(emphasis mine)

My reading is that bitcoins are classed as money if and when they become mainstream. Note that the FSA is based on principals not rules...if something looks like a duck and quacks like a duck then it is a duck as far as they are concerned. They would not be interested in protestations about bitcoins merely being solutions to difficult maths problems.

The implication of this (again, by my reading) is that people processing transactions (ie miners) will be regarded as payment processors and subject to the payment services directive (PSD http://www.fsa.gov.uk/pubs/other/PSD_approach.pdf). This requires registration with the FSA if in UK (see section 3.2). If you process more than 3M EUR per month you need full authorisation (section 3.3), involving things like holding reserve capital and paying FSA upfront fee of > 1500 EUR (sec 3.13), otherwise you can get a lightweight authorization. In either case you would appear on a public register (section 3.6). In either case (sec 3.92), you must adhere to anti money laundering regulations and perform customer due diligence checks (sec 3.36).

TL;DR - If bitcoin becomes popular and FSA deems it to be money, legal mining will likely become impossible in the UK and presumably EU.

If you stand back a bit it makes perfect sense  - regulators and governments don't want funds to be easily transferred to and from terrorists or organized crime, and that is exactly what bitcoin would enable. Note that I'm not saying whether AML regulation is a 'good' thing or not, just that it is a fact of life.

Thanks for the feedback.

The benefit over a straight short (or short future) is that a miner doesn't actually know the rate at which he will be mining since he doesn't know the future global hashrate. Since the global hashrate will be longterm correlated to the price, an outright short is likely to be worse than no hedge.

The mswap contract takes into account both price and difficulty, so a miner is much better hedged with it.

I will add all this into the pdf.

Thanks!

I'm writing a document on an exchange-traded contract that would allow a miner to hedge his exposure to future prices and difficulty. The first draft is available here

http://dl.dropbox.com/u/42985614/miners_swap_draft_1.pdf

If anyone has any comments or suggestions for improvement, I'd very much appreciate it.

Thanks

I don't really understand what you're saying here. The bitcoin honeypot would be open to 'skilled locksmiths' as well as friends. If there is an outstanding bounty of, say, 50 BTC for a 1-minute delay then it does at least say that as a merchant you're pretty safe accepting 1-minute confirms in the same manner as the honeypot. You could also think of it like a bug-bounty.

I think that we should build a confirmation honeypot so the community can get a better handle on how long you have to wait for a transaction to be effectively irreversible.  If it turns out that it only really needs 1 minute rather than 1 hour, that could be a huge win for bitcoin adoption by bricks-and-mortar businesses.

More details on my blog http://newmeraire.blogspot.com/2011/09/bitcoin-confirmation-honeypot.html.

What do you think?

I'm after daily btc price levels over last 6 months.  Where can I get this from?  I can see charts on bitcoincharts.com but I need the actual numbers.  Using the bitcoincharts API I can get all trading levels, but this is far more data than I need, and it doesn't fit in excel.

Any advice?

Nonsense.  Bitcoin doesn't need miners to write blank cheques for it to survive.  If the price was $0.01 or $100 it would not make much difference, what matters is volatility.  Why would anyone care what the absolute level is?  What matters is that they can easily transfer btc into real currency and back, so that there is little or no market risk when making transactions.  The problem we have had is the transition from hobbyist miners who 'hoard' bitcoins to professional miners who sell as they mine.  The price will naturally converge to the rate at which investors put money in divided by the rate bitcoins are mined.  No problemo.  Why all the angst?

There aren't 11 million people trading bitcoins.  And if there were, do you think it's really that likely that we happen to be talking to him/her?

Re: what is random and what is not, I would encourage anyone who is interested to learn about modern probability theory (laid out by Kolmogorov in the '30s) and stochastic processes.  One nice thing about this theory is the prominence that conditional probabilities and conditional expectations take.  This allows you to describe 'deterministic' and 'random' as simply two extreme points on a spectrum.  Something is deterministic when conditioned on a large information set, something is random when conditioned on a small information set.  Probabilities are always relative to an information set*.  Something that seems random is actually highly predictable given the right information, and something that appears predictable would have appeared random if you knew a little less.

One person may consider rolling a six being p=16.67%, whereas another person who noticed the die being slightly oblong might consider rolling a six being p=20%.  Another person with a supercomputer and highly accurate motion detectors might see it as p=0% (or 100%, depending on what number his supercomputer spits out).  All three people can be right in their own assignments of probabilities, the different numbers just illustrate that the probability of an event is always with respect to a particular information set.  Two people with different information will assign different probabilities to the same event.  It's not that one is wrong and one is right - they're both assigning the correct probabilities as they see it, it's just that one knows more than the other.  The more you know, the less random things become.

Trading is like that - you have some people who know almost nothing about what's going on..they don't read the news they don't read company reports they don't look at historicals; they don't analyse anything.  You have other people who spend their entire life reading all this stuff and conclude slightly different probabilities for assets rising or falling.

The point here is that the uninformed trader will see everything as random because from his perspective it actually is random.  It's wasn't that mortgage-backed securities actually had an objectively high probability of default as such, it was just that he didn't go out and grab enough information that would have revealed to him a high probability of default.  He sees things go up and down and has no idea why.  He sees some people make money and others lose money and that too looks random.  He sees the smart people who made money betting against subprime and assumes they were just lucky because, after all, this event was pure randomness.  Then he looks to the people who lost money on subprime and says, "well they wore the same pinstripe suits and they worked in the same bank and they drank the same fine wine, so they're clearly indistinguishable from those other guys that made money...hence verifying my position that it's all just random and unpredictable".

If he was uninformed but smart he would realize that while to him things appear indistinguishable from noise, it could be that to people better informed it would be more predictable.  On the other hand if he was closed-minded he might think "well if it appears random to me then it must be genuinely random."

This is the problem here...it's easy for things to look random or unpredictable, you just have to bury your head in the sand and ignore all the information that comes your way.  For things to become predictable you need to do hard work, hence not very popular.

* A good candidate for an absolute probability may appear to be the unconditional probability.  However, for any probability space with measure P you can always embed it in a larger space with a new measure Q that agrees with P in the small space but disagrees outside the smaller space.  So while the unconditional probability looks unique and objective once you've constructed the probability space, if the space had been constructed differently then the unconditional prob would have been different too.

Yes, you have to prove you can troll before being allowed onto this forum! 

I'm curious as to the long-term economics of mining.  I'm interested at what happens when bitcoin gains price stability, the majority of bitcoins have already been mined and (presumably) miners mine to win transaction fees rather than new bitcoins.

Suppose all miners are rational economic players, in that they mine if and only if the rewards outweigh the costs.  This means that it is in effect free to buy hardware and electricity to mine with - every GPU and kWh funds itself by winning transaction fees.  This in turn means that (with access to large amounts of initial capital) you can actually build an arbitrarily large self-funding mining rig.  You just keep adding extra nodes/GPUs because each node is self-funding.  Eventually, by accumulating more nodes you end up owning half the network at which point you can (it seems) do many devastating attacks on the network.  Given the time you've invested you may not want to destroy it completely, but you may wish to make some huge double spends that live for long enough for you to cash out into USD.

It seems to me that the only way of stopping people taking control of the network for free, is by making mining being a loss-making activity...but then why would people want to mine for free?  But even then, you would still have to make it significantly loss-making to stop black-hats from 'investing' some short term capital with the reward that they can do some monster double spends.  So you can see the general argument here - it costs the same amount for a good-guy to mine as it does a bad-guy, except that the bad-guy has the added incentive of double-spend upon seizure of the network.  Economically speaking, this means that in the steady-state era it is rational to mine only if you're a bad-guy looking to seize control of the network.

Hopefully I'm wrong about all this and I've missed some key argument...but what is it?

Thanks for the reply, but no, I'm actually trying to get the address that sent the money.  Later I will be sending money back to that address, kind of like bit lotto does (although I hadn't heard of bitlotto when I made this post).

> There's no data set in which a trader has ever outperformed chance. Ever.

To know this would require knowledge of all details of every trading decision ever made.  Obviously you don't have such knowledge, and neither does anyone else.  So why do you keep stating stuff as fact when everyone knows that you are in no position to know that?  As an aside, can *you* actually define precisely what "outperforming chance" means?

> If you want to claim differently I urge you to source that information. Please.

Many people have given your examples of how you can beat the market.  e.g. investigating company fundamentals that others haven't noticed e.g. spotting patterns that nobody else has.  Contrary to what you claim this is not illegal at all.

> There's still a Nobel Prize waiting

No, there is no Nobel Prize for beating the market.  You would also not win a Nobel Prize in economics for beating the market, because you would not be showing anything surprising.  There are no serious economics who believe that markets are 100% efficient.  Highly efficient, maybe, 100% efficient, no.

Your claim is that there is no statistical pattern in any data and that all information about all companies is spread across the whole market.  This is an extraordinary claim that I don't see you backing up with any data at all.

I hope everyone can agree that if there is a real statisitically significant pattern in the data and if someone can recognize it when others do not, then they can beat the market in a statistically significant way, not just in the sense of "well there're lots of participants so some must win."

So, are there real patterns in financial markets?  To me the answer is clearly yes for these reasons:

• Historically there have been many patterns. They existed due to real-world factors like financiers liking to sell off some of their assets before going on holiday, like certain international events making people think more optimistically about life in general, like corporation taxes being levied at particular times of the year, like breweries being anti-correlated with GDP and so on and so on.  Shortly after they are identified publicly they disappear, because the market starts to predict them ahead of time, hence smoothing them out.  So how come you can look back and see all those patterns historically and yet you look now and there doesn't seem to be any patterns?  Well it could be because there are in fact no more patterns because they've all been discovered, but much more likely it's because there are patterns that exist now but they have either not yet been discovered or have not yet been made public.  In ten years time, today's patterns will have been revealed and made public...I wonder if in ten years time people will still be saying "but now is different, now I can quite surely say that there are no more patterns because they have all been discovered".
• With the (possible) exception of modern algo trading, trades are done by humans.  Humans have emotions, they trade partly on sentiment, they make flawed analyses. They buy because they want to impress the hot sales girl.  They sell because the risk-manager is breathing down their neck.  They double up when they get drunk.  Humans cannot even generate random numbers if they try...how can one plausibly claim that a price series generated by humans is perfectly random when humans don't seem capable of generating a random series of numbers at all?
• Just because a trader cannot stay ahead of the pack indefinitely, that does not mean that he never spotted a real (statistically significant) pattern.  It would be like saying there's no evidence Pele was a good footballer because he currently cannot get into the Brazilian team. Maybe one day I'll spot something that nobody noticed about company X.  I'll trade it, make some money and that would be it.  I wouldn't become famous, I wouldn't get a nobel prize, maybe I would never spot any pattern again, maybe I would never trade again. But that doesn't mean that my trade was random, it just means that it would never be picked up and given as evidence for the existence of patterns.  Remember, there's a world of difference between on the one hand patterns actually existing and on the other being able to statistically prove that patterns exist given public data.

So I hope I've given pretty strong arguments that patterns exist, and that some people can use them to make money, even if you can't necessarily prove it using statistical means and even if it gives you no indication of what those patterns actually are.

How do you know?  Is there evidence?  Or is it just implausible that people who spend tens of thousands of dollars on mining rigs need to recoup at least some of their money to pay the bills?  Lets be generous and say the cost of mining is half the value of the coins...that means collectively bitcoin miners are spending $25k per day on electricity...that's $10M per year...that's a freaking lot of money to spend on electricity...why are you so sure that everyone doing this is so rich that dropping a few hundred thousand dollars in the short run is no big deal?

I can't quite parse that sentence, but the price has been below $12 for over a month now.  According to bitcoin charts, MtGOX has traded 1.2M BTC in that time.  That's quite a lot of volume to say that prices are below $12.

Why is this 'most likely'.  Do you have any evidence to support it?  It could be, I don't know...I'm just wondering why everyone seems so sure it's the explanation.  Anyway, it doesn't actually follow that old coins don't have to be sold by miners.  If you mined old coins and new coins and you need to pay some USD bills, why would you necessarily trade in your old coins rather than your new coins?

Presumably you'll have multi-protocol clients developed that can support the various flavours and blockchains that exist.  So in that case a merchant who takes the time to incorporate btc into his site will just incorporate all the different flavours in one go at no extra cost.

IMHO the key is volatility.  Since transaction fees are all negligible and if we assume all the different versions are equally secure, the only thing a merchant would care about is the volatility of the different versions.  You're always going to want the one that is least likely to fluctuate w.r.t your outgoings.  e.g. if you are reselling cars that you bought with USD, you want to receive whatever will fluctuate least against USD.

Why do you class buying as legitimate but selling as somehow malevolent?  Could the sellers not just be miners trying to pay their electricity bills?  I mean in the context of 5k bitcoins being mined every day, the 5k dumps you see on MtGOX every fortnight or so are really not large at all..it's just one day's worth of mining.  Or 3% of one month's mining.

In any case, if these people had cashed out in April when we were at the same levels as we are now, bitcoin would never have reached $30, we wouldn't have had the big crash, bitcoin would have been far less volatile and everyone would have been happy.  So would that have been evil in your PoV?  As in all markets, cashing out at the right time reduces overall volatility - calling it 'greed' is just childish.

Every day there are around 5,000 bitcoins mined.  Assuming the miners have a fairly small margin and they have to sell bitcoins to pay their electricity bills*, that means that a similar number will have to be sold daily.  For a $10 price to be maintained, that means the bitcoin economy requires $50,000 worth of outside investment every day, or $1.5M per month.  If you think this rate of new investment is unsustainable, then you would expect prices to fall.

It looks like the largest source of outside investment (other than peoples electricity bills - see below) comes through MtGOX.  So if you want to know whether the price is going to go up or down, just ask Mark Karpeles, or his (real-world) bank how many deposits they get.  You'll see a lot of people say things like "yeah I hope the price falls to $x because then I'll buy", but are they really talking about spending > $10,000 per day on bitcoins?  Because this is the kind of throughput you need to make any kind of noticeable difference on market levels.

FWIW, I reckon BTCs fall to well below $5 and will stay there until either

• someone with real money comes along (hedgefund billionaire?) or
• bitcoins start getting used by more than 1% of online retailers or
• the rate of bitcoin mining decreases significantly (2014?)

* if they are pure miners then they would sell their bitcoins to pay electricity. if on the other hand they pay electricity in USD and keep their BTC, then they are some kind of miner/investor hybrid.  But this doesn't really change the analysis above - it still means that the bitcoin economy need $1.5M of outside investment every month (either through bank transfers or electricity bills) to maintain a rate of $10/BTC.

Is it possible to retrieve the senders address from bitcoind?

I can see it in blockexplorer.com but don't see it in the bitcoind api.  Also, while blockexplorer gives the senders address, it doesn't say how many confirmations there have been, and doesn't appear to be part of the documented api for blockexplorer.  Is there a tool I can use where I specify the receivers address and it will tell me all the incomming transactions along with number of confirmations in a machine-readable format?

Thanks

Yes, this kind of thing worries me too.  If someone did come up with a bitcoin-like technology (BTCv2) that was substantially better in some way then presumably more people would invest in it, more merchants would accept it etc.  This would clearly devalue the BTCv1 w.r.t other things (usd, eur, gold, land, whatever) because there would be the same supply but less demand.  But of course BTCv2 will come along at some point, that's just innovation.  Will it be backward compatible?  Can it be backward compatible?

As I see it, the only thing that could save BTCv1 in the long-run is the 'network-effect' of many people having already invested a lot of money in it.  The longer bitcoin goes without a competitor the more embedded it will become, hence less likely that it will be displaced by a non-backward-compatible BTCv2.  But how embedded it needs to be to not be replaced by better technology is anyone's guess.