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Over the past several months, Bitcoins have soared in popularity, acceptance and price. Naturally, it was only a matter of time before Bitcoin crime followed. As reported here previously, earlier this month, the largest heist in the history of Bitcoin was pulled off when the illegal drug bazaar Sheep Marketplace was plundered, either by hackers or insiders, and about $100 million worth of the currency was stolen from customers.

That was only the most recent heist however: the reality is that Bitcoin theft has been around for years. In June of 2011, a user named Allinvain was the victim of what is arguably the first recorded major Bitcoin theft. As The Verge reports, “Allinvain awoke to find that a hacker had stolen about half a million dollars’ worth of bitcoins. “I feel like killing myself now,” he wrote at the time.”

Outright robbery is not the only crime plaguing the new digital currency, as more sophisticated thefts have emerged including ponzi schemes:

The supposedly high-return investment fund Bitcoin Savings & Trust turned out to be a pyramid scheme, its owner charged with ripping off investors for $4.5 million in bitcoins. MyBitcoin, a “wallet” service that stored bitcoins like a bank account, disappeared with about $1 million worth of users’ bitcoins. Several of the most trusted and well-known Bitcoin companies, including the Mt. Gox and the now-defunct Bitcoinica exchanges, have also suffered high-profile thefts.

 

Victims of credit card theft can cancel a card or reverse fraudulent transactions, but Bitcoin is attractive to thieves because its transactions are irreversible. “Bitcoin is like cash,” says Nicolas Christin, an assistant research professor at Carnegie Mellon University who has done extensive analysis of Bitcoin. “The only way to get it back is by tracking you down and basically beating you up with a lead pipe.”

So it appears that despite the advent of the digital, hard physical objects – like lead pipes – still rule supreme.

But going back to Bitcoin is, where the vast majority still aren’t exactly clear what the fiat currency alternative actually is, it’s difficult to understand exactly how digital theft works. What are you stealing, exactly? And once you’ve got it, what do you do with it?

 

The Verge provides the explanation on how to steal Bitcoins in three easy steps:

 

1. Copying the keys

There is no such thing as a Bitcoin. The virtual currency is nothing more than a public ledger system, called the blockchain, that keeps track of an ever-expanding list of addresses, and how many units of bitcoin are at those addresses.

If you own Bitcoin, what you actually own is the private cryptographic key to unlock a specific address. The private key looks like a long string of numbers and letters. You may choose to store your key, or keys if you have multiple addresses, in a number of places including a paper printout, a metal coin, a hard drive, an online service, or a tattoo on your body.

All methods can be protected with various levels of security, but all methods are vulnerable to theft since the robbery simply depends on gaining access to the string. “I recommend creating physical paper wallets using an Arch Linux boot which has never been online,” says Marak Squires, an early Bitcoin adopter who is developing a secure Bitcoin bank. “Unfortunately, this is not an option for most people. For the average user there are no good options right now to securely store cryptocurrencies.”

The most lucrative attacks are carried out on online services that store the private keys for a large number of users, as Sheep Marketplace did. It seems these attacks are often carried out by insiders who don’t have to do much hacking at all. Just copy the database of private keys and you can gain control of the bitcoins at all those addresses. You, the thief, can now spend those bitcoins whenever you want, as long as the owner doesn’t move them first.

2. Getting away with it

While Bitcoin has some features that make it great for thieves, it also has some features that make it not so great. The fact that the blockchain is public means that anyone can see to which address the coins were transferred next. After the Sheep Marketplace heist, some users tracked the thief as he or she moved the stolen coins from address to address.

This tracking technique isn’t very helpful for the time being, since the thief’s identity is still unknown. However, Bitcoin forensics is getting better and better as programmers figure out new ways to extract information from the blockchain. A thief may leave traces that are undetectable now but could be uncovered in the future, inspiring a retroactive investigation.

That’s why this step, money laundering, is so important. Laundering Bitcoin is done with “mixers,” also called “tumblers,” which randomly crisscross your bitcoins with other users’ bitcoins so that you get a clean address that the blockchain cannot connect with any of the addresses from which the coins were stolen.

Most of the time it works basically like this: you transfer your stolen bitcoins to a new address owned by the Bitcoin tumbler. That address is still “dirty” because there is a clear path from the victim’s address, so the tumbler leaves the coins there. The tumbler makes a note to transfer the same amount of bitcoins from other users to a new “clean” address owned by you. But it doesn’t make the transfer right away. Anyone watching would probably notice if the same exact amount of bitcoins — say, 96.1 — were moved into a new address, so the tumbler has you withdraw your coins over time in smaller amounts. When you request 10 bitcoins, the tumbler will transfer 10 bitcoins to your clean address. Extra-careful tumblers may also split these payouts further, especially if it is a noticeably large number of bitcoins.

Over time, the tumbler will sip bitcoins from the “dirty” addresses in order to replenish the pool. By the time your dirty address gets tapped, you’re long gone. The tumbler is only accessible through the anonymizing Tor network, making it difficult for law enforcement to trace traffic to it or discover the people behind it.

Of course, that also means you have to trust the tumbler. “Caution: Mixing services may themselves be operating with anonymity. As such, if the mixing output fails to be delivered or access to funds is denied there is no recourse. Use at your own discretion,” reads the Bitcoin wiki.

Another option is to launder the money the way the mob might: spend it at Satoshi Dice or another Bitcoin casino.

3. Get rich

Now you’ve got clean bitcoins — hopefully a lot of them! — and you’ve got your eye on a villa in the south of France. Unfortunately, the landlord doesn’t accept Bitcoin. Like most merchants in the world, she wants a government-sanctioned currency, preferably the euro.

So now you’ve got to convert your bitcoins to euros. But you’ve got a lot of bitcoins. If you’re the owner of Sheep Marketplace, you’ve got $100 millions’ worth. The Bitcoin economy is still tiny and relatively illiquid — there aren’t many buyers who could cash you out for that much Bitcoin all in one sale, and a transaction of that size would surely raise alarms. It a
lso becomes much harder to conceal your identity when you exchange Bitcoin for other currencies. Most exchanges require some type of identifying information, and at the very least you need an account into which the euros can be deposited.

It’s time to get creative. There are several ways you can unload a lot of Bitcoin while maintaining your anonymity. Find a rich buyer who is willing to take the bitcoins without verifying your identity in exchange for a discount on the price, for example. However, the best way to protect yourself is to remain patient. Unload your bitcoins in a series of transactions over weeks, ideally months or even years, in order to avoid arousing suspicion from those watching the blockchain as well as real-life authorities that might wonder how you suddenly came into millions of dollars.

Now, enjoy life in France.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/ov_RH7zbhE0/story01.htm Tyler Durden

Thanks to Bob “I don’t get out of bed unless it’s over 20” Pisani’s daily diatribes about VIX (the so-called ‘fear’ index), we are supposed to rest assured that all is well in the ever-decreasing horizon world of equity markets. However, while VIX measures the expectations of ‘normal’ day to day moves in stocks, it does not offer any insight into market participants’ perspectives on tail risks (or ‘the big one’). CBOE’s SKEW index does just that, based on the pricing differences between normal and fat-tail risk pricing in the options market, it provides a measure of the market’s belief in extreme events… and for only the 4th time in history, it’s flashing a big red warning signal of volatility ahead.

The last 3 times this happened… markets went a little crazy…

 

In 24 years of history, SKEW has been above 140 only 4 times (including the current)… the last 3 times were…

• 06/21/1990 – S&L Crisis (Stocks dropped 18% in next 3 months and the US entered recession)
• 10/16/1998 – Russian Default and LTCM (Stocks soared 22% in the next 3 months and the dot-com bubble was born)
• 03/16/2006 – Housing Bubble peak (Stock dropped 6% in next 3 months and the ‘great recession’ started within a year)

And now?

• 12/20/2013… Taper…

 

Chart: Bloomberg

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/0mSMpoNTC6A/story01.htm Tyler Durden

Submitted by Adam Taggart via Peak Prosperity,

Every year, David Collum writes a detailed "Year in Review" synopsis full of keen perspective and plenty of wit. This year's is no exception. The 89-page tour-de-force is a must-read this holiday season for perspective on where we have been and where we are going. From Krugman to the abuse of civil liberties, from gold to muni bankruptices, and from Student debt bubble to Cyprus and beyond, Collum covers it all.

…

Why would anybody give a damn what an organic chemist thinks about investing, economics, and politics? I’m baffled. As a half-hearted defense, in over 34 years of investing with a decidedly lopsided portfolio, I have had only two years in which my total wealth decreased in nominal dollars. My 14-year return since 01/01/00 is 9% compounded with no leverage and no glass eye. (We all made money in the 90’s so I don’t even go there.)

Each review begins with a highly personalized account of my efforts to get through another year of investing, which is followed by an overview of 34 years of investing. I thought maybe I would drop the former, but I couldn’t because one of my two losing years was this year. Come again? You lost money this year? Yep, I’m the guy—an urban legend in the flesh. You cannot teach this kind of prowess. It was a very expensive year to be in the Church of Austrian Economics and Hard Assets. Thus, I must continue with the personal overview as a form of a trip to the confessional. The investing section may be instructive for those interested in my approach and for gold bulls on suicide watch. The bulk of the review, however, describes thoughts and observations—the year’s events told as a narrative. The links are copious, albeit not comprehensive. Some are flagged as highly recommended.

I try to avoid themes covered amply in my previous reviews. I won’t pick on the Roth IRA anymore (although I was right), and I’ve left resource depletion alone (it’s still a problem). Nonetheless, some gifts just keep on giving. Debt permeates all levels of society, demanding comment every year. Precious metals are a personal favorite. This year seems to be more about politics and less about economics. Sections entitled Baptists, Bankers, the Federal Reserve, and Bootleggers describe the players involved in the biggest battle since Frodo melted down the ring for beer money. Society is juiced on easy money, leaving some of us breathless. I finish with a book list that shaped my thinking.

Every year I have declared with an increasingly shrill voice now inaudible even to dogs that civil liberties must be protected at all costs and that we all should avoid using “conspiracy” as a pejorative term. Oh…my…God! Just as smartphones have put to rest the existence of Yeti, aliens, and the Loch Ness Monster, 2013 put to rest any claim that conspiracies do not exist. If you denounce conspiracy theories and conspiracy theorists to me, I will remind you of the quote from a 20th century philosopher:

“Everybody has a plan until they get punched in the face.”

~ Mike Tyson

The full review is below:

 

The contents are as follows:

    Background
    Investing
    The Bear Case
    The Economy
    Broken Markets
    Gold
    Debt and Retirement
    Municipal Debt
    Student Debt
    Bonds and Sovereign Debt
    Housing the Mortgage Markets
    Europe
    Cyprus
    Rest of the World
    Confiscation
    The Fourth Estate
    CNBC–Rise Above
    Bankers and Finance
    Federal Reserve
    Bootleggers
    Paul Krugman
    Baptists
    Government Gone Wild
    Mr. Obama Goes to Washington
    Civil Liberties Part 1
    Civil Liberties Part 2: Edward Snowden versus the NSA
    Books
    Acknowledgements
    Links

 

2013yearinreview-30

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/uf-rU3uqvIw/story01.htm Tyler Durden

The last few days have seen significant shifts in the term structure of US Treasury bonds; auctions have not gone well and despite the world’s expectations for ‘taper’ to lead to a surge in rates, the long-end of the bond-market has rallied. While Goldman might believe the ‘bond bubble’ is starting to pop, the following 223 years of Treasury yields (through free-markets and centrally-planned) sheds some light on what the ‘new normal’ level of rates really represents because, as we noted previously, the world is so levered now that any ‘reversion’ in rates is simply unthinkable.

 

 

Notice any difference pre- and post-Fed?

 

Chart: Goldman Sachs

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/cx4NWgb6XNo/story01.htm Tyler Durden

The last few days have seen significant shifts in the term structure of US Treasury bonds; auctions have not gone well and despite the world’s expectations for ‘taper’ to lead to a surge in rates, the long-end of the bond-market has rallied. While Goldman might believe the ‘bond bubble’ is starting to pop, the following 223 years of Treasury yields (through free-markets and centrally-planned) sheds some light on what the ‘new normal’ level of rates really represents because, as we noted previously, the world is so levered now that any ‘reversion’ in rates is simply unthinkable.

 

 

Notice any difference pre- and post-Fed?

 

Chart: Goldman Sachs

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/cx4NWgb6XNo/story01.htm Tyler Durden

Submitted by F.F. Wiley of Cyniconomics blog,

Here are a few moments from Wednesday’s FOMC press conference that stuck in our heads, all from Ben Bernanke’s comments in his last Q&A as Fed chair:

 

On financial instability questions

[W]e can’t control [financial instability concerns] perfectly and there may be situations when financial instability has implications for our mandate … which we saw of course in the Great Recession. So it’s a very complex issue. I think it will be many years before central banks have completely worked out exactly how best to deal with financial instability questions.

Has the chairman been this forthright recently about the Fed’s lack of understanding of financial instability? If so, I don’t remember it. He seemed to take a different approach in his last presser versus, say, congressional testimony. Here’s how Janet Yellen dealt with the same topic in her confirmation hearing last month:

No-one wants to live through another financial crisis, and the Federal Reserve is devoting substantial resources and time and effort at monitoring those risks. At this stage, I don’t see risks of financial instability. There is limited evidence of ‘reach for yield’. We don’t see a broad build-up in leverage or the development of risks that I think at this stage poses a risk to financial stability.

This is closer to what we’re used to, which is essentially: “Look, we have a whole bunch of people working on this thing and don’t see any problems. Next?”

On Bernanke’s personal regrets

Whether or not we could have prevented [the global financial crisis] or done more about it, that’s another question. By the time I became chairman, it was already 2006 and house prices were already declining. Most of the mortgages had been made. But obviously it would have been good to have recognized that earlier and tried to take more preventative action.

Do FOMC governors not count? Don’t they have responsibilities? Except for the last seven months of 2005 – when the FOMC was on an autopilot rate hiking program of 0.25% per meeting – Bernanke has participated in every FOMC meeting since August 2002 as either a governor or chairman. He never cast a dissenting vote. As a known deflation hawk and inflation targeting advocate, he was closely associated with the June 2003 rate cut that lowered the fed funds rate to its housing boom trough of 1%. He famously dismissed the possibility of a fall in house prices. Were the bolded sentences really necessary?

More on financial instability

Our general philosophy on financial instability issues is where we can that we try to address it first and foremost by making sure that the banking system and the financial system are as strong as possible.

This is another way of saying that the Fed will never again let another large financial institution fail. There’s nothing new here; just a reminder that all talk of ending bailouts is empty and all Fedspeak about the dangers of moral hazard is lip service.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/WaRHjKWw32c/story01.htm Tyler Durden

Submitted by F.F. Wiley of Cyniconomics blog,

Here are a few moments from Wednesday’s FOMC press conference that stuck in our heads, all from Ben Bernanke’s comments in his last Q&A as Fed chair:

 

On financial instability questions

[W]e can’t control [financial instability concerns] perfectly and there may be situations when financial instability has implications for our mandate … which we saw of course in the Great Recession. So it’s a very complex issue. I think it will be many years before central banks have completely worked out exactly how best to deal with financial instability questions.

Has the chairman been this forthright recently about the Fed’s lack of understanding of financial instability? If so, I don’t remember it. He seemed to take a different approach in his last presser versus, say, congressional testimony. Here’s how Janet Yellen dealt with the same topic in her confirmation hearing last month:

No-one wants to live through another financial crisis, and the Federal Reserve is devoting substantial resources and time and effort at monitoring those risks. At this stage, I don’t see risks of financial instability. There is limited evidence of ‘reach for yield’. We don’t see a broad build-up in leverage or the development of risks that I think at this stage poses a risk to financial stability.

This is closer to what we’re used to, which is essentially: “Look, we have a whole bunch of people working on this thing and don’t see any problems. Next?”

On Bernanke’s personal regrets

Whether or not we could have prevented [the global financial crisis] or done more about it, that’s another question. By the time I became chairman, it was already 2006 and house prices were already declining. Most of the mortgages had been made. But obviously it would have been good to have recognized that earlier and tried to take more preventative action.

Do FOMC governors not count? Don’t they have responsibilities? Except for the last seven months of 2005 – when the FOMC was on an autopilot rate hiking program of 0.25% per meeting – Bernanke has participated in every FOMC meeting since August 2002 as either a governor or chairman. He never cast a dissenting vote. As a known deflation hawk and inflation targeting advocate, he was closely associated with the June 2003 rate cut that lowered the fed funds rate to its housing boom trough of 1%. He famously dismissed the possibility of a fall in house prices. Were the bolded sentences really necessary?

More on financial instability

Our general philosophy on financial instability issues is where we can that we try to address it first and foremost by making sure that the banking system and the financial system are as strong as possible.

This is another way of saying that the Fed will never again let another large financial institution fail. There’s nothing new here; just a reminder that all talk of ending bailouts is empty and all Fedspeak about the dangers of moral hazard is lip service.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/WaRHjKWw32c/story01.htm Tyler Durden