of Bitcoin, they have likely misled the public. This is interesting from a legal perspective because it amounts to fraud without the individualized intent of fraud (can a mob "defraud" someone when no individual person in the mob is consciously telling a lie from which he or she expects to profit?), but several features of the official forum stand out immediately to informed readers. These are largely tangents, but they may help paint a more accurate picture of the current users of Bitcoin than the official forums would:

Bear in mind that there is no official Bitcoin™ entity behind the currency and the block chain.  It truly is a distributed, P2P, grass-roots effort.  What you get from these forums are the ravings of a deeply heteregenous bunch of individuals acting as such -- individuals.  We do not get kickbacks from The Bitcoin Cabal™ and I reckon very few people on these forums even have any education on economics and finance.  If you go down the road where you think that popular anonymous discussion on an open forum should be liable to accusations of fraud, then you're seriously misunderstanding the nature of the Internet.

b. More obviously, the official forum is filled with disturbing and juvenile, extreme anarchism. Comments like "I reject all systems of human morality and law" are common. Uses of Bitcoin to encourage trading in illegal goods and services are routine; even "assassination markets" are encouraged. Bitcoin as a virtual currency probably does not threaten governments the way that some novices initially imagine upon hearing about the technology, but when the only people buying Bitcoins are (1) engaging in illegal activities, (2) anarchist teenagers who want to promote the technology for ideological reasons, and (3) speculators, sound investors like those in the Fatwallet crowd would be well advised to stay away. To a mainstream community of investors, however, the deranged rants that are commonplace among early Bitcoin adopters are perhaps reason alone to hesitate to adopt the technology.

Yeap, here I mostly agree.  It does get very tiring to come across the same infantile rants again and again, and I fear a large portion of this community suffers from a serious case of epistemic closure.  Moreover, I'm pretty sure that if the present incarnation of Bitcoin is to fail, this will happen in large part because it was unable to grow past the juvenile philosophy of a large portion of its early adopters.

[jon_smark]

6. Probably less significantly, but still interestingly, the Bitcoin block chain has now been demonstrated by at least two good analysts to be able to store arbitrary data "steganographically." This means that the Bitcoin block chain can contain arbitrary contraband, so that merely by running the Bitcoin client, you may (at least theoretically) be propagating child pornography, Wikileaks, and other material in the style of Freenet and other distributed storage systems. This is more theoretical than practical at the moment, but it is disconcerting. How popular would VISA cards be if (say) 4% of them contained contraband information encoded in the holograms on the front of the cards?

As you noted, this is indeed less significant, even if a bit disconcerting.  However, bear in mind that nothing prevents someone from steganographically embedding whatever "forbidden" data into a photograph used in a newspaper, for example.  Yet no one seriously defends abolishing newspapers to prevent that from happening...

An interesting side note: if the mathematical constant π (3.14159...) turns out to be a normal number like many suspect (it has not been proven yet), then for whatever natural number N you will be able to find embedded within π all possible binary strings of size N.  Which means that all copyrighted materials ever created, all the sickest forms of porn, all classified state secrets, etc, etc, will be found somewhere in π.  Should we ban circles too?

[Vasili Sviridov]

OH MY GOD, I DID A `cat /dev/urandom` AND THERE WAS CHILD PORN THERE (somewhere, anyway). COMPUTERS ARE DOOMED!!!

[unk]

uh, guys, this isn't the ComputerScientist who has been posting elsewhere. see http://www.fatwallet.com/forums/finance/1090435/?start=249

most of what he has been saying around the web is accurate and interesting, and those of you with the angry tirades are dismissing him and ben laurie way too easily. unjustified inferences that CS is a student are unhelpful, and who cares if he is anyway? i strongly suspect that he isn't, as he's given several credible indications of being around on the internet in the mid-1990s. he is plainly competent and honourable, or at least very good at pretending to be those things.

benjamin, your tone is very offputting in its arrogance and stridency. technological attacks against an economic system can be quite important in evaluating the system. as for the law, the american legal analyses that have been shown to the forum so far do suggest that bitcoin is likely a security, or at least could be. 'what is a security' is a very difficult question to answer, and the law doesn't accept answers by mere assertion.

as i've pointed out in other discussions, you're talking as cultural conservatives, as if bitcoin is perfect and has already achieved all its goals. it's remarkable to me how quickly the forum consensus got to that point, and benjamin is a good example of it. if we prevent ourselves from learning from anyone with real experience in these matters, it's our loss.

as for the forums, it's not hard to find statements as mental as that quote. just casually poking through the histories of people posting in this very discussion, it took me 20 seconds to find this from JohnDoe: 'Basically I'm close to anarcho-capitalists/agorists except that I completely reject morality, law and the existence of rights'.

[matonis]

I really don't know what this ComputerScientist guy is all disturbed about. All I wanted to do was to trade some hash cookies with my international friends.

[unk]

the 'all it is is data' argument ignores all law and policy. and you're all misunderstanding the argument about embedding rogue data in the block chain, which is a serious enough concern that satoshi acknowledged it.