Weekly Roundup: BTC Turns A Corner, Tumbling Services & Blockchain Forensics Explained
In this week’s edition, we examine how bitcoin may have indeed found its price bottom for 2018 (with any luck), take a close look into the seldom-mentioned world of bitcoin mixing services (coin tumblers), and inspect their co-dependent, evolutionary relationship with the blockchain analytics companies who are trying to outdo them.
BTC Up, Down, Up… Down?
The price of bitcoin managed to climb about 5.5% during the course of the week after apparently having bottomed out at the $7,100-mark last Tuesday. BTC still remains down 21% over the last 30 days, unable to break above the $10,000 mark since mid March, and down close to 50% since January 1st. The fact that the recent low of $7,100 is significantly higher than the year’s lowest point of $6,000 (set at the beginning of April) is being hailed as encouraging news by small and bigtime investors alike. In a note of exercising caution, it would serve to remind investors that the price of BTC is still up a whopping 1,200% over the last 2 years – far greater a number than most anything else actively traded by institutions and hedge funds in New York City.
Amid the usual clamor of “buy” and “sell” proclamations to emerge from the overhyped, over-voiced financial media machine “braniacs” on Wall Street (who brought you hits like Black Monday and The Great Recession) came an unusual point of sanity: that bitcoin was decidedly the new gauge of fear among investors. The revelation infers that a greater appetite for risk among investors exists when bitcoin is on the rise and shrinks when bitcoin is on the decline. On the face of it, this makes a lot of sense, given that bitcoin remains a more volatile (and thus risky) investment than any fiat currency and most stocks or commodities.
The Secretive Battle for Bitcoin Privacy
Since its early days as a fledgling experiment, only known about by internet and cryptography nerds of overlapping circles, bitcoin has been used as a means to evade law enforcement in the purchase of illegal materials, substances, and services. Its association with this sort of criminal activity dates back to the opening of the original Silk Road darknet marketplace in February of 2011. Hiding behind a combination of anonymity provided by the Tor network and bitcoin addresses, a whole underground economy of drug trade developed around bitcoin, unironically making use of government-operated postal services as its preferred courier. Since Silk Road was shut down as the result of a government-led investigation in 2013, several others popped up to fill its place, and when those were shut down, new markets have always followed suit. There are currently over 20 major darknet markets currently in operation – many of which are likely the target of ongoing investigations.
As bitcoin gained more value, it became useful for other sorts of nefarious enterprises, including money laundering, extortion, and more recently, as payment for ransom. The open source, publicly-available nature of bitcoin and its blockchain ledger system is often confused with providing complete anonymity by criminals without a healthy respect for how it functions. Because the blockchain is a record of every bitcoin transaction that has ever taken place – every sender linked to every receiver – its is theoretically possible to trace the origin and transaction history of every bitcoin that has ever been mined. In this respect, the bitcoin blockchain is a very transparent ledger that is available for inspection by any person who knows how to use a blockchain explorer. This is where the transparency ends, however, as connecting a bitcoin address to a specific individual or entity is almost an entirely opaque process. Unless a bitcoin address has been self-tagged by its owner or tagged by a reputable source which has made such identification publicly available, most investigations get stopped in their tracks at this point in the analysis.
Chainalysis Changes the Game
Only in the last 3 or 4 years has a solution to this problem emerged, with an entire scientific discipline burgeoning around it, known as blockchain (or bitcoin) forensics. When a government entity, such as the IRS, FBI or NSA combines advanced block explorer expertise with subpoenaed user information from major cryptocurrency exchanges like Coinbase and Poloniex, it suddenly becomes much more possible to trace user bitcoin spending, potentially linking it to bitcoin addresses tagged as belonging to darknet markets, money launderers and even terrorist organizations. A company named Chainalysis has created a novel business model doing exactly that: helping the government track down criminals via use of blockchain forensics and statistical analysis.
Chainalysis rose to prominence last year when it was announced that they were being employed by the IRS to help identify tax cheats. Starting as a business in 2014, Chainalysis was initially geared for the express pursuit of aiding law enforcement. Thanks to $16 million recently acquired in a round of venture capitalist funding they are now expanding their services to banks and financial institutions that are hoping to better identify sources of funds from their ever-expanding crypto-oriented customer base. In November of last year, they also published a research study using their advanced blockchain forensics capabilities to estimate with a great amount of precision the number of bitcoin that had been “lost,” or whose owners had somehow mismanaged their private keys.
The Evolution of Tumblers
Coin mixing services, also known as “bitcoin tumblers,” have been in existence almost as long as the dark markets themselves, providing another layer of obfuscation between a user and their bitcoin. Prior to the creation of tumblers, it was very easy for stolen or otherwise “tainted” bitcoin to be sold on an exchange without repercussion. Somewhat ironically, it was the nefarious exchange MtGOX that first implemented the policy of tagging coins that had been stolen from other exchanges, as chronicled in a 2012 article written by Vitalik Buterin (who would go on to found Ethereum, incidentally).
After the policy of marking bitcoins that had been stolen became more widespread, and the independent need for privacy among bitcoin users rose, coin mixing services began to crop up, which were websites/companies that mix user coins together with other coins in a long series of transactions, making it harder to determine their address before entering the mixer. For a 1-3% fee, services like Coin-O-Mat, Bitcoin Fog, SharedCoin and BitMixer employed different methodologies to all basically accomplish the same thing: make it harder for authorities (and cybercriminals alike) to determine the original holder of an amount of bitcoin.
Bestmixer: Second-Generation Crypto Mixer
Nowadays, “bitcoin privacy maintenance specialists” (or tumblers) are trying to stay one step ahead of the authorities or companies like Chainalysis which actively seek to undermine their work. A prime example of a next-gen tumbler service is Bestmixer, which was specifically created to help its customers avoid detection by advanced blockchain analysis services. Unlike the tumblers before it, Bestmixer does not just mix customer-deposited coins with other coins but sends entirely different coins from a different batch of customers to the original customer’s “output” address. These coins may have been deposited to the Bestmixer system at a previous or future date and carry no explicit relationship to the original customer’s coins. In a post on bitcointalk, a member of the Bestmixer team dispels a particular customer’s fears that they were employing the exact same tactics used by the first-gen mixing services, which were no longer immune to blockchain analytics and government investigations:
There was a misunderstanding between us: it seemed to us that you claim that you have already received your coins back when re-mixing. But you just surmise that it will happen. Obviously, you came to this conclusion because you saw that we combined your coins with other coins. And you’re assuming we did this specifically to increase our pool.
Such assumptions are incorrect.
The combined coins, you are talking about, are the combined small transactions that can no longer be used in the mixer for many reasons and mainly because of de-anonymization. Therefore, you, or anybody else, will never get back your coins from the combined coins. It is not possible since they are permanently removed from the pool and no longer participate in the mixing process. Instead, if necessary, coins with a different story from completely different sources are added to the pool.
Hopefully, this explanation is enough to solve this misunderstanding.
Of course, whether it be for legal reasons or because it is simply the reality of the situation, Bestmixer employees prefer to think that their service is necessitated as protection from hackers and other criminal elements that can somehow profit off snooping on the source of an upstanding citizen’s cryptocurrency treasures. We’d like to believe this is indeed the case, if only because their well-produced YouTube video makes it seem compellingly so:
Also in the News
- There are more bitcoin ATMs in America than all other countries combined, concludes financial shamen at CNBC, and according to Vice their increasing popularity remains well on the rise. Some machines are now catering to other cryptocurrencies or even a multiple array of cryptos all within the same ATM, as evidenced by an advertisement for one such machine in Las Vegas, Nevada:
- The guy who famously bought 2 pizzas for 10,000 bitcoin in the world’s first bitcoin transaction, Laszlo Hanyecz, revealed that he had exchanged correspondence with Satoshi Nakamoto hundreds of times in bitcoin’s early days, describing the mysterious developer as “weird and bossy.” Apparently Nakamoto was somehow aware that his invention would go on to be as powerful and transformative as it was because he insisted on maintaining every aspect of his personal anonymity while more-or-less ordering Hanyecz around like he was a paid bitcoin development employee (he was not).
- The long-dreaded, always-theoretical “51% attack” actually managed to take place on one of bitcoin’s many forks: Bitcoin Gold (BTG). In such an attack, a single player gains control over more than half of a coin network’s hash rate in order to replace a coin’s actual blockchain with one that favors the attacker, usually re-arranging transactions to reflect an inordinate amount of coins as belonging to addresses owned by the attacker. Good thing nobody actually uses Bitcoin Gold for anything important.
- Unsurprisingly, a treatment center for cryptocurrency trading addiction opened up within the United Kingdom last week, catering to those who had been afflicted by making large, ruinous bets on the price movement of bitcoin and Monero, in particular. Because excessive gambling is medically classified as an addictive behavior, rendering it no different from excessive consumption of drugs or alcohol, and because excessive speculation on cryptocurrency is considered gambling – as is most short-term stock or commodity trading behavior – cryptocurrency trading is being labeled by physicians as a new subtype of disease. Whether or not its treatment will be covered by the U.K.’s National Health Service is yet to be known.