Bitcoin Markets Blog

Periodicity of Volatility in the Bitcoin Markets and Risk Management

2015-02-26T00:43:07Z

Hey Everyone,

Today I'd like to talk about the periodicity of volatility in the bitcoin markets and how it might affect how you place stop orders.

First, it's long been noted that volatility in the equity markets form a U shape throughout the day. Volatility during the market open and close are the highest with a pronounced lull in the middle of the day (some half-jokingly say due to traders taking their lunch). Similarly, intraweek volatility also shows a U shape for many asset classes with Mon and Fri being the most volatile and Wed being the least though this effect is not as pronounced as the intraday effect. Outside of these short term cyclical effects, some traders have noticed an October Effect (a number of market crashes happened in Oct so there may be some psychological effect here) and a January Effect (people dump losing positions for tax reasons in Dec and buy back into the market in Jan) but these effects are related to returns, not volatility, so we will not focus on them.

So it begs the question, do the bitcoin markets display periodicity in return volatility too? Some traders on TradingView have found that large price moves often happen during and slightly before the New York and London open and closes. If that's the case and if your trading strategies have a timeframe longer than a single day, it might help your risk management processes to factor out this persistent and periodic noisiness in returns during those times. For example, if you believe bitcoin will go up over the next few days but you also want some downside protection in case you are wrong so you place a trailing stop 3% below the current price, you don't want random noise due to these New York and London "kill zones" to stop you out of your position when your trading idea over a longer timeframe was sound and the general market trend agrees with you. Rather it would be better to have a dynamic stop which periodically adjusts for the extra volatility during these kill zones by going proportionally wider below the then current price during those specific times. The longer the timeframe of your trading strategy and the closer you want to put your stop next to the current price, the more important this concept becomes. If your timeframe is longer than a week, it might also help to apply this concept to intraweek periodicity (e.g. weekends are less volatile than weekdays).

Outside of managing risk in trading the underlying, once options markets develop in bitcoin, understanding the periodicity of volatility will help options market makers know when to widen their quotes and by how much, which can directly lead to less adverse selection and subsequently greater profits.

References:

Intraday volatility in FX and equity markets: http://public.econ.duke.edu/~boller/Published_Papers/joef_97.pdf
Bitcoin Kill Zones: https://www.tradingview.com/v/zZYED4fH/

Cheers,

Kevin & Team Buttercoin

Hope you enjoyed this week's post. If you did please up-vote / like / share :D. And if you’re a bitcoin trader, come visit us at Buttercoin for free bitcoin trading.

A Falling Bitcoin Price

2015-01-08T00:57:08Z

Hi, I’m Kevin Zhou, Economist at Buttercoin a Silicon Valley / Wall Street backed Bitcoin Marketplace (sign up here). Every week we take a look at what’s happening in Bitcoin and share it, here’s the latest.

This week markets dropped from $320/BTC to $260/BTC amidst the Bitstamp hack before rebounding a bit to $300/BTC. As I'm sure you all know, Bitstamp's wallets were compromised with an official announcement on Monday. With the drop in price a day or two before this announcement, some suspect that there was insider knowledge of this breach and that this was responsible for the selloff.

Difficulty is set to go up by 12.5% in the next adjustment which suggests the past two weeks have seen the fastest block generation speed since early November. Some of the selling pressure in the past two weeks can be attributed to this. On top of that, end of 2014 may have seen some bitcoiners sell for tax reasons. Of course we have to net these selling pressures against the increase in consumer demand related to google search volume spiking at the end of last year (mostly due to the Bitcoin Bowl): .

On a longer time horizon, bitcoin has dropped by about 60% over the past 6 months. Some suggest this is due to dollar strength. I think this can only account for a fraction of that effect. The trade-weighted dollar index over the past 6 months shows about a 10% gain in dollar strength. Moreover, dollar strength is arguably just euro and yen weakness rather than anything intrinsic to the buying power of the dollar.

Looking forward, a miner on /r/bitcoinmarkets shares his insights on mining economics and the mining industry in general: http://bit.ly/1zV4ruP. He suggests that at a super efficient 5 cents/kwh (including hosting, electricity, employees, and other marginal costs) and the current difficulty (pre 12.5% jump), the marginal cost of bitcoin production is around $70. He also suggests that most mining farms are well above that cost (e.g. ASICSPACE at 10 cents/kwh). This suggests that the less efficient miners will get pushed out of business soon and margins are shrinking at a rapid rate. He continues that the Chinese have stopped building mining farms since their electricity is too expensive. Mining will continue to consolidate to the most efficient mining operations with the cheapest costs. He suggests that Bitfury is currently one of the most efficient, weighing in at 5 cents/kwh with their self-run datacenter in Georgia. Not much is known about 21e6's cost basis. This is all very reminiscent of GPU mining saturation in 2011.

Other News:

Japanese police suspect gox was an inside job: http://bit.ly/14qwgTc. I'm not fully convinced that this was an inside job but I do think the missing coins are very closely related to the 2011 crash to $.01/BTC on gox. Whether it was a hack or an inside job, it wouldn't surprised me if Karpeles covered it up in hopes of making customers whole through collecting trading fees by keeping operations open.
Bitmex launches their BVOL series, 30-day historic volatility futures contracts: http://bit.ly/14rAGd7. It's good to see these kinds of structured products come out. I expect more structured products to be developed in the coming year.
Cointerra defaults: http://bit.ly/1BJyh7O.
Vault of Satoshi closes: https://www.vaultofsatoshi.com/. The team there has been working on a new project and, in light of some success, chosen to pursue that opportunity instead.

With so much blood on the streets from a year of a falling bitcoin price and the latest downturn from Bitstamp and with a sentiment of despair and nausea in the air, it may be a good time to buy some cheap coins. Over a time horizon of a year or two, even with the remote possibility of the price dipping down to the marginal cost of producing a coin (i.e. sub-100) in the interim, I am bullish on bitcoin price. Better infrastructure, significant merchant adoption, increased awareness, increased fiat troubles around the world and an increase of talented people working in the space suggest long-term prospects are good.

Cheers,
Kevin & Team Buttercoin

Hope you enjoyed this week's Bitcoin recap. If you did please up-vote / like / share :D. And if you’re a bitcoin trader, come visit us at Buttercoin for free bitcoin trading.

How the US Marshal Bitcoin Auction Affects the Market

2014-12-08T22:00:12Z

This week markets traded between $365/BTC and $385/BTC. Volatility has remained low with the exception of a sharp but minor drop on 12/4 from $375/BTC to $365/BTC. Trading volumes continue to decrease.

News this week:

Second US Marshal bitcoin auction closes: http://bit.ly/1vxswoF

50k BTC were auctioned off.
11 bidders present.
Tim Draper wins 2000 of them.

In an Australian Senate Economics Committee inquiry, Mastercard argues for stronger regulation of bitcoin: http://bit.ly/1vFPRJP

This was shortly followed by a video: http://bit.ly/1z0puy9

Coinjar relocates to the UK due to unfavorable bitcoin tax environment in Australia: http://bit.ly/1ubRj2f
Rep. Steve Stockman introduces bill to impose a moratorium on new legislation regarding cryptocurrency for 5 years: http://bit.ly/1I5hK2T

Also calls for bitcoin to be treated like a currency.
For tax purposes, the creation or purchase of bitcoin is not immediately taxable based on "fair market value" but only taxable after converting to fiat. Only then is net gain/loss calculated.

3 top Dutch banks experiment with blockchain technology: http://bit.ly/1w6CQce
Venezuelan congressman Guido Ochoa buys HashFast in bankruptcy sale: http://bit.ly/1G9c2JI
Blockchain.info's random number generator was compromised for a brief moment yesterday resulting in unsecure private keys being generated on behalf of customers: http://bit.ly/1wUbOGO

Losses total around $100k.

BTCT and owner/operator burnside fined $68k by SEC for violating securities laws: http://bit.ly/1vFPXkT
A good explanation of block withholding attacks on open pools: http://bit.ly/1w6CTon

Open pools are intrinsically vulnerable to block withholding attacks by solo miners and other pools.
This can be somewhat mitigated by giving a disproportionally larger reward to members which find the actual block in a pool but it cannot be completely solved for open pools.

This week, I'd like to delve into the second US Marshal bitcoin auction and how it affects the market. Markets should only react to new, unexpected information. The expectation that these Silk Road seized coins would be auctioned off by the government had already formed to some degree on the day the coins were seized and further confirmed by the first US Marshal bitcoin auction. Thus the event of the second auction, itself, should have little market impact because it was, with near certainty, expected by the market.

There are broadly two types of bidders in the auction. Those who bid under market price (short and long-term value seekers) and those who bid above market (long-term investors). If an underbidder wins, they could either sell the bitcoin into the open market to lock in some profit or hold onto the bitcoins for a longer period of time. Both of these behaviors are reasonable. However, if an overbidder wins, the only reasonable behavior is to hold. This is because the only reason someone would bid above the current spot price is because they are seeking to take a sizable long position in bitcoin while incurring less slippage than if that position was bought in the open market. There would be no reason for someone to bid above market price only to win the auction and immediately it sell back to the market at a loss.

Therefore, if an overbidder wins, we can be reasonably sure that those coins will not be dumped onto the market and create selling pressure. If opinions about the market are distributed between pessimistic on one side and optimistic on the other, you would expect that some people belong to the pessimistic side and some others to belong to the optimistic side and most people are in the middle. If everyone was on the price-pessimistic side, some of them would just sell into the market until both sides become roughly balanced. So of the 11 bidders, we can expect some of them to be underbidders and some of them to be overbidders. This is expectation is amplified by the fact that some of the 11 bidders represent syndicates composed of many smaller bidders who all likely have differing sentiments about bitcoin price. A lopsided 9-2 split is more likely to happen purely by chance than a 900-200 by chance. In light of that, I expect most of the auctioned coins to be won at above market price and for those coins not be be dumped for some significant time.

Up until now, we've considered how auction winner behavior affects post-auction price. How about the effect of expected winner behavior on pre-auction price? If we expect most of the auction to close above market, does that lead normal market participants to buy and pump up the price knowing that there will likely be someone who bought at a higher price than them, who will not sell below that price? Intuitively that might make sense but I would argue that it can't be the case. Overbidders by definition are willing to pay more than the rest of the market so the reciprocal is also true: the market is only willing to pay up to a point less than the overbidders' price point. The market sees the overbidder as overpaying in a sort of short-term winner's curse even if the overbidder ends up being right in the long run.

Therefore, I think we can reasonably assume:

The market expected the government to auction off those coins and continues to expect that the rest of the seized coins will be auctioned off at some time in the future.
A significant majority of the auctioned coins sold at a premium to market price.
Those coins won above market price will not be dumped in the near future.
Market price is a better reflection of short-term "true value" than the price at which the auction closes.

The last thing we haven't considered is that some bidders could trade on the open market leading up to the auction to influence the market price and subsequently the auction closing prices. This is worth exploring further.

Cheers,

Kevin & Team Buttercoin

Bitcoin Trading Made Easy | Buttercoin.com

Hope you enjoyed this week's Bitcoin recap. If you did please up-vote / like / share :D. And if you’re a bitcoin trader, come visit us at Buttercoin for free bitcoin trading.

Bitcoin Difficulty Suggests Rally

2014-12-01T04:11:39Z

Hi, I’m Kevin Zhou, Economist at Buttercoin (sign up here) a Silicon Valley / Wall Street backed Bitcoin Marketplace. Every week we take a look at what’s happening in Bitcoin and share it, here’s the latest.

Every week we start by taking an overview of the market, followed by recent and notable news in the bitcoin space and finally a closer look at some part of the bitcoin ecosystem. This week we focus on bitcoin difficulty slowing its ascent and its effect on the markets.

This week markets traded between $360/BTC and $395/BTC. Trading volumes have been moderate and volatility has been relatively low.

News this week:

Western Union sees backlash after claiming copyright infringement on bitcoin spoof ad: http://bit.ly/1tjilEd.
Kraken was selected to aid in the mtgox liquidation: http://bit.ly/1tCjbLI.

Liquidation will likely be quick and both gox creditors and Kraken stand to benefit.
Gox creditors get some portion of their money back while Kraken gets an influx of new customers.

Approximately 70% of bitcoins have not moved in 6 months: http://bit.ly/11GsW4R.
Switzerland will treat bitcoin like a currency: http://bit.ly/1yyF8S8.
Dutch official says bitcoin likely not liable for VAT: http://bit.ly/1y7g2ep.
Australian Senate holds first hearing into cryptocurrencies: http://bit.ly/1FH2N34.

Since early August of this year, bitcoin difficulty has doubled while the price has dropped around 20%. Miner profit margins are thus being squeezed on one side by the increased rarity of finding a block as well as the decreased nominal value of the reward.

The previously steep climb in mining difficulty over the past 22 months has started to flatten out. The next difficulty adjustment will happen in about 2 days and is expected to be +.86% (the lowest since January 2013). Moreover, three of the last four difficulty adjustments have been below +3%. Compare this to last October where we saw difficulty increases of over 25%-40% each time. This slowdown shows that the amount (in hashing power terms) of mining hardware being added onto the network by yet profitable miners are nearing equilibrium with the amount of mining hardware being taken off the network by now unprofitable miners. It suggests that ASICs are possibly hitting a saturation point in the network where for a lot of miners the marginal cost of producing a bitcoin is now equal to or above the price of a bitcoin. It also implies the further centralization of mining power to larger miners with greater efficiencies of scale.

This also affects the bitcoin markets. Since a flatter difficulty adjustment schedule implies blocks are being generated at close to 10 minutes per block the number of bitcoins entering the economy every day is slowing down. Compare this to October of last year when blocks were generated at close to 7 minutes per block. That means now the network generates about 62 fewer blocks per day than last October. This is equivalent to 1550 BTC less influx in bitcoin supply per day which means significantly less selling pressure in the market.

In addition to directly less selling pressure, there are circular effects which are bullish on price. For example, miners are more likely to sell when they think other miners are also selling so as to get in front of each other and not to get stuck with a worse price and possibly become unable to continue with operations due to constant operating expenses. Miners are more likely to hoard when they believe other miners are hoarding. In other words, all else equal (e.g. consumer adoption growth), a steeper difficulty climb implies more selling by miners and a flatter difficulty climb implies more hoarding by miners.

It takes about $1.33m of new fiat money coming into the bitcoin economy to buy up the total bitcoin supply increase of about 3600 BTC per day. This is the lowest dollar amount it's been in a year and the lowest BTC amount it's been in almost 2 years. In light of all this, I am strongly bullish.

Cheers,

Kevin & Team Buttercoin

Bitcoin Trading Made Easy | Buttercoin.com

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The 30k BTC Bear-Whale

2014-10-08T22:48:05Z

Hi Everyone,

Sorry for the delay. It's been a hectic week for me in the markets.

This week markets fell from $390/BTC to $280/BTC, before coming up to $330/BTC where it sits today. Once again, I maintain that this and previous drops have little to do with fundamentals and everything to do with short-term order flow imbalance. There are three major factors at play: consumer buying pressure, merchant selling pressure, and miner selling pressure (most dominant).

Consumer Buying Pressure

Consumer adoption has generally been slower to grow than merchant adoption.
Consumer adoption could see growth soon due to Circle and Coinbase opening their brokerage business internationally once they ramp up.
Large funds (e.g. GABI) looking to get into bitcoin might have been buying on the way down and they might be waiting on an even lower price to fully buy in. They possibly contributed to eating through the 30k sell wall we saw over the weekend. More on this later.

Merchant Selling Pressure

Merchant adoption continues to grow. Coinbase seems to be focusing on fewer large merchants while Bitpay seems to be doing both large and small merchants across the board.
There's some nuance here on why merchant adoption would actually cause selling pressure when it has to be true that those bitcoins spent at these merchants must have been bought at some point in the past (or it may have been bought immediately before the purchase directly for the purpose of buying goods and services from the merchant). In other words, any sell order processed by the merchant must have had a matching buy order by the purchaser sometime in the past. So merchant adoption only creates net selling pressure if, on average, spenders do not replenish their spent bitcoins with corresponding bitcoin buy orders.

I would imagine that most bitcoin spenders are bitcoin believers and would actually replenish their spent coins thus capturing positive value in whatever bitcoin discount the merchant offered minus the fee paid to the broker.
But this could be a different situation for early adopters who, having not declared their gains on bitcoin to the government/IRS, are now spending bitcoin at merchants en masse to "cash out" without having to pay taxes they otherwise would have been subject to if they liquidated to cash first, especially if they have a lot of bitcoin.
I should say, as a disclaimer, that I do not condone tax evasion but this narrative would explain why merchant adoption creates strong net selling pressure and coincides well with the ideologies of many early bitcoin adopters.

Miner Selling Pressure

As difficulty continues to ramp exponentially, the cost of producing a bitcoin will also increase in proportion.
As the price continues to drop, it will eventually reach equilibrium with the marginal cost of producing a coin.
Then miners' profits are driven toward 0, all but the most efficient miners exit, and selling pressure subsides.
The fixed costs of mining hardware does not factor into this since those costs are sunk and the miner's decision to mine is solely based on whether the marginal cost of producing a coin (electricity; hosting) is cheaper than the market value of that coin.
Side Note on Mining Economics

Although for each miner with a fixed number of ASICS, bitcoin quantity produced decreases exponentially as difficulty ramps exponentially, for the mining industry as a whole, bitcoins are produced at a constant rate (a block every 9.5 minutes) and thus selling pressure is mostly linear with respect to time.
Miners have incentive to sell all their coins as soon as they are mined in an environment where consumer adoption is growing slower than the net inflation of the bitcoin money supply from mining (~3800 BTC per day).

Actually this is still not counting other net outflows like merchant adoption growth.
There could also be a point above the break-even point where miners will actually choose not liquidate their coins if freshly minted coins carry a premium over circulated coins.

It seems that right now the dominant force is mining selling pressure but this will likely subside soon as miner profits get pushed toward 0. Also in the short term, merchant selling pressure will slow down as the price gets too low for bitcoin holders to want to spend. In the medium term, merchant selling pressure should be persistent. If you buy the tax evasion narrative, this will pressure will continue until most of the unreported coins hit circulation or the IRS decides not to tax bitcoin appreciation. Also, in the medium term we will likely see consumer buying pressure pick up as brokers like Circle and Coinbase expand their customer base.

30k BTC Bear-Whale

Sunday, we saw a 30k BTC sell limit order at $300/BTC in Bitstamp's sell wall. There's been a lot of speculation on why it appeared, who was behind it, and whether it was manipulative.

At the time, some speculated that this was manipulation, that the whale was really a buyer and tried to use his sell wall to drop the price in order to buy cheaper coins. Others speculated that this was an OTC play where the whale put up the 30k wall to keep the price low in order to buy a huge quantity of bitcoin OTC. Yet others have said it was an early adopter who is naive about markets and how a large sell wall would net him worse a price than he could have gotten if he had broken his order into smaller chunks (or maybe the whale just didn't care).

Eventually, the wall got eaten by a number of market buy orders over the course of about 6 hours. There were even some buy orders as large as 2.2k BTC.

I'd like to take a minute here and talk about this idea of "manipulation". Everyone is always talking about manipulation in the bitcoin markets as if it were a simple thing to do like you might see in the movies or read about in a New York Times Best Seller. I don't think this is the case.

A person who puts up a 30k BTC sell wall with the intention of driving down the price is only successful if the market believes his intention of selling 30k BTC. If instead the market reasons that this 30k whale is trying to get it to panic because the whale really just wants to buy cheaper coins, the market would actually try to buy instead of sell to get ahead of the whale's buying intention. But you could go one step further and reason that maybe this is what the whale wants the market to believe so, in fact, the 30k sell order is real and the market should actually sell in a sort of reverse-reverse psychology. Obviously there's an infinite regress here. So really the question is, what does the market actually believe?

This depends directly on the aggregation of the meta-thinking levels of the market's constituents. A market filled with level-1 thinkers (30k sell wall implies time to sell because a whale is selling) will sell while a market filled with level-2 thinkers (30k sell wall implies time to buy ahead of the whale who is really a buyer) will buy and so forth. If the odd levels dominate the even levels, the market sells and vice versa. Of course, it's not the number of L1 or L2 or L3 thinkers that matters but how capital is distributed between the levels. So from the manipulation angle, a market's reaction to something like a 30k BTC sell wall is based on the capital-weighted distribution of its participants across the various meta-thinking levels.

My contention is that since most of the weak hands have already exited in Q1 of this year, everyone holding bitcoin right now is on average 1) at a higher meta-level of thinking than the market from Q1 and 2) more likely to be true believers of bitcoin and thus less willing to sell since they have continued to hold through the fall in price over the past few months.

Trying to induce selling through manipulation just doesn't make sense in this kind of market environment.

Moreover, any type of manipulation in general requires outlaying capital in some form which entails risk for the manipulator. If the market reacts against the manipulator, he or she could stand to lose a lot of money.

Manipulation in general is very risky for the manipulator and, in my opinion, rarely actually happens.

News

Following a $50m Series B, Reddit announce it would 10% of the round's equity to its users: http://tcrn.ch/1rEahAJ.

They could do this through one of the existing smart asset platforms or through their own cryptocurrency (likely PoS since mining for equity seems beside the point).
Turns out they will probably not issue their own crypto: http://bit.ly/1xYrcBK.
They are currently leaning toward colored coins: http://bit.ly/1uTm3K1.
Might end up tying the new Reddit shares to Reddit Karma as a way to reward users who bring content as well as incentivize content finders away from "competitors" like (Fark, 9gag, StumbleUpon, etc.). And even if we don't consider them competitors, any future possible competitor would have to contend to that as well as Reddit's network effects.
If they do tie equity issuance to content generation, they will also likely face more users trying to cheat the system.
Maybe they will decide to issue it based on a snapshot of karma at this point in time and then Reddit users with Reddit Shares can give microshares to other users as a kind of super upvote.
In any case, a novel use of cryptocurrency and wonderful idea.

CoinArch unveils bitcoin structured products: http://bit.ly/1s4RkXX.

Although the article says one of the products (Maximizer) is a reverse convertible (they make it sound like one but it's not), it's actually an uncovered OTM put write. The customer of the product is essentially selling a put to CoinArch. The payoff has limited upside and unlimited downside for him.
On the long side of the put, CoinArch hedges their BTCUSD exposure by buying BTC (delta hedge). They dynamically increase and decrease their BTC holdings to stay delta neutral. Of course, if the underlying gaps (gamma risk), their delta hedge will be off. Given the turbulence of the bitcoin markets, gamma may be more relevant here than in most markets.

Russia in process of issuing ban on the emission or issuance of money substitutes likely to include bitcoin and other cryptocurrencies: http://bit.ly/1vzGgRX.

If pass in it's current form, the bill would fine individuals 50k RUB, officials 100k RUB, and businesses up to 1m RUB.
If passed, it would likely go into effect in 2015.

Deckbound brings collectible card games to the blockchain: http://bit.ly/1vBRE0B.
Using Bitcoin automated micropayments to create a sensory data marketplace: http://bit.ly/ZBb8Id; http://bit.ly/1BO1AVH.
Bitcoin SF Devs Seminar on CoinShuffle: http://bit.ly/1uy3QjC.
Overstocked hires Counterparty devs to develop crypto stock exchange: http://bit.ly/1CR3Uh1.

XCP jumped 100% on the news before settling at around 50% higher than pre-announcement: http://bit.ly/1s7ZUoZ.

Ethercoin started trading on Bittrex. Ethercoin is a claim on ETH to be delivered once Ethereum launches.

The Ethercoin creators have proof-of-reserves showing that they did indeed buy 1m ETH during the presale.
Currently Ethercoin (ETC) is trading at 3x the presale price in BTC which is about 1.6x the presale price in dollars.

You can now buy animal feces delivery with cryptos: http://www.shitexpress.com/.

Cheers,

Kevin & Team Buttercoin

Bitcoin Trading Made Easy | Buttercoin.com

Buttercoin currently in Private Beta, if you'd like access right now apply here: http://bit.ly/1kSgHZg.

Sentiment Analysis

2014-09-30T21:54:10Z

Podcast: http://bit.ly/1rEBVNP

Hi Everyone,

This week markets jumped from $400/BTC to $450/BTC on the announcement that Paypal would be partnering with Bitpay, Coinbase, and GoCoin to allow its merchants to accept bitcoin: http://bit.ly/1rtLP5l. Since then the price has tumbled to $370/BTC. It further shows the ineffectiveness of fundamental news on price in an environment where short term buying and selling pressure dominate price discovery.

News:

Swiss secret service to use bitcoin to pay informers: http://bit.ly/1rGaFyQ.
Last week's rumor that BFL was shut down by regulators was substantiated this week: http://bit.ly/1vqOaiv; http://bit.ly/1pmQT6H; http://bit.ly/YIEVNN.
Gavin Andresen begins work on invertible bloom lookup tables to make Bitcoin more scalable: http://bit.ly/10genoh.
The supposed attack on the Monero network looks to be a hoax. A good summary of events: http://bit.ly/1yxlyYp.

A reputable hacker and pool operator BCX claimed he had discovered a fatal flaw in Monero.
No one knows exactly what this flaw is or if it even exists.
BCX threatened to attack the network on 9/24.
No attack came but BCX now claims it will take a few days for the effects of the attack to manifest.
Some people think the original intended attack was related to a long-debunked attack vector (http://bit.ly/1u7chlY).

At a high level, a person's public key gives you an equation involving the person's private key and a ring image also gives you an equation involving the person's private key. But it is not the case that with these "multiple equations" you can solve for the private key.

Others suspect this is purposeful FUD by BCX to drive the price down and buy cheap coins.

Peercoin loses earlier gains as Nubits launches: http://bit.ly/1u2HDu0.

The article isn't exactly right in that Nubits has nothing to do with Peercoin (PPC) since it is an separate altcoin since there is some mechanism in the Nubits/NuShares system which pays dividends in PPC.
I've only skimmed the arduous whitepaper (http://bit.ly/Zm4oOf) and it seems Nubits is trying to do something similar to BitsharesX's market-pegged assets but instead of using margin calls and market psychology to peg the price, it uses data feeds and centralized interest rate oracles.
I'm highly skeptical of all pegging schemes without ultimate redeemability for or delivery of the underlying asset.
On a side note, apparently BitsharesX is also using data feeds now to band the price of its bitAssets after their market peg broke down a few weeks ago: http://bit.ly/1tcMncm. Disregard the title of the linked thread.

IOCoin (not to be confused with I0Coin) switched to a new form of PoS where transaction fees are burned instead of given to stakers.

So while staking seigniorage provides inflationary pressure, burned transaction fees provide deflationary pressure set by the market (i.e. transaction volume on the network).
Even after reading their short, badly-written whitepaper (http://bit.ly/1yxofJN), I'm not sure what the point of this is.

Secret Goldman tapes surface: http://bv.ms/YicgiH.

It seems like the cryptospace generates copycats of the flavor-of-the-week at an alarming rate. When anonymous coins started getting popular after Darkcoin's rise, every week saw a new coin based on a new anonymity mechanism, where each successive mechanism was more convoluted and more difficult to decipher than the last. There was also the hype behind arbitrary asset issuance protocols like Nxt, Counterparty, followed by several others. Now with Nubits, it seems pegged assets is the new hot thing. I think, at this point, what's necessary are experts in mechanism design (http://bit.ly/1DTrfQK) and implementation theory (http://bit.ly/10gXV7m) to come into the cryptospace and separate the plausible from the impossible. I also feel that many altcoin whitepapers are needlessly long and painful to read. That being said, I think anyone who has the patience to thoroughly sift through the noise will find many opportunities in the altcoin markets.

In an unrelated note, I recently read a paper on the correlation between bitcoin market activity and Twitter sentiment: http://tinyurl.com/k5b27a3.

To summarize its findings:

The paper looked at the number of times positive emotive words (e.g. happy, great, awesome, etc.), negative emotive words (e.g. sad, bad, unhappy, etc.), and uncertain emotive words (e.g. hope, worry, fear) were mentioned in tweets alongside the word "bitcoin".
Correlation between negative tweets (but not positive tweets) and bitcoin price is found to be negative at the 1% statistically significant level.

This means negative sentiment is reflected in the market much more than positive sentiment (i.e. it could be that the baseline for tweeting is that most people say positive things about bitcoin most of the time)

Correlation between uncertain tweets and bitcoin price is found to be negative at the 1% statistically significant level.

This means that price goes down as uncertainty goes up.

Trading volume was correlated with positive tweets, negative tweets, the ratio of positive to negative tweets, uncertain tweets, and total emotive tweets at the 1% level.

This means that more twitter action goes together with more trading volume.

Wider spreads are correlated with negative sentiment.
Narrower spreads are correlated with the ratio of positive to negative sentiment.
It also found that sentiment (negative, uncertain, and positive to negative ratio) could lead price movements by up to 2 days but sentiment did not lead trading volume.

This suggests that directional sentiment lingers for a few days but excitement does not linger. In other words, people who are right in their sentiment but slow pay off people who are right in their sentiment but fast.

Ultimately, the methodology could be better. It would have been better to use price returns instead of price and de-trended tweet counts instead of tweet counts since the correlation of two non-stationary time series is less telling than the correlation between two stationary time series since correlation is a linear relationship.
Also they could improve upon their word choices for what represents positive or negative emotions. They could also look for not just the word "bitcoin" but its many variants like "BTC" or "XBT".

If you want to get really fancy, you can build out a neural network of emotive words each with a weighting for "positiveness", "negativeness", and "uncertainness" off a list of seed words (e.g. happy = (1,0,0) (positive, negative, uncertain), sad = (0,1,0), unsure = (0,0,1)) and doing heavy machine learning as a first pass over Twitter. Then in the second pass, apply the full neural network onto the word "bitcoin" plus variants.

I think there is a lot to explore on the topic of sentiment analysis in the bitcoin markets.

Cheers,

Kevin & Team Buttercoin

Bitcoin Trading Made Easy | Buttercoin.com

Buttercoin currently in Private Beta, if you'd like access right now apply here: http://bit.ly/1kSgHZg.

Bitcoin Price Dips 17%

2014-09-23T02:46:13Z

Podcast: http://bit.ly/1ysEnfk

Hi Everyone,

This week markets tumbled from $480/BTC to $400/BTC, dipping as low as $380/BTC at one point. Merchants and miners continue to exert downward pressure on the price.

Miners, in particular, create a positive feedback loop whereby the number of bitcoins that need to be sold to fund operations increases as the price drops since each bitcoin is worth less per unit. Thus a miner who sells a large block creates a lower price on the market which, in turn, causes the next selling miner to have to sell even more bitcoin to receive an equal amount of cash.

As an aside, at this point mining is turning into a real arms race with some operations moving the Arctic, others moving to places with cheaper electricity, liquid immersion cooling, ever smaller chips, etc. Seems very similar to the HFT arms race. It seems that the "arms dealers" are the ones making the easiest money as miners compete themselves toward zero profits much like the HFT space.

I've heard a number of other theories as to why the price dipped this week: 1) the dollar strengthening (and thus bitcoin weakening relative to it) due to the Federal Open Market Committee (FOMC) announcing they would continue with QE tapering and 2) investors are cashing out of bitcoin to buy into the Alibaba IPO. I don't buy either of these narratives.

On the first point, there was nothing unexpected about continuing with the QE taper so it should be already priced in. In fact, the FOMC September meeting press release's overall sentiment was "dovish" in that "...it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends". Also, and in general, fluctuations in the strength of the dollar are not large enough to account for BTCUSD dropping by 17%. Bitcoin's price is dependent almost entirely on idiosyncratic bitcoin properties or events rather than broad macro properties or events. The last macro event that arguably moved the bitcoin needle was the ECB taking deposit rates negative and even then the price jump was less than 3%.

On the second point, since it takes at least a day or two to move cash out of bitcoin and into your brokerage to buy Alibaba, the timing seems inconsistent. Alibaba IPOed on Sept 19 and the majority of the bitcoin drop came on Sept 18 and 19. It seems there wouldn't be enough time for the bitcoins sold to be converted into Alibaba stock. If a large whale did indeed sell bitcoin in anticipation of buying Alibaba, we likely would have seen a sharp drop at least a number of days earlier and less of a drop closer to Sept 19.

News:

Trendon Shavers (pirateat40) was fined $40m for operating the largest bitcoin ponzi scheme in the history of bitcoin (Bitcoin Savings & Trust) from November 2011 to August 2012: http://bit.ly/1pp1jSj.

$40m seems low. From what I remember, he absconded with over 150,000 BTC which by today's prices is much more than $40m.
When he was running the ponzi, pirate offered 1% guaranteed daily returns, which is simply too good to be true. Back in those days bitcoin was already appreciating at about 20% per month (though with high volatility), yet there were many people greedy for even more. There were even pirate pass-through (PPT) funds where investors could pool their BTC together to meet the minimum investment for BS&T and to get the best rate from pirate after paying the pass-through operator a small cut.
Bitcointalk and #bitcoin-otc were rife with scams like BS&T. I was once offered 10% daily returns by a #bitcoin-otc regular. Fortunately, those wild west days of bitcoin are past and the bitcoin world has come a long way in terms of professionalism since those times.

(Rumor) BFL raided by US Marshals: http://bit.ly/1sVnn9b. So far the rumor is unsubstantiated.
Disacoin is an app being built that would allow you to share your internet access/bandwidth with people around you for micropayments in bitcoin: http://bit.ly/ZDQKWC.

Still in the very early stages but the concept is a good application of bitcoin for micropayments.

MIT students face subpoena over web browser bitcoin mining tool: http://wrd.cm/1C3OZjg.
Apple will restrict NFC antenna and TouchID for Apply Pay only: http://bit.ly/1oerFqL.

That's unfortunate since TouchID would have been a good anti-fraud and KYC tool to better allow consumers to buy bitcoin at brick and mortar shops.

Square Register will integrate bitcoin: http://bit.ly/1ri3POu.
(Rumor) A group of MIT students are working on bitcoin option pricing.

A few thoughts on that...
Black-Scholes seems particularly bad for bitcoin due to strongly leptokurtic returns.
In one of my earlier market updates, I suggested using the Levy alpha-stable distribution for modeling returns instead of the normal.
Dana Hobson from bitnet suggested to me some literature which found the truncated Levy distribution (TLD) to be an even better match to empirical data.
Since real world option pricing theory has come a long way from Black-Scholes, bitcoin can benefit from those advances without having to rediscover the wheel.
There's also something to be said for a veteran option trader's intuition which quantitative models may not be able to capture.

Peercoin jumped 40% on Nubits announcement: http://bit.ly/1B2tDjU.

What does Nubits do? Supposedly something related to getting rid of market volatility. No one really knows
It might also be related to Peershares which is something of a crypto-equity platform built on top of Peercoin that the Nubits team was working on prior to Nubits.
In any case, I'll believe it when I see it. Pie-in-the-sky claims are plentiful in the cryptospace.

(Rumor) Monero crashed 40% due to a supposedly fatal exploit in it's anonymity mechanism discovered by a reputable hacker: http://bit.ly/1v1ERo7.

BCX, a pool operator with a strong reputation in the cryptospace, claimed that Monero had an exploit which allows attackers to hijack addresses which cannot be fixed without compromising anonymity (Monero's killer feature).
BCX has a good track record for calling out exploits in a number of altcoins (most notably Auroracoin) and also attacking them with his mining pool.
Others suggest that this is all FUD by BCX for the purpose of crashing the price and buying Monero cheap.
Another forum member, TheFascistMind claims to also have found the exploit but claims, contrary to BCX, that it is fixable.
BCX announced in btc-e's trollbox that he will be attacking the Monero exploit on Sept 24.
If the exploit exists and it exists at the CryptoNote protocol level, it means the other CryptoNote coins like Boolberry, Ducknote, Bytecoin, etc. are also vulnerable. Yet none of the other CryptoNote coins showed a significant dip in price.
If the exploit exists and it exists at the implementation layer of Monero, the market reaction makes more sense.
I'm interested in seeing what happens in the coming days.

GABI deploys first round of client capital: http://bit.ly/1pphzCL.

Depending on their AUM and how much capital they intend to deploy into BTC (mandate is at least 75% of AUM in bitcoin at all times), this could be the counterbalancing buying pressure to merchant and miner selling pressure we have been looking for.

I'm still waiting for some MIT students to make a bitcoin micropayments platform for buying and selling class notes.

Cheers,

Kevin & Team Buttercoin

Bitcoin Trading Made Easy | Buttercoin.com

Buttercoin currently in Private Beta, if you'd like access right now apply here: http://bit.ly/1kSgHZg.

A Noteworthy Week for Bitcoin.

2014-09-16T02:27:04Z

Podcast: http://bit.ly/XcUoVn.

Hi Everyone,

This week bitcoin traded between $460/BTC and $490/BTC. Volatility remains low for the third week in a row.

News:

Satoshi's gmx.com email account got hacked: http://bit.ly/1AuKmw4.

Some initially thought the email expired and the hacker just reregistered using that email but that doesn't seem to be the case. It looks like Satoshi's email was actually hacked with all of his previous correspondences inside: http://bit.ly/XpVZHR.
Everything else in the article isn't conclusive. The BTCe account could be photoshopped, the receipt for the miners could be a red herring, the hacker's other claims could just be lies or trolling.
The hacker supposedly has Satoshi's identity and wants 25 BTC to release the info. It seems to me that Satoshi is the sort of character who would write all his emails with the thought in mind that it could one day be public information. I don't see him being careless enough to leave personally identifiable information lying around but who knows.
This event has led a number of trolls to pretend they are the hacker and extort the community for money to reveal Satoshi's identity. Very opportunistic and very funny; trolls beget trolls.

IBM partners with Samsung to develop blockchain-like technology to debut at CES in January: http://bit.ly/1y8cWHz; http://bit.ly/ZjjgfZ.

Rumors of it being a copy of Ethereum.
Will use Telehash for secure communication.

Braintree partners with Coinbase to bring bitcoin to its merchants: http://bit.ly/1wegQdr.

Braintree's merchants include Uber and Airbnb.

Coinbase is also expanding to 13 European countries: http://bit.ly/1m8Ta9y.

It's possible that this move was due to merchant growth slowing in the US.
Coinbase number of merchants over time according to bitcoinpulse:
Another explanation for the chart is that Coinbase has just been going after the larger merchants who are less in number but do a large amount of volume.
The European market would open a new avenue avenue of growth for Coinbase and it looks like they are ready to challenge Bitpay and other bitcoin merchant services companies in Europe.

Dogecoin begins merged mining with litecoin: http://bit.ly/1uKtXlu.

Merged mining allows litecoin miners to confirm dogecoin transactions given their PoW meets the appropriate difficulty level.
In other words, the dogecoin network can now benefit from the hashing power (and thus security) of the more powerful litecoin network.
Since moving to merged mining, dogecoin price has gone up about 75%:

OKPay was ordered by courts to hand over $6.1m to mtgox: http://bit.ly/1s3M9cQ.

Originally, OKPay had intended to return the money to depositors and now this is no longer possible.
Given that most of these funds came in immediately preceding the fall of gox, this move by courts is effectively a transfer of wealth from gox's new creditors to gox's old creditors if the courts should decide to paid out all creditors in proration.

Bank of England publishes its second paper on bitcoin: http://bit.ly/1tCvqJD. First paper from Q1: http://bit.ly/1gph2wA.
Federal Reserve Bank of Boston publishes paper on bitcoin: http://bit.ly/1uxSrPA.

Observed that merchants give on average .86% discount on items bought with bitcoin.
Their sentiment is bearish on bitcoin as a payment system but bullish on the innovation spurred by bitcoin in the payments space.

I'm sure you have all heard the announcements for Apple Pay. I see this as an indirect boon to bitcoin app developers as I'm sure many of them will leverage the TouchID (fingerprint identity verification) and NFC technology Apple is putting into place.

TouchID should decrease real fraud and subsequently friendly fraud as well.
This would benefit both traditional payments systems and bitcoin as well.
Apple will be earning .15% on each transaction.
83% of US card issuers are on board.
220,000 stores will support it at launch in October. Compare this to 9 million stores where credit/debit cards work.
Best Buy and Walmart will not be using Apple Pay.

CFTC in approves first fully-regulated bitcoin swap: http://on.wsj.com/1qBrzPB;http://on.barrons.com/1m6voeM.

All contracts would be written, quoted, and settled in dollars based on a bitcoin price index developed by TeraExchange by aggregating prices from 6 different bitcoin exchanges.

Some quick thoughts on the altcoin space. As more scrypt ASICS come out, we will likely see a mass exodus of GPU miners from litecoin and other scrypt coins to some other coin(s) in the same way that the GPUs migrated from bitcoin to litecoin. This will likely cause both litecoin and the new GPU-heavy coins to increase in value as price has historically been correlated with difficulty for young, nascent cryptocoins.

But why is that the case? The fact that a commodity all of a sudden becomes more difficult or more costly to produce should not mean that it becomes more valuable per unit since consumer demand for it has not changed and especially since the supply of it goes up in the process of it becoming more costly. The labor theory of value explanation seems wrong.

Many argue that this is due to the increased security of the network (a higher hashing power implies a more costly 51% attack). Perhaps demand for a bitcoin-like commodity is directly related to the costliness of a 51% attack on its network.

Possibly. In the case of dogecoin, difficulty has gone up about 10x from the merged mining while price has gone up about 75%.

What's interesting to note is that, historically, as countries transitioned from older bills to newer bills, the value of that currency did not appreciate even though "security" against forgery improved through the addition of security features in the newer bills (waterprint, security strip, etc.). Of course we can chalk this up to other factors having a dominating effect on currency value like general demand for the currency and central bank policy.

In any case, I would keep an eye on the Scrypt N-Factor coins and the X11/X13/X15 coins as GPUs migrate from Scrypt coins.

Cheers,

Kevin & Team Buttercoin

Bitcoin Trading Made Easy | Buttercoin.com

Buttercoin currently in Private Beta, if you'd like access right now apply here: http://bit.ly/1kSgHZg.

Monero Fork; Boolberry; Altcoin Trading

2014-09-08T21:03:20Z

Hi Everyone,

This week markets dipped from $505/BTC to $480/BTC before rebounding to $495/BTC and then back down to $480/BTC. Trading volume has been average and volatility remains fairly low.

News

DigitalTangible, a services which allows you to buy gold with cash or BTC and trade it against BTC using virtual gold tokens, launches: http://bit.ly/1tzOv2S.

This version of virtual gold will actually work since the gold tokens are fully redeemable for cash or physical delivery. Contrast this with bitGold from BitsharesX which has no redeemability and is thus unlikely to maintain a peg to actual gold.
Asset ownership is bound to a bitcoin address. Claims on the asset can be traded on Counterparty, Poloniex, and Melotic.
The physical gold is held at depository institutions like International Depository Services of Delaware.
My initial impression of this system is a strongly favorable one.

Charlie Shrem reaches plea deal to forfeit $950k to the US government: http://bit.ly/1CA8DVj.
NYU and Duke begin offering courses on bitcoin and cryptocurrencies: http://bit.ly/1lJrqZp.
Ripple published a white paper on their consensus mechanism: http://bit.ly/1qAqBlx.

Although I've had my doubts about Ripple's consensus mechanism in the past, after carefully reading the paper, I'm becoming more convinced that it does and will work properly.
Remaining questions:

Given that Ripple is susceptible to a 21% attack, are the UNL lists sufficiently diverse such that more than 1/5th of the nodes colluding is unlikely? The weak point here is the default UNL list, as brought to my attention by Vitalik.
Will connectivity in the network always remain high enough such that large, loosely connected cliques don't form. If they do, forks will be possible.

In a somewhat unrelated thought, I think Ripple should implement the ability for user's to price debt from the various gateways they trust. For example, to me, $1 Citibank USD is worth $.90 Bill and Ted's USD. This way, Ripple's seek-least-price path-finding algorithm would work better by pricing in the user-perceived risk of default. Compare this with their current system of gateways being either trusted or not trusted (i.e. 0 or 1). Least-price path-finding will often also be highest-default-risk path-finding.

Nxt asset, Nxttycoin up 53% against BTC this week. It is the official cryptocurrency of a mobile encrypted-messaging app: http://bit.ly/1AgFYAs.

I'm concerned that this is a pump and dump scheme since Nxttycoin does not actually represent equity in the company.

Viacoin up 70% largely due to their recent update: http://bit.ly/1CA5EMx.

Also due to Peter Todd's OP_CHECKLOCKTIMEVERIFY coming out soon which allows payments to be locked until a certain time before being spent.
Also interesting is that an Ethereum dev has been committing to CleariningHouse github: http://bit.ly/1nBpVaL.

The Monero (XMR) was forked this week in a complex, well-thought-out, well-planned attack. You can read about it here: http://bit.ly/1okelRs.

Basically, for a few days the attackers sent out a lot of spam transactions into the network designed to look like mining pool payouts. This was to increase the median block size without raising suspicion. Once the median block size was large enough (which this attack requires), the attackers were able to start the attack. The attack left half the network on one blockchain and the other half on another. And due to how the Merkle tree code was flawed, the both halves of the network believed that they were all on the same blockchain. In other words, there was a fork created without anyone knowing that there was a fork because it seemed like everyone was on the same ledger. A two blocks later, the coins from the actual differences in the two ledgers are spent causing half the network to reject the transaction and half the network to accept. Here the fork becomes visible.

Trading was immediately halted on most of the altcoin exchanges. The Monero devs quickly fixed the issue and trading then resumed. The price surprisingly did not suffer. It seems the community consensus is that the devs handled the situation very well.

Interestingly enough, this attack does not seem to have been done for monetary gain nor to permanently cripple the XMR network. The conflicting transactions which caused the fork were for negligible amounts of XMR (4 XMR total or about $8). Also, since the attacker revealed the fork only two blocks later, the network was only forked for a very short amount of time. Compare this to if the attacker forked the network but allowed the network to think it was on the same ledger for a long period of time before revealing the fork.

Besides Monero, another CryptoNote currency that's been gaining momentum is Boolberry (BBR). Over the past week and a half, it's gone up over 500% in price.

It makes a number of improvements to the CryptoNote reference implementation. From what I understand, it has the most changes of any CryptoNote currency from the reference code. According to Peter Todd, this would be a good thing (http://bit.ly/ZeTsl5; credit to Tim Swanson for sharing the link).

Links:

Wild Keccak over CryptoNight as the PoW hashing function: http://bit.ly/1w8yn9I.
Unlinkability improvement: .
Reduced blockchain bloat: .

Overall, the changes make sense and seem to be good improvements to CryptoNote.

Given the innovations in the altcoin space, I think now is a great time for altcoin speculation. A year ago, the altcoin space was filled with various clones of bitcoin which just altered things like the block times and the coin supply (not real innovations) but now these new altcoins are making serious contentions to their utility and necessity through real innovation. Most of the early altcoins have no good justification for their existence but many of these new ones make compelling cases.

With that, I also expect some of the older but smaller altcoins like Feathercoin, Megacoin, Quark, Novacoin, Ixcoin, IOcoin, HoboNickels to die off if they haven't already. Megacoin's main innovation was the Kimoto Gravity Well which nearly all new altcoins have adopted rendering Megacoin nonunique. Quark's main innovation of using multiple, chained hashing functions was adopted by a plethora of X11, X13, and X15 coins (e.g. Darkcoin, XCurrency, etc.). Neither were able to generate enough user adoption as first movers to compensate themselves for the new features their successors developed (e.g. Quark's "X6" compared to Darkcoin's DarkSend/CoinJoin plus X11 ).

In the same vein, it is likely that new altcoins in the future will come to supplant the top coins today. Already Halcyon (CoinShuffle) is steadily making it's way up coinmarketcap.com to challenge Darkcoin (CoinJoin).

The altcoin space does about a quarter of the trading volume of bitcoin and this proportion is rising with each passing week. At a time when bitcoin market activity is low, it may be the perfect time to play the growing altcoin market.

Cheers,

Kevin & Team Buttercoin

Bitcoin Trading Made Easy | Buttercoin.com

Buttercoin currently in Private Beta, if you'd like access right now apply here: http://bit.ly/1kSgHZg.

Byzantine Cycle Mode

2014-09-01T07:05:01Z

Hi Everyone,

This week markets have been mostly stable, trading between $485/BTC and $585/BTC. Trading volume this week has been low. This calmness in the markets is generally a positive sign. If we assume miners and merchants sell off their coins at a fairly constant rate, low trading volume and a steady price would suggest that retail bitcoiners are mostly buying. Compare this to an environment where there is high trading volume and a steady price. In that environment, it is more likely that retail bitcoiners are more balanced in their buying and selling since the merchant/miner selling pressure is a smaller proportion of the total trading volume.

News:

Bitshares X jumped 100% this week before crashing back down, net up about 20%: http://bit.ly/1vBMGmH.

Tim Swanson brought to my attention rumors of a potential collaboration between Bitshares and Ethereum a few weeks ago which may have triggered this price jump: http://bit.ly/1qTb9wV.
In the thread, Bitshares founder, Dan Larimer, seemed to suggest a formal partnership (including distribution of ETH to Bitshares PTS/AGS holders) with Ethereum was underway while the Vitalik and Ethereum team had other ideas (informal collaboration on technical challenges, no hard promises).
There's also some discussion in the thread about the merits of delegated proof-of-stake (DPoS) which is Bitshares' consensus algorithm. DPoS is one of the better versions of PoS (I prefer it to checkpointing and other schemes involving ) but there is still disagreement on whether PoS or PoW is superior.
My main issue with Bitshares X doesn't have to do with its consensus algorithm. It has to do with its bitAssets concept and the idea of a market-pegged asset. I'm unconvinced that it actually works. I think redeemability is key for the pricing of a bitAsset to reflect its corresponding "real" asset. There's also the problem of bitAsset's positions requiring 2x of the notional as collateral: http://bit.ly/1zZwlpS. It's sort of a reverse 1 to 3 leverage which seems to defeat the point of having this sort of market.

OpenBazaar announces the use of reputation pledges, a reputation system based on proof-of-burn: http://bit.ly/1vBOyMs.

The idea is that customers will be more likely to trust vendors who have burned away some bitcoins since it makes the loss of that reputation costly (i.e. vendors are less likely to scam customers since it destroys their reputation for which they burned bitcoins. Scammers would have to start a new account and burn an equivalent number of bitcoins as they did the first time for their first account to achieve the same reputation level.)

Dogeparty, the Counterparty analog for Dogecoin, started trading on Poloniex: http://bit.ly/1nOlJo6. It's already dropped below the ongoing genesis burn/sale price: http://bit.ly/1pyS9bF.

Recently I've been looking into a variety of different anonymity mechanisms and meta-mechanisms and also atomic cross-chain trading (i.e.a P2P way of trading BTC for LTC without the use of a third-party and without requiring trust between the two first-party participants).

CoinSwap: http://bit.ly/1wZbSW7.
CoinShuffle: http://bit.ly/1tSe2CU.
Byzantine Cycle Mode: http://bit.ly/1pyWknN.
Atomic Cross-chain Trading: http://bit.ly/1ox4pTU.

The motivation behind the anonymity work is that there are a few shortcomings of CoinJoin (master nodes know inputs and outputs; inputs to be mixed cannot be arbitrary amounts (e.g. can be 10 BTC or 100 BTC but not 8.2246 BTC or 293.463 BTC)) and these mechanisms seek to address them.

Regarding the Byzantine Cycle Mode (BCM) paper, BCM is a meta-mechanism since it does not describe in any way how the actual mixing is done. BCM assumes that a mixing algorithm requiring equal inputs exists (e.g. CoinJoin) and outputs a method for mixing unequal inputs. Essentially, it breaks down multi-party arbitrary-input mixing into isolated, smaller mix-cycles of equal-input mixing. This is an important innovation because it allows all equal-input mixing algorithms/mechanisms to remain competitive with inherent nonequal-input mixing algorithms. In other words, it makes the equal-input mixing property a non-issue since all equal-input mixers can be generalized using BCM into nonequal-input mixers.

At a very high level, this is how it works:

A number of players broadcast to the rest of the network that they are interested in mixing.
For each mix, an ordering for the players is established using predetermined rules (e.g. an ordering based on the hash of last block).
Each player generates random numbers and broadcasts them to each of the other players.
With these random numbers through Byzantine agreement, each honest player in the mixing pool comes to the same Bitcoin Flow Matrix which is a matrix representation of who will mix how much with who else. The main innovation in this paper is in defining that agreement protocol such that no one player has disproportionate influence, each player has some tangible influence, each player's desire to mix their specified amount of bitcoins is correctly represented in the final Bitcoin Flow Matrix and the calculations used to arrive at the Bitcoin Flow Matrix are deterministic so all honest players come to the same result.
The result is a consensus between the players on a number of mixing cycles with equal inputs. For each cycle a player is a member of, he then reaches out to each of the other players in that cycle uses CoinJoin or some other equal-input mixing algorithm to do the actual mix.

For example, Alice, Bob, Carol, and Dan each want to mix 1, 2, 3, 4 BTC respectively. BCM returns these cycles: Alice mixes 1 with Bob, Bob mixes 1 with Alice and 1 with Dan, Carol mixes 3 with Dan. So the total mixing operation with inputs 1, 2, 3, and 4 gets broken down into 3 cycles of equal inputs:

A<=>B for 1
B<=>D for 1
C<=>D for 3

So everyone is happy. Of course BCM could have returned different cycles. For example:

A<=>D for 1
B<=>C for 1
B<=>D for 1
C<=>D for 2

The innovation of BCM is that all parties are able to agree through a deterministic computation, whether to go with the first case (3 cycles) or the second case (4 cycles) without anyone being able to cheat (strongly influence which case is reached).

The only minor issue I see is in the way player order is determined. If player order was determined by previous block hash, a bad actor could enter the mixing pool when he was guaranteed to be Player 1 and then have some influence on the first mix cycle computed by the BCM (See paper). If he had dirty coins he would be able to choose to which player his coins would be dumped. Of course since players' identities are hidden, he would still need to associate a player number with an identity so maybe this isn't a real problem. If this is a problem, player order can be determined, instead, by some event in the future from when the BCM is initiated such as next block hash. In any case, this is either a minor issue or not an issue at all.

Overall, I think the BCM mechanism is robust and provides a good extension to equal-input mixing algos.

It seems like solutions to the anonymity question like the ones above are bound to improve over time. The volume and depth of work being done on this front confirms my belief that many intelligent people think anonymous transactions are important to a well-functioning cryptocurrency.

Cheers,

Kevin & Team Buttercoin

Bitcoin Trading Made Easy | Buttercoin.com

Buttercoin currently in Private Beta, if you'd like access right now apply here: http://bit.ly/1kSgHZg.

Anonymous Transactions through Multisig Escrow

2014-08-25T17:52:51Z

Hi Everyone,

After the flash crash last Monday on BTC-E which took the price as low as $309/BTC, prices rebounded to the $500/BTC range. The flash crash was similar to the one that happened on bitfinex on the 14th (margin calls and stop losses cascading after large market sells).

Other news:

BitsharesX (bank and exchange DAC) climbs over 100% through the week:http://bit.ly/1p9hU20. This makes it the third largest crypto, only smaller than litecoin and bitcoin. I was not able to find a good reason for this jump and I am still skeptical of its long-term viability (particularly the concept of market pegged assets: http://bit.ly/1p5Hkro).
Storj, a decentralized cloud storage system (i.e. distributed Dropbox), raises 910 BTC in crowdfunding: http://bit.ly/VKKTfS.
Nxt asset nxttycoin rallied 150% over the past two weeks: http://bit.ly/1pyvD1I. nxtty is an end-to-end encrypted mobile texting/communication app.
Crypti, and altcoin which rewards users for spending their coins at merchants, has been gaining traction recently: http://bit.ly/1kYexrK. From a cursory glance, it seems like the system is highly centralized in how it determines which accounts are merchants versus which accounts are consumers.
NYDFS extends the commenting period for virtual currency regulation: http://on.ny.gov/1qt2O42.
Wedbush Securities publishes a new paper on bitcoin volatility: http://bit.ly/1mtc6up.
Chain, a blockchain analytics company, raises a $9.5m investment round: http://bit.ly/VKLHRG.
Coinbase acquires Blockr.io, another blockchain analytics company: http://bit.ly/1p5I53A. Blockchain analytics seems to be the hot thing recently. Earlier in July, Tradeblock, yet another blockchain analytics company raised $2.8m: http://on.wsj.com/1rvDb4v.

I recently came across a PoW(scrypt)/PoS hybrid altcoin called supercoin. Beside having lottery-like superblocks, they also have a anonymity mechanism based on multisig escrow.

The Sender elects a Mixer to serve is an anonymizing intermediary between him and the receiver. To keep the Mixer honest, the sender also employs a Guarantor and a 2-of-3 multisig address. The details are below:

I think this mechanism is interesting because it almost works. By itself, the mechanism fails when Sender and Guarantor collude against Mixer. This could be partially remedied by a reputation system since Mixer is allowed to reject Guarantors he doesn't trust. The another problem is that the Guarantor knows both Sender and Receiver so there is some partial loss of anonymity there. Finally, blockchain timing analysis could reveal a possible relationship between Sender and Receiver since Mixer is known to the network as one of many mixers (you could match up inbound txns to Mixer with outbound txns from Mixer). All in all, it's a clever mechanism but I don't think it fully works yet. At least the mechanism is more clever than most of the multisig escrow mechanisms involving customers and merchants posting collateral: http://bit.ly/1mIZnUM.

Cheers,

Kevin & Team Buttercoin

Bitcoin Trading Made Easy | Buttercoin.com

Buttercoin currently in Private Beta, if you'd like access right now apply here: http://bit.ly/1kSgHZg.

Cascading Margin Calls and the Flash Crash

2014-08-18T19:48:43Z

Hi Everyone,

This week markets have tumbled from $590/BTC to $500/BTC, seeing a low of $450/BTC.

Thursday at around 1am PST, bitfinex saw a flash crash taking the price to $450/BTC. This flash crash was the result a series of very large market sell orders on bitfinex at around $525/BTC which further triggered cascading margin calls on the way down.

Over 9000 BTC were sold in a matter of minutes, 650 BTC of those being liquidated leveraged long positions due to the cascade of margin calls. While 650 BTC liquidated in margin calls is only about 7% of what was entirely sold, their presence is enough incentive for the initial dump. In other words, given that you know that $5/BTC below the current price is a series of cascading margin calls worth about 650 BTC, how much would you be willing to sell ahead of it if you think there is a good chance for a slight drop in price or you had the long term intention to sell anyway? And also, stop-losses on the way down would also cascade in the same way as liquidated margin positions. Moreover, given that many traders have arbitrage algos running on multiple exchanges, stop-losses in non-bitfinex books could still end up impacting the bitfinex selloff once the arb bot would mirror some part of the foreign stop-loss sell as one leg of the arb. [Also, as a slight tangent, given that Ethereum will be liquidating some of their pre-sale bitcoins to pay back debts and use for development, getting in front of those coins is also worth some value. 4150 BTC will be withdrawn from the exodus address some of which will be used to pay off debts and prior expenses and establish development teams in Berlin and Amsterdam. It is unclear how much of that 4150 BTC will be liquidated and how much will be kept in BTC].

Looking at bitfinex's swap market, active USD Swaps almost doubled between late May and early July. This suggests that many traders entered into leveraged long positions somewhere between $560-$680. Given the maintenance margin of bitfinex as 15%, margin calls should be spread between $476-$578. While the slower selling pressure throughout the week above $525 did not trigger a cascading effect, the sharp sells around $525 did.

On the way down, bitfinex uses an algo to throttle the price (as an alternative to circuit breakers). It works something like this: if an order would drop the price more than 10% in a minute, execute part of the order to take the price down 10%, then wait a few seconds, then execute another part of the order to take the price down 10% more, and wait a few seconds and repeat. This is to give the market some breathing time to refill the bid wall before the large sell market order continues its way down the orderbook.

I suspect this also gives bitfinex some time to insert their margin call liquidation orders in front of individual chunks of the large market sell order. If they are doing this, it would give added protection to swap underwriters since margin-called positions would be liquidated at higher prices and would also give traders who were forcibly closed by margin calls smaller loses due to a better price. The person who loses out is the person executing the large market sell order which triggered the crash.

If bitfinex, instead, gives priority to the large market sell order over the margin call liquidation orders, then the large seller benefits from less slippage at the cost of the intermediate buyers on the way down who refill the bid walls during each "speed bump" (although there is less slippage, the overall price could be worse since market orders inserted between successively executed chunks of the initial order could depress the price more).

Bitfinex gives the second explanation for why they have this "price throttling". They suggest that any market order of that size is likely to be manipulative since no rational person would prefer a worse execution price over breaking up the market order for a better price. Therefore, they throttle it.

Personally, I don't buy that explanation. Market manipulation is an ominous term which can mean anything from spreading false rumors to painting the tape to hunting for stop losses. What some people call manipulation, others call good strategy. In any case, "manipulation", real or not, is very difficult to pull off and usually the manipulator takes on exorbitant risk which results in huge losses if the market does not react how he wants it to react. Regardless of which practices we term manipulation, there are good non-manipulative reasons for executing a large market sell in the face of cascading margin calls below you.

I think bitfinex is just looking out for its swap writers' solvencies and, thus, indirectly their own interests. If there are full or partial defaults in bitfinex's swap market, people would be less willing to write them and those that do would require a higher premium. This would make leverage more expensive and reduce margin trading volume altogether.

What this whole episode shows us is that the bitcoin markets are becoming more automated and more intricately interwoven. Already fundamental news has stopped affecting the price and now we are starting to see flash crashes (much like the real world markets). Maybe bots are getting progressively more tangled up with other bots and there will be more flash crashes to come.

Other news:

Bank of Canada came out with a paper which looks at arbitrage opportunities in the bitcoin markets and finds arbs no longer exist: http://bit.ly/1mcW6Ne.

Unfortunately, the paper's methodology was questionable. They use daily closing prices for their historic data which makes no sense since arbitrages don't last 24 hours barring special events like the China ban.
As a side note, if a market seems to have no arbs possible, it's because arbitrageurs are doing those arbs. So tautologically, the lack of apparent arbs is evidence of the presence of arbs being done, so the question itself is rather pointless. A better question would be, how fast do you have to be to capture the arbs from the other arbitrageurs?

Jed and Ripple strike a deal to avoid immediate selloff of Jed's $9bn XRP: http://bit.ly/1v96yKS.

I wonder what Jed got out of that deal. Maybe Ripple agreed not to sue Stellar. Not that there is a strong basis to sue over open-sourced tech.

Viacoin unveils ClearingHouse, decentralized p2p trading on the blockchain: http://bit.ly/1rOvmpk.

Cheers,

Kevin & Team Buttercoin

Bitcoin Trading Made Easy | Buttercoin.com

Buttercoin currently in Private Beta, if you'd like access right now apply here: http://bit.ly/1kSgHZg.

Bitcoin Price Bubbles and Socio-economic Feedback Cycles

2014-08-10T21:31:42Z

Hi Everyone,

This week bitcoin traded between $575/BTC and $600/BTC, ending the week at $590/BTC. Volatility continues to be low for many weeks in a row.

News

Gavin Andreson made a recent post on Bitcoin's scalability: http://bit.ly/1kuO7iY. By using invertible bloom lookup tables, allows the decoupling of block size from block propagation time by allowing nodes to share only the block headers instead of the full block. This erases the incentive for mining pools to include fewer transactions with the intent of propagating the block through the network faster because the block is smaller. This would matter if two pools find a block at roughly the same time.

Monacoin crashes; BitcoinDark on the rise, Cloakcoin falls after a jump last week; Stellar starts trading on exchanges and has seen a rise in market cap albeit not much movement in price.

On a side note, the way Cloakcoin works is by having transactions which can be conditional on future states of the blockchain. For example Bob creates a transaction (to be released 4 blocks from now) which sends coins to Mixing Node A which releases only if Mixing Node A sends some similar amount of coins to Joe in one of the next 4 blocks. Combining this with one-use stealth addresses and two mixing steps, supposedly anonymity is achieved. I'm not yet sure if this works or not.

BTC.com sold to GAWMiners for $1m: http://bit.ly/1kPUjm8.

There are rumors that AQR and DE Shaw are looking at bitcoin markets.

A Paper on bitcoin price bubbles and socio-economic feedback cycles was published week: http://bit.ly/XGhjJE. I found it very informative and it confirms some ideas I've had about demand-side leading indicators to price movements like search volume and client downloads. It was also very readable compared to some of that heavy crypto stuff and the results gave immediate real world insight.

Without getting too technical, it looks at the feedback loops between bitcoin price, bitcoin search volume (Google/Wikipedia), bitcoin word-of-mouth spreading (Facebook/Twitter), and bitcoin user adoption (client downloads/blockchain address analysis) by running a series of statistical/econometric tests.

The results are shown in this diagram:

Interpretation

Social Cycle: search volume goes up => word of mouth goes up => price goes up => search volume goes up

Hype begets hype (bubble behavior).
"Bitcoin's growing popularity leads to higher search volumes, which in turn result in increased social media activity on the topic of Bitcoin. More interest encourages the purchase of bitcoins by individual users, driving the prices up, which eventually feeds back on search volumes."
This is mediated by the media reporting on price increases, which drives curiosity and greed, triggering their search activity.

Adoption Cycle: price goes up => search volume goes up => user adoption goes up => price goes up

Understanding begets adoption (organic growth).
"New bitcoin users download the client and join the transaction network after acquiring information about the technology.
"This growth in the user base translates into a price increase, as the number of bitcoins available for trade does not depend on demand, but rather grows linearly (more or less) with time."

Search-Price Dyad: negative external event happens => search volume goes up => price goes down

Negative news (e.g. goxings, bans, hacks) dissemination precedes market crashes.
Search activity responds faster to negative events than price drops.
People must figure out what's wrong before they can determine whether or not to sell.

3 of the 4 largest price drops were preceded by the first, fourth, and eighth largest increases in Google search volume.

Other Findings

An increase of 10k client downloads leads an increase of $3.80 in price.

An increase of .01% in bitcoin tweets as a proportion of total tweets leads to an increase in price of $2.70.

Search levels experience sharp increases 2-4 days after price increases.

Word of mouth (through social media) increases 1-2 days after search volumes increase.

User growth (client downloads) also increases 1-2 days after search volumes increase.

There is little to no relationship between each of the variables beyond 4 days.

Bitcoin prices significantly deviated away from fundamental value (based on electricity costs during mining and mining efficiency) during the June 2011 bubble and the April 2013 bubble.

Price never dropped significantly below fundamental value.

This suggests the cost of producing bitcoins as a lower bound to their value.
This also suggests that at the current supply of bitcoins, the market always prefers them to the electricity used in their production.

Their model correctly identifies the sign of the 10 largest price increases and 9 of the 10 largest price drops.

***Technical Stuff***

Data is grabbed and bucketed into days. Daily Google search volume was simulated out of weekly data and 3 months of the most recent daily data. User adoption was, in one method, proxied by blockchain change address analysis and, in another method, by wallet client downloads.

From the data they take first differences of each time series to guarantee stationarity (Augmented Dickey-Fuller test, KPSS test).

Next a vector autoregression of lag 1 (VAR(1)) is done and yields significant p-values thus passing the Granger causality test (Note: This is predictive causality, not "true" causality in the narrative sense, but it is good enough for trading strategies).

Pairwise correlation analysis was also done and while the results show interesting insights, more complex 3-cycle relationships are hidden so the authors prefer VAR(1).

Both normalized and non-normalized results of VAR(1) are given.

Impulse response functions are created to show the impact of 1 standard deviation shocks of each variable to the other variables.

The Bayesian Information Criterion achieves a minimum for the model with lag 4 (Note: This is a measure of the tradeoff between model complexity versus predictive power. It penalizes having more variables more so than the Akaike Information Criterion does. Given that AIC is arguably superior to BIC (http://bit.ly/1nGao8C), using 5 or 6 lags might make for a more comprehensive model.

Possible refinements to the model:

Use hourly buckets instead of daily buckets
Use VAR(4) or VAR(5) instead of VAR(1)
Model fundamental value based on changes in mining technology (GPU=>FPGA=>ASIC) instead of based on a constant energy efficiency value since later technologies are more efficient per kilowatt.
Add supply side modeling with hashing rate vs difficulty and the block reward halving point.

Cheers,

Kevin & Team Buttercoin

Bitcoin Trading Made Easy | Buttercoin.com

Buttercoin currently in Private Beta, if you'd like access right now apply here: http://bit.ly/1kSgHZg.

Merchants Versus Consumers; Ethereum Pre-sale

2014-08-02T11:33:25Z

Hi Everyone,

This week markets took a tumble from $600/BTC to $560/BTC before recovering to $595/BTC today. There's been a lot of speculation why prices dropped so persistently earlier this week in spite of weeks of good news (with the exception of the BitLicense piece). As I mentioned in my earlier posts, for the most part, bitcoin markets are no longer sensitive to fundamental news (with perhaps the exception of news at the level of Argentina's default (thought in this case there wasn't much of a reaction)). Rather most people suspect that the recent price drop was based on the expectation of merchant adoption outpacing consumer adoption in the near term. With Bitpay announcing free processing for all merchants, it's likely that the market expects incoming sell pressure from new merchant signups some weeks or months down the line thus depressing prices this week (insiders likely sold in front of the public announcement). There is also a multiplier effect at work. If the market expects the price to dip $5/BTC due to Bitpay's announcement, those who sell in front of the incoming merchants can drop the price multiple times that amount (say $40/BTC). Also, there's another propagating effect since Coinbase and other competitors can be expected to follow suit and reduce fees for merchants thus magnifying the number of merchants entering the entire space. Considering these effects in vacuum, the total drop should be an equilibrium price at which customers would be indifferent to spending the bitcoin to show support for new merchant acceptance and holding it because the BTC price has dropped too much for spending it to be desirable. Ceteris paribus, and with some handwaving, the price drop can abstractly be thought of as the value of "good will" in the bitcoin community toward new merchants who accept bitcoin. The more the price drops, the greater the "good will" which must be counteracted by lower price to reach equilibrium. One argument against this interpretation is that for merchants to sell bitcoin through Bitpay, Coinbase, and other services, the bitcoin had to have been bought somewhere, sometime, by someone. In fact, if customers immediately replace all bitcoins spent at merchants, the net effect will be zero instead of a drop. Thus the actual selling pressure is the total bitcoins spent at merchants without buyer replacement minus the BTC collected by merchants and not liquidated into the market (i.e. some merchants choose to hold BTC instead of convert it to USD). Taking this selling pressure and netting it against buying pressure from consumer adoption and we can get a prediction on short term price. Of course much more goes into the market pricing mechanism than just merchant adoption versus consumer adoption but at least this is a short term signal to be considered with other signals on direction and magnitude.

News this week:

Stellar, a Ripple clone with more transparent and equitable initial distribution and built-in 1% inflation started by Jed McCaleb, founder of MtGox and Ripple, launches: https://www.stellar.org. They also have a partnership with Stripe which can serve as a strong foundational gateway. I found this slightly funny: a github commit where Jed is replacing all instances of the string "ripple" with "stellar": http://bit.ly/1xHWMiz. It should be fine, of course, since the Ripple protocol is open source. Ripple XRP tanks 10% on Stellar announcement.
Mircea Popescu of MPEX fame offers to sell an ethereum future (5000 ETH per 1 BTC) deliverable March 15, 2015 on #bitcoin-assets: http://bit.ly/URreKm.
In March, one of the Bitcoin contributers, Peter Todd, wrote a piece on treechains (http://bit.ly/XqUr0z) which is basically a more elaborate version of sidechains. It tries to solve the problem with sidechains (2-way) where reorganizations of the blockchain can lead to undesirable situations which may result in inflation and the danger of sidechains being merge-mined with too much hashing power and 51% attacked. Most of the other core developers like Gavin, Jeff, and Greg are not fans of the treechain idea (though they do like sidechains). This week Peter Todd joined the Viacoin team as Chief Scientist to work on treechains causing the altcoin to spike 70% on the announcement. As with all pie-in-the-sky ideas, this will either be really good or really bad.
Argentina defaults on interest payments to bold holders.

Regarding the Ethereum pre-sale, I have a slight suspicion that it might be over-bought. The Ethereum team did such a good job promoting it that a good deal of people think it's a good idea. That's not to say it's not a good idea, just that investments that are understated and "more hidden" often return more than investments which everyone is aware of and watching. It's also analogous to the idea that when your oldest relatives are asking you how to buy bitcoin, the bitcoin price is probably peaking on a hype bubble and it's time to sell. Also, personally, I would never have invested into bitcoin had I not carefully done my research and thoroughly read the Satoshi white paper. With Ethereum, I doubt that most people buying have read the white paper (http://bit.ly/1ogGVYa), yellow paper (http://gavwood.com/paper.pdf), or genesis sale terms (http://bit.ly/1rYuUbR). In the terms of agreement Section 19.9, it says "Purchaser understands, that while the Ethereum Team will make reasonable efforts to complete the Ethereum software, it is possible that an official completed version of the Ethereum Platform may not be released and there may never be an operational Ethereum Platform". This is a real possibility. Also, I'm not sure if the claims on ETH bought in the presale can be traded before the actual genesis distribution. Not being about to trade out of ETH in the scenario where things are going badly is liquidity risk. And then there's the question why one of the founders Charles Hoskinson (also a founder of Bitshares) is no longer with them? So that is why I have very mixed opinions about Ethereum. But all that being said, I will likely still buy a couple BTC worth of ETH. For me buying ETH is a bet that Vitalik, Gavin and the rest of the team know what they are doing and will be able to execute. Even if the project is 90% fated to fail, the scale and the scope of the project is so grand that the net expectation could still be positive. Finally, given that you want to buy, there is a tradeoff between buying now for a discount and buying later at a higher price. Right now you get 2000 ETH/BTC and in three days the price changes to 1970 ETH/BTC. You lose out on 1.5% by waiting. Alternatively, you can think about it as paying 1.5% for a few days more worth of information. Just a thought.

Cheers,

Kevin & Team Buttercoin

Bitcoin Trading Made Easy | Buttercoin.com

Buttercoin currently in Private Beta, if you'd like access right now apply here: http://bit.ly/1kSgHZg.

Smart Contracts

2014-07-26T12:18:37Z

Hi Everyone,

This week markets have been dropping from $630/BTC to $595/BTC. A sharp selloff on Thursday was subsequently followed by two smaller selloffs.

In the news this week:

Ethereum launches their presale where you can buy 2000 Ether per BTC: https://www.ethereum.org. Price goes up in 10 days.
BitsharesX, a cryptocurrency developed to be used with DACs (Decentralized Autonomous Corporations), starts trading on select altcoin exchanges (bter and BTC38): http://bit.ly/1rlstMN. It is currently the 8th largest crypto with a market cap of $18m.
Ripple introduces their smart contract project, Codius: http://bit.ly/1rH2aEo.

Given the news this week, let's talk about smart contracts. A smart contract is essentially a computer program which mediates between two (or multiple) parties based on predetermined encoded rules. It essentially replaces the function of lawyers and courts for dispute mediation. It is also often self-enforcing. The simplest example of a smart contract would be a vending machine. You put money into the vending machine with the understanding that a Coke will come out. The vending machine functions as a smart contract between you and the owner.

So what about Ethereum? Ethereum is a protocol on which smart contracts can be designed and executed. These smart contracts also have the property of not requiring trust between the parties mediated by the contract (e.g. if a contract specifies the rules where I can hold your data for you and you pay me for it (decentralized Dropbox style), then so long as I can produce proof-of-storing-your-data to the contract machine, I will get paid even if neither of us trust each other or even know each other). However, there are certain types of contract which require external information which requires trust of some type of oracle (e.g. if I bet you through a contract that the BTCUSD price is going to go up, the contract machine must serve also as an oracle to figure out what the price of BTCUSD actually is). Trust is therefore required in the process by which the oracle decides on the state of the outside world. For example, if the oracle checks the BTCUSD price through Bitstamp's and Btc-e's APIs, as party to the contract you have to trust that Bitstamp and BTC-e's API's are working properly, the oracle has the right certs for Bitstamp and BTC-e, and that there are proper failover procedures for when Bitstamp and BTC-e's APIs are formatted differently from before, temporarily down, or completely defunct. Also how does the oracle handle bad/glitched data (e.g. Bitstamp shows $0/BTC because of some bug)? Where oracles are involved, the situation can get messy. Still in today's world, there are many companies and services we choose to trust for deciding on the state of things like our bank serving as an oracle on the amount of money we have in our account. If Ethereum works out, there will likely be many contracts essentially doing the same thing, competing with each other for business. There will likely be two opposite effects. First, an oracle with high trust would be more valuable than an oracle with low trust or a short history of correctly deciding on states of the world. Over time, those contracts (which require oracles) with strong network effects will tend towards natural monopolies as the highest trust oracle squeezes out its clones. The second effect is that newer and better (seen as more fair) oracles will be created to mediate the same conceptual contract. If the newer and fairer oracles are significantly better than the older oracles, they will gain market share. If the newer and fairer oracles are only marginally better than the older one(s), then the network effect dominates and the older oracle(s) stays a monopoly (oligopoly). But who knows how things play out. Ethereum is a highly speculative play at a new and more decentralized world.

Bitshares, on the other hand, wants to do away with oracles for outside world state verification. It was born out of the idea, can we have a USDBTC, gold, oil, exchange without touching fiat/gold/oil. They believe that a bitAsset like USDBTS will be pegged to the real USDBTS rate based on behavioral confirmation of traders even without the virtual asset being redeemable for the real one (i.e. bitAsset USDBTS cannot be redeemed for real USD). The logic is very circular but I can't say for sure that it won't work. After all, most gold ETFs cannot be redeemed for gold. But all things considered, I'm leaning toward this not working correctly. On a side note, Bitshares uses Delegated Proof of Stake for it's consensus mechanism. Everyone uses their stake to vote for delegates who they entrust their staking rights to. These delegates then have staking power equal to the total stake delegated to them and use it to decide which transactions to include in the next block and which transactions are legitimate if there are double-spend conflicts. Individuals can, at anytime, choose a different delegate to represent them. I'm not sure this solves the Nothing-at-Stake problem (might make it worse). Bitshares also uses TITAN (Transfer Invisibly To Any Name) which is basically just stealth addresses bound to a naming registrar (e.g. you can send to Bob instead of 13w5sdkdgs42sSk4EsfdeE).

Cheers,

Kevin & Team Buttercoin

Bitcoin Trading Made Easy | Buttercoin.com

Buttercoin currently in Private Beta, if you'd like access right now apply here: http://bit.ly/1kSgHZg.

Competition in the Bitcoin Space and the Future

2014-07-19T00:44:20Z

Hi Everyone,

This week markets dropped slightly from about $635/BTC to $630/BTC. Intermittent swings brought us as low as $615/BTC and as high as $640/BTC. Volatility this week has been notably low given the number of pieces of exciting news. This may suggest that regulatory news and industry news (short of goxings) no longer has a strong effect on price. Macro news like the ECB taking the deposit rate negative a month ago may still have an effect: http://bit.ly/1jaWGsQ.

News this week:

New York's Department of Financial Services have released proposed "BitLicense" regulations. Marco Santori gives his take on them: http://bit.ly/WgRKy6. Regulations look strict; they may push innovation overseas if not amended and if other states follow New York's lead.
GHash.IO commits to capping its hashrate at 40% of the network total hashrate: http://bit.ly/1oZDHXf. Given their trackrecord, some believe this to be an empty promise: http://bit.ly/1zPm1nb.
TradeBlock (formerly The Genesis Block), a Y Combinator blockchain analytics company, raises $2.8m from Andreesen, Barry Silbert and a few others: http://on.wsj.com/1rvDb4v.
Shopify, already using Bitpay for merchant services, also integrates with Coinbase giving merchants a choice between the two: http://bit.ly/1mgx3HS.
Circle releases its wallet to positive reviews giving Coinbase direct competition: http://bit.ly/UdQuKH.
Elliptic Vault raises $2m giving Xapo direct competition: http://bit.ly/1r5gRz8. From what I can see so far, Xapo is cheaper and has a higher coverage limit through their captive insurance company.

Competition between bitcoin companies is heating up this week. This is, of course, healthy for the ecosystem as it drives prices (fees) down and generates value to the consumer. It's also bad news for the incumbent but, in the bigger picture, competition is inevitable in spaces where profit margins are high and barriers to entry are low. These companies were likely expecting competition sooner or later.

Here is one way it could play out in the next few years. As bitcoin enjoys higher and higher prices due to adoption, speculation, and shifting sentiment and bitcoin companies pull in serious profits, more startups will enter the space to get a piece of the action and a bubble forms and then pops. Final market share breakdown for each segment of the bitcoin space (wallet, exchange, merchant services, etc.) will likely follow some power law distribution where most of the profits are captured by the top few companies and very little remains for the rest. For every Google, there are a couple of AltaVistas. As each segment of the bitcoin space becomes saturated, mergers and acquisitions will likely follow between the players who survive giving the merged conglomerates better price-setting power and better economies of scale (on the costs side). All the while, the investors and VCs which back the right metaphorical horses get paid off handsomely. Among those investors, some deliberately picked horses they thought were strong while others sprayed their money around giving them a diversified basket of seedling companies.

Yet that whole narrative is an old narrative applied to a new situation. If cryptocurrency truly is a phenomenon on the same plane as the internet revolution of the 1990's and 2000's, it's possible that the narrative itself changes. In other words, just as no one could have predicted how the internet would play out in 1993, maybe no one can predict how this whole cryptocurrency phenomenon will play out. It's possible that entirely unexpected industries will be morphed by blockchain technology and the best innovations and products will be created by disenfranchised hackers and cryptographers, not investor-backed companies.

The first scenario likely plays out if the applications layer of bitcoin holds most of the value as opposed to the second scenario playing out if most of the value is in the technical developments in blockchain technology and cryptocurrency lateral to bitcoin. In the first case, capital is quite useful for consumer product development and improving time-to-market. In the other case, capital is not as useful for generating technical innovations and finding novel uses for fringe tech. Is bitcoin English to some future Esperanto or is bitcoin AltaVista to some future Google? Personally, I lean toward the first scenario playing out but I would not be surprised either way.

Cheers,

Kevin & Team Buttercoin

Bitcoin Trading Made Easy | Buttercoin.com

Buttercoin currently in Private Beta, if you'd like access right now apply here: http://bit.ly/1kSgHZg.

Making Money in the Markets

2014-07-11T02:00:00Z

Hi Everyone,

This week markets fell from about $645/BTC to $612/BTC. This likely suggests that the market thinks Tim Draper overpaid for his 30k BTC. Bitcoin warnings out of Italy and bitcoin regulation out of Argentina could also have dropped the price a few ticks.

In other news:

Litecoin botnet Lecpetex was taken down by Facebook and Greek local authorities: http://bit.ly/1kMAQNd.
Gox will auction off bitcoins.com and give proceeds to creditors: http://bit.ly/W4Y8sl
Next version of Bitcoin Core will have floating fees depending on your inputs' coin-age and average transaction confirmation time on the network: http://bit.ly/1n8buhu.
BitXBay, an Ebay-esque decentralized and anonymous marketplace was released this week: http://bit.ly/1twXMcE. They use collateral multisig escrow payments to keep parties honest. I'm not convinced that this incentive system actually works.
3.5 BTC puzzle with 32 page solution solved: http://bit.ly/U69JG5.
Grooveshark and XHamster now accept bitcoin.

Making Money in the Markets

First, let's ask ourselves how hard is it to win money in the markets? Assuming that the market is a zero-sum game (i.e. someone must hold a losing position for someone else to win; zero-sum in money but positive-sum in utility since not all participants enter the market for profit only (e.g. buy weather futures to mitigate crop failure risk)), it seems that by being a better predictor of an asset's future market value than half of the players in the market, you will win. But that isn't actually the case. Even in this simplified model, you would need to be better than half the capital, not half the people. Since capital tends to centralize toward the better players (i.e. the winners) in this sort of game, you likely need to be better than 90%-95% of the other players. Adding on frictional costs like broker fees and exchange fees makes the game negative-sum and ups the threshold to beat. So when is it possible for you, as one person, to be right where many people are wrong?

In the super-short term, profits are divided according to the power law (i.e. 1st takes most, 2nd takes some, 3rd takes crumbs, etc.) to those firms with the best and fastest technology. Strategies are often simple although the computer hardware and routing/communication technology is very sophisticated. Speed is valued above all else.

In the short-medium term, in the absence of private and material information, you will likely lose in your analysis of public information to the teams of Math/Stats/Physics PhD's, veteran traders, and other experts at top hedge funds and prop shops. On top of that, you are also competing against people who actually do have insider information so you will be left picking up crumbs at best and losing at worst.

In the long term, a singular powerful insight not obvious to most people can net you a huge payday. This is where having a better mental representation of the world can make one person right where hundreds/thousands of people are wrong. Being able to predict the subprime mortgage crisis would compensate you for thousands/millions of missed short and medium term opportunities. At this frequency level, being perceptive and meta-reflective matters more than anything since the market, itself, is highly reflexive. Primary effects cause secondary effects which cause tertiary effects. All parts of the market system update to new states simultaneously with complex feedback loops and general interconnectedness.

What about market efficiency? How efficient is the market? The wisdom of crowds is a phenomenon whereby the aggregate opinion of a large population tends toward the truth even if most members of the population are uninformed. For example, if a group of people in a room are shown a jar with some number of marbles in it and told to guess the number, the average guess of the group is usually very close to the actual number of marbles in the jar. Does price discovery in the market follow this same process? No, while some market participants are trying to guess the intrinsic value of the investment asset, others are trying to guess, at a meta-level, what that aggregate guess will be. In this way price discovery is more reflexive than the discovery process of the number of marbles in a jar. Another difference between the marbles example and the markets is that with guessing the number of marbles in the jar, there is no real emotional investment into whether there are 42 marbles versus 47 marbles but with the markets real money is at stake so greed and fear play in integral role in players' behaviors and the determination of price. This also adds to stronger market reflexivity.

Consider a second experiment (Keynesian beauty contest) where a group of people are told to pick a number between 0 and 100 such that it is 2/3rds of the average guess of the group. A person might think about choosing 66 and before realizing that should everyone else guess 66, he should guess 44. But if everyone else guesses 44, he should guess two-thirds of that and so on. Under perfect rationality on the part of all players, the optimal guess converges to 0. However, in actual experiments where this game is played out, the winning value is often somewhere between 10 and 25. Taking this further, we can think of this winning value as a quantification of the meta-rationality of a group. Without a functional form, we can make ordinal comparisons by saying a group which has a winning value of 10 is more meta-rational than a group which has a winning value of 20 but we cannot compare absolute distance in any way (group-10 is more meta-rational than group-20 by the same amount that group-20 is more meta-rational than group-10). Nevertheless, it should suffice as a tool to think about market efficiency. Any market comprised of a population which does not yield a winning value of 0 in this experiment cannot be considered an perfectly efficient market. How inefficient a particular market is can be quantified by how far it's population would deviate from 0 in it's winning guess should they be subject to this experiment.

The market is filled with a diverse set of players, some more meta-reflective or meta-rational than others. Predicting the future price of an asset, then, can simply be thought of as an exercise in being slightly more meta-rational than 50% of the capital (95% of the players) in that asset (game).

Cheers,

Kevin & Team Buttercoin

Bitcoin Trading Made Easy | Buttercoin.com

Buttercoin currently in Private Beta, if you'd like access right now apply here: http://bit.ly/1kSgHZg.

Auctions, Bidding Syndicates, and Bidding Strategies

2014-07-04T22:33:27Z

Hi Everyone,

This past week opened at $600/BTC before jumping to $640/BTC-$660/BTC before ending at $634/BTC. Much of the early action from $600/BTC to $640/BTC was likely due to US Marshal auction insiders buying up to at least their bid, possibly a little more based on their expectation of the winning bidder's bid conditional on their own information set (their bid price and the fact that they didn't win). The market seems to agree that the winning bid is somewhere between $640/BTC and $660/BTC. On a side note, it's interesting that the US Marshal sent the 30k BTC to the winner (Tim Draper) with no network fee (coin age likely helped speed up the inclusion of this transaction into a block).

Had an interesting thought the other day on why syndicates (e.g. SecondMarket's syndicate) don't win auctions like the US Marshal bitcoin auction. One common reason a person might join a syndicate instead of become a bidder himself (herself) is that he might not have the capital or desire to buy a full 3k BTC block. In either case, his slippage from buying through the market would be significantly smaller than slippage incurred by someone buying a full 3k BTC through the market. Therefore, his "soft" upper bound on what he is willing to bid is much lower than a full-block bidder's upper bound. So long as there are enough real bidders (and assuming some bell-esque distribution of willingnesses to pay), there will likely be at least one bidder who is willing to bid above the syndicate's highest bidder's upper bound (as proxied by slippage) which means the syndicate will not win. By the same reasoning, it makes sense that one bidder swept all the blocks since, if his intention was to buy 30k BTC, his market slippage would have been the greatest compared to bidders who wanted fewer than 30k BTC and thus his upper bound on willingness to pay would be the greatest. Conditional on a person being the highest bidder of this group (those who want all $30k BTC) he is very likely to be the highest bidder overall as well (once again assuming some bell-shaped distribution of willingnesses to pay).

Another interesting thing to consider is the bidding strategy for the syndicate. At the lower limit, the syndicate will take the top bids which total a quantity of 30k BTC and do a weighted-average to get the syndicate's bid price and then bid on all blocks at that price (assuming the syndicate does not purposely bid below this to net itself some profits on a win). If the syndicate wins, almost everyone (besides the bottom bidders) gets what they bid for and everyone is happy. At the upper limit, the syndicate will take the top bids which total a quantity of 3k BTC and do a weighted-average to get the syndicate's bid price and then bid on one block at that price. If the syndicate wins, only the top bidders get what they bid for and everyone else gets cash returned. There are also intermediate strategies involving bidding on 2-9 blocks but considering the edge cases reveal the some insight. In the first case of taking the grand average of all bids summing up to a quantity of 30k BTC, there are reflexive effects. Those syndicate members who bid less also pay less and thus free-ride on the higher bidders' willingnesses to pay. So optimum bidding strategy for syndicate members involves shading bids down because the marginal effect of an individual's lower bid on his own profits is positive and stronger than the marginal effect his lower bid has on reducing the average syndicate bid and subsequently the probability the syndicate actually wins. In other words, if you are a syndicate member, your maximum payoff is achieved when you bid the lowest possible bid that still puts you in the the top 30k BTC bidded for (so you still qualify). This essentially turns into a multi-player Prisoner Dilemma situation, the end result being an aggregate syndicate bid which is much too low to have a reasonable chance to win the auction. Strategy effectiveness increases monotonically as the syndicate's bidding strategy moves toward securing fewer and fewer blocks. In the limit case of the syndicate bidding on one block, their chance of success is highest as both the average price bidded by qualified members is naturally higher and due to less moral hazard of qualified members shading down their bids (though there is still some of this so long as it takes more than one syndicate member to clear one 3k BTC block). Also it's worth noting that higher homogeneity in syndicate members' willingnesses to pay implies lower moral hazard since the low-bidding free-riders extract less value from the high-bidding members.

Finally, it's worth noting that a syndicate benefits directly from the flow information it receives from its bidders. First, if we ignore all bids under market value (there's some ambiguity here on what market value means e.g. market value before the start of the auction or market value right before the end of the auction or somewhere in between), the syndicate gains information on how many coins are demanded above market price and at which specific prices. Going further, the syndicate also knows at what times it's members bidded what price and how that compared to market price at that exact time. In the event of losing the auction, the syndicate can estimate how much unsatisfied demand exists in the market from its own members which gives a lower bound on unsatisfied demand in the entire market. Second, the syndicate can buy on the market up to it's own final aggregate bid and gain positive expected value. If they win, they get coins at cheaper than their bid. If they lose, they get coins at cheaper than the winner.

To conclude, bidding syndicates make the most sense where the average price of the auctioned asset on the market decreases with respect to quantity bidded for (similar to many commodities e.g. a 100 kilos of wheat will be cheaper per kilo than 10 kilos of wheat). This is true for angel syndicates as well where it is less hassle for a startup to deal with a syndicate than its individual members so it can offer a better deal to the syndicate. There and in normal commodity markets there are direct synergies and efficiency gains of a syndicate banding together to get a cheaper price. In the case of the US Marshal bitcoin auction, the opposite is true where the average price of the auctioned asset on the market increases with respect to quantity bidded for due to the way slippage works (e.g. 100 bitcoins will be more expensive per bitcoin than 10 bitcoins). This combined with inherent moral hazard between low-bidding members and high-bidding members makes it very unlikely for a syndicate to win this type of auction.

Other news this week:

Kuwait investment banking and asset management firm, Kuwait Financial Centre, suggests trading oil in bitcoins: http://bit.ly/1pH65AZ.
Newegg starts accepting bitcoin: http://bit.ly/1xbkTrE.
Tibanne invoices Gox for $200k; court-appointed trustee signs off: http://bit.ly/1o8qY1l.

Cheers,

Kevin & Team Buttercoin

Bitcoin Trading Made Easy | Buttercoin.com

Buttercoin currently in Private Beta, if you'd like access right now apply here: http://bit.ly/1kSgHZg.

Bitcoin Markets React to US Marshal Auction Close; Lighthouse

2014-06-28T02:44:06Z

Hi Everyone,

This week markets traded between $555/BTC and $605/BTC. The US Marshal Bitcoin Auction just ended a few hours ago. At the close of the auction the markets jumped from $584/BTC to $598/BTC. This likely indicates that a bidder in the auction also bought up all the coins in the market below his bid at around $598/BTC. If a bidder wins, he or she also would likely be willing to buy up coins for cheaper than what he paid in the auction. If a bidder does not win, that means someone won with a higher bid also implying that he should buy up all cheaper coins on the market anyway.

This also suggests that the auctioned coins sold for above market price (considering $584/BTC the market price and those auction coins selling for at least $598/BTC) in a the immediate sense of "market price". Ultimately, if markets are somewhat efficient, the market itself should have an expectation for what price the auction closes based on the available information it can gather (e.g. leaked list of bidders). Given that bitcoin was trading at $630/BTC before the auction announcement, we can also say that the auction likely settled at under market price in that sense if we assume that the confounded GHash 50% effect was less than $32 in downward movement).

Also from the charts you can see someone selling coins at $590/BTC for 6 hours starting 8 hours before the close of the auction up until 2 hours before the close. Likely that person (possibly a bidder in the auction) believed the auction would not close above $590/BTC and thus sold coins at that level in the face of upward pressure. Then the price takes a dip to $575/BTC before shooting up. This suggests that about 1 hour before the close of the auction, the highest bid was at least $575/BTC.

Of course this is all speculation. A more comprehensive analysis would require looking into the tick data of exchanges and drawing more informed inferences from that.

Other News:

In the altcoin world, Monero has been crashing from a high this week of $5.37 to $2.52, over a 50% drop. The end of last week saw Darkcoin being dumped for Monero and this week we are seeing Monero crashing and Vericoin rising from $.07/VRC to over $.18/VRC.
Vericoin is a PoS coin whose main innovation is network-dependent-stake interest which increases the interest paid to stakers as the amount of staked coins in the networks increases. This gives a snowballing incentive for stakers to stake their coins thus improving the security of the network. you can read about here: http://bit.ly/1nDrKD8. It also has a suite of consumer and merchant-friendly wallet features (e.g. VeriSend, VeriBit, VeriSMS). Although incentivized staking is a nice feature, I don't see it as a big innovation. I see the real challenge in PoS is that there is incentive for all users to stake their coins in all branches of the blockchain and incentivized staking does not solve this issue. Ultimately, I don't personally care for this altcoin.
Tax haven country Jersey wants to be bitcoin island: http://bit.ly/Topqbt.
Swarm, a bitcoin crowdfunder, launches and raises 1200 BTC in funding in just 18 hours: http://bit.ly/1lWjsZW. Swarm intends to be a crowdfunding platform where startups can raise capital from the crowd in bitcoin for equity.

Speaking of crowdfunding platforms, Mike Hearn, a bitcoin core developer, is working on a project called Lighthouse which is decentralized crowdfunding built on top of the bitcoin protocol using assurance contracts (http://bit.ly/1sLCQ19). Anyone can create their own funding campaign directly on the blockchain and interested parties can fund the campaign in bitcoin. Backers have the option of changing their mind and getting their bitcoins back so long as the campaign goal isn't hit yet. Basically, it aims to be a cheaper, decentralized version of Kickstarter with take-backs. On the other side of the valley, there's an app called Yo.

Cheers,

Kevin & Team Buttercoin
Bitcoin Trading Made Easy | Buttercoin.com

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

Mining centralization; US Marshal leaks bidder list; Monero

2014-06-21T02:10:55Z

Hi Everyone,

This week traded between $540/BTC and $615/BTC before ending the week at $593/BTC. Volatility was highest in the beginning of the week and settled down thereafter.

Interesting bits from the week:

Ghash.IO continued to hover between 45% and 50% of the network hashrate before coming down sharply to 36% where it sits today: http://bit.ly/1lugyvQ.
US Marshal leaks list of potential bidders for it's bitcoin auction: http://bit.ly/1pJel2q.
Japan announces that it will not regulate bitcoin: http://reut.rs/1rhK7Bm.
Monero has been on the rise. I mentioned Monero and ring signatures in one of my previous posts (5/30/2014) and, since then, it has quadrupled in value. Currently it is the 13th largest cryptocoin by market cap: http://bit.ly/1dqX6ht.
An article by Tuur Demeester drew parallels between the invention of bitcoin to the invention of petroleum as an energy source: http://bit.ly/1jv7270. I thoroughly enjoyed the parallels.

Concerns about a 51% GHash.IO continued this week as some in the bitcoin community had suspicions that much of the hashing power coming from "unknown" mining operations actually belonged to GHash and that GHash was simply splitting their hashing to appear smaller. This is no longer believed to be the case as two mystery addresses unrelated to GHash.IO were found to represent about 8% of the network and were originally counted as belonging to the "unknown" group.

There was also suspicion in the past that GHash sent fake miners to infiltrate other pools to show partial work while withholding full solutions to reduce honest member payouts. See block withholding attack: http://bit.ly/1npHgCC. This type of attack would cause the attacked pool to seem "unlucky" and might ultimately drive members to convert to a pool which is not being attacked. This could be a minor contributing factor to how GHash has been gaining members (the major factor would be the 0 fees).

In any case, given the whole 51% scare, many have come up with possible solutions to the centralization of mining power we are seeing with GHash:

P2P mining enabled by an auxiliary blockchain: http://bit.ly/1uMeobz. P2Pool does this, has been active for a while, and is gaining traction.
Lamport Signatures: http://bit.ly/1nq9f6x.
Not using Lamport Signatures: http://bit.ly/1qzc61K. Incorporates a secret which allows pool members to steal the block from the pool thus making pools which don't trust its members impossible.
Fawke Signatures: http://bit.ly/1kWtYMg.
Two-Phase PoW: http://bit.ly/1srPhPs. One phase is outsourcable and the other is not thus creating an equilibrium size for mining pools (i.e. the equilibrium is set to the point when the efficiency losses of a pool due to the nonoutsourcable phase of PoW is equal to the gains in utility to members from reducing the variance of their payouts).
Nonoutsourcable Scratch-Off Puzzles: http://bit.ly/UWqPr1. ???
Multi-PPS: http://bit.ly/1nTynV5. Individual miners mine blocks where the coinbase transaction is split between multiple mining pools and each pool pays the individual per share of partial work proportionally based on the proportional split of the coinbase transaction.

It's rather amazing that not 1 week after the 51% scare, the bitcoin community has come up with several possible solutions to mining centralization. It furthers my confidence that no challenge bitcoin encounters will be insurmountable.

I also recently read a piece by Vitalik Buterin which took a very thorough but concise look at mining centralization: http://bit.ly/1rfwra1. I highly recommend it.

The US Marshal email leak was quite interesting. First, from the list we can see players like DRW Trading (top-tier prop shop), Matrix Capital (Tiger Cub) (on a side note, Pantera Capital is also a Tiger Cub)), and BNP's stat arb desk taking a serious interest in bitcoin. Tiger Cubs and other hedge funds, bank trading desks, and prop shops are all coming to bitcoin? I wouldn't be surprised if Jane Street and GETCO are also positioning themselves for a Jump into bitcoin. Looks to be a huge year in the making.

There has also been speculation whether the auction coins will trade above or below market price. It all depends on the propensity of the bidders to have directional opinion. Folks like the stat arb desk and Binary Financial are probably only looking for a deal they can quickly flip for profit so they will likely underbid the market. Coinbase is also unlikely to buy at a premium since they usually keep their books balanced. For SecondMarket's syndicate, they will likely aggregate the bids they receive from their syndicate members and pass them on as block bids to the auction (capturing any differential in the process) so their bidding prices will likely vary per 3k BTC block and depend on their members' propensities to buy. For DRW and Matrix, it's hard to say. They could see this as an opportunity to get into bitcoin for a directional play, giving up less slippage than market would charge them. If this is true, it is possible that the auction closes at above market rates. I am more inclined to believe that Matrix will take a serious long position here rather than DRW or any of the others. Since most of the big players are well-capitalized enough to buy all blocks being auctioned, it is hard to say how the auction will play out and whether most people will come away empty-handed.

Cheers,

Kevin & Team Buttercoin

Bitcoin Trading Made Easy | Buttercoin.com

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

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

2014-06-14T02:52:44Z

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: http://bit.ly/1oZNxsN;http://bit.ly/1hSfGRS.
For more information on the US Marshal auction: http://1.usa.gov/1oj0zE7.

In other news:

Expedia now accepts bitcoin: http://bit.ly/1l96H9U.
Google finance and Yahoo finance now track bitcoin price: http://tnw.co/1nzn4RG.
DuckDuckGo provides bitcoin address search functionality: http://bit.ly/1ljaFNa.
GHash.IO crossed 50% of the network hashrate: http://bit.ly/1ptx7uE. More on this below.
Gavin Andresen, recently made a blog post about co-opting some features of Ethereum without the need for a separate protocol: http://bit.ly/TUvoBl. More on this below.

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: http://bit.ly/TUvoBl. Also check out RealityKeys for automated oracle systems and dispute mediation (http://bit.ly/1qddVkX), Orisi for distributed oracle systems for cryptocurrency contracts (http://bit.ly/1uqou1V), and Truthcoin for decentralized bitcoin prediction markets (http://bit.ly/1iirA14).

Cheers,
Kevin & Team Buttercoin
Bitcoin Trading Made Easy | Buttercoin.com

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

Bitcoin Rallies on Strong Fundamentals

2014-06-07T22:55:40Z

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: http://on.wsj.com/1kN4KQj. 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: http://1.usa.gov/1xm0Xn2. 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

Source: http://bit.ly/1lc5QcJ.

Facebook approves cryptocurrency tipping apps: http://bit.ly/1tO8O8h.
IRS says no FBAR reporting needed for bitcoin: http://bit.ly/1hErAiu.
Bitcoin provides incentive to crack time-release encryption: http://bit.ly/1nomHt7. 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 (http://bit.ly/1tPsKYe). 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.

Cheers,
Kevin & Team Buttercoin
Bitcoin Trading Made Easy | Buttercoin.com

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

Bitcoin Market Update 5/30

2014-05-30T19:00:00Z

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: http://bit.ly/TUZ7dP.
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: http://bit.ly/1tvsVrD.
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: http://bit.ly/1gLRyjp.

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): http://bit.ly/1qZQQU7. 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: http://bit.ly/1pMvAwW. CryptoNote whitepaper: http://bit.ly/1nN0WE2. 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 http://bit.ly/1dqX6ht. 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.

Cheers,

Kevin & Team Buttercoin

Bitcoin Trading Made Easy | Buttercoin.com

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

Bitcoin Market Update 5/26

2014-05-26T19:00:00Z

tl;dr:

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: http://bit.ly/1icW3i2; http://bit.ly/RukoJ1.

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 (http://bit.ly/1raCVL9). 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: http://bit.ly/S9D1mc; http://bit.ly/1nrfFVb.

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 (http://bit.ly/1ilLKZ1). 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: http://bit.ly/1i70Rp1. 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: http://bit.ly/1nqMAvs) 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: http://bit.ly/1hs2a1O. 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: http://bit.ly/1psXHRF. 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: http://bit.ly/1takJgd. 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: http://bit.ly/1nS1gj9. 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 http://bit.ly/1c5Z0n; http://bit.ly/1joxONv.

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.

Cheers,

Kevin & Team Buttercoin

Bitcoin Trading Made Easy | Buttercoin.com

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

Bitcoin Market Update 5/16

2014-05-16T19:00:00Z

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: http://bit.ly/1jnaIMO.

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: http://bit.ly/1k8UVAm. 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: http://bit.ly/1klyUK5). 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.

Cheers,

Kevin & Team Buttercoin

Bitcoin Trading Made Easy | Buttercoin.com

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

Bitcoin Market Update 5/9

2014-05-09T19:00:00Z

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: http://bit.ly/1l0aEhG.

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.

Cheers,

Kevin & Team Buttercoin

Bitcoin Trading Made Easy | Buttercoin.com

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

Bitcoin Market Update 5/2

2014-05-02T19:00:00Z

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: http://bit.ly/1fBWg33)

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.

Cheers,

Kevin & Team Buttercoin

Bitcoin Trading Made Easy | Buttercoin.com

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

Bitcoin Market Update 4/25

2014-04-25T19:00:00Z

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: http://bit.ly/1ruKbhG. 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: http://bit.ly/1nP4nZg. 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: http://bit.ly/1nP4nZg. 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.

Cheers,

Kevin & Team Buttercoin

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Bitcoin Market Update 4/18

2014-04-18T19:00:00Z

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.

Cheers,

Kevin & Team Buttercoin

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Bitcoin Market Update 4/11

2014-04-11T19:00:00Z

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.

Cheers,

Kevin & Team Buttercoin

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