Dan Kaminsky on BitCoin

Ever since BitCoin appeared, I've been waiting for two security experts to venture detailed opinions on it: Dan Kaminsky and Ben Laurie. Dan has now weighed in, with a long, thoughtful piece on the merits and demerits of BitCoin as a currency and as a phenomenon.

Bitcoin’s fundamental principle of fraud management is one of denial. If we drop our wallet on the street, the U.S. government is not going to compensate us for our lost cash. Bitcoin attempts to make the same deal, to the point where it calls its stores of keys, “wallets.” If we drop our wallet on the street — heck, if someone picks it out of our pockets — the money’s gone.

There have been bitcoin thefts. A few years ago, I tried to break Bitcoin, and failed quite gloriously. The system and framework itself is preternaturally sound. But it too is built on the foundation of buggy technologies we call the internet, and so Bitcoin must experience failures from the code around it. Hackers don’t care whose code they broke on their way to bitcoin, any more than pickpockets care that they’re exploiting the manufacturer of one’s jeans or leather wallet. So they break the server below the money, or the web interface above it. They still win.

At least, that’s the theory. Reality is more complicated. Of all the millions of dollars of purloined bitcoin that’s floating around out there, not one Satoshi of it has been spent. That’s because while most other stolen property becomes relatively indistinguishable from its legitimate brethren, everybody knows the identity of this particular stolen wealth, and can track it until the end of time.

Bitcoin Is Not as Secure, Unregulated, or Lucrative as You Might Think


  1. My (layman’s) impression of bitcoin ‘theft’ is that the real players aren’t dumb enough to steal bitcoin wallets(depending on the current hash rate, stealing CPU and GPU cycles to make your own is occasionally worth it), since a hot wallet remains a hot wallet; but the small size of the market, and its reliance on a tiny handful of semi-amateur websites for exchange, expecially into USD, means that compromising or DDoSing those websites in order to cause wild swings in the USD value of bitcoins before you buy or sell a bitcoin position for a USD position, or the reverse. is something that is almost definitely happening.

    It’d be like the stock market, if “short some teck stocks, firebomb NASDAQ” were something that happened several times a year.

    1.  Don’t people regularly do pretty much that, only not, you know, with actual firebombs, but insider trading?

      1. Insider trading, pump and dump, absent internal controls between vendors, raters, and brokers, pre placement before the revolving-door-lobbyist-regulators set policy, etc etc etc

      2. Oh certainly, it’s just a lot more dramatic and visible with bitcoins because the entire ‘currency’ needs to swing for the plan to work, and the plan usually takes down nontrivial chunks of the financial infrastructure surrounding the ‘currency’. I think that there’ve been a few historical instances of very large capital entities sandbagging national currencies for fun and profit; but that is a much higher bar to clear, while bitcoin exchanges seem to get shot up with impressive frequency.

        With insider trading or pump-n’-dump, the basic principle is the same; but it is confined to the given stock(s) being scammed.

        My point was just that, while there doesn’t seem to be much money is stealing bitcoins, and ASIC miners are pretty quickly making even stolen GPU time pointless, the frequency and effectiveness of attacks on ancillary institutions strongly suggest that there is money to be stolen in transactions between bitcoins and dollars. 

        1.  Aye, why there’s money to be stolen everywhere, I was just being glib. “short some teck stocks, firebomb NASDAQ” is a splendid sentence either way. Sounds like a lost NoMeansNo album.

    2. Here’s the thing. You regret having bought your subscription to Hot Cherry Grandpa Action, and you say the bitcoins were stolen from you – for deniability, to try and jockey for a refund, whatever.

      Or your wife is cheating on you and wants to get a divorce so she transfers the $50,000 in bitcoins to a hidden wallet and then says they were stolen.

      How do you tell the difference between that and an actual theft where the bitcoins in question become fruits of a crime and are therefore seized when next transferred to a “reputable” business?

      Through the use of credit bureaus, and governments, and regulators, and investigative units, and an entire other infrastructure of reputation and accounting, to which the BitCoin network (or large portions of it) would have to become subordinate to, in order to be able to make some sort of claim that a “stolen” BitCoin is not kosher to be accepted.

      One of the attractive features of these types of currency is that the recipients can choose to give the finger to the government regulators, whose only choice is to stay hands-off or watch GDP drain forever into something beyond their reach of taxation and re-injection.

      1. That’s not really true. Yes, people have always done things under the table here and there, but that doesn’t stop governments from regulating their economies.

        What Bitcoin does is prevent governments from regulating other nation’s economic activity. No leaning on Visa to not process donations to Wikipedia or offshore online gambling sites. Governments can still make it illegal for their citizens to donate to Wikipedia or gamble online, but they have to do the enforcement only within their own borders.

        1. Yes, governments can regulate their economies and financial instruments and markets. When value is transferred from the USD financial instrument to the BitCoin instrument, it moves beyond the reach of a government to regulate, tax, seize, or outlaw – all they can do is say “we won’t allow this BitCoin’s value to flow freely back into our markets and economies”, by outlawing it – which effectively means they’ll never get to tax or regulate or see the value re-introduced into something they can handle, which is an incredibly bad idea. Governments want to tax and regulate and seize, but BitCoin has diplomatic immunity.

          1. Not entirely. If they catch that contractor building decks for cash and not paying or charging tax, they can and will stamp him down.

            Bitcoin doesn’t have immunity, but it forces a government that doesn’t like offshore gambling sites (or whatever) to deal with their citizens, not the centralized gambling site. It forces them to weigh the costs and benefits of such a policy, rather than externalizing them.

            They’re not going to outlaw trading Bitcoins that’ve gone through the gambling site any more than they’ll destroy dollar bills that have cocaine residue on them.

  2. The post seems to imply that Ben Laurie hasn’t written anything but he’s written an interesting series of blog posts at http://www.links.org/?p=1164

  3. BitCoin is phenomenally stupid, at least as far as economics go.  The last great advance in global economics was the de-coupling of the economic system from the gold standard, when it was realized that the link between gold and money was not only unnecessary but counter-productive.  BitCoin suggests we go back to that, but replaces a physical constraint with some minimal inherent value (gold) with something completely arbitrary.  It’s Rapture of the Nerds, economic-style.

    1. And you have to have a Bell Labs UNIX license or a SUNStation and a hard connection to the ARPANET to use it! And you have to know which path it will take through which systems!
      This “E-Mail” thing, it’s Rapture of the Nerds, communication-style!

    2. Gabriel the benefit of bitcoin to me is the minimal fee of transmitting them. Whenever you buy something with paypal you lose 3% plus and additional 2.5% for currency conversion.  And it is not acceptable! I imagine you saying that is a fact of life and stop being silly, but it is not…it is pure BS that we should be paying anything but a tiny percentage (0.01%) for a human-less automation.

      1. i’m no defender of paypal, but part of what you pay for with currency conversion is exchange rate fluctuation risk on their part. same-currency transactions should be zero cost, always, everywhere.

    3. I’m not a rapturous apologist; but it is worth noting that the goldbug-esque and ‘I-have-a-total-hard-on-for-deflation’ tendencies of bitcoin are products of its enthusiasts, not fundamental to its design.

      At present, there is only “The” block chain, and Math assures us that there will only ever be 20 million odd bitcoins associated with that chain, with gradual loss of some of them likely due to the usual things that eat data.

      However, it is only the consensus of the miners(who probably overlap rather neatly with the early adopters who have nontrival stashes, which likely helps keep it this way) that prevents there from being two, three, or N block chains.

      A ‘bitcoin’ is rather less like a chunk of gold and rather more like an unforgeable ‘dollar-printed-in-2005-with-serial-number-XYZ’. It is mathematically impossible to produce more than a specific number of bitcoins associated with a given hash chain; but there is absolutely nothing special about the hash chain currently being traversed.

      Given the current audience, I’m guessing that a “Let’s start another million hash chains and get that quantitative easing rolling!” proposal would be about as popular as a drag queen at the Southern Baptist Convention; but it’d be architecturally unproblematic.

      If there were bitcoin users who desired other properties, other properties could be accommodated.

      1. Now that’s a fascinating idea, and I imagine that it’ll be actively presented as a brave new frontier for early adopters to get in on at the ground floor, when we reach 20 million coins in the “main” block chain.

    4. Ok. Now that I’m not wrangling a tantrum-throwing four year old:

      Your comment is so off-base, it is not even wrong. The value of BitCoin is not arbitrary – it is subject to market forces.
      Gold, used as a commodity, has no inherent value – it is an accounting token, producing no other utility. It could literally be replaced by consistent, unforgeable, transparent accounting – which is the idea behind fiat money, with serialised bills and anti-forgery methods.
      It is also then idea behind BitCoin – consistent, unforgeable, transparent accounting, performed with encryption techniques – which are far more consistent and transparent and unforgeable than physical artefacts and private central banks and revolving-door officeholders between the industry being regulated and the regulators.
      It removes the central trust from fiat money – because, as it turns out, because of the revolving door, the insiders are using the central banks to tilt the playing field to make value pour into their own coffers and out of the pockets of poor and ignorant people – which makes the link between money and a central trust counterproductive.
      So, really, what you seem to say is that, given the benefit of hindsight, but with a complete ignorance of why it is so, the last great advance in global economics is “great” — but because BitCoin does the same thing and extends it to removing the central point of failure/manipulation/trust from the system, it’s “phenomenally stupid”, in your view. Your conclusion does not follow from the words you put on the table.

      1.  Gold, as a commodity, actual has a little value – we can make things from it (as I pointed out).  No one can make things from BitCoins.  The Gold Standard is bad.  BitCoin is worse.

        Someone else attempted to reassure me that there will only ever be a set number of BitCoins out there, and that number is set.  That’s EXACTLY (part of) the argument AGAINST BitCoin.  Currency manipulation is a powerful tool, and the inability to devalue a home currency is a large part of the story of why European economies are flailing right now.

        Really, let’s call BitCoin what it is: the dreamchild of a bunch of techno-libertarians with no real grasp of basic macro-economics.  I’m not against a replacement of currency, if people can puzzle out something better (and a way to transition), but this ain’t it.

        1. Once you make something from it, it’s not a commodity anymore – it’s a product.

          BitCoin doesn’t pretend to be a classical commodity. It’s commodity bookkeeping/accounting, in a sense – ledgers in public, signed and countersigned.

          Currency manipulation is definitely a powerful tool – unfortunately it is a tool wielded by the already-powerful, often to the detriment of the powerless. That’s a large part of the story of why African economies are massively collapsed and their children are starving – the markets are played to extract wealth from them by the powerful.

          You can pooh-pooh it as a “dreamchild” (poison the well), say its proponents have no grasp of macro economics (un argued bald assertion), etc – but I am a proponent, I have an excellent grasp of macroeconomics (as I’ve demonstrated), and BitCoin stands on its own merits – those merits being consistent, authenticatable, transparent accounting, which is the ideal behind fiat money, and the ideal behind regulating markets to prevent manipulation. In principle, paper fiat money is simply a serial number certificate with a value attached to it. So is BitCoin.

        2. Let me phrase this differently. I now know, after our exchange, the following:
          The way you feel about BitCoin;
          Your feelings over political views regarding Economics;
          Your feelings about the Gold Standard;
          That you readily display your feelings.

          I don’t understand that you:
          Understand Economics;
          Understand BitCoin;
          Read the linked article;
          Have a substantive argument based in technical merit or economic theory to critique BitCoin – or any other collectively-authenticated ledgering systems.

          So I wish you a good night.

        3. You are correct that the principle of a finite number of currency units is a potentially fatal flaw in bitcoin, but that flaw will not reveal itself for many years and in the meantime bitcoin will flourish.  By the time the events you worry about come to pass there will likely be many competing crypto-currencies and bitcoin will either learn from them and improve itself or eventually die off in terms of usage, at which point it may nor may not develop a primary use as a store of value.  In any case, your argument does nothing to devalue (pun intended) bitcoin in its present state and to deny its amazing success and resilience so far is to miss the main story and get hung up on motives rather than results.  Other crypto-currencies will develop that are modeled on less flawed understandings of fiat currency such as Modern Monetary Theory and they will flourish even more successfully.

    5. You miss the point of BitCoin.  Yes, using BitCoin as your national currency would be dumb.  You can’t manipulate the BitCoin in the same way that a government currently can with their own national currency.  Who cares?  No one is using or will ever use BitCoin as a national currency.  It is like complaining that skis are bad at flying across oceans.   No shit, so don’t use skis to fly across oceans, and don’t use BitCoin as your national currency.  An inflationary fiat currency is all the rage for central banks, but BitCoin isn’t for central banks.  

      The value of a BitCoin is that you can send a token of value that can’t be copied anywhere in the world, anonymously (if you do it right), without gatekeepers.  Gatekeepers have their upsides and downsides, but if you want to avoid the downsides are willing to skip the upsides, BitCoin are THE answer.

      For black and grey market transactions, BitCoin can’t be beat.  You don’t even need to have BitCoin in order to use them.  So sure, BitCoin sucks are inflating away sovereign debt and manipulating trade balances, but it is awesome a lot of other things like:

      1) Skipping all transaction fees.  The only time you need to pay any sort of fee is when you convert BitCoin to cash.
      2) Black market dealings.  If you want to buy something illegal, be it a dildo in Alabama, some LSD from Australia, porn in Iran, or gambling in the US, BitCoin is going to make that transaction something that is essentially untraceable between you and the dealer.
      3) Jumping national monetary controls. BitCoin care nothing for government controls on what you can exchange your money for.  If you can find someone that is willing to take your currency for BitCoin and have access to the Internet, you can convert your money to BitCoin, and then the BitCoin to whatever tickles your fancy.
      4) You can get around government and corporate blockades.  Want to donate to Wikileaks or buy space on Mega, but Visa won’t let you?  Just use convert cash to BitCoin and complete the transaction.

      So yes, BitCoin sucks if you are a national bank.  If you are not a national bank, and I think most of us here are not a national bank, it has its uses.

      1. Here’s something I don’t get. If I buy something with a credit card, I have a receipt and a paper trail.  If the seller scams me, I can prove we had a contract.

        If I pay cash and get a receipt, same deal. But if I don’t get a receipt, I’m screwed. You can pretend you never saw my cash, and then my only means of enforcement is…  extralegal.

        This is one reason (not the only) why black markets are rife with violence. If the government won’t help you enforce your contracts then you can’t rely on government violence (the Fuzz) to back you up in a pinch. So you make your own.

        If Bitcoin is untraceable then who enforces contracts?

        1. What I took away from the post on bitcoin and silk road was that it comes down to building trust. The risk is mostly on the buyer, so it is up to the buyer to investigate the trusworthiness of the seller. Sellers that don’t deliver won’t last in a market full of sellers that will.

          1. Agreed, the same thing happens with torrents.  The scammers who create fake RAR torrents with passwords can’t build a steady reputation and are ignored for the most part.  The people that only deliver real torrents get a reputation for it.  Not that much different than AFK, really.

            What I think many in thread might be interested to know is that Boing Boing has been discussing “reputation economies” for well over a decade.

            (Hat-tip to Cory Doctorow, of course)

        2. Usually, the reputation the seller has amongst the particular community, or a third-party escrow service, which itself is relying on its reputation. Most people aren’t trying to rip other people off, is then thing – it’s merely that large “global” communities and one-off transactions and the popularity of horror stories and triteness of success stories makes it difficult to distinguish between a legitimate one-off vendor of an item you want, and a scam artist trying to rip you off. So people become anxious.

          1. Particularly difficult to distinguish in a black market with no regulation or accountability.  What could possibly go wrong?

          2. You need to go read up on Silk Road.  You clearly don’t understand how it works, or how well it works.  Reputation is something that you build, and stiffing someone is risking getting that reputation trashed.  People don’t buy from people with trashed reputation.

            The alternative is to use the street corner black market.  In this case, you have no idea what the quality of product is, can’t talk to other customers, and generally can’t talk the competition.  When the street corner stiffs  you, the pull a gun, or (more often) just give you crushed up tylenol or worse.

            If you want to deal in the black market, the technological one is by far the safest and most likely not to screw you.  Like all black market it has its risks, but it is a battle between folks using crypto, software, and social systems, rather than ones using guns.

        3. Uh, you can get a receipt with BitCoin.  You are thinking about BitCoin wrong.  It is like cash.  Cash that can teleport anywhere in the world and can’t be made fraudulently.  

          You can buy drugs on the street and get no receipt.  You can buy drugs on Silk Road with BitCoin and get no receipt.

          You can buy food with cash on the street and get a receipt.  You could send your BitCoin to a cash register and get food on the street and get a receipt.  

          Receipts are something tacked onto money via a separate system.  They are not a feature of a money system.  You can slap a receipt onto BitCoin or cash or not.

          So white market transactions (is that a thing?) BitCoin come with receipts like anything else.  In black market transactions, they have developed other methods of ensuring transactions, like through reputation systems.  

          1. Thanks! I’m still not sure I get it.  I fail at International Criminal Mastermind.

        4. Suppose you want to buy $100 worth of acid*.  You can go to a Grateful Dead show, hand somebody $100 in greenbacks, and get back a strip of blotter paper that might or might not have anything useful in it, and even if you get a receipt, it doesn’t do you much good.  You might be able to find him in the parking lot after the show (if it wasn’t any good :-), but tomorrow the travelling circus will leave town and you may not see him again unless you’re on tour.

          With Bitcoin, it’s sort of the same; you pay in bitcoin, maybe the dealer sends you your acid or maybe they don’t, maybe it’s good product or it’s not.  But if you wanted to buy $500 worth (ignoring the huge wholesale/retail price break), maybe you split up the transaction into five parts, and the dealer’s got some incentive not to rip you off, at least on the first four of them, because they’ll make more money off repeat business.

          (*Acid’s one of the canonical examples for this, because it’s for sale on Silk Road, and unlike marijuana it’s not going to be detected in shipment, and you can’t really judge the quality quickly.)

    6. BitCoin suggests we go back to that

      BitCoin doesn’t suggest anything.  It’s just another currency platform to complement other platforms.  It’s not here to replace all forms of currency.  It has its role, it has its purpose.  If you don’t like it, don’t use it.

  4. For me, the biggest drawback of Bitcoin is that it’s not anonymous (unlike real cash).  It’s a convenient way to spend money over the Internet (or it could be), but it’s not going to prevent tracking of my expenditures.

    1. If you re-use the same address, sure, it will facilitate tracking of your expenditures. However, if you don’t re-use addresses, unless an investigative body performs route analysis of all (or a sufficient majority of) BitCoin transactions and performs regression analysis to identify YOU as a given address, or seizes your wallet, or forces a confession, linking YOU to the given address is difficult – whereas your bank can have a record of which serial numbers it gave you when you cashed your paycheque.
      There’s also nothing stopping you from accepting a payment on an address, transferring it from address to address from various devices and locations and ISP’s and etc until it gets increasingly laundered against investigative scrutiny.

      1. Which is to say that you can have many different addresses for receiving and paying, and if you don’t reuse them, it takes an actual analysis to link them all to you, versus them being indistinguishable from the hundreds of thousands of other users’ addresses.

      2. A Bitcoin contains a record of every wallet that it’s ever been in.  That means the transaction is only anonymous if my wallet cannot be associated with me, now or in the future.  Under conditions of normal use I’m going to spend some Bitcoins in exchange for tangible products sent to my home address, which would prove the wallet belongs to me.  To spend Bitcoins anonymously I’d have to create a separate wallet for anonymous transactions and have the discipline to never use it for anything else.  Getting it wrong, once, would blow my anonymity.  So Bitcoin doesn’t provide privacy except with a lot of fiddling.

        It doesn’t have to be that way.  It’s possible to have other kinds of digital currency (I’m thinking of Digicash as an extinct example) where it’s anonymous by default, and de-anonymizing the payment requires the consent of the person who spent it.

        1. In short, no. You can generate addresses at will, and use a different address for each transaction. Once you’re done with the address (hopefully once all value is transferred away from it), you can erase it from your wallet, and a forensic analysis of your device(s) would be necessary – ultimately at the hardware level – to demonstrate your ownership of that address. And there’s no way to distinguish within the BitCoin system between one of your addresses and an address held by someone else. So if you transfer all your bitcoins to a new address on a rolling basis, without seizing your device or performing Internet route / communication network analysis, demonstrating that those addresses are / were “yours” is very difficult.

        2. > That means the transaction is only anonymous if my wallet cannot be associated with me, now or in the future. 

          And this doesn’t just mean that you have to be careful. It means that if anyone else you transact with isn’t as careful as you there’s a route to you through them.

          1. On top of given all transactions are visible on the network you better believe people will be data mining that.

            Given today you can actually identify a person with 3 data points from phone gps data.   I expect people will find a way to make a profile of a person that goes beyond just one wallet.

    2. Yeah, Bitcoin isn’t cryptographically perfect; it has some traceability downsides.  It’s usually good enough. 
      – If you’re trying to fund your program for overthrowing a significant-sized national government, Bitcoin may not be the currency for you. 
      – If you want to buy $100 worth of politically incorrect pharmaceuticals online, it’s probably good enough, and it’s certainly radically better than Paypal or Visa. 
      – If you’re trying to retail a few hundred thousand dollars worth of “research chemicals” by mailorder, the risk from accepting payments with Bitcoin will probably be much lower than from shipping the chemicals themselves, and probably lower than accepting greenbacks.
      – If you want an investment vehicle that lets you avoid paying taxes, Bitcoin is probably better than betting on inside straights or long-shot horses, but you’re still subject to the Sucker Rule, and there are investment advisers who’ll be happy to help you with your dreams. 

  5. If I had a penny for every individual person that I’ve seen get angrier about Bitcoins than about anything else that’s ever happened, I’d have about a mil… 

    …oh, now I get why I’m reading so many Bitcoin articles.

  6. Yeah, it’s not *easy* to track an individual down using Bitcoin transactions. It’s also not impossible.

    It seems like the kind of system that you’d set up once and just keep updating with new information. I don’t know if there’s a system available that can cross reference transactions with known and unknown wallets but it seems like the kind of thing police/tax authorities would eventually figure as not a bad investment.

    1. Remember: Attacks only get better with time.   At some point somebody will figure out to to profile people using the bitcoin transaction data that will go beyond just a single wallet.

  7. I don’t want anything to do with bitcoin.  Not because of any flaw in the infrastructure but because apparently the people who are really into bitcoin are total assholes and I don’t want to deal with them.

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