Markets tank; US Marshal to auction SilkRoad coins; GHash.IO and the 51% attack; Bit-thereum

Hi Everyone,

This week markets fell from $650/BTC to $550/BTC yesterday before oscillating between $570/BTC and $610/BTC before ending at $590/BTC where it sits right now.

Some believe this crash to be the result of the US Marshall announcing an auction for about 30k BTC of the Silk Road seized coins.  But I don't think this is the case.  First, the re-introduction into circulation of 30k out-of-circulation BTC is a very small fraction of the total 12.9m BTC that exists (let's say 80% of this is in circulation i.e. not lost, not belonging to a deceased person, not belonging to Satoshi).  The price impact of that (including strong 10x ripple effects) should probably be no more than $20 down.  Second, since the announcement in January that the US Marshal would likely be auctioning off the seized coins, the market expectation for the auction should have mostly been priced in i.e. a 90% probability of the auction happening now becomes a 99% expectation instead of starting at 0% expectation.  Altogether, the price impact of the auction announcement this week should have been safely less than $5 by my estimates.

More information about the auction:
  • Bitcoins will be sold in blocks of 3000.
  • $200k must be wired over as a deposit for a seat at the auction.
  • Winning bidder must wire over bid sum within 1 day of winning the auction. Otherwise his/her $200k deposit will be forfeit.
  • The auction will be held online.
  • It does not specify what the auction style will be (e.g. English, Dutch, first-price sealed-bid, Vickrey).  On a side note, I prefer the Vickrey auction because truthful bidding dominates all other strategies (e.g. bid shading to avoid the Winner's Curse) and it saves time since only one bid per participant needs to be placed.  For anyone interested, you can read more about it here:;
  • For more information on the US Marshal auction:
In other news:
GHash.IO recently crossed 50% of the network hashrate spurring concern of a 51% attack.  Most core developers and bitcoin veterans have said that this is nothing to be concerned about since the 51% attack is only theoretical and in practice, the mining pool with 51% has a much greater incentive to continue mining honestly and reaping the benefits of the block rewards and transaction costs rather than completely undermine the network for a double-spend.  For a double-spend to be worth it, the size of the transaction must be of a magnitude greater than the discounted future value of honest block production over the course of bitcoins future life.  For all practical purposes, it is extremely unlikely for this situation to arise.  It's also worth remembering that a 51% attack does cannot create coins out of thin air or manipulate ledger balances, it only allows for double-spending with inevitability (i.e. inevitably the 51% pool can outrace the rst of the network in block production in the long run).  I agree for the most part with this assessment.  However, I am still uneasy because a pool having 51% of the network hashrate causes the bitcoin protocol to become more "fragile", in the Nassim Taleb sense.  Should the 51% pool get hacked or seized by some malicious actors, the normal and rational incentives of the pool operator may not matter.  On the bright side, any evidence of an actual double-spend would cause many pool participants to leave the pool so even in the worst of the worst cases I don't see more than a few double spends happening.  In fact, the reason why GHash.IO can't maintain 50% of the network hashrate is because every time it crosses 50% or gets close, many pool participants leave of their own volition.

In Gavin's recent post, he begins by saying that although Ethereum has some great properties like funds bound to contracts, arbitrary code and state, it's complexity may be unnecessary and ultimately lead to security problems.  Instead he suggests a sort of bit-thereum whereby many of Ethereum's good features can be implemented on top of the bitcoin protocol so long as we permit contract verification by a set of semi-trusted oracles instead of the entire network.  Since most interesting contracts would require data from outside the blockchain(bitcoin)/blocktree(Ethereum) anyway, even an Ethereum system would require trust at some point to arbitrate these types contracts (e.g. contracts based on the price of bitcoin on an exchange).  So the only real loss in having a bit-thereum oracle system instead of Ethereum would be the requiring of trust to verify contracts which are based entirely within the blockchain (e.g. contracts based on bitcoin transactions from address to another).  Gavin goes on to talk about incentive structures for the oracles and for those using the oracles.  You can read more about it here:  Also check out RealityKeys for automated oracle systems and dispute mediation (, Orisi for distributed oracle systems for cryptocurrency contracts (, and Truthcoin for decentralized bitcoin prediction markets (

Kevin & Team Buttercoin
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Bitcoin Rallies on Strong Fundamentals

Hi Everyone,

This week the rally has continued but slowed with bitcoin trading between $630/BTC and $680/BTC.  The calm trend up was punctuated with a few intermittent mini-spikes and mini-crashes.  Currently bitcoin is trading at around $650/BTC.

The rally this week could be attributed to a number of factors.
  • Apple lifted its ban on bitcoin apps.
  • ECB takes deposit rate negative in a historic move:  No mention of QE but some suggest that the option is on the table.  On the ECB announcement, bitcoin jumped about $15: 
  • As per a conversation I had with a friend, Pantera Capital may be been converting their $147M (as per their Dec filing) fund into bitcoin.  This may have even started during the three weeks of stability at $450 or even earlier.
In other news:
  • Erik Voorhees reached a settlement with the SEC to pay a little over $50k on charges of selling unregistered securities with his virtual IPO of SatoshiDICE (bitcoin gambling) and FeedZeBirds for bitcoins:  Last July, SatoshiDICE was sold for 126,315 BTC or $12.4mm at the time.  I remember that on the day of that announcement, bitcoin markets tanked on the anticipation of SatoshiDICE investors selling some portion of their coins once they got their distribution from the sale.  I also remember that two weeks later when the coins from the sale were actually distributed, the markets fell some more.  In any case, SatoshiDICE was the first of its kind in that it was the first provably-fair bitcoin gambling site and it paved the way for future provably-fair gambling sites like Just-Dice (On a side note, Just-Dice allows investors to stake the house and get 90% of the house's winnings. The house edge is 1% so investors have an expected return of .9% for every time the house bank is turned over.  In the past year, investors have made 42.65% returns on top of bitcoin appreciation).
  • VC money continues to pour into the bitcoin space
  • Facebook approves cryptocurrency tipping apps:
  • IRS says no FBAR reporting needed for bitcoin:
  • Bitcoin provides incentive to crack time-release encryption:  Time-release encryption is basically purposefully crackable encryption that takes some predetermined effort/time.  At a high level, the encryptor calculates parallel hash chains using his multiple cores (e.g. 16 cores => 16 chains of SHA-256 hashing each with 2 trillion nodes).  He then obfuscates the chains such that the end of one chain is required for starting on the next chain.  This way, although he computes the chains in parallel, the decrypt must compute them in serial (i.e. it takes the encryptor 1 day to make a cryptographic problem that takes others 16 days to crack).  He buries the private key to a bitcoin address in the final node of the final chain.  So now whoever cracks his cryptographic problem gets the bitcoins.  Then he ties the secret he wants to time-release to the bitcoins' public key in such a way that should anyone find the private key and claim their loot, the secret is revealed.  This entire mechanism benefits from integrating bitcoin in this way because it gives people incentive to actually crack your puzzle so that your secret gets revealed on time.  Without bitcoin you could guarantee that a secret would take AT LEAST x amount of time to release but you had no guarantee that anyone would work on your puzzle to release the secret as fast as possible so there was no upper bound on how much time it would take for the secret to actually be released.

I read a study recently which compares the social, economic, and environmental costs of bitcoin with the gold and fiat money systems (  It looks at the costs of gold mining/recycling (including worker deaths), printing/minting paper/coin money, bitcoin mining, banking industry maintenance (ATMs, electricity, etc.), and more. The author finds that relative to the gold and fiat money systems, the bitcoin protocol's costs in the three categories of social, economic, and environmental are negligible, .11%, and .275%, respectively.  This supports my intuition that the benefits, rather than the costs, of bitcoin are likely to be the drivers of its viability since the costs are orders of magnitude too small by comparison to bind as a constraint worth considering (as an aside, the costs of automated, digital systems are naturally lower than physical systems; just avoiding the need for physical transport and human labor/administration saves big).  If you buy that argument and the argument that systems which are massively more efficient than incumbent systems ultimately win out (that major improvements in efficiency can attack and beat established network effects), we can take it farther and claim that, benchmarked to absolute fiat terms, it might still be profitable in the long run to mine bitcoin now at a loss.  But of course, at that point, you might as well just buy bitcoin instead.  To put it more clearly, if the net world benefits of bitcoin are greater or of the same magnitude as established forms of currency AND the net world costs of bitcoin are orders of magnitude less than established forms of currency AND in the human journey toward technological advancement, massively more efficient systems do succeed in replacing incumbent systems (even those with very strong network effects), THEN bitcoin could be severely undervalued.  Even though the argument is bit nebulous (it doesn't address how the adoption/transition actually happens), I think there's something there.

Kevin & Team Buttercoin
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Bitcoin Market Update 5/30

Hi Everyone,

This week markets continue to rally.  Since our last update, the market traded within the $570/BTC-$580/BTC range before shooting up past $610/BTC yesterday.  I would not be surprised if there was a correction in the short term back to $550-$600 as people who have accumulated coins under $500 may want to take profits.  Medium-term prospects still look strong.

Some news from the week:
  • DISH network is now accepting bitcoin through Coinbase making it the largest company by market cap which is accepting bitcoin for payment.
  • Truecrypt developers abruptly announce that development of Truecrypt will end and that it is not secure and may contain unfixed security issues.  This is particularly relevant for early bitcoiners who used Truecrypt to create encrypted volumes to store their bitcoin wallets private keys.  In the early days of bitcoin, Truecrypt was a go-to method for securing your bitcoins. Link:
  • A private meeting between the large players in the mining industry was held in Shenzhen.  The people present represented what some estimate to be 30-50% of the bitcoin network hashrate.  The meeting was aimed at fostering cooperation between the large mining operations in a fiercely competitive industry. It's interesting to note that since power costs are cheap in China and often subsidized, it makes sense that many mining operations have set up there.  Also having mining operations close to the ASIC factories, allows faster and cheaper shipping which matters when the difficulty is growing exponentially.  Link:
  • Darkcoin value crashed over 35% on issues with master node behavior causing the blockchain to fork repeatedly.  The developers responded with a hard fork which removed master node functionality.  They have yet to uncover the exact problem.  The price has since recovered slightly.  Link:
Last week, I mentioned that CoinJoin was just one of the major approaches being taken toward anonymity in cryptocurrencies; zero-knowledge proofs and ring signatures being the two other major approaches.  I'd like to take some time to compare and contrast these three approaches but, before that, why does anonymity even matter? When we think of anonymous transactions there is this connotation/undertone of illegal or bad behavior.  Yet, where anonymity would enable illegal activity, it would still be no different than cash.  But moreover, there are also perfectly legal reasons for why a person might want to disassociate from his or her transactions.  For example, in a country where drugs, gambling, or prostitution is legal but carries a negative social stigma, a person could use anonymous transactions to make payments without associating themselves to the activity.  In military operations, undercover agents in hostile and watchful environments could be paid and funded through anonymous value transfers.  On the other hand, there are times when not using anonymous transactions is preferable.  if you were paying your taxes and would like a very clear paper-trail for the auditors to examine if they come knocking.  My point is that different transaction types are useful for different things and we should allow people to choose what they want to use and we should allow the market to decide on the relative values of competing currencies with different transaction types.  Also, from a different perspective, illegal activity (e.g. drugs, subverting capital controls) can serve as a strong bedrock of support for the price and market cap of a cryptocoin even if you are personally against those activities.  Suppose you were an investor in 2001 before Apple released their first Ipod.  You believe that huge swaths of people will buy the Ipod to store their illegally downloaded music and thus sales will outperform expectations.  As an investor, it would be smart to buy AAPL even if you were personally opposed to illegal file sharing.  My point is that you should consider entire market demand for an asset and not just "legitimate" demand when estimating valuation.  

Many altcoins are just bitcoin clones with a few different settings for block generation time, number of total coins, etc. and occasionally a small innovation on how hashing or difficulty adjustment is done.  Most of these altcoins are not sufficiently differentiable or innovative to win against the network effects of bitcoin which already has such a large first-mover advantage.  However, sufficiently novel and innovative altcoins could become serious contenders for bitcoin in a few years.  Another signal of an altcoin's potential value is the quality of its development team.  Bitcoin has many powerhouses on its core development team while many of these clonecoins have the "get-rich-quick-type" of folks.  As technical issues and scalability problems arise over time, whether a cryptocoin can survive may depend on the abilities of its core team (often it will depend only on their foresight).  Given that the anonymity question is a difficult technical challenge, those working on it will likely be very capable (this belief is supported by how technically advanced the whitepapers for cryptonote and zerocash are).  Arguably, one of the reasons bitcoin was so extremely undervalued for such a long time was because it was hard to understand how bitcoin works (and it it were easy, it would have already been done).  For those reasons, keeping an eye on these anonymous cryptocoins seems worthwhile.

So now lets talk about Zerocash/Zerocoin/sk-SNARK.  Here's the whitepaper (but don't bother reading it; it's indecipherable):  As background, Zerocoin was originally supposed to be an extension of bitcoin before the Zerocoin team decided to build a new crypto altogether.  On May 18, they released the whitepaper on Zerocash.  To understand Zerocash, we should take a moment to understand zero-knowledge proofs.  A zero-knowledge proof is a proof of a statement which reveals no information about anything apart from the fact that the statement is true.  Let's take an example.  Suppose Peggy wants to prove to Victor that she owns 10 BTC.  She could point to 10 BTC in the blockchain and then move them all to a predetermined address and have Victor verify that it happened.  This is not a zero-knowledge proof because Peggy revealed to Victor which coins were her coins instead of the general fact that she owns 10 unspecified BTC.  A zero-knowledge proof would entail Peggy proving to Victor that she owns 10 BTC without revealing which 10 BTC.  The Zerocash construction relies on constructing these types of zero-knowledge proofs.  Here is a high level metaphor with a some hand-waving for how this works: Alice has 10 coins.  She sends 10 coins into the void getting back a receipt that shows she sent 10 coins into the void.  At some later date, she can redeem the receipt for any 10 coins which have been sent to the void (not her own coins).  The receipt is a zero-knowledge proof of Alice having sent 10 coins to the void.  There is some hand-waving here because apparently the amount itself can also be obscured.  Of the three main approaches to anonymity, Zerocash is the most anonymous.  There are a few drawbacks to the Zerocash approach.  Whatever party (e.g. Zerocoin Team) holds the private key used to initialize the accumulator must be trusted to destroy it.  Also, since the entire economy is obscured, if anything does go wrong, no one will know that the protocol has been compromised.  This would be as if in bitcoin, whoever holds the private key of the genesis block can just print bitcoins on discretion and no one notices what's happening because the blockchain is invisible.  This is a serious issue.  That's why many people think ring signatures are the most promising approach to anonymity.

Ring signatures:  CryptoNote whitepaper:  Implementations of CryptoNote include Bytecoin (which came first with a large insta-mine; insta-mine is like pre-mine except instead of people mining before it's released, it's heavily mined the instant it's released) and Monero (fair-mine branch of Bytecoin).  Right now Monero is the 26th largest cryptocoin on  The CryptoNote anonymity protocol is based on something called ring signatures.  As I understand it, this is how ring signatures work: Alice generates a private key and public key.  Bob takes Alice's public key and offsets it by some random number to generate a one-use public address and sends over some coins (sort of like how stealth addresses work).  This is done in a way such that only Bob is able to retrieve the those coins with his private key.  Alice signs the whole transaction with a ring signature which proves that some member of Alice's group sent the coins but does not identify Alice in particular.  Although this does not provide complete anonymity, it still provides some (more the larger the ring-signature group is) but it's superior to CoinJoin in the sense that it does not require some central master node or obelisk server and arbitrary amounts can be sent at any time without needing to wait for other mixers with whom to mix transactions.  It's also preferable to Zerocash in that it does not require trust of some initializing party and any compromises would be detectable since the economy is not entirely dark.  Also, Monero is working code while Zerocash is still, at this point, vaporware.

Kevin & Team Buttercoin
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Bitcoin Market Update 5/26

  • Bitcoin up.
  • Darkcoin up very much.  Darkcoin has a distributed implementation of CoinJoin, an anonymizing mixing process, as well as a few other features.
  • Ripple down very much on founder announcing he will dump his holdings.
  • Suspicious activity in Gox trading logs suggest possible cause for Apr and Nov bubbles.
This past week markets have been rallying strongly from around $450/BTC to over $580/BTC with a brief pause Thursday at around $495/BTC and Friday/Saturday at around $530/BTC.  After over 3 weeks of consolidation at around $450/BTC, it seems that demand is once again outpacing supply.  Actually, given that 25 BTC are introduced into the economy every 10 minutes or so, the fact that the price stayed at $450/BTC for so long likely showed that consumer demand was slightly outpacing the rate at which merchants could sell.  An alternative explanation could be that many merchants have started holding onto their bitcoins without converting them back into fiat.

A curious thought I had recently was that since Bloomberg started tracking bitcoin at the end of last month, many more eyes in the financial sector must have since started watching it.  I could see some traders, brokers, and bankers who've heard of bitcoin but never made the jump now taking a more close and serious look (maybe during their lunch break) at the bitcoin charts on Bloomberg which ultimately caused them to make the jump.  A 5000% yearly return is more than enough to catch a few Wall Street folks' interests.  And it's one thing to hear the number and another to see it as a chart on Bloomberg.  And a lag of a few weeks seems like a reasonable amount of time to for people to familiarize themselves with bitcoin and deal with the logistics of moving money into an exchange.  That's one narrative of what triggered the rally but who knows.

Outside of bitcoin, Darkcoin, an altcoin focused on anonymity and privacy shot up almost 100% in market cap (and price as well) this week.  This is largely due to a transaction anonymizing feature called DarkSend (based on a distributed implementation of CoinJoin) which disassociates senders from their receivers.  Darkcoin also uses X11 which is a combination of 11 different hashing functions in it's proof-of-work (as compared to bitcoin's single hashing function, SHA-256) as well as a variant of the Kimoto Gravity Well (fast difficulty retargeting after every single block) called Dark Gravity Wave (I don't know who comes up with these names).

DarkSend involves senders pooling their funds together and electing a master node among themselves based on a predetermined random algorithm based on the blockchain history.  The master node then creates a transaction which would take the inputs of all pool participants and send them out to the appropriate outputs, mixing the transactions in the process.  Then each member of that current pool signs the transaction to make it valid (requires all signers to sign; multi-sig n of n) once they see their personal outputs are correct in the transaction.  If the master node creates a fraudulent transaction, the pool participants simply refuse to sign.  There are also incentive structures in the form of collateral payments which keep the system honest (i.e. punish the pool participant when he/she fails to sign a legitimate transaction or hangs the mixing process; punish the master node for creating fraudulent transactions).  That's the short version.  You can read more about it here:

The Kimoto Gravity Well (KGW) was invented by the creator of Megacoin as a solution to a difficulty adjustment problem many altcoins were facing at the time.  Imagine a situation where difficulty readjustment happens every 2056 blocks for a new Proof-of-Work altcoin with very low total network hashing rate.  One day the price goes up and it becomes profitable for multipools (multipools are mining pools which move around mining the most profitable coin of the time) to mine this new altcoin, driving up the hashing rate and subsequently the difficulty to new highs.  Once the difficulty readjusts, the multipool leaves and goes back to mining some other coin which is now the most profitable coin for it to mine.  Now this new altcoin is now stuck on an artificially high difficulty with a low network hash rate and must trudge through 2056 blocks of very slow block production.  Clearly, this is a problem.  These days, almost all new altcoins use the KGW difficulty adjustment algorithm or some variant of it to avoid this problem.  The Dark Gravity Wave (DGW) algorithm claims to address some of the recently found exploits in the KGW, namely something called the Time Warp Exploit (  Outside of a potential patch of the Time Warp Exploit, DGW does not seem to have any meaningful innovation on top of KGW though it is claimed to adjust faster and more accurately to hashrate manipulation.  On a sidenote, Dogecoin uses a variant of KGW called DigiShield.  You can read more about KGW here:

X11 is a hashing algorithm consisting of 11 different chained hashing functions (blake, blue midnight wish, grostl, jh, keccak, skein, luffa, cubehash, shavite, simd, echo) including the 5 finalists which competed for the designation, SHA-3 (  The idea for using multiple hashing functions is that should any single one become cryptographically compromised, the whole protocol still stays secure.  On the flip side, in the event SHA-256 becomes weakened or broken, the whole of the bitcoin protocol becomes compromised.  With multiple chained hashing functions, the cryptocoin becomes more robust to that type risk.  I should also mention that having a handful of hashing functions should suffice.  11 functions seems overkill since each additional function gives diminishing marginal value.  On a sidenote, there is a PoW-PoS hybrid coin which uses this X11 hashing algorithm for its PoW component called X11Coin whose price went up over 70% in the past 24 hours.

In other news, Ripple XRP fell over 50% on an announcement by founder Jed McCaleb (also the founder of Gox before he sold it to Mark Karpeles; founder of eDonkey prior to that) that he would be selling his 9bn XRP stake (considering that the float is only 8bn XRP, that sum is massive and will likely, in the words of some, "crater the market") in two weeks.  See:  Jed had already left Ripple Labs in the summer of last year citing disagreements with the CEO (he begins to talk about this before catching himself and exercising more prudence: so this eventual selloff was not unexpected.  Since the announcement, Jed has taken a small amount of XRP and moved it as proof he controls the address which holds the bulk of his XRP as a way to show the community that he is who he says he is.  Since then Jesse Powell, founder of Kraken, has resigned from the Ripple board.  In Jesse's statement, he called out that the founder's allocation of 20% of the XRP in existence was "perplexing".  According to Jesse, when he approached the founders to return their XRP to the company, Jed was open while Chris was hostile.  Shortly after these statements, Jesse was served with a cease and desist by Ripple Labs:  It accuses Jesse of libelous statements against Ripple and collusion with Jed to destroy Ripple's credibility.  In response, Jesse posted the cease and desist letter online and gave a rather heated tirade, airing out the company laundry even further.  In his response he reaffirms that his statements were factual and calls out that Ripple, has in the past, used legal strong-arming to keep former employees from speaking up.  He also points out that his relationship with Jed has been nonexistent since Jed forced the board to choose between Chris and himself and the board, including Jesse, chose to side with Chris.  Jesse claims that his friendship with Jed was irreparably damaged by that event and that he chose to side with Chris because he believed it was in the best interests of the company even though he knew it would damage his friendship with Jed.  He also claims that it was improper in the first place for Jed and Chris to award themselves so much XRP that should have belonged to the company.  He also acknowledges that a selloff by Jed would crash the market price and jeopardize the next financing round so he tried to broker a deal between Jed and the Ripple board to no avail. More here:  My takeaway from this is that pre-mined cryptos are susceptible to these types of dumps.  I'm also inclined to believe the Jed/Jesse side of the story.

I'm sure most of you have heard about the Gox Willy Report that came out over the weekend:  It uncovers a bot dubbed "Willy" whose activity spread across multiple accounts but had consistent behavior of continuously buying some 10 to 20 BTC every 5 to 10 minutes at market price with 0 fees.  It also uncovers a user account dubbed "Markus" which seemingly buys BTC are random prices.  The author suggests that in fact, bitcoins were bought for nothing and the "fiat spent" field was simply populated by the previous entry in the database creating what looked like bitcoins being bought at random prices but were actually bought for free.  Apparently Willy came online for the first time just 7 hours after Markus was taken offline for the last time after 8 months of activity.  The author also notes that there are two versions of the trade logs: one full log and one anonymized log with user hashes and state/country removed.  In the anonymized log there is another peculiar difference in that the user id for Markus was lower (since the original user ID stood out as an outlier) and the "fiat spent" field had normal correct values.  Also, this anonymized log had an earlier creation date.  This leads the the author to suggest there was an inside job going on and this discrepancy was Karpeles covering that up.  While author's findings have merit, I hesitate to jump to these sorts of conclusions.  It's possible that someone compromised their system and were able to inject values into their database thus altering the logs.  It's also possible that Karpeles did manually edit the database to cover up a hack even if he wasn't the one to do it.  There are many possibilities here but it is clear that something is very strange about the trading logs.  The author also implies that Willy was responsible for the run up in November.  While Willy may have had some effect, others have pointed out that the run up to over $1000/BTC started in China:  Nevertheless, Willy representing 7% of Gox volume during the period certainly had a big part to play in the run up especially since its entire volume was in the buy direction.  In April of last year, the author finds other suspicious activity including many low account ID accounts from Japan with no trading fees buying up a good deal of BTC.  Strangely, the user hashes of these users don't add up to the hashes of the account owners.  Again the author suggests insider malpractice.  It's also possible that these were employee accounts which were allowed to trade for free and were created before they were assigned to said employees.  All in all, the report shed light on the peculiar behavior of certain bots and accounts on mtgox and I agree that it is fairly conclusive that Willy had a big part to play in the Nov run up.  As for how gox lost it's all its customers' coins, that part is still unclear.  For other interesting theories, check out;

Next week I will be comparing Darkcoin (CoinJoin) with other implementations of anonymous transactions like Bytecoin/Monero (ring signatures) and Zerocoin (zero-knowledge succinct non-interactive arguments of knowledge).  I'll also give my thoughts on why anonymity ultimately matters against a background of popular opinion that a cryptocurrency's anonymity (and ability to store value for that matter) is largely irrelevant compared to it's value as a payments solution.

Kevin & Team Buttercoin
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    Bitcoin Market Update 5/16

    Hi Everyone,

    This week markets have been trading between $430/BTC and $460/BTC.  Continuing this pattern for the third week in a row, vol is at an all-time low this year (exchange volume is also very low).  This feels similar to the quiet, low vol periods of 2012.

    This week in bitcoin news:
    • Bitpay raises $30m in a round led by Index Ventures.
    • Ebay and Paypal are actively considering bitcoin integration.
    • Circle releases a demo of their consumer product:
    Circle is offering an interesting consumer product.  They will be offering instant deposits/withdrawals from credit/debit, instant buy/sell, insured BTC storage (multi-sig, encrypted, geographically distributed) and no fees for any of that.  Instant deposit/withdrawals from credit/debit will be a very nice feature.  Chargebacks will likely be a hassle for them but I'm sure they will take precautionary measures to ensure that chargeback risk is a minimum and then, when it does happen, they will probably just take the loss as a cost of doing business.  Instant buy/sell is also a good feature.  Most likely they will be outlaying capital with each of the exchanges they use for routing customer orders and front the customer's order with their own capital while the customer's funds are in transit (they will likely batch customer orders to minimize frictional costs like wire fees).  Their storage solution follows industry standard practices and will likely be good.  Insurance on the vault, of course, begs the question, who is the underwriter? (I wrote extensively about the challenges of vault insurance in one of my earlier market updates).  If only the hot wallet is insured, they can likely underwrite it themselves given the capital they have raised.  If they have an external party underwriter, the expected value of having insurance will likely be negative and this is most likely a PR move.  On the point of no fees, I think one of two things is happening: (1) either they are willing to hemorrhage VC money to get user growth and will worry about monetization later (not a bad strategy; many tech companies in the growth phase do this) or (2) they are actually charging their customers up on the spread when they buy/sell (arguably this isn't literally a fee but semantically it's the same as a fee).  All-in-all I'm interested to see how it plays out for Circle.

    In world news, official Treasury International Capital (TIC) numbers on major foreign holders of US treasuries came out yesterday:  It shows Russia dumping about $20bn in March but more surprisingly Belgium (actually some private account located in Belgium) has been buying up a total of $200bn since October of last year making them the third largest holder of US treasuries as of March 2014.  So in December, the Fed tapered $10bn from monthly asset purchases ($85bn->$75bn), another $10bn in Jan ($75bn->$65bn) and another $10bn ($65bn->$55bn) in Mar all the while some private buyer in Belgium is buying up $200bn in treasuries?  The timing seems strange.  It seems to me that if this secret Belgian did not buy up treasuries, markets might have reacted more negatively to the taper which, at this point, looks artificially successful.

    Last week I touched briefly on applying a support vector machine to bitcoin market data.  This week I was able to refine my algorithm and can now consistently achieving an out-of-sample predictive accuracy of about 62%-63%.  I've run a series of batch tests on  different blocks of data, different discretizations of time, different features and different kernels (See: For certain feature sets, frequencies, and kernels work better than others so I've settled on a combination I believe to be the best.  There is strong consistency in results from different blocks of training data so this gives me confidence that there is something real and valuable here.  I should mention that even though 62%-63% accuracy seems very good, the true effectiveness of improved accuracy scales down exponentially the higher your accuracy gets.  That means that the improvement from 50% to 55% accuracy gives greater benefits than the improvement from 55% to 60% accuracy.  This is largely due to there being fewer large up and down moves and more small up and down moves, assuming larger magnitude moves are easier to classify by the SVM (which they should be).  Next week I'll be looking into multi-class SVM and also figuring out a heuristic for magnitude estimation given that the SVM is correctly predicting direction.

    Kevin & Team Buttercoin
    Bitcoin Trading Made Easy | 

    Buttercoin currently in Private Beta, if you'd like access right now apply here

      Bitcoin Market Update 5/9

      Hi Everyone,

      This week bitcoin markets have been relatively stable trading between $420/BTC and $460/BTC.  Currently, the price sits at $455/BTC.  In the middle of the week, some bad news came out of China with BTC China no longer accepting CNY deposits and it didn't drop the price very much.  By the next day, the price had already recovered from the small downturn.  Bad news from China seems to no longer have an effect on the markets so barring any drastic developments, I see the markets consolidating for a rally soon.  General market sentiment seems positive.

      Today I'd like to talk about a measure of "order flow toxicity" called volume-synchronized probability of informed trading (VPIN).  

      A good explanation and application of VPIN to the bitcoin markets can be found here:

      To give some background, order flow is considered "toxic" (from the perspective of the market maker) when it is largely comprised of informed directional trading as opposed to noisy, non-directional uninformed trading.  In the face of a lot of informed trading, market makers lose money as the price moves against their inventory after they are adversely selected against by traders with better information.  To compensate for this adverse selection (moral hazard), market makers go wide on their quotes resulting in larger spreads.  As market makers recede into the order book, flow becomes even more toxic (since to trade against a progressively wider spread, you must be progressively more informed) and this feedback loop continues until market makers exit the market entirely and liquidity dries up resulting in a steep crash (in theory, by symmetry, the price could sharply skyrocket too but in practice this doesn't happen).  What I've just described is a concept called probability of informed trading (PIN).  VPIN adds on top of this concept by measuring time in volume instead of clock-time.  What that means is that the time axis is discretized into equal volume-weighted ticks (e.g. 100 share volume) instead equal time ticks (e.g. 1 second).  The authors argue that this is a better way to measure time because it gives equal weight to time periods with the same amount of information density even if the periods are different in terms of clock-time.   VPIN is credited with predicting/forecasting the flash crash of May 6, 2010.

      In any case, it would be interesting to see more extensive work done on this area as applied to bitcoin markets especially as more market makers enter the space.  Already, there is, at least, one very distinct market making bot on Bitstamp which quotes $5 of size every 3 cents up and down the bids and asks with its best bid and best ask being a little over 1% away from each other (All the small .0111, .0109, etc. orders are from this bot):

      Currently, the algo does not seem very sophisticated but as more complex and professional algos show up, a VPIN model might serve as a good early indicator of near-term crashes.

      Unrelated to VPIN, I've been looking into applying a machine learning algorithm called support vector machine (SVM) to bitcoin market data.  SVM is essentially a binary classification algorithm which, in this case, tries to determine a pattern in the feature space (this feature space can consist of any features which you think might explain bitcoin returns like lagged returns, volume, rolling-vol, day of the week, the number of times a positive emotional word is mentioned in the same tweet as the word "bitcoin", or whatever) for classifying upticks versus downticks.  Preliminary results show a predictive accuracy of between 51% and 57% in classifying out-of-sample bitcoin returns.  These results are very cursory due to dependence on how time is discretized (e.g. 1 min, 2 min, 5 min etc.), the technical caveat that there are really three classes (uptick, even, downtick) instead of just two so I've had to do a 'hacky' tweak on the training data, and the fact that the feature space is relatively small and simple for now.  Also, I should mention that these types of algorithms are susceptible to black swan risk since they seek out patterns in historic data and would not be prepared for a unique and impactful event which has never happened before (e.g. Germany criminalizes the use of bitcoin, Amazon accepts bitcoin, etc..).  Given all of that, I think there is still value to be had here as long as we keep in mind its assumptions and limitations.

      Kevin & Team Buttercoin
      Bitcoin Trading Made Easy | 

      Buttercoin currently in Private Beta, if you'd like access right now apply here

        Bitcoin Market Update 5/2

        Hi Everyone,

        This week bitcoin traded between $460/BTC and $430/BTC ending at $450/BTC.  With the exception of a brief moment during the middle of the week which saw the price dipping to under $430/BTC, volatility has been low this week.  Not much action in the markets this week though a couple of distinct bots have joined Bitstamp's book.

        News this week includes:
        • MIT Bitcoin Project will give $100 of BTC to each student with the aim of creating a digital currency microcosm.
        • Bloomberg now shows bitcoin prices and charts due to popular demand from their clients.
        • Chinese bitcoin exchange FXBTC shuts down due to central bank pressure.
        • DarkWallet, a privacy-centric bitcoin wallet, releases it's alpha version.
        • OpenBazaar branches off DarkMarket, a proof-of-concept anonymous and decentralized marketplace (essentially a distributed version of SilkRoad).
        • Investor group Sunlot Holdings announces proposal for revitalization of mtgox.
        Regarding the Sunlot proposal for gox, the details are as follows:
        • In the proposal, customers (creditors) of gox would own 16.5% of the new entity.
        • Of the 200k BTC gox has remaining in it's vaults, it will be pro-rata distributed to all customers/creditors with a lock-in period of 1 year.
        • Of the fees collected by the new gox, 50% will go towards operational costs and 50% will go towards making creditors whole.
        • $10mm of gox's remaining fiat will be used to conduct forensic investigations and prosecute perpetrators of the hack/theft.
        • 10% of any recovered assets will be awarded to those participating in its recovery as an incentive bounty.
        Some argue that Sunlot is essentially giving themselves or their buddies $10mm to look for lost coins and then get a 10% cut of anything that's found.  Some suggest that Karpeles might even accidentally find a long-lost wallet himself.  Other than suspicions of vulture capitalism by Sunlot, the proposal seems reasonable if and only if revitalization is superior to liquidation which isn't obvious.  Arguments against liquidation include that gox might spend years in liquidation (especially since courts or officials responsible for the liquidation process likely have little expertise in bitcoin) before creditors get their money back and by going with a revitalization plan, creditors can get their fiat and BTC faster.  It's unclear which path is better though I personally favor a quick liquidation officially masked as restructuring but perhaps with a different and more favorable proposal than the Sunlot proposal.

        DarkWallet is the latest in innovative developments in the bitcoin world.  Features include the following:
        • Ultra-light-weight (Uses something called obelisk servers for all blockchain queries bypassing the need to initially download and verify the blockchain history. Headers can be downloaded in the background for simplified payment verification (SPV) without compromising immediate use given some level of trust of the obelisk server.)
        • Hierarchical Deterministic Wallets (allows the same functionality as Electrum where a user a wallet with unlimited addresses can be generated from a 12 word seed. Also see BIP32)
        • Multi-sig
        • Pockets (basically the ability to sub-divide your wallet into sub-wallets or pockets
        • Chat channel (hosted on an obelisk server)
        • Identity and contact management
        • Stealth Addresses (I talked about this in one of my earlier newsletters)
        • Automated mixing (CoinJoin:
        Given the various desktop personal wallets currently available, DarkWallet will be a strong contender going forward.  On an aside, for mobile wallets I like Mycelium.

        Lastly, if you don't already know, Buttercoin is currently in private beta.  If you would like to join our platform, please send me a line and I'll help set you up.  Also, thank you everyone for your overwhelmingly positive feedback on my weekly updates.  It encourages me to continue writing them every week to know that there is an active audience who reads them.  Also feel free to pass them around to anyone who might be interested.

        Kevin & Team Buttercoin
        Bitcoin Trading Made Easy | 

        Buttercoin currently in Private Beta, if you'd like access right now apply here

          Bitcoin Market Update 4/25

          Hi Everyone,

          This week bitcoin stabilized to the $480/BTC to $510/BTC range before dropping to the $450/BTC to $470/BTC range earlier today.  The drop was most likely due to an official announcement by China Merchants Bank prohibiting the use of its accounts for bitcoin-related transactions.  Given that this news affects fiat withdrawal (unlike earlier news which affected fiat deposits), some speculators likely sold their bitcoins and cashed out in anticipation of other banks following suit.

          It seems that most of the trembling-hand speculators have already exited the market and everyone else is getting acclimated and recalibrated to China's fickle behavior toward Bitcoin so that news related to banking and regulation in China will have diminishing effects as they surprise the markets less and less.  Barring any new material developments, I don't see the price going significantly lower.

          Maidsafe, an attempt at a fully distributed, de-centralized internet recently closed its pre-sale of MaidSafeCoin which represents 1:1 convertibility to safecoin, the transactional currency of the Maidsafe network once it goes live.  You can read more about MaidSafe here:  Interestingly enough, the pre-sale was available in both bitcoin and mastercoin at 17,000 SAFE : 1 BTC and 3400 SAFE : 1MSC.  This artificial and implied peg of 5 MSC/BTC led to MSC rallying from about $39/MSC to over $85/MSC.  Immediately upon the start of the pre-sale, large MSC holders dumped their MSC for SAFE and bought millions of dollars worth within the first few hours.  This prompted MaidSafe to close the mastercoin pre-sale so as to "leave some for the bitcoiners".    When the presale for MSC locked, MSC plummeted to $40.  Unfortunately, many bitcoiners had just sold their BTC for MSC in hopes of capturing value on the cheaper side of the peg and getting into SAFE that way.  Now, those who were slow to capitalize on MSC=>SAFE were left holding mastercoins worth less than half their peak/pegged value.  Bitcoiners who were slow got the worst of it as they bought MSC high and got locked in while the price tumbled.  This is a good example of the dangers of centralization (in arbitrarily deciding to close the presale to MSC) and in pegging one currency to another when the market disagrees (also see Argentina).  Arguably, MSC insiders made off with large profits and Maidsafe decision makers helped facilitate it.  As to whether the Maidsafe project itself will be successful, it remains to be seen.  It certainly is ambitious and there is good depth to the technical aspects but this botched pre-sale leaves me uneasy.  I will continue to watch for developments in this project going forward.

          Recently there has been a lot of buzz about Blackcoin, the first hybrid Proof-of-Stake (PoS) - Proof-of-Work (PoW) altcoin to fully reach the PoS stage where PoW has been entirely phased out.  So today, I thought I'd take some time to talk about PoS.  First a little brackground: Bitcoin, litecoin, dogecoin and the majority of cryptocurrencies are based on PoW, whereby doing work (expending electricity and calculating hashes) creates new blocks in the blockchain.  Those who show "proof of work" (valid hashes given the difficulty) decide on the official history of transactions.  PoS, on the other hand, generates blocks based on your stake or how many coins you own and how "old" those coins are (I mentioned in one of my previous updates the concept of coin-days-destroyed; this would be coin-days before they are destroyed in a transaction).  Those who show "proof of stake" decide on the official history of transactions.

          There's a few advantages and disadvantages with PoS.  On the pro side, transaction costs in the endgame will be significantly lower since the only cost of generating a block will be storage and bandwidth costs as compared to PoW costs of large quantities electricity (given a high hashing difficulty in the endgame).  PoS is more decentralized and mining pool oligopolies don't exist.  PoS is also more environmentally friendly since "energy" isn't wasted on hashing, a seemingly pointless exercise (arguably, environmentally friendliness has no material effect on how viable a cryptocurrency is in the long run from an incentive architecture perspective since the environment is a public good).  Finally, PoS is considered safer with respect to a 51% attack which would require an attacker to acquire not 51% of the mining power but 51% of the total coins which is much more expensive.  Also consider that the larger a stake someone has, the less incentive they have of undermining the system.

          On the con side, participating in the PoS staking process requires you to leave your wallet facing the network constantly and unencrypted which is clearly a security hazard.  Also, and more importantly, the incentives for participants break down during a fork in the ledger.  Whereas with PoW, a miner can choose to mine on only branch of a forked blockchain because mining power is scarce, in a PoS system, stakers can stake their coins on all branches of a fork (can be more than a 2-way fork) at the same time at virtually no cost.  You can prove to Branch A that you own the coins you say you own while also proving to Branch B and Branch C and etc.  If you believe that any of those branches has a non-negligible chance of becoming the official history in the future, you would want to stake your coins on every branch at every fork.  Also, if you, yourself, are a double-spender, you can stake your spent coins on a branch where you never spent them.  The possibly infinitely bifurcating transaction history of PoS is my main contention against its viability (in fact, Peercoin (the biggest PoS-PoW hybrid coin uses centralized checkpointing precisely to avoid this type of consensus bifurcation).  Some solutions have been suggested like Vitalik Buterin's Slasher algorithm:  Here staking in multiple branches is punished and whoever finds the cheater is rewarded.  Also it functions on a Proof-of-Stake-2000-Blocks-Ago instead of Proof-of-Stake-Now so you can only stake now if you can prove you owned the coins 2000 blocks ago.  The latter feature prevents a double spender from immediately staking the spent coins in a different branch unless he controlled those coins at least 2000 blocks ago.  There is also Transactions-as-Proof-of-Stake (TaPoS) suggested by Daniel Larimer:  It essentially decouples network security from network hashing rate by making double spending more difficult even when the difficulty and hashing rate of the network are very low.

          PoS is an ongoing experiment and new algorithms and incentive architectures are being thought up every week.  So far, I am unconvinced that current implementations of PoS are long-term viable (Peercoin, Blackcoin).  There are also some issues with Slasher and TaPoS but they are certainly improvements.  Personally, I've always favored pure PoW.  There's something intuitive about it.  To draw an analogy, suppose there was a material anyone could create by destroying gold and only by destroying gold.  Suppose that material had a good property which gold lacked (maybe it was lighter and uniformly came in the shape of coins).  It makes intuitive sense to me that such a material would have value and that part of its value would be derived from its scarcity due to its link to gold.  And people would have some incentive to actually create it by destroying gold because of its good properties.  With PoW, real value (electricity) is consumed/destroyed to produce a cryptocoin.  The comparison seems parallel.  With PoS, even if ultimately viable, just feels less scarce since nothing was expended or consumed for its creation.  PoS, if ultimately viable, also seems more prone to clone coins coming in and taking over market share. Whereas stake-based security is easily cloned by a new altcoin, mining hardware and thus PoW security cannot be duplicated out of thin air. Anyway, I'll be keeping an eye out for further developments in PoS.

          Kevin & Team Buttercoin
          Bitcoin Trading Made Easy | 

          Buttercoin currently in Private Beta, if you'd like access right now apply here

            Bitcoin Market Update 4/18

            Hi Everyone,

            This week we've seen highly volatile bitcoin markets.  Starting at the $420/BTC to $440/BTC range, the price shot up to around $540/BTC before settling back down to $486/BTC where it rests now.  As Chinese fears subside, the sentiment in the market has taken a turn towards optimism.

            In Bitcoin news this week, Second Market has opened its dealing desk to do block trades of bitcoin no smaller than 25 BTC per trade.  We have been openly quoting and receiving quotes from Second Market in these previous weeks prior to this for exactly this type of block trading and it seems now they are opening this up to a broader market though still not the retail public just yet.  Given the prices I've seen from them, they are looking to take a profit while dealing, have low immediacy, and are willing to deal on both sides of the bid-ask.  Currently, us and Bitpay seem to offer more aggressive quotes on large block trades but Second Market still offers a better quote than sliding through the various exchanges' orderbooks.

            Also worth nothing, mobile wallet Mycelium released their Local Trader feature which allows their users to find other Bitcoiners physically near them who are willing to buy and sell bitcoin.  It's functionally a Local Bitcoins marketplace for users of their wallet.  On the plus side, I like the disintermediation this sort of peer-to-peer marketplace allows.  On the con side, trades on their application and on Local Bitcoins for that matter often cost a premium for the added anonymity. Mycelium charges a .2% fee per trade.  Any interesting coincidence to note is that just as Mycelium was announcing their Local Trader feature, cases of coins being lost and stolen from Local Bitcoins started to appear.

            Today I'd like bitcoin aside for a moment and talk about the state of the American economy.  It seems to me unsustainable in the long run to continue our fiscal policy of quantitative easing, expanded social benefit programs, and a continuation of fighting proxy wars with Russia be it in the Middle East or Ukraine.

            The question with QE is whether it ultimately debases the currency through inflation and, directly related to this, is this "economic recovery" as seen in the rallying equity markets real? I personally believe that there is no free value to be created by the central bank printing money and what we expend now to "recover" and give us comfort from our 2008 recession must be paid for sometime in the future by inflation in full.  While official reports based on the CPI show inflation in the low single digits for the past few years (1.5%-3%), there has been some controversy on whether the weightings of the CPI accurately reflect the proportional spending of households on each expenditure type (e.g. housing, food, transportation, medical care, etc.).  When thinking about real inflation, we can do away with economic models and just reflect back to a time when goods and services were cheaper (particularly rent, tuition, and healthcare).  My memory of prices 5 and 10 years ago gives a different story than the low single digit annual inflation numbers reported.  Also this is just baseline inflation without considering the lagging effects QE might have on inflation in the future.  It is often the case that inflation lags the expansion of the monetary base by a few years.  It seems to me that this fiscal stimulus has failed to defibrillate our economy and soon the we will have to pay for that defibrillator we bought on credit.

            Currently 69% of all government expenditures are on entitlements and welfare (this includes medicare, medicaid, and social security).  Furthermore, most of these programs have expanded in the past few years.  Given that it is politically unviable for any politician to severely cut back on these social programs in a democracy, I see the trend of continued expansion inevitable.

            Where there is spending, there must be either taxes or deficits.  Taxes are a tricky issue since greater taxes cause capital flight.  Sometimes I feel that the government is killing the geese which lay the golden eggs.  Revenue can be generated by unexpected tax policy changes but eventually people adapt their behavior to the now expected tax policy to minimize their taxes.  They do this through a variety of ways including offshore account, tax loopholes, and foreign investments.  Eventually people even adapt to the expectation of unexpected changes in tax policy.  Also, as special interest groups on K Street gain power, the tax code becomes more convoluted enabling special loopholes and causing more lost revenue.  Deficits are fine so long as the country running them has an internal rate of return on capital at higher than the interest charged.  So long as we are productive with our borrowed capital, things should be fine but in times of economic strife and stagnation, deficits could bloom to unsustainable levels.  I wonder if Japan's decade of stagflation foretells our own country's future.

            Currently 18% of all government expenditures is for the national defense (or offense as I like to joke).  Much of this money goes into fighting proxy wars with Russia mostly over oil interests in the Middle East.  To the US's credit, we are becoming more efficient about our resources.  Inciting (possibly) and supporting a revolution costs much less than sending troops over to stabilize a region as we've learned with Afghanistan and Iraq.  Ukraine is a little different.  Right now Russia is attempting to annex the Crimea region of Ukraine, a region which is predominately ethnically Russian.  I say let Putin have it.  We've already gained greater Ukraine and any economic sanctions against Russia will only hurt both sides (albeit it will hurt Russia more).  Western Europe gets most of its oil from Russia with most of that flowing through Ukraine.  Also with Ukraine proper joining the EU, we will have gained another buffer state to Russia and they will have lost a buffer state.  Moreover, Putin is in a hard spot because of the strategic importance of Crimea as a major military port to the Black Sea.  Should Putin give up Crimea, he exposes the southern area of Russia to western military action and there will be anxiety for people living there in the same way that the Cuban missile crisis cause us great discomfort.  I think he cannot back down from Crimea.  In my opinion, physical war is the worst but economic war does neither side any good either.  Proxy wars are less expensive yet but cultural wars are even cheaper and not bloody for that matter.  Cultural imperialism is more permanent than physical or economic imperialism.  We should seek to convert rather than fight if our goal is a globalized world.  Already most of the world speaks English.  I wonder if one day we will all share a single currency as well.

            Kevin & Team Buttercoin
            Bitcoin Trading Made Easy | 

            Buttercoin currently in Private Beta, if you'd like access right now apply here

              Bitcoin Market Update 4/11

              Hi Everyone,

              It's been a rough week for bitcoin as Chinese exchanges (with the exception of BTC China) can no longer accept deposits through their banking partners driving the price down from the $450/BTC to $460/BTC to around $340/BTC before rebounding to $420/BTC where it sits right now.  Fiat withdrawals from Chinese exchanges are not affected.

              Altogether, I'm not worried in the least.  This crash event reminds me of when Silk Road closed down, causing a brief panic selloff before rebounding very quickly.  It seems to be happening in the same way which suggests that Chinese regulatory policy may not have much influence anymore on the bitcoin price given that most trembling-handed speculators were already pushed out of the market in the earlier fall from over $1000/BTC to $800/BTC during the first Chinese crackdown.  In other words, most of those left holding are strong believers of bitcoin since they didn't sell off during the earlier panic.  Very similar to those who held during the crash from $260/BTC to below $100/BTC except now those true believers are greater in number and have more capital invested.   

              I also suspect that market participants outside of China had bigger part to play in the selling pressure we saw yesterday than initially apparent.  It's possible that the crash was more of a reaction by the rest of the world to the news coming out of China in anticipation of how the Chinese would react rather than the Chinese actually reacting to it themselves and selling large quantities of BTC.  Like I mentioned before, most of the trembling-handed speculators in China had already been shed off by the earlier crash. Also a freeze on deposits is very different from a freeze on withdrawals in the sense that since neither BTC withdrawals nor CNY withdrawals have been affected, exchange users can at anytime pull out their assets through either of the two funnels and get out of exchange counterparty risk.  One of the reasons gox BTC traded so much higher than the rest of the market before they halted BTC withdrawals is because it was the only funnel to get your assets out and neutralize counterparty risk.  Users would trade their immobile gox fiat for BTC which they would then sell on other exchanges.  The cost for getting out of gox was the premium paid in the trade price.  As gox got more "risky", the premium increased.  Since a freeze on deposits does not affect a user's ability to exit out of counterparty risk, panic selling as a Chinese user on a Chinese exchange does not make much sense.  To sell, a user would have to believe that this latest crackdown foretells another crackdown in the future whereby withdrawals might be halted AND he/she would have to not believe in the long-term value of bitcoin otherwise he/she would just hold bitcoin instead of sell it.  The second contingency seems unlikely since most of the shaky speculators have already left the market, leaving mostly strong believers still in the game.  The first contingency also seems unlikely given that the stance of the Chinese government has always been to put a ring fence around bitcoin to prevent it from affecting the financial sector should it implode.  It would be counterproductive to halt withdrawals since it would lock capital in with the potential implosion.  In fact, a halt on deposits is very much in line with a "keep the bomb from getting any bigger" policy.  Ironically, this could have an unintended effect whereby a black market for BTC or peer-to-peer marketplace like localbitcoins could grow and thrive in China, allowing people to convert CNY to BTC freely.  Also, by making it difficult for the Chinese to buy bitcoin, it will only increase the incentive for them to subvert capital controls and buy those bitcoins overseas.  The government loses out on tax revenue, faces more money laundering problems, and could push their exchanges out of the country.  Regulatory arbitrage is real; one needs to look no further than the many offshore jurisdictions so many companies use for incorporation and banking.

              In other news, there has been some buzz in the bitcoin community about sidechains.  Sidechains would effectively replace altcoins and bitcoin-2.0-esque creations like mastercoin/ethereum.  Sidechains involve something called proof-of-burn which Counterparty XCP helped popularize.  These sidechains would also benefit from the hash rate and difficulty of the bitcoin network.  Proof-of-burn is where bitcoins are be sent out to an address which no one controls and an alternative coin is produced based on some fixed peg to the amount of BTC burned (e.g. one to one or one to two).  Then transactions can happen on the altchain and eventually those alt coins can be redeemed for bitcoins based on the set peg.  The logistics of this get tricky if redemption (burn plus redemption for a two-way process) is desired since it would require changing some parts of the core bitcoin protocol.  The burning part (one way process) is easy and can already be done.  Some drawbacks of sidechains include a reorganization of the sidechain should the blockchain reorganize (due to the orphaning of previous main chain blocks).  Also theft would be possible on a sidechain if there was a 51% attack within the sidechain as opposed to how blockchains currently work where a 51% attack would enable double-spend attacks but not outright theft of held coins. More on this as I learn more.

              Kevin & Team Buttercoin
              Bitcoin Trading Made Easy | 

              Buttercoin currently in Private Beta, if you'd like access right now apply here