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The Bitcoin network is predicated on the premise that it is difficult to find 'low' hash values for a given input. This is an incredibly safe bet because of the way the algorithm is implemented - if you change one byte in the input then the output changes to an (apparently) random number without any way to predict what it could be in advance.

People can 'mine' for new bitcoin by taking existing blocks and trying to 'solve' them by looking for a particularly low hash value. Currently this is done by simply trying lots of input values until a low enough output is hit by chance. Huge 'farms' and pools of computing power and specialised hardware exist to mine the new bitcoin and by all accounts only just manage to turn a profit after the cost of powering them.

So suppose someone somewhere discovers the hashing algorithm the Bitcoin network uses is not as random as the world thinks and comes up with a new unlocking algorithm that can reliably produce low hash values and 'solve a block' in seconds on his beat up pentium III computer at home (I realise that this is almost certainly impossible but it's a hypothetical).

He, and only he, then knows the secret and has the power to create new bitcoin quickly. Would there be legal implications for him to use this new knowledge to his advantage and to the detriment of others by, for example,

  1. Generating new bitcoin and accumulating it just slowly enough to avoid arousing suspicion

  2. After a period suddenly dumping and short-selling as much as he can before going public with the news of his algorithm (which would surely suddenly devalue the currency to the point of collapse)

Obviously he would be on safe ground if he just started using his new algorithm to generate bitcoin - nothing in the rules about how blocks are solved.

My suspicion is that as soon as he uses that algorithm to deliberately influence the exchange for the currency for his own profit (which he arguably does by 'going slow' in stage 1 but certainly does by timing the dumping/short selling just before the announcement in stage 2) then he must be violating some law, such as some kind of ban on insider trading?

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  • @Dawn Yeah, i know - hence our hero's slowly slowly approach in stage 1 - he doesn't want the difficulty to adjust enough to knock out too many other nodes and raise suspicion (they drop out on basis if difficulty increases then profitability decreases - weakest can no longer make a profit and stop)
    – Stewart_R
    Commented Jun 3, 2016 at 7:24
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    I think you can fix that hypothetical like this: assume that the person has found a flaw in the bitcoin algorithm that would destroy the security of the blockchain. Suppose releasing this proof would lower the value of bitcoin. Then the rest of your question makes sense. You are basically asking if having unique access to information that would lower bitcoin's value prohibits you from buying or selling bitcoins before making that information public.
    – user3851
    Commented Jun 3, 2016 at 7:39
  • @Dawn In the long term, yes, But difficulty adjustments only take place every fortnight so there would be a huge glut in that first period (and probably a few subsequent ones as a balance was reached) and a devastating impact on confidence in the currency so the collapse would still be inevitable, no?
    – Stewart_R
    Commented Jun 3, 2016 at 7:41
  • @Dawn - sorry - we crossed comments. Your latest one is a fair summary of my question
    – Stewart_R
    Commented Jun 3, 2016 at 7:42
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    What laws? Are bitcoins securities? Are they traded on regulated markets? What could make a person a "bitcoin insider?" Is your question actually, "When is it illegal to engage in commerce with the benefit of non-public information?"
    – feetwet ♦
    Commented Jun 3, 2016 at 15:36

1 Answer 1

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Your question assumes that there is a method to find a block of bitcoins with a faster computation than the brute force method used so far.

If such a faster calculation method exists, it is proprietary to the mathematics and our superhero has not invented it, he just discovered it and used it. It is not an insider trading case since everybody has the possibility to acquire the same math knowledge for free and use the same super algorithm (and maybe is using it already). Insider trading covers only situations when an insider has an information earlier than the market due his proximity to the information, being e.g. employee of the relevant company whose shares are traded, etc. Insider trading presumes that the insider is an "insider", i.e. has the information earlier only due to his position. On the other hand, having an information earlier due to his math skills which are available to everybody does not constitute insider trading.

Using the new discovered super algorithm for shorting the bitcoin price is not illegal since the super algorithm is not illegal either, but proprietary to the mathematics. The assumption that the price will drop may be not true, it is only a valid speculation.

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    "It is not an insider trading case" are you sure that it true in every jurisdiction? Insider trading laws may be designed to stop "insiders", but depending on the exact wording of the law the OP's example may or may not caught by the laws (and remember that the judge that tries the case will be a lawyer, not a mathematician).
    – Martin Bonner supports Monica
    Commented Nov 6, 2018 at 12:22
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    @MartinBonner Bitcoin is not a security, it is a form of currency. An algorithm is not specific, privileged/non-public knowledge, it is a complex mathematical computation typically applied or expressed in a programmatic fashion (which is the only reason algorithms themselves can't be patented in the US - because math can't be patented.) The discovery of the algorithm is just that, a discovery like fire or the wheel. The application of it might potentially be considered intellectual property. Zeroing out cryptocurrency in this fashion could be described as a weakness of the technology.
    – OpenSorceress
    Commented Nov 6, 2018 at 23:05
  • @OpenSorceress You seem to be assuming your categorization will be accepted in every jurisdiction. I see no evidence of that.
    – Martin Bonner supports Monica
    Commented Nov 7, 2018 at 9:43
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    @MartinBonner Well, I suppose I have no evidence. All I have is this determination from the SEC. sec.gov/news/public-statement/statement-clayton-2017-12-11
    – OpenSorceress
    Commented Nov 7, 2018 at 14:22
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    @OpenSorceress Bitcoin is actually more a commodity than a currency. It is even classified as commodity by many regulators in many countries. The reason: (i) bitcoin has too wide spread between buy and sell, (ii) it can not be used as value measure due to its high volatility and (iii) its acceptance by general public is limited.
    – Codigo
    Commented Nov 8, 2018 at 15:27

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