Clarifications and corrections from a computer scientist

[Note: I recently received some feedback on The Anatomy from Jorge Stolfi concerning a few of the passages in the introductory chapter.  Below, reprinted with his permission, are some of his comments and corrections that readers may find helpful and more clarifying than what I originally published.]

In the introduction you say:

Property is a legally recognized right, a relation between actors, with respect to control rights over given contestable, rivalrous resources.14 And with public-private key encryption, individuals can control a specific integer value on a specific address within the blockchain. This “dry” code effectively removes middlemen and valueless transaction costs all while preserving the integrity of the ledger.15 In less metaphysical terms, if the protocol is a cryptocurrency’s “law,” and possession is “ownership,” possession of a private key corresponding to set of transaction (tx) outputs is what constitutes possession.16 In other words, ownership is conflated with possession in the eyes of the Bitcoin protocol.17

I don’t think that the Bitcoin protocol did (or could do) that; property and possession remain quite distinct in its realm, although property is often very difficult to enforce.

As you say, possession is the physical ability to control and use the thing, while property is the legal right to do so. The state decides whether something is your property, and when it passes to someone else. Taking possession of a thing without the state’s agreement — i.e., without becoming its proprietor — constitutes “theft”. In that case the state is supposed to use its power to restore the thing to your possession, and possibly punish the thief.

“Ownership”, “owner”, “own” are sometimes used for possession, but usually they refer to property. I will use them with the latter sense only.

Knowing the private key to a blockchain address gives possession of the bitcoins stored there, but not ownership. The general rules of property still apply: to become owner, you must create some coins with materials, equipment and labor that you own, discover some that have no owner, or receive them from their previous owner, with his agreement; all with many other conditions and exclusions, taxes, etc.. Thus the notions of property and possession are quite distinct even for bitcoin.

The US government has acted on this distinction already, e.g. by seizing the Silk Road bitcoins, prosecuting Trendon Shavers for “misappropriating” bitcoins of clients with his Ponzi scheme, and accusing Butterfly Labs of pocketing bitcoins that they mined using customer equipment.

All crypto assets are essentially bearer assets. To own it is to possess the key.

Even with bearer assets the notions of property and possession are distinct; one can be prosecuted for the theft (taking posession) of bearer bonds or cash that are someone else’s property. Bitcoin, like cash, only makes it more difficult to prove to the state that a theft occurred, and to catch the thief; but that does not mean that property has been reduced to possession.

In the early years of bitcoin, one could perhaps have believed that bitcoins would be outside the scope of the concept of property — like inventions and songs used to be, until the recent transformation of copyright and patents into “intellectual property”. However, even before the legal cases above, Mt GOX and many other cases made the community recognize the concept of “bitcoin theft” — and therefore the notion of property distinct from possession.

The shift from bearer, to registered, to dematerialized, and back to bearer assets is like civilization going full circle, as the institution of property evolved from legal right (possession of property) to the registered form (technical ability to control) that predominates in developed countries today.

I don’t think that the shift from material to dematerialized assets implied the weakening of the concept of property. On the contrary, dematerialized assets became possible only after society invented the concept of property. In fact, dematerialized assets are simply the rights of property of other things, as recorded in some “official” registry recognized by the state, and only as long as those records are changed in ways admitted by the state.

Private blockchain keys are like the keys to a car, in the sense that the person who has the keys in hand can take possession of the car. But the keys do not define the property of the car, which is determined by car documents and records issued and kept by the state.

Complementing the analogy: the blockchain protocol is therefore not the analog of the car ownership documents and records, but more like the door lock mechanism: a blind device that will only give possession of the car to whoever has the proper key, and thus usually makes theft more difficult; but it does not define property. In fact, the door lock sometimes may even hamper the restitution of the car to its rightful owner. And replacement of the door lock (analog of moving bitcoins to another address), by the owner or by a thieff, has no effect on the car’s ownership.

A bit further down from that section:

by building a blockchain tree (called a “parent”) [ … ] These blockchain trees are simultaneously built and elongated by each machine based on previously known validated trees, an ever growing blockchain.

There may be some confusion here perhaps. A Merkle tree is a very general concept: it is a set of data records (or “blocks”), where each record contains, among other information, a cryptographic signature of the contents of some other record, its “parent”. These signatures tie the records in such a way that, if one wants to change the contents of one record, one must recompute all the signatures contained in all the records that are downstream of it. It is called a “tree” because a record may be the parent of two or more other records, thus a fork of the tree.

The Bitcoin blockchain is a special case of a Merkle tree. It forks only “accidentally”, and when it does one of the branches of the fork is usually very short, quickly dies, and becomes completely irrelevant. Thus it is a basically a linear chain (a Merkle chain) or records, rather than a bushy tree.

There have been proposals to change the Bitcoin protocol to use a “bushy” Merkle tree instead of a linear chain. That would make some operations much faster and less wasteful of bandwidth and memory. However, there is so much software out there which depends on the current structure, that such a radical change is highly unlikely to be implemented.

Bushy Merkle trees have been proposed also for other uses, e.g. as a way for exchanges and similar places to demonstrate that they have all the bitcoins that they are supposed to have. But those uses are not part of the Bitcoin protocol.

The blockchain only forks when (1) some bug is found in the protocol, that requires discarding all blocks since the first bad block, and replacing them with a new set of blocks, starting at that point, re-processing all transactions again if possible. Or, (2) when two miners succeed in mining the block N+1 nearly at the same time, and each broadcasts his version of that block without seeing (or acknowledging) the other. Then all the miners may choose either version as the parent for their block N+2. Thus the two branches may grow independently for a while, but at some point one of them will get defintely longer, and then all miners will have to continue extending that branch. At that point the shortest branch will become irrelevant and the blockchain will again become a linear chain.

So, maybe you want to avoid mentioning Merkle trees at this point, and pretend that the blockchain is just a chain that grows orderly, one block at a time. Those accidental branchings are relevant later, for the discussion of double spending and other possible faults/attacks.

Further down:

By January 2014, the computational power of the network reached 200 petaflops, roughly 800 times the collective power of the top 500 supercomputers on the globe.25

Perhaps it would be better to say something like:

“The proof-of-work computation essentially consists of performing a large number of relatively expensive operations, called ‘hashes’. The computing power of the Bitcoin network (or of any Bitcoin mining equipment) is therefore measured in ‘hashes per second’ (H/s). By January 2014, the computational power of the network reached 200 petahashes (200’000 trillion hashes) per second. By comparison, the top 500 supercomputers in the world could perform only about 120 trillion floating-point operations per second (teraflops).”

This too is somewhat garbled:

To prevent forging or double-spending by a rogue mining system, these systems are continually communicating with each other over the internet and whichever machine has the longest tree of blocks is considered the valid one through pre-defined “consensus.” That is to say, all mining machines have or will obtain (through peer-to-peer communication) a copy of the longest chain and any other shorter chain is ignored as invalid and thus discarded

I would just write something like:

“The computers that comprise the Bitcoin network are constantly communicating in peer-to-peer fashion, sharing their known versions of the blockchain and checking each other’s work. The nodes strive to reach a consensus — which is defined as the longest version of the blockchain where each block contains only valid transactions and the correct signature of the previous block. Any side branches that are not part of the longest chain are ignored (and their blocks are called ‘orphans’).

As of this writing, the height of the longest chain has just over 311,000 blocks.

Rather: “As of this writing, the length (or, in bitcoin jargon, the ‘height’) of the consensus chain was over 311,000 blocks.

The Composition of Metacoins on the Bitcoin Network

[Note: This was originally published on December 24, 2014 at]

Earlier this year, on March 24, “Dexx” – a user on Bitcoin Talk – published a pie chart illustrating the composition of some metacoins.

Over the past six months we have kept in contact and he has updated the chart showing the progress and trend of multisig outputs.

Below is the original chart:

Uan23Z9There were 5,176 meta-coin transactions

  • There were 35,508,561 transactions in total
  • There were 9,819,223 unspent outputs

On July 29, 2014:

41vkzkhTaken at height 312999

  • There were already 46,948 meta-coin transactions
  • There were 43,442,280 transactions in total
  • There were 12,444,288 unspent outputs

On December 9, 2014:

mJ2qWVHTaken at height 333507

  • There were identifiable 152,699 meta-coin transactions
  • There were 53,527,466 transactions in total
  • There were 15,426,367 unspent outputs

This only includes the transactions Dexx was able to identify such as Proof of Existence, Open Assets, Coinspark, Block Sign and the use of OP_RETURN (note: there is still an active discussion between using 40 bytes and 80 bytes). Open Assets and Coinspark are a type of colored coin implementation and both Proof of Existence and Block Sign are a type of notary service (here is an album view).

Dexx originally used the term “multisig transactions” but later replaced it with “unspent outputs.”

Some other closing analysis from Dexx:

Almost all Counterparty transactions carry data via bare multisig and there are about 5000 non-multisig Mastercoin transactions. There are furthermore 17620 unclassified, unspent multisig outputs and 6286 unclassified, spent multisig outputs.

Almost all of those unclassified multisig outputs were created by Wikileaks and actually carry some data too.

Proof of Existence, Open Assets, Coin Spark and Block Sign account for 7363 OP_RETURN transactions. The total number of all OP_RETURN outputs, according to, is close to 11960, so more than 60 % can be mapped to those four.

What does this look like on a day to day basis?

GjZA2rYOver the past several months – according to Blockscan – Counterparty transactions have sometimes accounted for roughly 3% of all traffic on the Bitcoin network.

In the future, observers and researchers may find that coin mixing (via Coinshuffle, Coinjoin, Darkwallet, etc.) as well as P2SH are comprising ever larger shares of the network as well.

Note: there is also continual discussion over the role and use of bare multisig as data carrier.

Happy Holidays!

Are there changes in the volume of retail transactions through Bitpay this past year?

A couple days ago I noted that because Bitpay reuses its addresses, it is possible to monitor them and that there hasn’t been much of a growth since May (the last time they announced numbers).

Today a redditor posted some visual analysis and explanation of these same Bitpay addresses.  [Note: I’ve reached out to the user and will update this post if they provide any other information.]  Below is their analysis:


The green line on this graph shows the number of payments per day into the presumed (see below) receiving address of BitPay, from 2013-01-01 to 2014-11-3. Note that the vertical axis uses log scale. The number was about 1000–1500 per day through most of 2014, with a strong weekly pattern. The spike at the right end is Black Friday; there were about 3200 inputs, i.e. about 2x to 3x as many as in a typical day.


The green line on this graph shows the number of BTC deposited each day into that wallet. This graph is rather strange since the number is practically constant since January 2013, about 500–1000 BTC/day, and shows no weekly pattern. And no Black Friday spike either.

What happens is that there are two kinds of inputs to that wallet, which I will call “retail” and “wholesale” (although I have no idea what the latter are, really). The wholesale inputs are large (often hundreds of BTC) and have been regular in amount since 2013-01. The “retail” ones are much smaller (mostly under 10 BTC, many under 1 BTC), much more numerous, and have increased about 3x from mid-2013 to mid-2014. Hence the first graph above is dominated by the retail inputs, while the second graph basically shows the wholesale ones.

The data for these plots comes from these pages that are claimed to show all transactions into the BitPay receiving wallet since it was created. However, the addresses that make up that “wallet” were inferred from the blockchain by an undisclosed heuristic that is supposed to identify addresses belonging to the same owner.

My guess is that the heuristic simply assumes that two addresses that are inputs to the same transaction must belong to the same owner (since one needs both private keys to sign the transaction) and assigns them to the same “wallet”. If my guess is correct, the heuristic may fail to include in the “ wallet” some addresses that belong to BitPay but were never used together with the identified ones.

However, the volume of BTC that went into that heuristic “wallet” during May/2014 seems to match what BitPay said to process per day in that month (assuming that they picked the best day of May); so it seems that the heuristic wallet is fairly close to the real one.

Updated with more from the same user:

  • BitPay now processes about 1000-1500 “retail” payments per day, averaging less than 1 BTC each;
  • The number of retail transactions processed by BitPay has grown 3x since mid-2013, and has been flat through most of 2014;
  • The amount of BTC processed by BitPay (including “retail” and “wholesale” payments) has been quite constant since Jan/2013, about 500-1000 BTC/day
  • In terms of dollar value, the amount processed by BitPay (including “retail” and “wholesale” payments) has increased a lot from 2013 to 2014, but has fallen 50% or more since February, as the BTC price fell.
  • Black Friday had a modest effect (2x to 3x) on the number of “retail” payments, but had no effect on the total BTC/day (which is dominated by the “wholesale” payments).

Panel for Blockchain University debut

Tonight I had the pleasure to moderate a panel at the new Blockchain University developer seminar.  Panelists included: Tom Ding from Koinify, Ryan Charles from Reddit, Ryan Smith from Chain and Atif Nazir from  Special thanks to Christian Peel, Zaki Manian, Sri Sriram and Robert Schwentker for organizing it.

The basic idea of Blockchain U is to provide hands-on practical knowledge to not only understand the nuts and bolts of what a blockchain is and how it works, but to be able to build apps in this ecosystem (such as a block explorer, wallets and anything that can plug into an API).

Panel starts around 45:20m

I was also quoted in a CoinDesk article a couple days ago that briefly covered the pre-event planning:

If you’re a software developer, even in the Valley, there are few physical locations you can visit to get hands on practice and feedback in building decentralized applications.  Blockchain University is hoping to bridge that chasm, by providing interaction with industry entrepreneurs and developers who are bringing their on-the-ground experiences into an accessible classroom format.

Eris launches an actual smart contract / decentralized application platform

[Note: this is not an endorsement nor was I compensated for posting the following information]

Preston Byrne (who helped provide feedback and content for GCON) left Norton Rose Fulbright a couple months ago and just announced the launch of Eris Industries.  While details are still forthcoming, it looks like they have managed to beat to market other proposed systems and it uses agnostic tech (not necessarily Bitcoin “rails”), to settle/move contracts on a blockchain.

In an email exchange Byrne explains the Eris system in a nutshell:

I think the key takeaway point – if there is one – is this. It’s sort of like Nick Szabo’s blockchain computer (albeit an Apple 1 version of it). There are no mystical powers to a blockchain – it is a data structure. But you can parameterise the data structure to address pain points where you currently rely on multiple-redundant (hardware and labour) systems to achieve that verification.

Where those pain points are will differ from case-to-case and application-to-application. It’s something that you can’t know in advance – businesses need to do the analysis and come up with proposed deployments, and it’s best for them to do so, as they are far and away in the best position to know how their business is structured and where the humans and hardware need to come out (and then, how to design a system of smart contracts tailored to address it).

That’s why Thelonious is a smart contract-enabled blockchain design, a template to create blockchains, instead of a single one – because developers, not us, are in a way better position to establish what those pain points are and how to address them.

Thus they set the parameters, and we don’t. We just give them the enterprise-compatible, open-ended, smart contract-enabled, and smart contract-controlled framework over which they can drape their particular problem, define it, code it, test it, solve it, and (while still benefiting from the security of public-key cryptography) improve it later thanks to the GenDoug kernel, and without needing to fork the chain.

Our job over the next couple of years is to make sure we keep building the tools that help them achieve that as easily and safely as possible.

Some of their blog posts explaining what the platform and goals are:

Does spending decrease as purchasing power declines?

ecommerceLast year Peter Coy illustrated what a deflationary economy looks like (such as the Bitcoin economy) and explained how this impacts consumer spending (and lending).

Depending on what peak someone may have bought at, the very reverse happened this year, with prices denominated in bitcoin rising by perhaps as much as 65% (a full analysis should probably also adjust a couple percent to include CPI).

Though, to my knowledge there are no products actually denominated in bitcoin (yet).

So then, did spending habits change over the course of the year?

Not really, users as a whole still preferred to simply hold onto coins either because they had low time preferences with future expectations of large price appreciation and/or they were ‘underwater’ in coin (e.g., they bought at a peak).  Off-chain transactions on Coinbase did not see much of a difference (yet) either.

Economic theory suggests that consumers prefer a medium of exchange with stable purchasing power and in practice that seems to be the case.

For instance, on January 9, 2014 online retailer began accepting bitcoin as payment.  In the first two months it generated $1 million in bitcoin payments and through May the tally had grown to $1.6 million in bitcoin payments.

According to a new story yesterday, Overstock announced it would likely generate $3 million in bitcoin payments this year (though they do not specify how many bitcoins that is altogether).  This is in contrast to the estimates at the beginning of the year:

The figures are notable given that the e-commerce company had issued a wide range of potential estimates for its first-year bitcoin sales over the course of the year. In March, CEO Patrick Byrne suggested Overstock was on pace to achieve $10m–$15m, or even $20m, in bitcoin sales.

Such estimates were also below the $5m Byrne said Overstock originally anticipated, though on par with those suggested by Overstock chairman of the board Jonathan Johnson in interviews.

Altogether approximately 11,100 customers paid with bitcoin this past year at Overstock — these customers spent an average of $273 in bitcoins.  That means that after the initial power law from the first couple months, roughly $200,000 in bitcoin sales occurred from March onwards, or roughly $6,700 per day.

If bitcoin denominated prices had stayed the same, would that have increased the amount purchased?  Perhaps, but as articulated by both Robert Sams and Yanis Varoufakis, bitcoin stability is perpetually ephemeral and perhaps the only solution is to switch the monocoin ledger and adopt a dual currency ledger design instead (a topic for another day).

Besides a decline in purchasing power, is there anything else that may have caused this?

In chapter 11, pages 181-182 I explored another reason (see this image): demographics.  Most (60%) of the customer base of Overstock are female and as we know empirically, there are very few females that inhabit the Bitcoin ecosystem.  Perhaps this will change in time, so what are other datum in this exhibit?

Specifically, what does Overstock do with these coins?  One redditor looked through the most recent 10-Q filing and found:

At present we do not accept bitcoin payments directly, but use a third party vendor to accept bitcoin payments on our behalf. That third party vendor then immediately converts the bitcoin payments into U.S. dollars so that we receive payment for the product sold at the sales price in U.S. dollars.


We have also begun accumulating bitcoin in an amount of approximately 10% of the amount of our bitcoin-denominated sales as well as other cryptocurrency.


We hold cryptocurrency denominated assets such as bitcoin. We currently consider these holdings to be investments and include them with other long-term assets in our Consolidated Balance Sheets. Cryptocurrency denominated assets were $346,000 and zero at September 30, 2014 and December 31, 2013, respectively … Losses on cryptocurrency holdings were $50,000 during the three and nine months ended September 30, 2014. There were no losses on cryptocurrency holdings for the three and nine months ended September 30, 2013.

Or in other words, sells all but 90% of the coins it receives and puts the remaining portion onto its books as an investment, which saw a loss of $50,000 through Q3.  Perhaps this reverses next year if there is another run up in prices.

In addition, the coin sales created (a marginal) sell side pressure on the market through the intermediary, Bitpay, the largest payment processor in this space.

What changes did Bitpay see this year?  In a recent profile they noted that:

BitPay, the largest and oldest bitcoin payment processor with a daily volume of $1 million bitcoin transactions supporting more than 44,000 merchants, stated in an email exchange to CCN that more than 4,400 of their merchants keep all of their settlement in bitcoin, almost 18,000 keep some of their settlement in bitcoin while the remaining 22,000 convert it all to fiat.

While the amount of merchants accepting bitcoin more than quadrupled this year, the amount of retail commercial transactions did not.  Because Bitpay re-uses the addresses for purchases, it is possible to monitor them for inflows.  And over the past 6 months, there has not been a significant change: roughly 2,000 bitcoins in aggregate (+/- 200) are received by Bitpay each day.  In fact, they have been receiving approximately the same $1 million in bitcoin transactions since May. [Note: at current market prices, even 2,200 bitcoins does not equal to $1 million thus a contradiction, which can only be cleared if/when Bitpay releases its methodology]

Because of the ecosystem still lacks a ‘circular flow of income,’ in return Bitpay sells these coins to other inventory providers such as financial institutions, family offices and exchanges (detailed here).  This further creates sell side price pressure and if there is not a corresponding increase in speculative or transactional demand in bitcoins, effectively lowers the purchasing power of a coin.

For instance, last Wednesday, December 10th, Microsoft announced that it had added bitcoin as a payment vehicle for games and apps.  The price rallied 10% in the course of an hour yet subsequently declined to pre-rally prices.  Why?

As analyst Raffael Danielli explained to me, on the one hand, Microsoft under the new CEO — Satya Nadella — seems to push deliberately into areas at the forefront of the tech sector.  Accepting bitcoin is an item on their list that can easily be implemented and subsequently crossed off (e.g., a cheap point in terms of risk / reward due to the usage of an intermediary).

On the other hand, if people are less willing to spend Bitcoin while ‘underwater’ this can lead to more ‘bad’ news regarding a lack of consumer adoption.  For example, one could see a correlation between Xbox One’s less-than-stellar sales and losses against the Playstation 4 (PS4 is outselling 2:1), versus the need to get some kind of PR spark before the Christmas shopping spree.  Similarly Time magazine’s announcement today probably will only produce a temporary marginal increase in bitcoin activity and was likely done with similar motivations (positive PR before holidays) because Time been hit hardest (it’s 2012 sales of single-issue copies declined 27%, the most across the entire industry and it laid off 5% of its workforce in early 2013).

Yet most bitcoin holders are probably not the usual demographic of paper magazine subscribers.  Or as one droll redditor explained:

Venn diagram of people who use bitcoin and people who subscribe to print magazines: OO

Perhaps market participants as a whole see this too or perhaps they recognize that even if there was an upsurge in bitcoin usage to Microsoft product lines (which we can monitor as Microsoft is using Bitpay), those coins will ultimately put sell side pressure because there is no circular flow of income.  And again, without a corresponding amount of speculative or transactional demand, the price of a bitcoin could decline as would its purchasing power.

There is never a dull moment in this space, perhaps 2015 will create new patterns to analyze.


[Special thanks to Jop Hartog and Jonathan Levin for their feedback and information this past month]

Guest presentation with O’Reilly media

About a week ago I gave a guest presentation (webcast) with O’Reilly media regarding the “Continued Existence of Altcoins, Appcoins and Commodity coins.”  For those interested, a short preview is found at, “Bitcoin and blockchain use cases won’t be sexy, but will be essential.”

Note: in order to listen to the webcast archive you have register for the event.

Article house keeping

I was quoted a couple times in a new Reuters article, “All the rage a year ago, bitcoin sputters as adoption stalls.”

I think it is probably more accurate to say that according to the Bitcoin Distribution Chart, that there are roughly 250,000 to 500,000 ‘individuals’ controlling “wallets” (there really is no such thing as a wallet with respect to the Bitcoin protocol) with more than 1 bitcoin.  The vast majority of the rest are probably categorizable as unclaimed tips, ‘dust’ (originally less than 5460 satoshi, now less than 546 satoshi), purposeful spam for research (taint analysis), etc.

Also (and I’m at fault for doing it too), we probably should stop using the word “liquidity” when more accurate words are probably velocity or movement.  Liquidity has a different meaning in the financial markets.

A few other posts I wrote this past fall include:

[Note: I was also quoted earlier this month in Questions Linger as Daily Bitcoin Transactions Pass 100,000 Milestone from CoinDesk and Analysis: Around 70% of Bitcoins Unspent for Six Months or More also from CoinDesk]


Making Lemonade out of Lemons: Squeezing utility from a proof-of-work experiment

Earlier today I gave the following presenation at the R3 Cryptocurrency Round Table in Palo Alto. It covers “Bitcoin 2.0” ideas including alternative consensus mechanisms, costs of operating decentralized ledgers, use-cases for these new ledgers within existing financial institutions and potential hurdles including disproportional rewards.

[Note: citations and references can be found in the notes of each slide]

Bitcoin / Dogecoin tipping and adoption panel

Last Saturday I moderated a panel at PubNub for the 1 year ‘Dogeversary’ — the anniversary of Dogecoin.  Panelists included Marshall Hayner, CMO of and David Dvorak, CTO of DogeTipBot.

Note: I don’t own any dogecoins and actually explained a hashrate vulnerability it had back in May (which they’ve at least temporarily rectified through ‘merged mining’ (AuxPOW) with Litecoin).

Panel starts at 1:33:32 but the sound quality doesn’t (marginally) improve until 1:36:42 (so start there) and ends at 2:17:00.

The concept of night and day are archaic to a network that never sleeps

I have a couple new articles published over the past few days.

The first one, “The Rise and Rise of Lipservice: Viral Western Union Ad Debunked” is over at CoinTelegraph and deals with the remittance industry.  Note: my original title included just the first 6 words, CT added the remainder including “debunked” which is probably apt.

Why spend time writing about this?  Because it is increasingly clear that keynote speakers in this industry are factually wrong about many things, including the various margins that money service organizations (MSO) like WU have.  For instance, yesterday there was a really good thread on reddit that broke down the erroneous claims from Andreas Antonopoulos regarding the margins that WU and others have, it is wrong by an entire order of magnitude.

The second article is, “Too Many Bitcoins: Making Sense of Exaggerated Inventory Claims” at CoinDesk.  Note: original working title was “Where is the inventory? Making sense of disaggregated inventory pools and financial controls” — I do have to say I like the CD editors choice, it’s much better!

Over the past year as I conducted interviews for my research I would often hear stories of how such and such owned X amount of bitcoins.  In just a six month period it became pretty clear that someone somewhere was embellishing because there just aren’t that many bitcoins around.  This was especially true once you start hearing rumors of the amount of bitcoins that large holders in China claim to have.  Which side of the Pacific is exaggerating more?

A few things were cut in the 2nd article to slim it down a bit and also because it meandered a little.  Here are a few of the items:

  • While an imperfect facsimile a UTXO (unspent transaction output) or bitcoin, is not equivalent to equity.
  • Remember, pre-Artforz, miners and hashers were one and the same, so a DMMS was not a farm or pool back then as it is today.
  • Some of these exchanges started within a niche such as futures speculation. For example, Bitfinex originally shared (mirrored) the Bitstamp order book and later, after growth, established their own thereby allowing their customers to partake in price discovery through the spot market (e.g., providing bids and asks). Others such as Coinbase effectively operate what Coindesk calls “a Universal” — that is as a hosted wallet, merchant processor and exchange — albeit without a users ability to speculate on the bid/ask of a token (in most cases Bitstamp acts as their liquidity provider who in turn receives coins from miners and so on).
  • This year alone, several exchanges have been hacked and/or customer funds were stolen by insiders, including Mintpal, BTER, CoinEx,, Neo & Bee (it wasn’t an exchange per se, it collapsed too soon to figure out what they meant, if at all, to do) and most prominently, Mt. Gox.  Despite a spectrum of counterparty risks and the advent of decentralized and multisig trading (eg the Counterparty DEx and Coinffeine), traders, on the whole, still prefer to use centralized exchanges due to their trading speeds (milliseconds instead of 10+ minutes).
  • ~300 ATMs globally

Lastly, a friend of mine, Anton Bolotinsky sent me some additional feedback that may be of interest to some readers:

The statement: “Also, withdrawal time from an exchange is not necessarily related to the price of bitcoin.” Seem to be out of context.

I’d assume it’s about market phenomena – which will move price if people withdraw both btc and fiat positions from exchange. They would either have some very fast cash deposit/withdrawal mechanism to be able to do it daily. Alternatively, at the end of the day, they would convert fiat to btc, and withdraw btc. This would move the price.
If fiat positions are not liquidated, withdrawing only btc, will reduce risk exposure to 50% on average. And will create evening & morning blockchain transactions spike – btc from exchange to wallet, and back. I can’t see anything like this happening.

Another thing that somebody will probably comment: btc exchanges, unlike NYSE, work 24/7, nothing besides trading volumes (maybe) changes. So notion of doing something for night might be archaic:)