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10 scary facts about Bitcoin

Colin Neagle | June 10, 2013
Before diving into Bitcoin, make sure you know the facts.

The Bitcoin Wiki for Anonymity isn't very reassuring, starting off admitting that "while the Bitcoin technology can support strong anonymity, the current implementation is usually not very anonymous."

The Block Chain logs and displays every Bitcoin transaction in real time, and makes that data available to anyone. Last year, Adi Shamir and Ron Dorit used the available data on Bitcoin transactions to try to get a lead on the mysterious Satoshi Nakamoto, the person or persons behind Bitcoin who has remained anonymous since publishing the whitepaper explaining the system in 2008.

Shamir and Dorit were able to trace all Bitcoin activity back to a handful of massive transactions made in November 2010, in which large amounts of Bitcoins were stashed away in several accounts that have yet to make another outgoing transaction.

Zach Harvey, co-founder of Bitcoin ATM developer Lamassu, says a theory is that these accounts belong to Bitcoin's creator, and haven't been used because another transaction could spoil Satoshi Nakamoto's anonymity.

"Finally, we noted that the subgraph which contains these large transactions along with their neighborhood has many strange looking structures which could be an attempt to conceal the existence and relationship between these transactions, but such an attempt can be foiled by following the money trail in a sufficiently persistent way," Shamir and Dorit concluded in their report.

3. Hoarding could pop Bitcoin's bubble.
Hoarding, or saving, in the Bitcoin community is a highly debatable issue. Harvey, when asked about hoarding and the fact that many Bitcoin users have stashed the currency away, says it's good for a community looking to establish savings rather than rely on credit.

However, others disagree. Vanity Fair contributing editor and long-time Wall Street-focused journalist Kurt Eichenwald touched on the hoarding issue in an April column on the issues with Bitcion. Citing Shamir and Ron's research, which found that 78% of all Bitcoin were not being used in circulation, Eichenwald warned that if a large amount of these hoarding Bitcoin users started to unload and exchange their stash for U.S. dollars, the value could plummet and may have difficulty rising again. Especially considering that Bitcoin is only valuable as long as people are willing to accept it, this could cause a potential issue for those looking to maintain value in their investment.

"In essence, the market is a fantasy," Eichenwald wrote. "Once the hoarders stop buying, what buyers will step up to the plate to take their place? My bet? No one. There will be, at some point, a time when some hoarder decides to unload. Prices will drop. Other hoarders will get scared and start to sell. Prices will drop further. Before long, there will be a mass rush to the exits. And at that point, the illiquidity of the Bitcoin market will be apparent."

 

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