Was The Bitcoin Market Manipulated Today?

February 10, 2014
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The tech world awoke Monday to news that one of the oldest and largest Bitcoin exchanges had gone down – and it was only allowing fiat withdrawals, citing structural issues with the Bitcoin algorithm causing questionable transfers.  BTC prices went into free fall, stretching as much as $200 between the day’s high and low.

There was tremendous speculation across the social media landscape and blogosphere, with numerous experts and novices alike commenting and speculating on the nature of the problem. An undated press release found on Mt. Gox‘s website seems to lay fault at the design algorithm of the cryptocurrency and saying that the problem has been known to Bitcoin developers for some time. As of the time of this article, Gavin Andresen, the Lead Developer for Bitcoin, made a  statement saying that, “Contrary to Mt. Gox’s Statement, Bitcoin is not at fault.” The tweet also points to a link by Gavin that explains,

“The issues that Mt. Gox has been experiencing are due to an unfortunate interaction between Mt. Gox’s implementation of their highly customized wallet software, their customer support procedures, and their unpreparedness for transaction malleability, a technical detail that allows changes to the way transactions are identified.”

There is something strange about all this. The excuses Mt. Gox decided to put up for the problem, and the direct blame they volleyed at Bitcoin doesn’t add up given their conspicuous silence across social media in the early hours of the problem. There is more to this than meets the eye.

Yes, the original algorithm has a malleability window. It is something that almost everyone who has bothered to look at the algorithm will tell you. It essentially allows a transaction ID to be altered before being validated and records permeating through the network of nodes that make up the blockchain. This is a known issue and can be handled, if protocols at the wallet-end, especially of proprietary and customized wallets, are erected and managed.

If I were running a Bitcoin trading or exchange platform, I would create a proprietary wallet (problem solved). Considering how long Mt. Gox has been in operation, and if this is the first time such an occurrence has happened, because they didn’t have the necessary protocols in place, I’d say they are pretty lucky.

There are two lessons here I hope investors and Bitcoiners learn to appreciate. First, Bitcoin should not be stored with anyone but yourself. Why anyone would trust their valuables with a third party is beyond me. Stop looking at Bitcoin as you would fiats and stop looking at places like Mt. Gox as Federally Insured banks. They are not.

Second, do yourself a favor and don’t run for the hills just because you see the price of BTC slump to a certain value. The price drop is more due to liquidity than due to intrinsic value. When the market can’t transact, prices tumble.

Now, I am not saying Mt. Gox did this on purpose; but if I were to jam the system and allow the price to fall, while only allowing fiat withdrawals, wouldn’t that be a synthetic way to short the market? Think about that.

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AJ is a naturalist and economic realist. His articles are based on his study of world events and common sense, not conventional wisdom. He believes technology allows humanity to get past the deficiencies inherent in civilization's inadequate political methods and deficient economic tools. His observations are sometimes radical, sometimes provocative and sometimes misunderstood. But they are effective in evoking a discourse. Ultimately, that is his intention and desire - to stir the pot in search of solutions to today's political and economical challenges.

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