Commentary on the economic , geopolitical and simply fascinating things going on. Served occasionally with a side of snark.
Monday, May 26, 2014
Bitcoin Updates May 26 , 2014 -- A Bot Named Willy: Did Mt. Gox’s Automated Trading Pump Bitcoin’s Price? Jesse Powell’s Fiery Response to Ripple Labs Accusations ..... Bitcoin set to overtake PayPal in 2014
There is more speculation today that bitcoin’s November 2013 surge and Mt. Gox’s trading volume’s were built in part on fraudulent trading activity – specifically via a bot that serious traders have dubbed “Willy”
Bitcoin’s price on Mt. Gox rocketed from around $200 in early November to its $1,236 all-time high on 4th December, exciting early adopters and causing analysts to go into fits over the cause: was it Chinese speculation on that country’s fee-free exchanges? Or perhaps a mass exodus to digital currency after its resistance to government seizure was noted during the Silk Road affair?
The ‘Willy Report‘, a one-post default-themed WordPress site, gives a detailed rundown of the suspected bots’ trading activity from around September to the end of November 2013.
The mystery traders
According to the blog’s writer, a trader who analyzed publicly-released logs from the time, trading bots ran rampant through the system under various user IDs, including one dubbed “Willy” that placed repetitive buy-only orders that always manipulated the price upward.
Another bot, dubbed “Markus”, appears to have bought and sold at completely random prices, paying zero trading fees. Both Willy and Markus were most active immediately before and during November 2013, when bitcoin’s price suddenly headed moonward.
The analysis is based on data leaked to the public on 9th March this year, which included details of all trades on Mt. Gox between April 2011 and November 2013. No data since that period is currently available, though there are anecdotal reports of activity matching that of Willy and Markus after December.
To November, the two trading entities bought a total of 570,000 BTC, enough to have an impact on price. Was bitcoin’s value in late 2013 even less inherent than sneering anti-crypto economic analysts have claimed?
Who were they?
Speculation now falls on whether the activity is the result of outside hackers gaming the system for profit (like Mt. Gox CEO Mark Karpeles’ claims) or an inside job, representing the interests of the (very) few people with access to the exchange’s innards?
Both bots were among the 500 highest-volume users on Mt. Gox, whose activities are graphed here. Willy and Markus represent the two most anomalous trading charts, #281 ‘Greater Fools’ and #15 ‘Glitch in the System’ respectively.
Markus frequently appears to spent the same low amount of money (around $15) no matter how large the trade, suggesting data in that field is misleading or non-existent.
Odd patterns in the two trading entities’ buying behaviour are compounded by suspicious details in their user registration data. Willy had only ‘??’ listed for a country code when all other accounts were identifiable. Markus’ location was listed as ‘Japan’, and both had ID numbers unusually high compared to other users’.
The Willy entity was also unaffected by Mt. Gox’s downtimes, continuing to buy between 10-20 BTC every 5-10min even at times when the exchange was non-functional to regular users, leading the blog author to conclude:
”This makes it likely the bot was being run from a local Mt. Gox server. It is not impossible that a hacker was able to install some kind of rootkit on Mt. Gox’s servers and ran the bot from there, but that seems extremely unlikely.”
The anonymous author of Willy Report does not give much credit to the external hacker theory. Willy’s balance is absent from the balance summary leaked at the time of Gox’s collapse in February, and Markus’ is only 20 BTC. There do not appear to be any withdrawals to match the large trades.
Details of Markus’ activity is curiously corrected in a separate, anonymized version of Mt. Gox’s trade data from April 2013 that matched the leaked version in every other way. The entity’s ID number also appears in that version as ’634′ – the ID connected to Mark Karpeles.
Suspected manipulative trading activity on Mt. Gox had been a discussion point among serious traders watching the exchange even back in 2013, and wasapparently confirmed once the trade data was leaked.
The Willy Report author also suggests signs of suspicious activity in the lead up to bitcoin’s first mainstream attention-grabbing run, in April 2013.
Once again, dark clouds have gathered, not around the bitcoin network itself, but around the centralized gateways guarding the on- and off-ramps between it and the legacy financial system.
Such businesses have operated mostly off the block chain and are inherently trust-based, functioning effectively as unofficial and uninsured banks. With developers and executives from the technology world rather than the financial, they have been accused of everything from incompetence to malice before their funds simply vanish – often along with the businesses’ owners.
A trustless crypto-based payment system still relies heavily on trusted supports. More often than not, these ‘trusted supports’ are unregulated, hence they attract unscrupulous traders and speculators.
Those in the pro-regulation camp point to the inherent weakness of unregulated exchanges as one of the biggest problems facing bitcoin, but regulation remains a controversial topic in the bitcoin community and there is no clear consensus on what should or could be done to stamp out abuse.
Crypto Currency News....
Jesse Powell’s Fiery Response to Ripple Labs Accusations
Ripple Labs co-founder Jed McCaleb’s recent decisionto sell his entire stock of XRP was the start of a difficult week for the open-source payments processor. After McCaleb made his announcement, Ripple’s price took a steep fall. Investor confidence declined further when Jesse Powell, known by most as CEO of Kraken, resigned from the board of Ripple Labs and levied some disturbing remarks about the company’s management. Feeling betrayed, Ripple had their lawyers draft and send Jesse Powell a cease and desist letter. Powell posted that letter online for the Ripple community to read and has publicly responded to the accusations made therein. Excerpts from his statement are posted below.
Jesse Powell’s Fiery Response to Ripple Labs Accusations
In their cease and desist letter, Ripple forcefully accused Jesse Powell of knowingly lying about a number of issues, including his relationship with Jed McCaleb, his conversations with co-founder Caleb Larsen, and the series of events that led to his resignation. The letter event went so far as to accuse him of deliberately sabotaging Ripple Labs in an effort to leverage a large payday for him and his supposed-conspirator McCaleb. Ripple gave him a 3-day ultimatum to retract his statements; however, in his response Powell reiterates that his statements are factually true.
My statements are factual, and I stand by them. I had no intent to damage the company—only to explain my actions. If the truth is damaging to the company, take its revelation as an opportunity to fix the problem, make things right by the community and rebuild trust. I’m not a Ripple board member. I have neither revealed insider information, nor used it to sabotage Ripple Labs.
Throughout the remainder of his response, Jesse Powell abandons formalities and levies an emotional rant against Ripple Labs. Referring to former employees who have parted with the company, Powell infers that Ripple has used legal pressure to silence the company’s critics.
After all, this tactic has worked quite well in the past, hasn’t it? I mean—we’ve had several people leave the company and board and we haven’t heard a peep from them. This is one example of the kind of behavior that has me questioning the management of the company.
Clearly, Powell has violated the cease and desist letter’s demands to refrain from making further disparaging remarks against the company.
Powell Denies He Colluded with Jed McCaleb to Sabotage Ripple
One of the major controversies alleged in Ripple’s letter to Powell was that the Kraken CEO had secretly conspired with Jed McCaleb to damage Ripple by coordinating McCaleb’s XRP liquidation and Powell’s resignation. The letter claims that McCaleb and Powell remained close friends and associates even after McCaleb parted with Ripple. However, referring to these claims, Powell declares:
Wild paranoia and irrational conspiracy theories here. I certainly did not coordinate my resignation with Jed’s XRP sell-off. Again, if either of these events is damaging to the company, it’s the company’s fault. Is it too much to imagine that the series of events that led Jed to sell his XRP have also contributed to my resignation? Maybe the sell-off was the last straw for me.
Powell argues that when the Ripple board was forced to choose between co-founders Jed McCaleb and Chris Larsen due to irreconcilable differences, he made the difficult decision to side with Larsen in what he believed were the best interests of the company.
In fact, my relationship with Jed has been almost non-existent since the board opted to keep Chris on rather than Jed, when Jed forced us to decide between them. I’m sure Chris does not appreciate how personally difficult that decision was for me, but I did what I thought at the time was in the best interest of the company. It certainly wasn’t in the best interest of my friendship with Jed.
Later on he reiterates this point.
I sacrificed my friendship with Jed when I chose not to fire Chris. I have always acted in the best interest of the company, even to my own personal detriment. If I was trying to broker a deal between RL and Jed, it’s because I thought it was in the best interest of the company. Yes, I believed that a sell-off would jeopardize a financing round and I strongly encouraged Chris and the board to work out a deal. I wasn’t making a threat—that was just the reality.
I don’t have any special relationship with Jed, I don’t know what he’s working on, I’m not involved in what he’s working on, and I’m unaware of any Ripple fork or competing effort. We’re not colluding and I’m not trying to attack or harm Ripple Labs.
Powell Dispute’s Ripple Labs’ Version of XRP Allocation
Ripple claims Jesse Powell’s alleged friendship with Jed McCaleb was instrumental in his supposed decision to sabotage the company. They argue that his comments about the co-founders’ decision to allocate a large portion of XRP to themselves and not return them to the company are false. Ripple states that Chris Larsen and fellow co-founder Arthur Britto made plans to return their XRP to the company. Powell disputes this, alleging that when Larsen and Britto claim they will return their XRP to the company they mean to do so on a temporary–not permanent–basis.
Jed and I got started with Ripple in September of 2011. I believe Chris joined sometime around August of 2012. Prior to Chris joining, the company had two investors. I’m not sure when Jed and Chris allocated themselves the XRP but they say it was before incorporation, which occurred in September of 2012. In my view, the two stole company assets when they took the XRP without approval of the early investors, and without sharing the allocation amongst the other shareholders. Whatever coin they allocated themselves prior to incorporation of Opencoin, Inc. [Author's Note: Opencoin later became Ripple], I believe was abandoned. There had been several ledger resets between Sep 2012 and Dec 2012, and a new version of Ripple emerged, built by Opencoin, Inc., clearly with company resources. If Jed and Chris have continued to run the old software to preserve their Betacoin, I have no problem. Unfortunately, Jed and Chris again allocated themselves XRP in December of 2012. That XRP unquestionably was not gifted by Jed and Chris to the company, it did not exist prior to the company’s existence, and it was generated with company resources. That XRP has always belonged to the company and it was taken from the company by Jed and Chris. I’m asking them to return what they’ve stolen.
He continues this train of thought in an earlier part of the statement.
My understanding of Chris’ position is that he is only willing to lend back his XRP to Ripple Labs, and only a portion of it….My proposal was to completely return all founder XRP remaining, with no prospect of ever having it given back….Chris, will you give your XRP back to the Ripple Labs and commit to not taking any XRP allocations in the future? The temporary return/lockup proposal is inadequate because it does not solve two fundamental problems: It was improper, and possibly illegal, for the founders to take this allocation in the first place, and eventually the community, company and investors will have to worry about a founder sell-off again.
I think it’s great that Chris and Arthur are willing to lock up their XRP regardless of what Jed does but this still falls short. Chris (at least) needs to return his XRP to the company permanently, not in a lockup. That asset belongs to the company. There may be some argument for Arthur to keep his XRP.
The Saga Continues
Ripple seeks to replace traditional payment processing methods. To do this, it must gain mainstream acceptance. However, this public airing of the company’s dirty laundry will hurt their effort. They attempted to quiet things down by ordering former board member Jesse Powell to cease and desist his disparaging remarks about the company, but this plan backfired as Powell responded publicly to the letter and launched several assaults on the integrity of the company and its management.
It is doubtful that Ripple Labs will let Jesse Powell’s comments slide by without response. At best, it seems that they will wage a war of words in the press. At worst, the two factions could engage in a messy legal battle that would clearly be a lose-lose situation for all involved.
Ripple investors need to strap in tight because it appears that the company will be travelling on a rocky road for the near future.
Report Suggests MtGox Fraud Led to $1200 Bitcoin Price
It turns out that the extreme rise in the bitcoin price near the end of the 2013 may not have had much to do with China, Silk Road, or government hearings in the United States. Although those three factors are often cited as the reason the price skyrocketed to over $1000 near the end of the year, a new report suggests that there was some price manipulation going on behind the scenes at MtGox. Although the report falls short of placing guilt upon Mark Karpeles or anyone else at MtGox, fraud is definitely an accusation that has been on the minds of many individuals in the Bitcoin community over the past few months. The report includes a large amount of evidence based on publicly available data related to trading patterns on the MtGox platform over the course of 2013.
MtGox Trading Bots Manipulate the Price
The basis of the claims of price manipulation in the “Willy Report” revolved around the activities of two trading bots: Willy and Markus. These bots were actually noticed by many avid Bitcoin traders back in 2013, and the suspicious activity related to the bots was discussed on various Bitcoin forums. The activity of these bots were actually rather obvious to people who were watching the charts and live trades take place during the day, and it was clear that someone was either attempting to manipulate the bitcoin price or simply take an extremely large position in the cryptocurrency. In total, the report estimates that roughly $112 million was used to purchase around 270,000 bitcoins through the use of trading bots. The vast majority of this activity took place in November, which is when the bitcoin price went from around $200 to over $1000.
Tying the Bots Back to MtGox
While many bitcoin speculators understood the existence of these trading bots during the bitcoin price rise, recently released details shed some light on who may have been behind all of that extra liquidity in the bitcoin market. A large number of different facts surrounding the trades made by Willy and Markus point to an inside job by MtGox, and it’s at least possible that these trades were manufactured with no real money changing hands. Some of the most damning claims in the report point out that Markus never had to pay any fees on his trades, and neither of the trading bots had a country code attached to their accounts. Perhaps the most amazing point made in the report is the fact that Markus’s user ID was actually changed to 634 in one version of the trading logs. When looking at a leaked account list from 2011, user ID 634 is actually attached to the name “MagicalTux“, which is the online alias of MtGox CEO Mark Karpeles. It’s also rather interesting to note that Markus and Willy were able to continue trading during those frequent MtGox downtimes when everyone else was stuck looking at a stalled trading engine. Some suspicious trading activity that was also pointed out by the Bitcoin Channel at the time is also mentioned in the report.
Can We Trust Centralized Exchanges?
This is not the first time that claims of fake trading data have been thrown at a Bitcoin exchange, but this possible fraud by MtGox would definitely have had an extremely large impact on the bitcoin price over the course of 2013. The impact could have been large enough to be the very basis for the boom, bust, consolidation, and repeat cycle that so many bitcoiners have come to know and understand over the years. BTC China CEO Bobby Lee has taken shots at other Chinese Bitcoin exchanges for possibly faking trading data, which points to the need for honest, transparent exchanges more than ever. After all, how is anyone supposed to know the real price of bitcoin if the data being used to create that price is completely fabricated?
The Laureate Trust has announced, via a press release to The Digital Journal, that they expect Bitcoin to pass PayPal in USD transaction volume later this year. The Trust has pointed out that Bitcoin is fast establishing itself as the currency of choice for international internet purchases and payments. Bitcoin has now reached a transaction volume of $300 Million, per day.
The Laureate Trust sees the current Bitcoin price, now circa US$530-560, as a tremendous opportunity to buy into Bitcoin, they advise that the currency could increase by up to 50 percent in price in the near-term as it prepares, for the first time, to overtake PayPal in actual transaction volume.
Peter Tasca, the CEO of The Laureat Trust, States:
“Whenever you have an instrument that trades over 300 million US dollars a day, it must be recognized. The digital currency works, Bitcoin has greater volume transactions than Western Union and we anticipate it will overtake PayPal later this year.”
He went on to say:
“We’ve seen governments all over the world impose restrictions on the currency and that is good. In a free market economy this creates a safe trading environment and reduces the volatility Bitcoin holders have experienced in the last six months. This digital currency was meant to facilitate the exchange of currency to be spent, not traded.”
Tasca says that the collapse of Mt Gox, from a theft, or possibly a misplacement, of almost half a Billion dollars worth of bitcoins, has created new opportunities for digital trading companies. These new companies are better regulated, better financed and are technologically stronger. Tasca expects that Bitcoin will continue to stabilize in value. He sees the introduction of Circle.com, a digital custodian offering a secure network architecture audited by a national cyber-security firm, as a huge stabilizing factor. He also states that he expects to see more companies like Circle enter this market. Very positive for Bitcoin stability although possibly not so positive for PayPal.
“Circle.com has some very large backers and we expect them to continue to make tremendous progress in utilization of Bitcoin. I expect in the next 2-3 years we will have the option to have a Bitcoin debit card which is a tremendous opportunity for Circle.com. Globally debit cards account for nearly 30% of all spending, the consumer wants to remove bank processing and currency exchange fees and right now Circle.com is offering the consumer an easy way to use Bitcoin without the risk that is currently associated with the digital currency.”
Laureate Trust is a company that can claim to provide expert portfolio management that achieves optimal results. Their proven trading strategies are based on four principles: diversification, technical analysis, trend following and risk management. They believe that these factors combined have the potential to maximise profit from any economic situation. This disciplined approach with trading strategies have returned a 10-year average of +31.6% per year. In 2013, they state that this multiple platform strategy returned +23.01%, net of all fees.This has outperformed the Barron’s Top 100 Hedge Fund Average, Barclay hedge Fund Index Average and the S&P 500 Total Return Average.
In 2014, Laureate launched a Referral Fee Programme that will pay 2% of the initial deposit and then a management fee for the life of the account. “We want our partners to benefit from every bit of success they help us generate” said Tasca.
For a company as established in the area of investments as Laureate Trust, to regard Bitcoin so highly, as an investment, may well be an indication of Wall Street preparing to come on board in a major fashion. Perhaps PayPal is merely moving towards incorporating Bitcoin because they simply understand that they cannot ignore the winds of change.
Laureate Trust states that they are a global leader in mutual fund management. Using seasoned professionals, relying on almost a century of expertise to develop and replicate trading strategies, they claim to have the ability to profit in a rising or falling market. They claim that this profit potential makes market neutral funds particularly attractive to investors in volatile or uncertain times.