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Using Benford’s Law to Detect Bitcoin Manipulation

139 points by luu 5y ago

louwrentius 5y ago
Frankly, I can’t judge the merits of this article because I lack the knowledge required. But I think at this point we know that all cryptocurrencies are ‘greater fool’ “investments”. [1] They are in every way totally irrelevant and detrimental to society. Governments are unfortunately slow to crack down on the exchanges, although progress is being made. And that effort is essential to battle the cancer that is the ransomware epidemic. Anyone who follows the Lock Picking Lawyer on YouTube knows that with time, resources and dedication virtually all locks can be defeated and cryptocurrencies make ‘expensive’ attacks worthwhile on IT infrastructure. Frankly it hurts to see how cryptocurrencies have been ‘legitimized’ by HN & ycombinator’s coinbase. Because so many people will be hurt. [1]: https://twitter.com/smdiehl/status/1384055017003311106?lang=en https://twitter.com/smdiehl/status/1384055017003311106?lang=...
- Joeboy 5y ago
  > But I think at this point we know that all cryptocurrencies are ‘greater fool’ “investments” It seems to me to be very apparent that we do not all know that. It is in fact a point of significant controversy.
  - louwrentius 5y ago
    I don’t think so. It’s quite simple: where do the profits come from? Other people, who by definition will lose money because crypto doesn’t create value. A large amount of people will hold the bags of worthless currencies while a few laugh their asses off in their lambo’s.
    - xiphias2 5y ago
      El Salvador's Bitcoin Beach project is a great example of people profiting from a debit based value network instead of a credit based financial system: even though both US and El Salvador had USD as the legal tender, it took $10 to remit $50 through the western union network. Lightning network (which is using Bitcoin as a settlement network) is both dramatically lowering the fees and provides instant debit transfer from an El Salvadorian living in US remitting money to his/her parents in their village (or directly paying the rent / gas bills) instead of the parents needing to travel hours by bus to the city.
      - nootropicat 5y ago
        LN isn't actually used - the way it actually works is: Strike holds dollars for the user. The user wants to send dollars to someone. Strike buys btc using dollars (from itself), sends btc via ln - to itself - and then sells btc for the same amount of dollars, again to itself, and credits the receiver. What's actually happening is that Strike is a normal payment provider like Paypal, Venmo, Revolut that fakes the btc transfer process because pretending to be only a btc wallet means less regulation than a full payment provider. They don't actually spell it as directly - they just claim an absurdity that buying btc and then selling btc is somehow cheaper than a direct transfer, which of course is impossible because it means taking the ask and then selling into the bid, and the actual spread on most liquid btc markets can be observed on biggest exchanges like Coinbase or Binance, and that's ignoring the fact that one part of the exchange is supposed to happen in a local illiquid market in El Salvador. The whole thing would be less convoluted if stablecoin tokens were sent directly using a payment channel without a fake trade step - using btc is a completely pointless for anything but marketing (Strike to btc holders and marketing btc itself).
        SV_BubbleTime 5y ago
        I read that twice and now it makes less sense. What is the purpose of the fake transfer steps?
        axiosgunnar 5y ago
        > because pretending to be only a btc wallet means less regulation than a full payment provider.
        xiphias2 5y ago
        You are totally right in each step, but there's 1 thing that makes it different from most exchanges: you can already transfer money in/out of it using LN, which makes it much more practical than using a Coinbase exchange account. Also, while Coinbase Pro has a 0.1-0.3% fee for market order, if you want guaranteed execution, Coinbase and its competitors take 3-4%. If you listened to talks from Jack Mallers, he was tracking lnd head instead of waiting for the full releases, and picking and testing pull requests by hand, fixing bugs that come up in practice (or giving feedback to lightning devs), that's one of Strike's advantages over other exchanges. Also the ,,less regulation'' is just not true generally, people have to go through KYC to link with bank accounts, they are communicating with regulators: https://jimmymow.medium.com/announcing-strike-public-beta-325877a79f87 https://jimmymow.medium.com/announcing-strike-public-beta-32...
    - Joeboy 5y ago
      > I don’t think so But the fact you don't disagree with yourself doesn't mean other people don't disagree with you.
    - echopurity 5y ago
      >where do the profits come from? Every heard a money printer go brrr?
- deleted 5y ago
  [deleted]
- bouncycastle 5y ago
  Attacks on IT infrastructure have other motives besides ransom too. For example. IP theft such as stealing the secret recepcie to the KFC herbs and spices, or stealing the soure code to a competitors product, or the user database. Moreover, attacks to ravage the target without the motive of ransom are common, see the Sony hack for example. The only solution against attacks is better security.
- casi 5y ago
  I equally find it strange that people continue to come to hackernews- the Silicon Valley VC startup land - and can’t grasp that the infrastructure for programmable money might have some value. And write off p2p communication and coordination tools as zero-sum/ fraudulent games. And then wish for the government to ban other people’s jobs and hobby’s and communities because they don’t like it. Blows my mind that people might spend their day coding, and night playing mmorpgs, and still not understand crypto. I guess we need better UX and storytellers.
  - z3c0 5y ago
    To give the original commenter some credit, they did warn us that they lack knowledge on the subject.
  - FabHK 5y ago
    You can easily (!) and efficiently (!) do "programmable money" without crypto[1]/blockchain/consensus (ie whatever Bitcoin and its descendants brought to the table), and guess what, people do. > Blows my mind that people might spend their day coding, and night playing mmorpgs, and still not understand crypto. Let's agree that you can lambast cryptocurrencies even despite understanding them, ok? [1] with good old cryptography, of course, but without "crypto"
  - Jasper_ 5y ago
    Nobody has been able to tell me a single thing that this "programmable money" can do, despite having 12 years of gestation to think on it. Everyone just seems excited about the concept and assumes that because it's "natively programmable", it's somehow more useful than what we have right now, which is that we write programs which move around money. And please don't reply with DeFi, that's not taking advantage of the inherent programmability of Bitcoin, it's just a marketplace based on failed economics.
  - Hokusai 5y ago
    > the infrastructure for programmable money might have some value And it has, Central Banks are creating their own digital currencies for digital wallets. They aware based on real needs for speed, volume, security, trazability, etc. > the infrastructure for programmable money might have some value I think that people understand cryptocurrencies quite well, and from that knowledge comes the skepticism. > wish for the government to ban other people’s jobs and hobby’s and communities because they don’t like it I want it banned because people with unsofisticated knowledge of economics and technology are being scammed out of their money by snake oil salesmen. But, that is not needed. As soon as normal accounting guaratees are required it probably will call by its own weight. I know people working hard jobs putting hard earned money into this scam trying too get money to better their lives. It breaks my heart to thing that they are being lied in such a way, this study suggests is all manipulation, and that is my experience with everything related to cryptocurrencies. The sooner it gets regulated the better.
- MichaelBurge 5y ago
  I tend to agree, but this rant has nothing to do with using Benford's law to detect Bitcoin manipulation.
- SamPatt 5y ago
  "at this point we all know..." Sorry that's an appeal to majority. You're wrong. Bitcoin is useful.
- Geee 5y ago
  Once you learn the externalities of fiat monetary systems, you will understand why we need Bitcoin. And you will realize that it is the most important innovation of our lifetime.
hhjj 5y ago
Maybe he should try with prices in yen...
- Gys 5y ago
  The currency against which BTC is exchanged the most is very likely the one that shows the best fit (most perfect market). Assuming that currency is the USD I expect any other currency would result is an even worst fit
  - Metacelsus 5y ago
    Presumably yen, being a smaller unit of money, would have the prices spread out over more logs. So Benford's law might be a better fit.
    - alisonkisk 5y ago
      A yen is nearly the same as a penny. Does BTC trade in small fractions of yen?
    - malf 5y ago
      That’s not how logarithms work
- zeckalpha 5y ago
  There are other problems with the article but currency exchange shouldn’t substantially affect the distribution.
- fungizid 5y ago
  With a fixed exchange rate, the choice of currency does not matter for Benford’s law. Benfords’s law states that for many real-life numbers x, log(x) is uniform. Converting to another currency using exchange rate E, so that y = E*x, yields log(y) = log(E) + log(x). This corresponds to a shift of the distribution of log(x) and does not change how uniform the distribution is. However, if the exchange rate varies with prices, then it will matter.
dannyw 5y ago
What is the statistical likelihood of this appearing by chance? Note that 2014 to today isn't actually that long of a timeframe, as prices in a time-series are highly linked to the previous data point. Berkshire Hathaway has been trading for several decades; so that's 40 years of data; as compared to 7 years of data. yet the author, by using the same charts, seems to falsely imply that these are remotely comparable. This article seems to have as much logic as the whole "Benford's law proves the elections were rigged!!!" claims by QAnon, who tried to apply Benford's Law on a county level, found that it generally fits a vast majority of the time, but cherry-picked the counties where it didn't fit (which generally tended to be smaller and hence less data points). Well, duh, it's statistics: outliers are to be expected. Pretty poor take from an author at "statmodeling.stat.columbia.edu".
- conformist 5y ago
  Isn't Andrew Gelman's take more like "Look what they did, that's kind of interesting, what do you think?" rather than "look at this article, it is true"? See also the comment section.
  - FabHK 5y ago
    Yes indeed. Most of the article is quoted from Smith, and Gelman (the prolific author of the worthwhile blog at columbia.edu) only really adds a few inconclusive sentences at the end. ("... There’s a lot going on, and people have lots of reasons for doing things.")
- mumblemumble 5y ago
  The author at statsmodeling.stat.columbia.edu is the person who wrote several of the books on things like this. I don't think he can be finger-wagged away quite so easily as that. There's a huge difference between this and the election one, which is that this one is working with data that satisfies the key statistical assumptions needed to properly apply Benford's Law, and the QAnon elections rigged claims didn't. (Or at least the ones I know about offhand - I don't use Benford's Law at work, so this is not really my area of expertise.) The big one you need to look for is that the variable spans multiple orders of magnitude. Berkshire Hathaway going back to 1980 spans three orders of magnitude, so we're good there. Note that we could not use Benford's Law to look at BRK going back only 7 years, but that is not because it's not enough data. It's because that would cover only 1/4 of an order of magnitude. BTC going back 7 years is also decent. It's not quite as good - only spanning two orders of magnitude - but it's enough that we would expect Benford's Law to apply better than it does in this graph. By contrast, a lot of the cases where people thought they were using Benford's Law to uncover electoral fraud, the data only covered a small fraction of an order of magnitude. It's just silly to expect 1 to be the most common leading digit in a set of data that's constrained to the range [300, 600]. I don't know that this is compelling evidence of fraud or manipulation in BTC, but it at least seems like clear evidence that BTC doesn't behave like other securities. There's something unusual going on that merits further investigation. Perhaps it is just a shortcoming in the statistical model being used. But, since this isn't a big data conference, it's not sufficient to just keep hitting the "need more data" number until you finally get the number you want.
saivan 5y ago
Sorry for the shameless plug. I made a video about Benford's law a while ago for anybody wondering how we get these values https://www.youtube.com/watch?v=9hY43XpVr1I&ab_channel=Treena https://www.youtube.com/watch?v=9hY43XpVr1I&ab_channel=Treen...
- randunel 5y ago
  I suspect your "shameless plug" message is trying to draw attention away from the fact that you've added an adblock whitelisting query param to the url, presumably whitelisting ads from certain providers. This is more unethical than sharing tracking links in here.
  - dmurray 5y ago
    Good spot, but I think this happens by accident rather than by design. If you have AdBlock Plus, and chose some option to allow YouTube ads on certain channels, it edits URLs to include this [0]. So @saivan may have just copied it from his browser's URL bar. [0] https://support.google.com/youtube/thread/69037368/url-change?hl=en https://support.google.com/youtube/thread/69037368/url-chang...
  - alisonkisk 5y ago
    "shameless plug" draws attention to, not against. Anyway, it's not a big deal, ads aren't worse than tracking, and anyone who uses a real blocker uBlock Origin isn't affected by ab_channel.
  - deleted 5y ago
    [deleted]
qPM9l3XJrF 5y ago
I don't buy it. My intuition here is that Benford's law is a thing because for pretty much any statistical distribution, large numbers are less likely than small numbers, and small numbers are more likely to start with 1. But I'd only expect this effect to show up when aggregating across many different statistical distributions (e.g. looking at all stocks in the S&P 500 at once) rather than looking at individual distributions (i.e. I think maybe he just got lucky choosing Berkshire, and other S&P 500 stocks might not show Benfordness in their price even if they're not manipulated). Plus, even if Bitcoin's price is mainly a product of manipulation -- speculators trying to make the price rise or fall relative to where it is right now -- there's no reason we can't think of that as also being a random process which produces some statistical distribution. Benford's law works for detecting fraud because the process that humans use to choose random numbers -- just write down a bunch of random digits -- results in a statistical distribution that is unusual relative to what would be produced by a natural process. But it seems quite unlikely to me that Bitcoin price manipulation takes the form of a whale saying "OK, I just wrote down a bunch of random digits, this is our BTC price target for Wednesday".
- dannyw 5y ago
  Correct. I've been in the bitcoin space for a decade now, and there were only brief moments* where it was difficult to buy or sell at the price quoted by major exchanges. * DDoS attacks, exchange illiquidity, etc.
- fluidcruft 5y ago
  I don't really know anything about this but every time I read these analyses using Benford's Law I don't understand why anyone would expect Bitcoin's exchange rate to begin with the digit "1" ~30% of the time. Once you're not talking about human-guestimated numbers, it seems more like a question of scale factors. If bitcoin's value fluctuates between 30k and 70k it's never going to start with a "1". Or if its value fluctuates between 120k and 180k then it's always going to start with "1". That's where I struggle trying to understand how Benford's Law is supposed to provide any insight.
  - deleted 5y ago
nobrains 5y ago
Why do some people keep trying to prove Bitcoin as a pump and dump scheme? Yes it has pumps and dumps, but if you zoom out, those pumps and dumps get smoothed out and you see a digital asset which keeps increasing in value because people see it as a hedge against USD and other currencies inflation. The increase in value is not infinite, and that can also be seen in the price increase curve (log). The price increase is slowing. Why is it difficult to come to the conclusion that initially Bitcoin price increase will be volatile and eventually it will come to parity, decreasing the volatility. From that point onwards, the price will be more closely related to actual inflation (world over). (The above purposefully ignores the other debate about electricity, usage, etc. to keep the discussion simplified.)
- acover 5y ago
  Gold isn't even an inflation hedge in the scale of one's lifetime, why will Bitcoin be different?
  - nobrains 5y ago
    Gold is an inflation hedge in many, many countries.
    - acover 5y ago
      I'm not an expert, I am referring to the following. Am I misunderstandibg something? > due to its real-price volatility, gold had not been a good inflation hedge over the short- or long-term. They did find that, going back to the era of Emperor Augustus who reigned from 27 BC–14 AD, gold had been a pretty good hedge for inflation measured by military pay. So, if you have a liability due in 2,000 years, gold might be a good way to maintain your purchasing power. https://www.pwlcapital.com/will-gold-save-the-day/ https://www.pwlcapital.com/will-gold-save-the-day/
    - deleted 5y ago
      [deleted]
    - bhaak 5y ago
mrfredward 5y ago
Benfords law is used to find evidence that the numbers came from a person, not a measurement or mathematical process, right? So anyone who knows what a limit order is should not be surprised to find evidence that humans are involved in picking the prices, right? It should be obvious that violating Benfords law isn't evidence of fraud or manipulation or even fomo, just evidence that the price is impacted by the people typing in the orders having to pick what number to type in. Edit: I've softened the language in my comment a bit, but I stand by the fact that this only shows humans are affecting prices, this analysis can't distinguish between fraud and psychological effects around "key" prices, like $10,000.
- UncleMeat 5y ago
  Benfords law is a perfect example of something that is cool and compelling and then gets applied inappropriately all over the place by people who don’t know better. Voting, for example.
  - abaga129 5y ago
    Or by people who do know better and have malicious intent.
  - snet0 5y ago
    Usually because the pop-description is, as usual, misleading. People find data covering "several orders of magnitude" and just assume by some cosmic fact that Benford's law should apply, despite the mechanics being their data having no reason to imply that the law holds.
  - HWR_14 5y ago
    > Benfords law is a perfect example of something that is cool and compelling and then gets applied inappropriately all over the place by people who don’t know better. Yes, but an Ivy-League educated Professor of Economics who created Yale's first course on the stock market under the mentorship of a nobel prize winner (for his work on the stock market) and whose research specialty is statistics and financial markets should be able to use Benford's law correctly. That this analysis was then repeated by Columbia is also pretty strong credibility.
echopurity 5y ago
>Since bitcoins generate no income, their intrinsic value is zero Embarrassingly bad.
- Geee 5y ago
  Yeah, it's like dollars or gold, their value is zero too. There is no such thing as 'intrinsic value'. Value is always subjective.
  - Etheryte 5y ago
    Intrinsic value is a specific term in finance [0] and it is by definition an estimation/approximation. Saying there's no such thing as intrinsic value because value is subjective is like saying there's no variables that are undefined because undefined variables have a defined value of undefined. [0] https://www.investopedia.com/terms/i/intrinsicvalue.asp https://www.investopedia.com/terms/i/intrinsicvalue.asp
    - Geee 5y ago
      It makes sense for something that produces cash flow, but saying that bitcoin doesn't have intrinsic value and therefore no value is just stupid.
hatware 5y ago
Show me you don't understand statistics without showing me you don't understand statistics...
Animats 5y ago
Huh? The NYSE looks that way because of a stock market rule that if the price falls below US$1 for 30 days, it becomes a "penny stock" and will be de-listed. There's also a tradition that when a stock gets well over $100, it splits. (Berkshire Hathaway refuses to go along with this, but everybody else does.) So issuers tend to split and reverse split to stay in the traditional trading range. Commodity prices and foreign exchange rates don't behave like that. They don't split or reverse split. Also, their price is different depending on which currency you view it in.
- HWR_14 5y ago
  > There's also a tradition that when a stock gets well over $100, it splits. Typically in doing analyses like this, you use "split-adjusted" prices. That is, you use the total value of a single (or 100 or whatever) shares as of the start date and follow all the split/reverse split rules to determine the new value. Being delisted as a penny stock may as well be going to zero - that rounding error won't produce these results. In fact, this is about exponential growth, not an accounting artifact, and applies to many areas. > Commodity prices and foreign exchange rates don't behave like that. They don't split or reverse split. Also, their price is different depending on which currency you view it in. But they still produce similar artifacts. I mean, if you list everything in 1/3rds of a dollar, it should follow the same pattern.
arcticbull 5y ago
I mean, we need only remember that in late 2016 two wash trading bots at Coinbase accounted for 99% of all global trading volume in Litecoin. (Likely Charlie Lee, btw) [1] And that Tether continues to exist after this devastating NYAG settlement. [2] It's clearly manipulated. And it's manipulated because its roughly speaking globally unregulated, and tracks globally via cross-exchange arbitrage bots. If the author found anything different I'd eat my ...hat, and if you believe the trading patterns are as pure and organic as the driven snow I've got an NFT of the Brooklyn bridge to sell you. [1] https://www.cftc.gov/PressRoom/PressReleases/8369-21 https://www.cftc.gov/PressRoom/PressReleases/8369-21 [2] https://ag.ny.gov/sites/default/files/2021.02.17_-_settlement_agreement_-_execution_version.b-t_signed-c2_oag_signed.pdf https://ag.ny.gov/sites/default/files/2021.02.17_-_settlemen...
- coolestguy 5y ago
  Why is what tether did (held 76% of its reserves in cash and cash equivalents and other short-term deposits and commercial paper as of the end of March, as opposed to 100% backed) any different to fractional reserve banking? The minuscule fine ($18M) shows that the AG didn't even really think it was a big deal.
  - CrazyStat 5y ago
    Because Tether lied about it.
    - arcticbull 5y ago
      Which is broadly referred to as fraud
  - arcticbull 5y ago
    For the same reason when the police abduct someone and throw them into a small room it’s called an arrest but when you do it, it’s called kidnapping. I wouldn’t read too much into the magnitude of the fine they’re just one state. They also forced them to stop doing business in, or with anyone connected to New York. They were fined because at one point they had a tiny fraction of the money they said they did, and at a different point they had all of their money in Stuart Hoegners personal bank account at BMO, comingled with his lunch money lol. Among many many many other frauds.

139 points by luu 5y ago

Frankly, I can’t judge the merits of this article because I lack the knowledge required. But I think at this point we know that all cryptocurrencies are ‘greater fool’ “investments”. [1] They are in every way totally irrelevant and detrimental to society. Governments are unfortunately slow to crack down on the exchanges, although progress is being made. And that effort is essential to battle the cancer that is the ransomware epidemic. Anyone who follows the Lock Picking Lawyer on YouTube knows that with time, resources and dedication virtually all locks can be defeated and cryptocurrencies make ‘expensive’ attacks worthwhile on IT infrastructure. Frankly it hurts to see how cryptocurrencies have been ‘legitimized’ by HN & ycombinator’s coinbase. Because so many people will be hurt. [1]: https://twitter.com/smdiehl/status/1384055017003311106?lang=en https://twitter.com/smdiehl/status/1384055017003311106?lang=...

Joeboy 5y ago
> But I think at this point we know that all cryptocurrencies are ‘greater fool’ “investments” It seems to me to be very apparent that we do not all know that. It is in fact a point of significant controversy.
- louwrentius 5y ago
  I don’t think so. It’s quite simple: where do the profits come from? Other people, who by definition will lose money because crypto doesn’t create value. A large amount of people will hold the bags of worthless currencies while a few laugh their asses off in their lambo’s.
  - xiphias2 5y ago
    El Salvador's Bitcoin Beach project is a great example of people profiting from a debit based value network instead of a credit based financial system: even though both US and El Salvador had USD as the legal tender, it took $10 to remit $50 through the western union network. Lightning network (which is using Bitcoin as a settlement network) is both dramatically lowering the fees and provides instant debit transfer from an El Salvadorian living in US remitting money to his/her parents in their village (or directly paying the rent / gas bills) instead of the parents needing to travel hours by bus to the city.
    - nootropicat 5y ago
      LN isn't actually used - the way it actually works is: Strike holds dollars for the user. The user wants to send dollars to someone. Strike buys btc using dollars (from itself), sends btc via ln - to itself - and then sells btc for the same amount of dollars, again to itself, and credits the receiver. What's actually happening is that Strike is a normal payment provider like Paypal, Venmo, Revolut that fakes the btc transfer process because pretending to be only a btc wallet means less regulation than a full payment provider. They don't actually spell it as directly - they just claim an absurdity that buying btc and then selling btc is somehow cheaper than a direct transfer, which of course is impossible because it means taking the ask and then selling into the bid, and the actual spread on most liquid btc markets can be observed on biggest exchanges like Coinbase or Binance, and that's ignoring the fact that one part of the exchange is supposed to happen in a local illiquid market in El Salvador. The whole thing would be less convoluted if stablecoin tokens were sent directly using a payment channel without a fake trade step - using btc is a completely pointless for anything but marketing (Strike to btc holders and marketing btc itself).
      - SV_BubbleTime 5y ago
        I read that twice and now it makes less sense. What is the purpose of the fake transfer steps?
        axiosgunnar 5y ago
        > because pretending to be only a btc wallet means less regulation than a full payment provider.
      - xiphias2 5y ago
        You are totally right in each step, but there's 1 thing that makes it different from most exchanges: you can already transfer money in/out of it using LN, which makes it much more practical than using a Coinbase exchange account. Also, while Coinbase Pro has a 0.1-0.3% fee for market order, if you want guaranteed execution, Coinbase and its competitors take 3-4%. If you listened to talks from Jack Mallers, he was tracking lnd head instead of waiting for the full releases, and picking and testing pull requests by hand, fixing bugs that come up in practice (or giving feedback to lightning devs), that's one of Strike's advantages over other exchanges. Also the ,,less regulation'' is just not true generally, people have to go through KYC to link with bank accounts, they are communicating with regulators: https://jimmymow.medium.com/announcing-strike-public-beta-325877a79f87 https://jimmymow.medium.com/announcing-strike-public-beta-32...
  - Joeboy 5y ago
    > I don’t think so But the fact you don't disagree with yourself doesn't mean other people don't disagree with you.
  - echopurity 5y ago
    >where do the profits come from? Every heard a money printer go brrr?
deleted 5y ago
[deleted]
bouncycastle 5y ago
Attacks on IT infrastructure have other motives besides ransom too. For example. IP theft such as stealing the secret recepcie to the KFC herbs and spices, or stealing the soure code to a competitors product, or the user database. Moreover, attacks to ravage the target without the motive of ransom are common, see the Sony hack for example. The only solution against attacks is better security.
casi 5y ago
I equally find it strange that people continue to come to hackernews- the Silicon Valley VC startup land - and can’t grasp that the infrastructure for programmable money might have some value. And write off p2p communication and coordination tools as zero-sum/ fraudulent games. And then wish for the government to ban other people’s jobs and hobby’s and communities because they don’t like it. Blows my mind that people might spend their day coding, and night playing mmorpgs, and still not understand crypto. I guess we need better UX and storytellers.
- z3c0 5y ago
  To give the original commenter some credit, they did warn us that they lack knowledge on the subject.
- FabHK 5y ago
  You can easily (!) and efficiently (!) do "programmable money" without crypto[1]/blockchain/consensus (ie whatever Bitcoin and its descendants brought to the table), and guess what, people do. > Blows my mind that people might spend their day coding, and night playing mmorpgs, and still not understand crypto. Let's agree that you can lambast cryptocurrencies even despite understanding them, ok? [1] with good old cryptography, of course, but without "crypto"
- Jasper_ 5y ago
  Nobody has been able to tell me a single thing that this "programmable money" can do, despite having 12 years of gestation to think on it. Everyone just seems excited about the concept and assumes that because it's "natively programmable", it's somehow more useful than what we have right now, which is that we write programs which move around money. And please don't reply with DeFi, that's not taking advantage of the inherent programmability of Bitcoin, it's just a marketplace based on failed economics.
- Hokusai 5y ago
  > the infrastructure for programmable money might have some value And it has, Central Banks are creating their own digital currencies for digital wallets. They aware based on real needs for speed, volume, security, trazability, etc. > the infrastructure for programmable money might have some value I think that people understand cryptocurrencies quite well, and from that knowledge comes the skepticism. > wish for the government to ban other people’s jobs and hobby’s and communities because they don’t like it I want it banned because people with unsofisticated knowledge of economics and technology are being scammed out of their money by snake oil salesmen. But, that is not needed. As soon as normal accounting guaratees are required it probably will call by its own weight. I know people working hard jobs putting hard earned money into this scam trying too get money to better their lives. It breaks my heart to thing that they are being lied in such a way, this study suggests is all manipulation, and that is my experience with everything related to cryptocurrencies. The sooner it gets regulated the better.
MichaelBurge 5y ago
I tend to agree, but this rant has nothing to do with using Benford's law to detect Bitcoin manipulation.
SamPatt 5y ago
"at this point we all know..." Sorry that's an appeal to majority. You're wrong. Bitcoin is useful.
Geee 5y ago
Once you learn the externalities of fiat monetary systems, you will understand why we need Bitcoin. And you will realize that it is the most important innovation of our lifetime.

hhjj 5y ago

Maybe he should try with prices in yen...

Gys 5y ago
The currency against which BTC is exchanged the most is very likely the one that shows the best fit (most perfect market). Assuming that currency is the USD I expect any other currency would result is an even worst fit
- Metacelsus 5y ago
  Presumably yen, being a smaller unit of money, would have the prices spread out over more logs. So Benford's law might be a better fit.
  - alisonkisk 5y ago
    A yen is nearly the same as a penny. Does BTC trade in small fractions of yen?
  - malf 5y ago
    That’s not how logarithms work
zeckalpha 5y ago
There are other problems with the article but currency exchange shouldn’t substantially affect the distribution.
fungizid 5y ago
With a fixed exchange rate, the choice of currency does not matter for Benford’s law. Benfords’s law states that for many real-life numbers x, log(x) is uniform. Converting to another currency using exchange rate E, so that y = E*x, yields log(y) = log(E) + log(x). This corresponds to a shift of the distribution of log(x) and does not change how uniform the distribution is. However, if the exchange rate varies with prices, then it will matter.

dannyw 5y ago

What is the statistical likelihood of this appearing by chance? Note that 2014 to today isn't actually that long of a timeframe, as prices in a time-series are highly linked to the previous data point. Berkshire Hathaway has been trading for several decades; so that's 40 years of data; as compared to 7 years of data. yet the author, by using the same charts, seems to falsely imply that these are remotely comparable. This article seems to have as much logic as the whole "Benford's law proves the elections were rigged!!!" claims by QAnon, who tried to apply Benford's Law on a county level, found that it generally fits a vast majority of the time, but cherry-picked the counties where it didn't fit (which generally tended to be smaller and hence less data points). Well, duh, it's statistics: outliers are to be expected. Pretty poor take from an author at "statmodeling.stat.columbia.edu".

conformist 5y ago
Isn't Andrew Gelman's take more like "Look what they did, that's kind of interesting, what do you think?" rather than "look at this article, it is true"? See also the comment section.
- FabHK 5y ago
  Yes indeed. Most of the article is quoted from Smith, and Gelman (the prolific author of the worthwhile blog at columbia.edu) only really adds a few inconclusive sentences at the end. ("... There’s a lot going on, and people have lots of reasons for doing things.")
mumblemumble 5y ago
The author at statsmodeling.stat.columbia.edu is the person who wrote several of the books on things like this. I don't think he can be finger-wagged away quite so easily as that. There's a huge difference between this and the election one, which is that this one is working with data that satisfies the key statistical assumptions needed to properly apply Benford's Law, and the QAnon elections rigged claims didn't. (Or at least the ones I know about offhand - I don't use Benford's Law at work, so this is not really my area of expertise.) The big one you need to look for is that the variable spans multiple orders of magnitude. Berkshire Hathaway going back to 1980 spans three orders of magnitude, so we're good there. Note that we could not use Benford's Law to look at BRK going back only 7 years, but that is not because it's not enough data. It's because that would cover only 1/4 of an order of magnitude. BTC going back 7 years is also decent. It's not quite as good - only spanning two orders of magnitude - but it's enough that we would expect Benford's Law to apply better than it does in this graph. By contrast, a lot of the cases where people thought they were using Benford's Law to uncover electoral fraud, the data only covered a small fraction of an order of magnitude. It's just silly to expect 1 to be the most common leading digit in a set of data that's constrained to the range [300, 600]. I don't know that this is compelling evidence of fraud or manipulation in BTC, but it at least seems like clear evidence that BTC doesn't behave like other securities. There's something unusual going on that merits further investigation. Perhaps it is just a shortcoming in the statistical model being used. But, since this isn't a big data conference, it's not sufficient to just keep hitting the "need more data" number until you finally get the number you want.

saivan 5y ago

Sorry for the shameless plug. I made a video about Benford's law a while ago for anybody wondering how we get these values https://www.youtube.com/watch?v=9hY43XpVr1I&ab_channel=Treena https://www.youtube.com/watch?v=9hY43XpVr1I&ab_channel=Treen...

randunel 5y ago
I suspect your "shameless plug" message is trying to draw attention away from the fact that you've added an adblock whitelisting query param to the url, presumably whitelisting ads from certain providers. This is more unethical than sharing tracking links in here.
- dmurray 5y ago
  Good spot, but I think this happens by accident rather than by design. If you have AdBlock Plus, and chose some option to allow YouTube ads on certain channels, it edits URLs to include this [0]. So @saivan may have just copied it from his browser's URL bar. [0] https://support.google.com/youtube/thread/69037368/url-change?hl=en https://support.google.com/youtube/thread/69037368/url-chang...
- alisonkisk 5y ago
  "shameless plug" draws attention to, not against. Anyway, it's not a big deal, ads aren't worse than tracking, and anyone who uses a real blocker uBlock Origin isn't affected by ab_channel.
- deleted 5y ago
  [deleted]

qPM9l3XJrF 5y ago

I don't buy it. My intuition here is that Benford's law is a thing because for pretty much any statistical distribution, large numbers are less likely than small numbers, and small numbers are more likely to start with 1. But I'd only expect this effect to show up when aggregating across many different statistical distributions (e.g. looking at all stocks in the S&P 500 at once) rather than looking at individual distributions (i.e. I think maybe he just got lucky choosing Berkshire, and other S&P 500 stocks might not show Benfordness in their price even if they're not manipulated). Plus, even if Bitcoin's price is mainly a product of manipulation -- speculators trying to make the price rise or fall relative to where it is right now -- there's no reason we can't think of that as also being a random process which produces some statistical distribution. Benford's law works for detecting fraud because the process that humans use to choose random numbers -- just write down a bunch of random digits -- results in a statistical distribution that is unusual relative to what would be produced by a natural process. But it seems quite unlikely to me that Bitcoin price manipulation takes the form of a whale saying "OK, I just wrote down a bunch of random digits, this is our BTC price target for Wednesday".

dannyw 5y ago
Correct. I've been in the bitcoin space for a decade now, and there were only brief moments* where it was difficult to buy or sell at the price quoted by major exchanges. * DDoS attacks, exchange illiquidity, etc.
fluidcruft 5y ago
I don't really know anything about this but every time I read these analyses using Benford's Law I don't understand why anyone would expect Bitcoin's exchange rate to begin with the digit "1" ~30% of the time. Once you're not talking about human-guestimated numbers, it seems more like a question of scale factors. If bitcoin's value fluctuates between 30k and 70k it's never going to start with a "1". Or if its value fluctuates between 120k and 180k then it's always going to start with "1". That's where I struggle trying to understand how Benford's Law is supposed to provide any insight.
- deleted 5y ago

nobrains 5y ago

Why do some people keep trying to prove Bitcoin as a pump and dump scheme? Yes it has pumps and dumps, but if you zoom out, those pumps and dumps get smoothed out and you see a digital asset which keeps increasing in value because people see it as a hedge against USD and other currencies inflation. The increase in value is not infinite, and that can also be seen in the price increase curve (log). The price increase is slowing. Why is it difficult to come to the conclusion that initially Bitcoin price increase will be volatile and eventually it will come to parity, decreasing the volatility. From that point onwards, the price will be more closely related to actual inflation (world over). (The above purposefully ignores the other debate about electricity, usage, etc. to keep the discussion simplified.)

acover 5y ago
Gold isn't even an inflation hedge in the scale of one's lifetime, why will Bitcoin be different?
- nobrains 5y ago
  Gold is an inflation hedge in many, many countries.
  - acover 5y ago
    I'm not an expert, I am referring to the following. Am I misunderstandibg something? > due to its real-price volatility, gold had not been a good inflation hedge over the short- or long-term. They did find that, going back to the era of Emperor Augustus who reigned from 27 BC–14 AD, gold had been a pretty good hedge for inflation measured by military pay. So, if you have a liability due in 2,000 years, gold might be a good way to maintain your purchasing power. https://www.pwlcapital.com/will-gold-save-the-day/ https://www.pwlcapital.com/will-gold-save-the-day/
  - deleted 5y ago
    [deleted]
  - bhaak 5y ago

mrfredward 5y ago

Benfords law is used to find evidence that the numbers came from a person, not a measurement or mathematical process, right? So anyone who knows what a limit order is should not be surprised to find evidence that humans are involved in picking the prices, right? It should be obvious that violating Benfords law isn't evidence of fraud or manipulation or even fomo, just evidence that the price is impacted by the people typing in the orders having to pick what number to type in. Edit: I've softened the language in my comment a bit, but I stand by the fact that this only shows humans are affecting prices, this analysis can't distinguish between fraud and psychological effects around "key" prices, like $10,000.

UncleMeat 5y ago
Benfords law is a perfect example of something that is cool and compelling and then gets applied inappropriately all over the place by people who don’t know better. Voting, for example.
- abaga129 5y ago
  Or by people who do know better and have malicious intent.
- snet0 5y ago
  Usually because the pop-description is, as usual, misleading. People find data covering "several orders of magnitude" and just assume by some cosmic fact that Benford's law should apply, despite the mechanics being their data having no reason to imply that the law holds.
- HWR_14 5y ago
  > Benfords law is a perfect example of something that is cool and compelling and then gets applied inappropriately all over the place by people who don’t know better. Yes, but an Ivy-League educated Professor of Economics who created Yale's first course on the stock market under the mentorship of a nobel prize winner (for his work on the stock market) and whose research specialty is statistics and financial markets should be able to use Benford's law correctly. That this analysis was then repeated by Columbia is also pretty strong credibility.

echopurity 5y ago

>Since bitcoins generate no income, their intrinsic value is zero Embarrassingly bad.

Geee 5y ago
Yeah, it's like dollars or gold, their value is zero too. There is no such thing as 'intrinsic value'. Value is always subjective.
- Etheryte 5y ago
  Intrinsic value is a specific term in finance [0] and it is by definition an estimation/approximation. Saying there's no such thing as intrinsic value because value is subjective is like saying there's no variables that are undefined because undefined variables have a defined value of undefined. [0] https://www.investopedia.com/terms/i/intrinsicvalue.asp https://www.investopedia.com/terms/i/intrinsicvalue.asp
  - Geee 5y ago
    It makes sense for something that produces cash flow, but saying that bitcoin doesn't have intrinsic value and therefore no value is just stupid.

hatware 5y ago

Show me you don't understand statistics without showing me you don't understand statistics...

Animats 5y ago

Huh? The NYSE looks that way because of a stock market rule that if the price falls below US$1 for 30 days, it becomes a "penny stock" and will be de-listed. There's also a tradition that when a stock gets well over $100, it splits. (Berkshire Hathaway refuses to go along with this, but everybody else does.) So issuers tend to split and reverse split to stay in the traditional trading range. Commodity prices and foreign exchange rates don't behave like that. They don't split or reverse split. Also, their price is different depending on which currency you view it in.

HWR_14 5y ago
> There's also a tradition that when a stock gets well over $100, it splits. Typically in doing analyses like this, you use "split-adjusted" prices. That is, you use the total value of a single (or 100 or whatever) shares as of the start date and follow all the split/reverse split rules to determine the new value. Being delisted as a penny stock may as well be going to zero - that rounding error won't produce these results. In fact, this is about exponential growth, not an accounting artifact, and applies to many areas. > Commodity prices and foreign exchange rates don't behave like that. They don't split or reverse split. Also, their price is different depending on which currency you view it in. But they still produce similar artifacts. I mean, if you list everything in 1/3rds of a dollar, it should follow the same pattern.

arcticbull 5y ago

I mean, we need only remember that in late 2016 two wash trading bots at Coinbase accounted for 99% of all global trading volume in Litecoin. (Likely Charlie Lee, btw) [1] And that Tether continues to exist after this devastating NYAG settlement. [2] It's clearly manipulated. And it's manipulated because its roughly speaking globally unregulated, and tracks globally via cross-exchange arbitrage bots. If the author found anything different I'd eat my ...hat, and if you believe the trading patterns are as pure and organic as the driven snow I've got an NFT of the Brooklyn bridge to sell you. [1] https://www.cftc.gov/PressRoom/PressReleases/8369-21 https://www.cftc.gov/PressRoom/PressReleases/8369-21 [2] https://ag.ny.gov/sites/default/files/2021.02.17_-_settlement_agreement_-_execution_version.b-t_signed-c2_oag_signed.pdf https://ag.ny.gov/sites/default/files/2021.02.17_-_settlemen...

coolestguy 5y ago
Why is what tether did (held 76% of its reserves in cash and cash equivalents and other short-term deposits and commercial paper as of the end of March, as opposed to 100% backed) any different to fractional reserve banking? The minuscule fine ($18M) shows that the AG didn't even really think it was a big deal.
- CrazyStat 5y ago
  Because Tether lied about it.
  - arcticbull 5y ago
    Which is broadly referred to as fraud
- arcticbull 5y ago
  For the same reason when the police abduct someone and throw them into a small room it’s called an arrest but when you do it, it’s called kidnapping. I wouldn’t read too much into the magnitude of the fine they’re just one state. They also forced them to stop doing business in, or with anyone connected to New York. They were fined because at one point they had a tiny fraction of the money they said they did, and at a different point they had all of their money in Stuart Hoegners personal bank account at BMO, comingled with his lunch money lol. Among many many many other frauds.