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According to a recent study by researchers from the University of Tulsa and Tel Aviv University, the massive increase in the bitcoin price in late 2013 was caused by suspicious trading activity on the now-defunct Mt. Gox Bitcoin exchange. The study, which is titled “Price Manipulation in the Bitcoin Ecosystem,” indicates that 600,000 bitcoins were acquired by agents who did not pay for them, and the bitcoin price rose by an average of $20 on days when the suspicious trading activity took place.

“Based on rigorous analysis with extensive robustness checks, we conclude that the suspicious trading activity caused the unprecedented spike in the USD-BTC exchange rate in late 2013, when the rate jumped from around $150 to more than $1,000 in two months,” the study states.

At the center of the study is the infamous Willy bot that was first publicized on a Wordpress blog back in May of 2014.

The paper details the data used for the study, identifies the suspicious trading activity and notes that these sorts of manipulative practices may still be possible today, especially in the altcoin markets.

The Data Used for the Study

This study regarding price manipulation in the Bitcoin markets is based on a data leak of CSV files that included the trading activity on Mt. Gox from April 2011 to November 2013. The researchers behind the study then supplemented that data with more information from bitcoincharts.com.

“We performed additional sanity checks of the data utilizing publicly available historical Mt. Gox trading data from bitcoincharts.[com],” reads the report. “We are confident that the data are high-quality.”

Suspicious Trading Activity

In the leaked data, the report notes that there are suspicious accounts in which the country and state fields are filled in as “??” Many red flags are then found upon further inspection of these accounts.

In the case of one account dubbed “Markus,” the report states that no trading fees are paid and the prices on trades are seemingly random.

“In the end, we have concluded that Markus did not actually pay for the bitcoins he acquired; rather, his account was fraudulently credited with claimed bitcoins that almost certainly were not backed by real coins,” states the report. “Furthermore, because transactions were duplicated, no legitimate Mt. Gox customer received the fiat currency Markus supposedly paid to acquire the coins.”

According to the study, Markus acquired a total of 335,898 bitcoins in the 225 days the account was active.

Another entity noted by the study is known as “Willy”; however, Willy controlled many different accounts. According to the study, Willy appeared roughly seven hours after Markus became inactive.

The data cited by the report indicates that Willy would purchase 10–19 bitcoins at a time until an amount equal to $2.5 million worth of bitcoins had been purchased. Willy would then make a new account and repeat the process.

The study notes that there are indications that the owner of the Willy accounts was a Mt. Gox insider. For example, Willy was able to trade while the Mt. Gox API was offline, and the user ID numbers used by Willy were high for the time period they existed.

The study on price manipulation in the Bitcoin ecosystem indicates that Willy acquired 268,132 bitcoins in exchange for $112 million. Much like Markus, Willy did not actually pay for his bitcoins.

“Hence, together, these unauthorized traders ‘acquired’ around 600,000 bitcoins by November 2013,” says the study. “Perhaps unsurprisingly, this is very close to the number of bitcoins (650,000) that Mt. Gox claimed to have lost when it folded in early 2014.”

According to the study, Markus accounts for 12 percent and Willy accounts for 6 percent of the total trade volume on the four major Bitcoin exchanges on the days they were active.

In addition to the possibility of an inside job, the study also notes that an early Bitcoin adopter could have artificially driven up the bitcoin price via a security vulnerability on the exchange in an effort to increase the value of his or her own holdings.

“We do not know for sure which, if either, of these scenarios reflect what actually happened,” says the report. “But that is largely beside the point. Our goal is to demonstrate that these fraudulent trades did in fact significantly impact the price of bitcoin.”

According to the New York Times, former Mt. Gox CEO Mark Karpeles admitted to operating the Willy bot in a Japanese court on Tuesday.

Altcoins Open to Manipulation

The researchers behind the study indicate that the importance of price manipulation in digital asset markets will increase as this technology continues to go mainstream. The study indicates that many altcoins are open to this same kind of price manipulation right now.

“Similar to the bitcoin market in 2013 (the period we examine), markets for these other crytocurrencies are very thin,” says the report. “Our analysis suggests that manipulation is quite feasible in such settings.”

Civic CEO Vinny Lingham shared a similar sentiment during a recent talk where he compared altcoins to pump-and-dump penny stocks. “With altcoins, [pump-and-dump schemes] are super easy,” said Lingham.

“Regulators may want to begin taking an active oversight role as the Bitcoin ecosystem becomes more integrated into international finance and payment systems,” concludes the study.

According to a recent study by researchers from the University of Tulsa and Tel Aviv University, the massive increase in the bitcoin price in late 2013 was caused by suspicious trading activity on the now-defunct Mt. Gox Bitcoin exchange. The study, which is titled “Price Manipulation in the Bitcoin Ecosystem,” indicates that 600,000 bitcoins were acquired by agents who did not pay for them, and the bitcoin price rose by an average of $20 on days when the suspicious trading activity took place.

“Based on rigorous analysis with extensive robustness checks, we conclude that the suspicious trading activity caused the unprecedented spike in the USD-BTC exchange rate in late 2013, when the rate jumped from around $150 to more than $1,000 in two months,” the study states.

At the center of the study is the infamous Willy bot that was first publicized on a Wordpress blog back in May of 2014.

The paper details the data used for the study, identifies the suspicious trading activity and notes that these sorts of manipulative practices may still be possible today, especially in the altcoin markets.

The Data Used for the Study

This study regarding price manipulation in the Bitcoin markets is based on a data leak of CSV files that included the trading activity on Mt. Gox from April 2011 to November 2013. The researchers behind the study then supplemented that data with more information from bitcoincharts.com.

“We performed additional sanity checks of the data utilizing publicly available historical Mt. Gox trading data from bitcoincharts.[com],” reads the report. “We are confident that the data are high-quality.”

Suspicious Trading Activity

In the leaked data, the report notes that there are suspicious accounts in which the country and state fields are filled in as “??” Many red flags are then found upon further inspection of these accounts.

In the case of one account dubbed “Markus,” the report states that no trading fees are paid and the prices on trades are seemingly random.

“In the end, we have concluded that Markus did not actually pay for the bitcoins he acquired; rather, his account was fraudulently credited with claimed bitcoins that almost certainly were not backed by real coins,” states the report. “Furthermore, because transactions were duplicated, no legitimate Mt. Gox customer received the fiat currency Markus supposedly paid to acquire the coins.”

According to the study, Markus acquired a total of 335,898 bitcoins in the 225 days the account was active.

Another entity noted by the study is known as “Willy”; however, Willy controlled many different accounts. According to the study, Willy appeared roughly seven hours after Markus became inactive.

The data cited by the report indicates that Willy would purchase 10–19 bitcoins at a time until an amount equal to $2.5 million worth of bitcoins had been purchased. Willy would then make a new account and repeat the process.

The study notes that there are indications that the owner of the Willy accounts was a Mt. Gox insider. For example, Willy was able to trade while the Mt. Gox API was offline, and the user ID numbers used by Willy were high for the time period they existed.

The study on price manipulation in the Bitcoin ecosystem indicates that Willy acquired 268,132 bitcoins in exchange for $112 million. Much like Markus, Willy did not actually pay for his bitcoins.

“Hence, together, these unauthorized traders ‘acquired’ around 600,000 bitcoins by November 2013,” says the study. “Perhaps unsurprisingly, this is very close to the number of bitcoins (650,000) that Mt. Gox claimed to have lost when it folded in early 2014.”

According to the study, Markus accounts for 12 percent and Willy accounts for 6 percent of the total trade volume on the four major Bitcoin exchanges on the days they were active.

In addition to the possibility of an inside job, the study also notes that an early Bitcoin adopter could have artificially driven up the bitcoin price via a security vulnerability on the exchange in an effort to increase the value of his or her own holdings.

“We do not know for sure which, if either, of these scenarios reflect what actually happened,” says the report. “But that is largely beside the point. Our goal is to demonstrate that these fraudulent trades did in fact significantly impact the price of bitcoin.”

According to the New York Times, former Mt. Gox CEO Mark Karpeles admitted to operating the Willy bot in a Japanese court on Tuesday.

Altcoins Open to Manipulation

The researchers behind the study indicate that the importance of price manipulation in digital asset markets will increase as this technology continues to go mainstream. The study indicates that many altcoins are open to this same kind of price manipulation right now.

“Similar to the bitcoin market in 2013 (the period we examine), markets for these other crytocurrencies are very thin,” says the report. “Our analysis suggests that manipulation is quite feasible in such settings.”

Civic CEO Vinny Lingham shared a similar sentiment during a recent talk where he compared altcoins to pump-and-dump penny stocks. “With altcoins, [pump-and-dump schemes] are super easy,” said Lingham.

“Regulators may want to begin taking an active oversight role as the Bitcoin ecosystem becomes more integrated into international finance and payment systems,” concludes the study.

A number of Bitcoin companies and miners have agreed to run code that will implement a hard-forking increase to the non-witness data in blocks roughly three months after the activation of Segregated Witness (SegWit). According to some of its proponents, the proposal, known as SegWit2x, is said to be the only viable solution to the Bitcoin scaling debate.

However, agreeing to initiate a hard fork without knowing how speculators will react to such a change comes with risks. If there is not full support for the hard fork from bitcoin holders, the end result could be a split of Bitcoin into two separate cryptocurrency networks, which could cause extreme brand confusion among the general public (depending on the severity of the split).

In addition to the potential risks of a permanent split of the community, SegWit2x also ignores tools that could be used to get the intended benefits of this particular hard-forking increase to capacity without the possibility of a network split.

Perhaps most troubling, SegWit2x ignores the reasons as to why Bitcoin is useful in the first place.

Speculators Call the Shots

While the original Medium post regarding the New York Agreement claimed the signatories accounted for $5.1 billion worth of monthly on-chain transaction volume (more than half of the entire network for April), the general view of SegWit2x from bitcoin holders is unclear at this time. Companies representing large amounts of bitcoin holdings (Digital Currency Group, Coinbase, Xapo, etc.) have signed onto the agreement as well, but we have yet to see speculators have the chance to set a price for the hard-forked chain.

As of now, the hard-fork portion of SegWit2x appears to be contentious, which means exchanges are likely to list both the original chain and the chain with a hard-forking increase to the block size limit. Companies that take custody of their users’ bitcoins will need to allow their users to withdraw both coins.

Although more than 80 percent of the network hashrate has agreed to run the SegWit2x code, it’s possible that speculators will prefer the non-hard fork chain. It’s also possible that a futures market could illustrate this point before the hard fork takes place.

Of course, miners could decide to mine at a loss and not listen to the market, which would theoretically go against the incentives of the Bitcoin system. If miners abandon the chain preferred by users, it’s possible that a proof-of-work change will be needed, as faith in the current miners may be lost.

Such a scenario could be disastrous for Bitcoin, which means miners (and everyone else in the ecosystem) should be incentivized to avoid it. But we’ll have to see what happens.

If These Companies Control Bitcoin, Then a Public Blockchain is Not Needed

The point of Bitcoin is that it allows everyone to have full control over their money without the need for a trusted third party. There is no third party in Bitcoin because no one controls the consensus rules. If someone is in control of Bitcoin’s consensus rules, then they’ve effectively become the third party that the system was designed to avoid in the first place.

With the New York Agreement, the signatories are basically saying they control the rules of Bitcoin (or at least the fork of Bitcoin that they’ve all agreed to run). If that’s the case, then the need for a public blockchain is less clear. Users would effectively be trusting these institutions with the rules of the system and ordering of transactions because they could decide to completely change the rules via a hard fork at any point in time. If the system is no longer trustless, Sybil attacks on the state of the blockchain can be thwarted by having trusted entities sign blocks rather than miners.

With that in mind, it may make more sense to launch a federated sidechain pegged to Bitcoin’s main chain instead of trying to turn the main chain into a trusted system. This would allow the main chain to retain Bitcoin’s core value proposition of permissionless money while the sidechain can process the microtransactions these companies desire.

The signatories of the New York Agreement could become the functionaries of the sidechain, where they’d control the consensus rules and sign blocks. This sort of setup makes much more sense if users are supposed to trust these entities anyway. A much more efficient transaction network can be created when proof-of-work and decentralization are thrown out the window.

In fact, this is exactly what Blockstream’s Liquid sidechain is supposed to achieve early next year. Ironically, some of the signers of the New York Agreement are supposed to be participants in Blockstream’s upcoming federated sidechain.

If there are no goals for SegWit2x other than increasing capacity on the Bitcoin network, then a federated sidechain is a much better alternative. There’s no risk of a chain split, capacity can be increased exponentially higher than the twofold increase offered by the hard-fork portion of SegWit2x, and other features, such as Confidential Transactions and faster block times, can also be implemented.

Put in this perspective, SegWit2x is completely nonsensical. I’m not sure what the New York Agreement will lead to over the next few months, but it appears to be unnecessarily risky.

This article is a guest post by Kyle Torpey. It does not necessarily reflect the views of BTC Media or Bitcoin Magazine.

Since Russian President Vladimir Putin expressed interest in Ethereum at his meeting with Vitalik Buterin at the World Economic Forum held in St. Petersburg, the blockchain industry in Russia has been quick to heat up. The Blockchain & Bitcoin Conference in Saint Petersburg was held in June, followed immediately by a blockchain-focused hackathon called BlockchainHack in Moscow, with 150 people in attendance competing for $100,000 worth of cryptocurrency.   

The hackathon took place at the Paveletsky Art Center, a massive building in downtown Moscow that has become the de facto hub for blockchain technology in Russia, with an increasing number of blockchain developers and enthusiasts who work out of it. The event was jointly organized by BTC Media, Qtum, Zerion, Waves, the Token Fund and Blockchain School, with additional support from the community in Russia.

The teams presented ambitious demos with winning topics including a mobile application to track and invest into ICOs; an arbitration service based on smart contracts and a reputation system; facial recognition software to determine what ICOs and blockchain projects a blockchain developer has been involved in and is currently active with; among others.

The winning team, Wafer, presented a demo and vision of creating a distributed Wi-Fi network using blockchain technology. They effectively allow routers to sell traffic without being tied to a particular software on the device. It uses smart contracts to ensure that users all pay for their traffic and that a user is guaranteed to get access to the internet after payment.

Qtum was the largest sponsor of the hackathon, and with members of the Qtum Foundation in attendance, many of the developers deployed their applications to Ethereum as well as Qtum. Qtum is a hybrid blockchain that merges the UTXO transaction model of Bitcoin with the EVM on Ethereum. It began as a fork of Bitcoin and the team added in an abstraction layer to integrate the EVM, ultimately allowing any developer tool built for Ethereum to also be available on Qtum, including Solidity smart contracts and Web3. Because of this, many of the decentralized applications presented were built on Ethereum as well as deployed to the Qtum testnet.

Prize money was awarded in Qtum tokens, Waves tokens and ether (ETH): as the grand prize winner, Wafer took home 5,000 Qtum tokens, valued at over $50,000. Qtum also awarded two other teams with 2,500 and 1,000 tokens for second and third prize.

Waves awarded their top three picks with 500 Waves, 300 Waves and 100 Waves, respectively. The winning Waves team developed a platform that uses facial recognition software for investors to quickly determine which ICO projects a person has been involved in.

The winning project in the Ethereum category, as selected by Zerion, created an interface for investors to quickly invest in multiple ICOs, and was awarded 10 ETH.

Patrick Dai, the cofounder of the Qtum project, said to Bitcoin Magazine, “We can see why this was the largest blockchain hackathon in Russia. Lots of developers brought new ideas to the table. We want to promote these projects that can bring the world closer together and spur innovation. We think that’s the purpose of blockchain technology, and it’s our purpose at Qtum.”

Alex Bash, one of the cofounders of Zerion, told Bitcoin Magazine, “I personally was really inspired by the idea of Wafer, a team that implemented a protocol that allows users and routers to share internet [access]. Their idea is based on smart contracts that guarantee the fair prices and conditions for both parties. Also the Lapti team who developed a product that processes various cryptocurrencies, generates a hot wallet for each user and aggregates their payments to a single wallet after collection of statistics and analytics.”

Every one of the 25 teams that participated presented a demo of the software they had created over the weekend.

“Overall, I think it’s a good result for the hackathon, that most of the teams not only came up with interesting ideas, but developed real products and solutions during the weekend,” said Bash.

Rodion Mikhalev, the director of the Blockchain Education Network in Russia, attended both the conference in Saint Petersburg and the hackathon in Moscow. He said that he expects the community in Russia will continue to grow very quickly.

“The Russian Government approved the entire concept of cryptocurrencies a few weeks ago, and a new industry in Russia has been unleashed surrounding blockchain technology,” Mikhalev told Bitcoin Magazine. “At the hackathon, we witnessed something new and extraordinary: a combination of smarts and digital innovation and a sense that through the evolution of blockchain technology, we will see Russia quickly rise as a powerhouse in the tech world. There will be a lot of positive products and services adapted to blockchain technology at a rapid pace.”

What happens next in regard to blockchain development in Russia remains to be seen, as there are still few blockchain companies that operate in the country. One thing we can be certain of though is that the technology is now high on their radar.

AlphaBay, the most popular market on the dark net, has been offline since July 4. Since the administrators of the website failed to issue an official statement about the current issues, many users are suspecting an exit scam. The absence of AlphaBay has since resulted in users looking for alternative underground marketplaces.

AlphaBay is infamous for being a site where vendors sell all kinds of goods, including illegal ones such as drugs, weapons and stolen financial credentials. There have been previous downtimes at the market; however, since neither the admins, nor the moderators have stated the actual cause of the issue, many users are suspecting an exit scam. An “exit scam” is when either a seller or an illicit marketplace decides to close down shop and make off with the funds (held in escrow) of clients and customers. In March 2015, Evolution Marketplace — one of the largest underground markets at the time — left with the funds of its users, cashing out an estimated 40,000 BTC worth approximately $12 million at the time (as of today, the BTC would be valued at $102 million).

“Trappy,” who is considered the main contact person for AlphaBay, submitted a post on Reddit on July 5 claiming he is in touch with the admins of the dark web marketplace; however, he did not specify the reasons why the market is down. The moderator also warned the users about the dangers that can ensue when a marketplace is offline, such as increased phishing activity in an attempt to steal the cryptocurrencies of misled buyers and sellers.

“I have been in touch with our devs and admins and they are working to restore AlphaBay as soon as possible. As I have said before, during downtimes, there are added risks that you should understand and be wary of,” Trappy wrote on the /r/DarkNetMarkets subreddit.

However, many users were not satisfied with the moderator’s post. There are plenty of posts with various theories speculating as to why the market has gone down. One user, “Artificial93,” claimed he followed the trail of his bitcoin address on AlphaBay, which pointed to a BTC wallet receiving large amounts of cryptocurrency in the past few days while the marketplace was down. Dark web users also spotted a large bitcoin transaction (1,479 BTC valued at $3.8 million) conducted on July 5. Because of this transaction, more users accused AlphaBay of executing an exit scam. On the other hand, “SarahLKJSGDHF” made a separate post on Reddit in an attempt to calm the community down and call for rationality.

“Yes, [the Bitcoin transaction is] large, and yes, it looks suspicious. But until someone can actually confirm that it's linked to AB, it's really just that — a large bitcoin transaction. The timing, admittedly, does fit,” the user wrote on the /r/AlphaBayMarket subreddit. “People have always screamed ‘exit scam’ in the past, and they've always been wrong. And I really hope this turns out the same.”

“XanaxBoss,” a verified vendor on the /r/DarkNetMarkets subreddit, speculated that the reason for the downtime is connected to a law enforcement operation in Quebec, Canada, where authorities raided two separate locations “in connection to a worldwide network with [the] sale of illicit products on the Dark Web.” In the police action — where the FBI was also involved — investigators were searching for computer equipment. According to XanaxBoss, the reason why AlphaBay is down at the moment is that one of their servers was seized in Quebec which they are trying to restore.

“The FBI didn't bust the market as a whole like they did for Silk Road because Alphabay is much bigger than Silk Road ever was, so it would be logical to believe Alphabay is operating through several servers in different areas of the world. Maybe the FBI just seized one of the mirror servers of Alphabay in Quebec, and there are many other servers located around the world. It would explain the ‘worldwide’ aspect of the FBI's ongoing investigation that is talked about in the article. I believe right now the ‘updates’ promised by Trappy and Bigmuscles are actually Alphabay's bosses attempting to secure the rest of their network and replace Quebec’s seized server,” XanaxBoss wrote.

Until either law enforcement or the administrators verify any of these claims, they all remain speculation. The only fact we know is that AlphaBay is still down.

Since the largest dark web marketplace went down, AlphaBay users have been looking for alternative markets. On Reddit, there appear to be multiple posts suggesting Hansa Market as a viable alternative because of the high security the website provides. In addition, the moderator (AlphaBay_mod) for the AlphaBay subreddit has suggested that Hansa admins are unlikely to be able to conduct an exit scam since the “money is never kept by Hansa.” The AlphaBay alternative has also eliminated a sticking point for AlphaBay users: finalizing early (FE). In FE listings, the customers have to send the payment directly to the vendors without escrow. This practice has resulted in numerous scams in the dark web community.

Because of the “high influx” of AlphaBay users joining Hansa, the marketplace closed down registrations for a while. In an update to the Reddit topic, AlphaBay_mod hasadvised the community to use the Dream Market since “it seems the only decent market for new users.”