Bitcoin’s Dirty Little Secret

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Photo Credit: Travis Wolfe

Note: This article was originally published on as “Bitcoin’s Dark Secret” and has since been taken down due to public outcry and accusations of hearsay. However, the assertions have been independently verified as true, that with the adoption of SegWit, a colluding majority of mining power could change the standard to that of not verifying transaction signatures thereby enabling the fraudulent bitcoin to be used.

There are a lot more than 21 million bitcoin.

If Bitcoin’s value is based on limited supply, with no more than 21 million in circulation, how do you think another 184 billion bitcoin would affect the price?

(Hint: Bitcoin’s price would be much lower.)

184 Billion Bitcoin Heist

On August 14, 2010, a hacker created 184 billion counterfeit bitcoin (BTC)[i], which the hackers sent to two addresses, and are now untraceable. According to the official story, the hack was identified, code was rewritten, and blockchain rebooted within just five hours, stranding the 184 billion bitcoin in cyberspace without the requisite 120 confirmations for inclusion into the blockchain. Satoshi and the early bitcoin development team took quick action. As a result of their efforts, they maintained the cap of 21 million and laid the foundation for future growth and global adoption.

There’s just one huge $3 quadrillion problem with this story — the 184 billion bitcoin are real, they exist in someone’s wallet, and are just waiting to be laundered back into the system.

A Bitcoin For Your Troubles

Imagine your doorbell rings. Standing on your porch is a man in a black trench coat and striped fedora. In his right hand, he holds a black inconspicuous looking briefcase. “It’s full of $100 bills — $10,000,000 in total,” he says with a thick accent. He continues, “It’s real money — and I want you to help me spend it.”

Your mind races: “How’d he get this money? Money laundering? Drugs? Human trafficking?!? And now he wants me to help him spend it? Why me? I can’t do this! But…it’s $10,000,000.” Your thoughts drift, “I could do so much…”

The point is that while the “stranded” 184 billion bitcoin are quite literally off the chain, as the saying goes, they’re as real as the money in your pocket. If someone gives you a briefcase full of money and then erases the transaction from their books (like rewriting the blockchain ledger), the briefcase full of money still exists whether or not it’s accounted for on the ledger. The real challenge now is how to put the 184B bitcoin, like the briefcase full of dirty bills, back into circulation without detection.

Money Laundering Bitcoin Style: “Segregated Witness”

On August 23, 2017, after two years of debate, Bitcoin officially adopted Segregated Witness, a technology that was arguably designed to boost blockchain capacity. However, much of the developer community felt so strongly that the security compromise outweighed the purported benefits of SegWit that they forked a new currency called Bitcoin Cash on August 1st, 2017. Bitcoin Cash forked ahead of the SegWit adoption in order to preserve the intended purpose of Bitcoin as a decentralized, secure currency.

So why did the developers oppose SegWit?

This excellent Bitcrust post explains that SegWit shifts the incentives to miners away from verifying transaction signatures — which creates the opportunity for aforementioned mystery hackers to spend their 184 billion bitcoin.

If the miners no longer validate transaction signatures, then it doesn’t matter that transaction 74638 failed to achieve the requisite 120 confirmations. Just like our briefcase of dirty money, these counterfeit bitcoin can be spent like any other provided that someone helps them spend it.

Miners: A Conflict of Interest

Miners are tasked with processing transactions and maintaining the security of the network by ensuring that all processed transactions are valid.

We previously discussed that miner consolidation has already occurred. The top miners now control 75.8% of the network. If any one of these miners chooses not to validate transaction signatures, the 184 billion bitcoin would appear as valid as any other on chain transaction.

This brings us back to the mobster at your door proposition. While you or I are unlikely to be approached by a briefcase-toting mobster in a trench coat, you can bet that the top miners will receive offers to buy equity in their company. If the new equity holders influence company policy, then it’s conceivable that that these companies may be unwittingly convinced to adopt a seemingly innocent policy change to cut costs by discontinuing signature validation under false pretenses.

Speaking of which, in case you wish to dig deeper, this CoinDesk article lists the small cadre of SegWit backers and opponents.

Bitcoin’s New Cap: 184,021,000,000

The good news is that whoever has control of the 184 billion bitcoin, let’s call them the ominous “they”, they have little incentive to flood the market. In fact, because their incentive is to maximize the value of bitcoin along with everyone else, it’s likely that portions of the hoard will leak onto the market slowly over a prolonged period of time so as not to create an adverse market reaction. So while the new cap may be 184,021,000,000 instead of 21 million, you should expect to see more media coverage of Bitcoin as the value creeps higher through mainstream adoption — unless, of course, you sell, and switch to a more secure currency.

If you’d like to read more about the hack, this account of the incident is quite a fascinating read, albeit a bit challenging to understand. A couple excerpts are listed below. There are also a few different threads. Read through each of them for the best context.

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By the way, if you’re still not convinced, watch this video for more on transaction signatures.

For more on the backstory, read “Can Terrorists Hack Bitcoin?

Joe McHugh is a licensed (crypto) currency trader, political and economic analyst, and founder of Earth Loans, a tokenized asset fund of funds platform. Mr. McHugh holds no position in Bitcoin as of the date of this writing.

Bitcoin Donations: 3FBhQxwvNXTVMkNtFCY3A7H8AfsrCndqjG

Bitcoin Cash Donations: 1JxBVpa3UiFpcZfAFwDbr5QoczkQrBGjMr


Written by

Joe McHugh is an Independent candidate for President, Forex & crypto CTA; political-economic analyst, and founder of Earth Loans.

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