Analysis of How Bitcoin Is Actually Used

Quantitative Analysis of the Full Bitcoin Transaction Graph,” by Dorit Ron and Adi Shamir:

Abstract. The Bitcoin scheme is a rare example of a large scale global payment system in which all the transactions are publicly accessible (but in an anonymous way). We downloaded the full history of this scheme, and analyzed many statistical properties of its associated transaction graph. In this paper we answer for the rst time a variety of interesting questions about the typical behavior of account owners, how they acquire and how they spend their Bitcoins, the balance of Bitcoins they keep in their accounts, and how they move Bitcoins between their various accounts in order to better protect their privacy. In addition, we isolated all the large transactions in the system, and discovered that almost all of them are closely related to a single large transaction that took place in November 2010, even though the associated users apparently tried to hide this fact with many strange looking long chains and fork-merge structures in the transaction graph.

The paper has been submitted to the 2013 Financial Cryptography conference.

EDITED TO ADD (10/30): Some commentary.

Posted on October 18, 2012 at 6:11 AM62 Comments


J.D. October 18, 2012 7:54 AM

Bitcoin is doomed, in at least two different ways…

First, because it is based on ECDSA, if and when someone invents a sufficiently powerful quantum computer, Shor’s algorithm will enable someone with such a computer to steal bitcoins at will.

Second, if no one ever does create a sufficiently powerful quantum computer, there is a fixed upper limit on the total number of Bitcoins (21 million), and no one has the authority to make more. So if you lose your private key/wallet (and don’t have a quantum computer) then the bitcoins in that wallet are lost forever.

In other words, the bitcoin system can be thought of as an absorbing Markov chain. Bitcoins leap from wallet to wallet (the non-absorbing states), but there is always a chance they will leap to the absorbing state of being lost. As an absorbing Markov chain, it is inevitable that eventually most and then all the bitcoins will become lost, and the bitcoin system will break down.

Together with the deflationary aspect of the bitcoin system, I sometimes wonder if it was carefully designed as a Pyramid scheme to extract wealth over the next decade or so from conspiracy theorists, paranoids, currency speculators, gold-bugs, and Ayn-Randian fanatics. Perhaps that is the reason why the creator used a pseudonym and is still anonymous…

F.Y. October 18, 2012 8:10 AM

J.D., perhaps you should research the subject a little more before stating your reasons why it is (or is not) doomed?

PJ October 18, 2012 9:01 AM

J.D: I’ve lost more paper money from washing my clothes with money in the pockets than I ever have / will Bitcoins.

J.D. October 18, 2012 9:25 AM

P.J., while I am sure you personally have immaculate back-up habits, and will never ever lose your bitcoin data to failed hard-drives, fire, or someone stealing your computer, not everyone involved in the bitcoin system will be so lucky or so careful.

Edw October 18, 2012 9:50 AM

F.Y, maybe you should use your brain a little more?
Bitcoin is fundamentally flawed because it is a deflationary system, period.

(I do not expect a meaningful answer, I have yet to meet a bitcoin fan with a basic grasp of what is deflation. To paraphrase your derogatory non-reply, “you should research the subject a little more”.)

Together with the deflationary aspect of the bitcoin system, I sometimes wonder if it was carefully designed as a Pyramid scheme to extract wealth over the next decade or so from conspiracy theorists, paranoids, currency speculators, gold-bugs, and Ayn-Randian fanatics. Perhaps that is the reason why the creator used a pseudonym and is still anonymous…

Yeah, that was obvious from the start. A very well made scheme, still very interesting from a pure engineering point of view. This is so funny to see the gold-standard armchair economists fall hook and sinker for it.

Don’t believe me ? The choice of an algorithm with an hard upper limit (there will never be more than ~21 million bitcoins) is the obvious proof.

This research shows that there are users (certainly early adopters, including the creator) hoarding a ton of bitcoins and trying very hard to hide it.

J.D. > Man, you should check your pockets a bit more often. Or move to Australia, the land of waterproof (and, I suppose, moldproof, bulldogantproof, saltwatercrocodileproof, greatwhitesharkproof, funnelwebspiderproof, boxjellyfishproof, blueringedoctopusproof) polymer banknotes.

S October 18, 2012 10:09 AM

@edw: So what? The same applies to the gold standard and that worked well for a long time…. A deflationary system is not necessarily bad.

After all, money is just some measure to price goods and services and to facilitate exchange of services and goods.

And because it is fixed, it isn’t an inflationary system which is very good and it is outisde of governments control (which is also good; just look at the Euro mess).

Sorry for Offtopic….

Nic Watson October 18, 2012 10:15 AM

Edw, I’m not sure that “lost” bitcoins are going to be a significant source of deflation compared to the potential of demand vastly outstripping a gradual decrease in additional supply.

To expand a bit on Edw’s point, a little inflation is a good thing for (useful) currencies. It discourages hoarding and therefore increases money velocity; the more money changes hands for goods or services, the better off everyone is. If you know the price of a good is going to be cheaper tomorrow, you might delay your purchase.

That doesn’t mean that bitcoins won’t be a good investment, just that good investment vehicles don’t necessarily make good currencies (why don’t we barter in AAPL stock?).

The tension is that, in order for bitcoins to be a good investment, current owners have to convince non-owners that it makes a good currency. The more they convince, the faster the deflationary effects occur, hence the worse bitcoins are as a currency.

Winter October 18, 2012 10:16 AM

Bitcoin was designed to “keep money out of the hands of the government and politicians”. Inflation was the enemy.

However, the Bitcoin gang have been so brainwashed by the libertarians and gold nuts, that they think deflation as the opposite of inflation must be a good thing (TM).

Terry Pratchett made fun of the Gold Standard in “Making Money”. The same holds for Bitcoins.

Edw October 18, 2012 10:21 AM

The gold standard worked well?

I, for one, welcome our visitors from another dimension.

(or, more likely, somebody who got “F” in Economics as well as History 101.)

And because it is fixed, it isn’t an inflationary system which is very good and it is outisde of governments control (which is also good; just look at the Euro mess).
How much inflation is there in Europe, smartie?
How much governmental control is there on the European Central Bank?
None. It has only one mandate, to keep inflation as low as possible.

And, yes, look at the mess that results from a hard-fixed, non-manipulated currency.

greg October 18, 2012 11:00 AM


They note that people tried to hide their transactions. Using what is referred to as mixers – these operations combining a large amount of bitcoins to a master account and based on information submitted to the person who controls the account, getting it paid back out again to a different account the user controls.

Obviously they did it in an incompetent way that was completely ineffective. Does anyone have any analysis on how to do it properly such that the statistics are suitably arranged?

ChristianO October 18, 2012 11:03 AM

I doubt bitcoins could really get lost.

If it ever became a problem I am sure you can move those BitCoins out of the wallets all you need is more than 50% of the computing power. i..e you add a rule that all agree on: if some wallet is not used for a certain time the bitcoins of the wallet will be distributed equally sth like that.

J.D. October 18, 2012 11:34 AM


So who do you propose would have the power to take bitcoins from ‘unused’ wallets? And how are you going to get every single one of the paranoiacs who bought into bitcoin precisely because there was no central authority who could ‘steal’ their money (via inflation) to agree to this rule of yours?

coinderp October 18, 2012 11:54 AM

Tho u can follow bitcoins going from address to address u still can’t prove what it was used for unless u have the private keys and can match up txn to identities. This seems like they found a mining pool such as deep bit which is sending out the bulk of coins to users who then trade them. As for the crypto its designed to improve with whatever breakthroughs in quantum research happen, if you read the updated whitepaper. There definitely is a problem of forever lost coins tho bitcoin can be forked into a new branch and more coins created if needed. Its up to the community to adopt the new fork… either they pay for them or not hence the future proofing of the system

Fred P October 18, 2012 12:36 PM

Interesting paper. It seems like many Bitcoin users are using Bitcoin as an investment instead of as a currency.

coinderp October 18, 2012 12:44 PM

agreed hoarding for the purposes of speculation are another problem with bitcoin if you want to use it for commerce

Busy Bee October 18, 2012 1:03 PM

@S: “So what? The same applies to the gold standard and that worked well for a long time…”

In high finance just as in cryptography, attacks never get worse. Bitcoin apparently[1] has a number of weaknesses as a financial system, that could easily be exploited. The main reason nobody seems to be running those exploits is that there isn’t enough money in it (yet). Interestingly, this article shows that, with so many of the bitcoins held in savings accounts, the amount of money that could be siphoned by manipulating the market for bitcoins is even smaller than previously assumed.

[1] I once read a forum post[2] that literally stated “Bitcoin takes the monetary system back essentially a hundred years. We know how to beat that system. In fact, we know how to nuke it for profit.” I don’t know enough of the “quant prop derivatives trader” jargon to evaluate the analysis that preceded that statement or recognize the examples of predatory algorithms following it, but it rings true.
[2] I don’t know of a good way to link to that forum post, but searching that exact phrase works well enough. Some of the follow-up posts are also relevant.

Nick P October 18, 2012 1:42 PM

@ Busy Bee

I think this is the article you were referring to.

Proposed techniques to use against Bitcoin in that comment:

“Bitcoin is volatile, inherently deflationary and has no lender of last resort. Cornering and squeezing would work well – they use mass in a finite trading space. Modern predatory algos like bandsaw (testing markets by raising and suddenly dropping prices), sharktooth (electronically front-running orders), and band-burst (creating self-perpetuating volatile equilibria in a leverage-sensitive trading space, e.g. an inherently deflationary one), would rapidly wreak havoc. There is also a part of me that figures regulators will turn a blind eye to Bitcoin shenanigans.”

Stanislav Datskovskiy October 18, 2012 1:47 PM

@ Nick P:

See Mencius Moldbug’s brilliant reply to that same comment:


How do you “corner and squeeze” a market that can’t be shorted? You can manipulate GLD down by issuing naked shorts (essentially counterfeited against collateral). But you can’t counterfeit Bitcoin. If you want to drop the market price of Bitcoin, you have to sell actual BC that you had before and don’t have now.

Then, to actually profit, you have to find a way to buy those BC back for less than you sold for. This isn’t going to happen unless your smart algo finds an equal and opposite stupid algo that it can rape. Who gets raped and why?

(If you ask me, it’s BC that’s a well-designed market and Wall Street that’s a funky, broken anachronism. A lot of stupid pointless volatility would go away if we eliminated synthetic securities and lenders of last resort, and replaced the ancient order-matching system with a central limit-order book. Then, you’d have to actually add information to the system in order to profit – rather than profiting by raping other algos, and more plausibly retail traders, with “sharktooth and band-burst.”)”

Jeff Garzik October 18, 2012 1:56 PM

1) First of all, the Ron/Shamir paper includes one clearly false assumption. That may not invalidate all their results, but it is provably false and a key assumption of their paper:

2) On deflation: critics inevitably cite unrelated economic conditions — an entire nation on a gold standard[-like] currency — as somehow indicative of bitcoin’s guaranteed failure.

Bitcoin is a private, virtual currency where the users are entire self-selected. These conditions are entirely different from those studied and widely cited.

A world where people may freely choose between nation-state currencies and private currencies at any moment, easily switching between the two, has economic signals and behaviors wholly different from a single, gold-backed nation-state currency.

3) Yes, there is a fixed upper limit on bitcoins — 21 million — however, bitcoins are divisible up to 8 places.

4) Lost bitcoins are lost in the noise. Ignoring the clear economic incentive to not lose bitcoins, we can see that bitcoin divisibility implies the system easily adapts.

5) ChristianO: you cannot steal bitcoins with >50% network power. Giving yourself someone else’s bitcoins requires breaking ECDSA.

Transaction verification (mining) may prevent transactions from being published, but it cannot modify or steal transactions.

6) Anyone with very deep pockets may “nuke” bitcoin, just like they may “nuke” a penny stock. This is true of any small issue. It has nothing to do with inflation.

Scipio Bor October 18, 2012 2:18 PM

Hello All, thanks for good blog!

Interesting paper but authors jump to conclusions when missing the use patterns in action, particularly pooled accounts, change transactions, and cold storage. I still believe some of the conclusions may hold but lets encourage more papers!

@Edw, J.D – Why do you occupy your thoughts with deflation vs inflation in terms of bitcoins. Your armchair macroeconomic theory applies (in the best case) to national currencies and bitcoins is a tiny nano part in a diverse family of new valuble things to send of the internet. Bitcoins is not macro economy!

In fact the gold standard of old times have nothing to do with bitcoins. As gold standard was a thing upheld or abandoned by the state or king, and bitcoin is a peer to peer thing you can freely choose to use or not use, in parallel to any national currencies, or other things. Deflation in bitcoins will not have any macro effects.

dragonfrog October 18, 2012 2:20 PM

To elaborate on Jeff Garzik’s post above, point 3)

The maximum number of bitcoins is about 21 million. Each one is divisable to 8 decimal places – the lowest atomic value for a tranaction is 1 100 millionth of a bitcoin

21 million * 100 million = 2.1 quadrillion units of currency

Per this randomly selected google result ( there are approximately 10 trillion US dollars in existence – or 1 quadrillion cents.

The theoretical capacity of the bitcoin system, then, is enough to individually account for every half of a currently existing US cent. Does that sound granular enough to stave off the inevitable collapse of the system by deflation?

Stanislav Datskovskiy October 18, 2012 2:34 PM

As I see it, whenever anyone is talking about “deflation” they are really referring to a lack of inflation. The deflation experienced by gold, for instance, is certainly not the logical opposite of the inflation experienced by the U.S. dollar. Unless gold is being launched into space or drowned in the ocean, never to be found again (I will admit that this happens at a certain rate, but I suspect that mining extracts gold from the Earth’s crust at a far greater rate.)

“Deflation” just means that your money is worth more as time goes by because the economy grows in productivity. This only happens if the growth is actually taking place – and growth does not happen forever in a finite universe, and certainly not on a finite planet.

Anyone arguing against deflation is simply arguing for the State’s right to reach into every pocket at the same time by printing money. This is a great deal if your pockets are empty and the some portion of the proceeds from the theft might land in them. Otherwise it plain old sucks.

Proponents of government-issued fiat currency: be honest and call inflation a tax. But don’t lie and paint non-rotting money as some kind of Medieval torment which the Enlightenment graciously set us free from.

osmosis October 18, 2012 2:51 PM

Economics is an open field and an ongoing debate. You go to a school and they only teach you to use microsoft tools or whatever tech companies have been financially supporting them with their generous ‘free’ licenses. So guess what type of economics the state run schools are going to teach you..

Deflation – good for you, bad for the state.

Keynes vs. Hayek Round Two –

Stanislav Datskovskiy October 18, 2012 3:04 PM

@ osmosis:

What is presently taught under the name of “economics” is a pseudoscience, not unlike astrology.

But the underlying science, to the extent there is any, is the science of theft – on a planetary scale. And a very special kind of theft, in which not only does the thief go unpunished, but he is able to brainwash his victims into feeling good about being relieved of their wealth.

J.D. October 18, 2012 3:12 PM

Stanislav Datskovskiy:
“Deflation” just means that your money is worth more as time goes by because the economy grows in productivity. This only happens if the growth is actually taking place”

That is incorrect. To pick a recent example, Hong Kong went through years of severe deflation in the late 90’s, and simultaneously went through an economic slump.

JohnT October 18, 2012 3:40 PM

I wonder if Bitcoins are fungible?

From my limited understanding, they aren’t, but fungibility is an important quality of present currency that should not be given up.

Stanislav Datskovskiy October 18, 2012 3:44 PM

@ JohnT:

Right now, bitcoins are fungible. But there have been suggestions to make them less so (here’s mine.)

I’m not sure why fungibility is so important in a currency. Paper dollars which have been stolen in a bank heist and stained by an exploding dye bomb are not freely-exchangeable for ordinary dollars, for instance.

Fred P October 18, 2012 3:58 PM

@Stanislav Datskovskiy

Inflation means that holding onto your money for a period of time devalues that money. This gives you an incentive to spend it instead of keeping it.

Deflation (in the formal sense) means that holding onto your money for a period of time increases the value of that money. This gives you an incentive to keep that money instead of spending it.

Typically, for a currency in a macroeconomy, you want the former behavior (an incentive to spend) instead of the later behavior (an incentive to keep). This increases the liquidity of the currency. However, you don’t want particularly high inflation, because that causes the desire to hold onto currency to approach 0.

That said, Bitcoin isn’t used by any macroeconomy. It’s features are well-known, and as far as I’m aware, no one is forced into the use of Bitcoin. I’m not certain that this means much other than that Bitcoin is relatively illiquid compared to most currencies (as this study demonstrates).

... October 19, 2012 1:22 AM

@ Fred P:

Inflation means that holding onto your money for a period of time devalues that money. This gives you an incentive to spend it instead of keeping it.

People should save, not spend.

Deflation (in the formal sense) means that holding onto your money for a period of time increases the value of that money. This gives you an incentive to keep that money instead of spending it.

Exactly. Even if people want to save instead of spend, they still need to buy milk and eggs. Few people will starve themselves because of deflation.

Typically, for a currency in a macroeconomy, you want the former behavior (an incentive to spend) instead of the later behavior (an incentive to keep). This increases the liquidity of the currency. However, you don’t want particularly high inflation, because that causes the desire to hold onto currency to approach 0.

Only in economies which are dominated by those interested in bleeding people as long as possible.

Winter October 19, 2012 1:37 AM

“Exactly. Even if people want to save instead of spend, they still need to buy milk and eggs. Few people will starve themselves because of deflation.”

You have obviously not looked at what happened in economies with consistent deflation?

Spoiler alert: Disaster

Saving only makes sense if the money is invested and generates ROI. However, with deflation, you get an interest without investment taking the incentives away from investing at all. Furthermore, reduced consumption will drag down ROI. So deflation will decrease the amount of money invested and hence economic growth.

Edw October 19, 2012 2:11 AM

…For those who doubted the BC fans have no clue about basic economic definitions, just look at Jeff Garzik and especially dragonfrog. They have absolutely no clue about what is deflation.

Stanislav Datskovskiy > No, saying “inflation is acceptable” is not “arguing for the State’s right to reach into every pocket at the same time. It is arguing against money hoarding. If you do not like it, please, do convert all your savings to gold, or anything which is not fiat money. If really it was about reaching into people’s pockets, you’d think this loophole would have been closed and nobody would be allowed to invest in anything, wouldn’t you?

Fred P gets it right. Which makes all those who get it right depressing, because it is not rocket science.

Winter > The “bitcoin is out of reach of the claws of the gov’ment” is bullshit anyway. How many bitcoins do you think the NSA could mine with their brand new datacenter? Most of the supercomputers are state-sponsored efforts, and bitcoins only rewards computational power. The US government – or any other first-world gov – can kick bitcoin in the balls anytime.

That’s Schneier’s analysis of the effect of the internet on power balances, by the way: to paraphrase, the internet is an enabler, which initially gave power to people because big organizations are slower to adapt, but once they do, they too will see their power augmented… And come back to the top (maybe even more powerful).

Democraatus October 19, 2012 2:22 AM

Deflation is all around us. Just because it would concern money, does not make it something bad. The balance would be different but deflation used by economist is usually thought of as a deflating credit bubble, not a stable balance between savers and spenders.

Anyone who argues that involuntary and stealth theft of one’s money is positive, is an enemy of liberty. I guess there are a lot of enemies then.

Edw October 19, 2012 4:38 AM

Exactly. Even if people want to save instead of spend, they still need to buy milk and eggs. Few people will starve themselves because of deflation.

So, tell me, Mr. “…”, I hope you are a few cows or hen? Because if not, you will have nothing to save, because you will earn nothing. If everybody saves, you will starve like everybody else (save a few farmers), sucker.

Deflationista really want to bring us back a few centuries ago!

Democraatus > Deflation is all around us? Pray tell, where is this wonderful land were a stale loaf of bread left three days on a table is worth more than a fresh loaf, where my five-year-old car is worth more than a brand new one? (Just a though: you are not, by any chance, suggesting that the fact I pay less for a used car than for a new one is “deflation” because I can buy “a car” with less money, are you?)

AC2 October 19, 2012 4:39 AM

There are no ‘investors’ in BitCoins, only speculators… (Well and miners but they are a bit rare now that the get-rich-quick economics of mining have fallen apart…)

And speculators may get rich or they may lose it all… If you’re holding more than $100 worth consider yourself a speculator…

For everyone else, just make sure you buy/ sell BitCoins less than a day apart and in small quantities…

Clive Robinson October 19, 2012 6:59 AM

Hmm the joys of economics home spun or otherwise.

One problem you bump into all the time is people basing their ideas on “monetary value” not actual or real value, mainly because it is mentaly easier.

It’s a problem because if you assume that they are equall then stockpilling natural resources is a deflationary activity. Only it is not, as a tonne of coal cannot be more than a tonne of coal, it can only decrease by the well known principles of entropy.

An increase in real wealth as opposed to monetary wealth comes about by applying energy (work) to resources (natural resources etc) to produce goods or services that are perceived as having sufficient extra utility to create a differential that exceeds the input values. We often call it “value added” activities.

Real wealth is thus based on the value of the resources and the perceived extra value of the utility of a finished good. The resources are finite, in current human terms, that is we only have so much of any natural resource on the planet at any one time, most of which is not usable because there is insufficient utility in aquiring it. Energy however is not finite in the human sense we have around 1.5KW of energy for every square meter of earths surface provided free gratis by the Sun. However energy from the Sun is problematic in that it is unreliable at the earths surface and difficult to store. It is also in most forms very inefficient to transport, the exception being where it’s stored in chemical bonds but currently the conversion process other than by nature is grossly inefficient (mind you a UK company has just anounced it can turn “thin air” into fuel sufficiently efficiently to be economicaly viable). Money on the other hand has due to inflation no upper limit to the number of right hand zeros and is thus infinite in human terms, every so often we revalue it simply because your average human has trouble remembering numbers of more than five digits and usually lose count of the zeros when they get above seven or eight (hence using comas every three decimal places, but even that gets out of hand after four or five of them, hence we write one above another when evaluating numbers as opposed to side by side as we do words).

The important thing to remember about money is it has no “real” value and was created in usable form to assist in trade and as a method of storing perceived value. Initialy it was by the use of various semi precious metals, later as promisory notes and now as bits of information speeding around computers and networks. At each step it has become furtheer divorced from “real” value, which is why some people hanker after Gold Standards etc.

Inflation is in reality the difference in exchange value with time, only it is sometimes difficult to see due to other factors due to the vageries of such things as ‘supply and demand’ which makes planning difficult (hence futures markets). In effect it represents the loss of value you might other wise obtain by increasing the utility of natural resources. In investment terms it is the loss of interest to you the person holding the money in your pocket (under the matress etc), but the interest is not actualy lost it in effect goes to the person who prints the money (seniorage) and other intermediaries. The main advantages of money are you know what you are going to get for it at any point in time you enter a market which makes transactions easier than bartering, and it’s transportation and storage costs are generaly minimal compared to most natural resources.

Unfortunatly converting real value into perceived value in a market allows those with more knowledge to gain advantage and further advantage by manipulation or controling supply (look at value of diamonds). Worse then divorcing the monetary value from real value alows others to further manipulate monetary value to their short term advantage over others. The main reason that Governments got rid of Gold Standards was so that they could mess around with the supply of money to their own advantage, not as usually indicated to free up markets.

Another way of looking at inflation is the “value added” product for investors in the Banking industry. In theory (only) the Banking industry increases the utility of money by providing an easy interface between investors and borrowers. In return the banks supposadly take a “fair” percentage for the cost of running the interface and for the risk involved. As we have seen for quite some time this is not the case and banks have been creating valuless faux markets in order to take a considerably larger percentage and have in the process kept Government appointed regulators off of their backs by the simple process of back handers in various forms to senior individuals and by giving preferential rates to Governments so that they can borrow money to bribe the electors with, and you the poor blighted tax pay have to pay the piper when the music stops even though you did not call the tune.

Adam October 19, 2012 7:26 AM

Lots of defensiveness about bitcoin here. Simple observation of where it stands and where it has travelled these last few years should tell people all they need to know. It’s fuelled several massive speculative bubbles and collapses and it’s still no closer to being a stable viable currency now than it was then.

From a security standpoint it’s also suffered from some serious hacks and many of these were quite obvious vulnerabilities even back then – unencrypted wallets, insecure exchanges etc.

Dan H. October 19, 2012 9:15 AM

Economic aspects of bitcoin aside, the analysis these authors have performed fills me with dread for the future of Bitcoin. When I see that most of the big transactions don’t seem to have been anonymised buys of various goods but more an attempt to covertly shift a huge amount of currency around, closely followed by obfuscatory tactics (that didn’t work), then I am forced to but one conclusion:


The original creator of bitcoin was setting up a scam to diddle a wide variety of potential marks out of actual wealth. What I’d wager occurred is that someone started out with a huge lump sum of bitcoins, and then sold this lot on to some half-smart financial wizards.

Said wizards then tried the very same obfuscatory tactics that work out in the real world with non-traceable money on their load of bitcoins, not realising that this was useless (hence half-smart). After this, the lump was then flogged off to legions of conspiracy theorists, loons, anarchists and dozy libertarians in a collection of very small parcels.

In the early days, bitcoin suffered a series of rollercoaster peaks and slumps; this was because most of the capital was being controlled by whizzkids. These days it’ll be stable because most of the capital will be sitting as nest-eggs in the wallets of the aforementioned legions of loons; there won’t be any movement save a slow deflation simply because there isn’t enough liquidity in the system to actually support much movement.

All in all, a very, very effective scam. I take my hat off to the man who invented bitcoins; almost as effective a way of fleecing idiots as a religion, and hitting a completely different market of suckers that was hitherto the sole preserve of gold-dealers. Nicely done, very nicely done indeed!

Rhenium October 19, 2012 11:40 AM

Damn… an interesting article made obscure by the internet inflation/deflation/gold fanatics.

More important from the article (yes I did read it) was the November 2010 transaction… perhaps a scam (Dan H.) but I’m not so sure. I’d like to think it is a nascent AI who is probing the concepts of markets. 😉

Satoshi Fan October 19, 2012 1:27 PM

Bitcoins are infinitely divisible. They are currently divisible to 8 decimal places because the value in the protocol is a 32-bit integer. Change to 64-bit and so on for more decimal places. An entire economy could exist off of 0.000001 bitcoins.

This paper’s analysis is flawed because it is impossible to know if these large transactions are single users or part of a company (eg Mt.Gox, Silk Road, BitInstant, etc). It is also impossible to know if the coins that have not moved in a while have been lost (user deleted private key and can no longer access wallet), or are actually being stored.

Breaking ECDSA would only allow one to steal bitcoins that have been sent to an address which has sent coins already. This is because the public key of an address is revealed when it spends coins. Use a new address for every transaction and ECDSA flaws will not be a threat to your coins (eg it is astronomically harder to brute force BOTH the public key and private key).

The only way the original creator of bitcoin (Satoshi) could make any money is if he redeemed the coins sent to the first bitcoin address (presumably his). There is a large number of coins in that address but there is no way to know if the private key to that address has been lost, or if Satoshi is holding on to it. Worst case: he sells the coins all at once and crashes the market for a bit.

Democraatus October 19, 2012 2:08 PM

Before diving into the matter of inflation and deflation, one must define them. I haven’t defined mine when speaking about ‘deflation is everywhere’ so let’s do this first.

I normally use the following definitions:

  1. Inflation: a net increase in money supply and credit, with credit marked-to-market.
  2. Deflation: a net decrease in money supply and credit, with credit marked-to-market.

The first two definitions have nothing to do with prices per se. However, many if not most economists, especially Keynesians, think of inflation in terms of prices. That’s the reason why I referred to deflation as such when stating ‘deflation is everywhere’.

‘Economist’ are so busy claiming that an increase of purchasing power of money is so bad because the economy would come to a crippling halt, that they fail to notice something else. Even if $499 remains $499 1 year later in nominal terms, I may be able to get ‘more’ for the same money.

2 March 2011: Ipad 2 is launched.
7 March 2012: Ipad 3 is launched.

Both were priced similarly when launched. Someone with $499 who waited one mere year could have bought a tablet that is much more powerful than the one he could purchase one year before. Realistically, he was able to buy much more a year later with the same money, than a year before. However, the iPad 2 was not a failure nor was the first iPad. Noboby cared about the next year when buying the iPad 2 at that time.

‘Economist’ tend to be very sensitive about money not appreciating over time. There is extensive material on defining whether there is ‘official’ inflation or not. In essence, a lot of bureaucrats comparing iPad 2’s with iPad’s 3, apples with pears, figuring out arbitrarily whether there is (Keneysian price) inflation or not. All because appreciating currency is so, so, soooo incredibly bad. The simple notion that people may – at times – just prefer to hold money instead of immediately spending it, is deemed bad. A true display that those kind of ‘economist’ do not understand the real world.

I have never ever ever ever never never ever never ever ever ever NEVER EVER postponed a purchase or brought a purchase forward for considerations of assumed increase or decrease of purchasing power. There is a simple truth that this argument used by ‘economist’ is just that: an argument. It has no meaning in real life because ordinary people do not take this into account. It’s simply the choice whether one wants NOW or in the FUTURE.

But that won’t stop ‘economist’ proclaiming that ‘deflation’ is bad and a little ‘inflation’ is good. Please do not mind that people are simply robbed of value if someone, be it banks or government, prints new money. Its nothing more than theft, taxation without representation. Something that once started a whole rebellion of the ‘best country in the world’ against the Brits. But humanity has to learn over and over again.

So, yes, I thinkered a bit with the definition of ‘deflation’ for argument sake. But the fact remains that deflation (if not too extreme) does not lead to a crippled economy. Otherwise, I would still be holding my $499 for that iPad 7 that will blow the rest out of the water, starved to death because deflation urges me not to spend any money.

Einstein already defined insanity: doing the same thing over and over again, expecting different results. Keynesian economist with their inflation fallacy were and are dead wrong. Their policies are part of the reason why we are in such a hard place. Entirely foreseeable for those willing to use real logic. And yes, I love to keep learning from the other side of the story.

That does not take away the particulars of the Bitcoin study. I would be interested to learn the numbers in respect of ‘official money’. No one is hoarding that other digital money?

Gweihir October 20, 2012 3:32 AM

One thing that marks Bitcoin rather strongly as a scam is the mind-set of its proponents. These arguments given (also given here) are the typical ones used by participants in pyramid schemes. It is a mixture of naive believe, and secret hopes that by recruiting enough others to the scam they can be high enough in the pyramid to profit themselves. (Which they never do. All profitable layers and a few extra ones are with the instigators of the scam.)

The Bitcoin creators did two things really well:

a) Create that mind-set (the “idea” part of the scam). As is well known, there are about 5% of the population that cannot identify a scam even if it is glaringly obvious, if the “idea” is good. With an “idea” this good, the number may be significantly higher.

b) Make the crypto strong enough that nobody has broken it so far. Not that the crypto is any good (see below), it is just not easily broken.

There are glaring flaws as well:

  1. The deflatory nature screams “pyramid scheme” so loud nobody halfway awake can ignore it. Due to defects in perception of the participants, it works nonetheless (as any good scam does).
  2. Bitcoin handling is very hard to implement securely, as numerous plundered individuals and Bitcoin exchanges have shown. I would go so far as to say that at this time secure Bitcoin handling is unsolved, unless you keep them completely offline. No doubt the people at the top of the pyramid are doing that until they decide to cash in. This flaw makes Bitcoin fundamentally unsuitable for its stated purpose.

Bottom line: Just another scam for the gullible, advertised with the usual “world changing” type of “idea” that cannot hold water on close scrutiny, but seems plausible to non-experts. I expect that is also why nobody really tries to outlaw it: Any good economist sees what it is.

It does have some interesting properties though, and can certainly be classified as an advanced scam.

Fred P October 22, 2012 10:47 AM


  • In that case, I’d advise that you create models of two economies: one with fiat currency with inflation and one with fiat currency with deflation, both at fixed rates (for simplicity). Include (very simple) debt, loans, investments, work, actors, etc. Then compare the two.

If you can find a realistic model where currency with deflation performs better than one with inflation, I’d encourage you to publish. I’m certain that I wouldn’t be the only person interested in this result; while I am hardly an economist, I’ve tried this and failed.

@Democraatus – you appear to realize that your definitions for inflation and deflation are non-standard. Are you aware that your definition for money is non-standard? Indeed, it’s pretty easy to construct an example where an increase in money supply does little to affect the value of money.

@bitbrain October 23, 2012 4:35 AM

Addresses which have never spent coins: the only reason to reuse an address is if you need to publish it. So concluding that these coins are being hoarded is unwarrented.

Quantum computers: never reuse a bitcoin address. Public key is disclosed only when coins are spent or moved. How is this worse than our e-commerce system which fails on publication of root PKI keys? Actually it is much better.

Bitcoin creators cash in: same as founders after a successful IPO.

Currency issues: bitcoin is a payment system and bitcoins are a commodity that cannot be manufactured. Bitcoins are useful because they can be used to make payments especially international payments.

Professional traders on currency exchanges: never try to beat the pros in short term trading.

Retail bitcoin exchanges allow payments with simultaneous rapid international transfer and currency conversion.

Hoarding is just commodity speculation.

Government takeover or suppression: definitely possible. Suppression simply requires many government miners whose goal is to slow down transaction processing enough to make bitcoin useless.

But there are ever more legitimate businesses in bitcoin and the system is useful. So I expect takeover by a group of nations (no nation will want to allow another to take over bitcoin). The majority of miners can change the rules. This offers an opportunity for a transaction tax, and for 3% inflation.

@bitbrain October 23, 2012 5:47 AM

I meant to include these points.

Wallet security: support for the “brainwallet” is maturing. A suitable (globuniq) passphrase is hashed to seed private key production. Neither the private nor public keys are disclosed; only the bitcoin addresses are placed online. Bitcoins are received at those addresses. To spend the coins in a specific address, the passphrase is entered into an offline device which generates the signed transaction and sends it over a write-only channel to the bitcoin network.

Real world adoption: Argentina has high inflation and is trying to enforce currency controls. People are buying bitcoins for Pesos and dollars for bitcoins. Google for Argentina blue market bitcoin.

Jess October 25, 2012 8:33 PM

Sure a lot of BC fans have a bit of the flavor of the true believer about them. They really do think BC is a valuable innovation, and they’re not ashamed to tell you that.

But for pure intellectually bankrupt desperation, the competing legions of jaded naysayers take the cake. If Bitcoin really were as weak and vulnerable as they say it is, well, they wouldn’t be saying a thing. Instead, they’d have their fancy trading algorithms and quantum crypto key-finders churning day and night, stealing all that money that the poor deranged libertarians have left lying around for the taking.

Since that clearly isn’t happening, I’m not going to worry too much about the hand-wavy pseudo-economics. Here’s a clue for the befuddled: don’t think of BC as a fiat currency, but as a commodity. No modern economy requires consumers to keep pork bellies in their wallets, and that’s OK!

Jonadab October 30, 2012 6:46 AM

The main problem with a gold standard is that it does not allow your exchange rate to float independently against multiple trading partners. This was not a large problem in the past (prior to about WWII), because at that time almost all countries were either exporters of raw materials or of finished goods, not both, and nobody exported services (except very locally, between immediate neighbors).

In the modern world, however, a gold standard would generate harmful currency arbitrage, draining the currency backer’s coffers, which is why the US Dollar had to be taken off the gold standard. There wasn’t really any choice, except in the timing of exactly how soon to do it. Ultimately, we had to go to a fiat currency (unless we wanted to return to the practice of enacting high tariffs on all imports, causing all of our trading partners to erect tariffs on our exports in turn, a practice that economically isolates you and allows the rest of the world to pass you by).

Bitcoin, for slightly different technical reasons, would have an effectively very similar problem, if it were ever adopted as a primary currency in any given geographic area. So it won’t be.

I suppose, if enough of the right people embraced it, it could potentially compete with services like PayPal. I see no evidence that that is happening in practice, though. For example, I am not aware of a single major retailer that accepts it as payment.

Harry S November 13, 2012 5:42 AM

Even the bitcoin enthusiasts know that these long strings of numbers aren’t worth anything. But I suspect that they are hyping it up so that the price of a bitcoin will rise and then they sell out before the coin crashes.

And the idea that this is the currency of choice for underground drug trafficking on the internet is laughable. Was that is a Cracked article or something?

Tamaulipas November 15, 2012 11:00 AM

I wonder about those dormant accounts. It seems to me they could be used as a reserve currency, passing the private key around as the actual, untraceable medium of exchange. I suspect this would require some enforcement mechanism, such as the violent response available to drug and weapons dealers.

Terence November 16, 2012 8:41 AM

The BIG problem with all this macro thinking by some, no doubt, “very clever people”, is that it oftentimes ignores the micro ~ almost all the complaints they level at the door of Bitcoins, in the macro, are equally applicable to flat currencies in the micro.

But please don’t let me interrupt your high-level discussion. Very interesting. Stupid, but very interesting.

William February 6, 2013 9:03 PM

Seriously, nobody knows what’s next.

Historically, all fiat currencies all disappeared.. and gold is totally unusable as a currency..

Yet.. Bitcoin is no fiat and no gold.. It is (take a deep breath) something else.

And since nothing like that exists in our past history, nobody can say what is going to happen.

Bitcoin future would be a dead end if Bitcoin wouldn’t have anything to offer.. The reality is that Bitcoin has something unique to offer.

  • Worldwide immediate and interoperable payments
  • Free (or extremely low fee) transactions
  • Total zero payback fraud
  • Total zero counterfeiting
  • Total zero spoofing
  • Impossible to freeze or control by any organisation

I would say that is pretty huge.. No fiat ever got to obtain such properties. And it is for real.

Yet, the real question is now to know if the market will want these properties.

And as for the deflation or legality, these are indeed valid concerns. Everyone is wondering how things will evolve. And negative reactions on this forums leaves a good demonstration that deflation might in fact be a factor that will stabilize Bitcoin adoption (and deflation) with a simple market resistance. Or maybe not!

My bet is that Bitcoin will not die that easily. The protocol is terribly resistant and resilient to anything that comes to imagination. And even when speaking about human reaction, Bitcoin confidence has shown is ability to survive to apocalypse when MT.Gox was hacked. The dollar would never survive to anything close to what happened to Bitcoin in its first years of existence. However, I still have no clue if Bitcoin has the potential to become mainstream. But the probability that it might disappears is very unlikely.

Ade February 28, 2013 6:48 PM

Even if it was initially set up as a scam,which I don’t believe, the bottom line is, we now have a system for sending money around the Globe, anonymously, quickly and relatively cheaply.
That’s a useful technology, which I think will make it very popular, and as it becomes more popular, it’s price will soar.

Paul March 28, 2013 11:08 PM

Dear Clive Robinson,

I could not have expressed it better except up to the point you argue that the government wanted to mess around with the gold standard for their own gains. Today we are much better off with the existing printed money system than if we were still on the gold standard because if we were, much of the world would be a desolate and poorer place and the richest country in the world today per capita would be S. Africa, which would probably still be a colony by whoever had the greatest military might.

Keep in mind there is nothing stopping you from remaining on the gold standard; just go ahead and buy the stuff if you love it so much. Also keep in mind that very few of us even store our wealth in printed money. Most of us will store it in fixed assets so nothing has really changed from the gold standard anyway, just that we prefer to store our wealth in other things that we find are more important than gold. Gold has simply been relegated to its true stature: a commodity that is rare, but not as rare as oil. Only those blinkered who bet on gold being an eternal store of rising wealth complain about the printed stuff.

Reminds me of an idiot who said to me they wanted to buy up all the land on an island because the sea levels were rising and so land would become scarce. I replied that was correct, but then who will buy your land when everyone is poor.

Clive Robinson March 29, 2013 6:13 AM

@ Dear Paul,

… except to the point you argue that the government wanted to mess around with the gold standard for their own gains.

It’s a mater of historic record that Governments leaving the gold standard was at times perceived by the then Government as most advantageous to them.

As for,

Keep in mind there is nothing stopping you from remaining on the gold standard; just go ahead and buy the stuff if you love it so much

I’m neither in favour or against people wishing to purchase any scarce commodity if they wish to, it’s upto them. It’s a matter of record that I’m actually not in favour of the “gold standard”. The simple fact is as can be seen with the price of gold the actual financial value has little or no relation to the real or utility value of the commodity, just the state of confidence in other financial systems, and various Governments behaviour.

Likewise with diamonds the value of which is kept deliberatly high by the likes of deBeers who basicaly horde something like 80% of “gem quality” stones. Apart from their ‘sparkely value’ diamonds have insufficient intrinsic value to justify the financial value they are given. The main advantage to them appears to have been as an easy way to transport very high values of financial value easily and at one time almost untraceably.

As you note,

Most of us will store it in fixed assets so nothing has really changed from the gold standard anyway, just that we prefer to store our wealth in other things that we find are more important than gold.

Unfortunatly for many the most valuable asset they own is the house they live in. Various Governments have promoted “home ownership” in various ways. And as we’ve seen that gave others an oportunity to “inflate” the market into a large “bubble” that has since burst. The houses and land still have the real value they had, that has not changed, however the financial value has been dictated by other percepcions and thus we have the oddly named “equity trap” which many have gotten into.

As for the,

… idiot who said to me they wanted to buy up all the land on an island …

Have a look at one of the more famous quotes by “Mark Twain” about investing money in land.

Times change as fast as peoples perceptions and what was once good advice is now bad, but as life is also cyclic in nature might well become good advice again. As has been observed about comedy “timing is everything”.

SimonBelmon April 27, 2013 4:49 PM

The discussion is interessting.

I think many Bitcoin adopters are well aware that the Bitcoin might die sometime. However, I beleve that the concept of such a decentralized cryptocurreny as such will not die during my lifetime. Facebook might die or be transformed into something else at the right time but social networks will remain.

Sanaka Toshimura February 2, 2014 3:38 PM

Isn’t it interesting to go through this comment thread and see how many of these fools were just talking out their ass.

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