Farhad's Week in Tech: Bitcoin and the Scams Under Everything


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Farhad’s Week in Tech: Bitcoin and the Scams Under Everything

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The technology behind Bitcoin was supposed to eliminate the kind of fraud that people associated with a trading service are accused of committing.CreditKin Cheung/Associated Press

Each week, Farhad Manjoo, technology columnist at The New York Times, reviews the week’s news, offering analysis and maybe a joke or two about the most important developments in the tech industry. Want this newsletter in your inbox? Sign up here.

Good morning, readers!

We’ll get to tech news in a bit, but let’s start somewhere else. My wife is a doctor who studies cancer, and one of the few things I’ve learned from her job is this unhappy little maxim: You can get cancer pretty much anywhere. Some cancers everyone has heard of. Breast, prostate, brain, lung — these are the calamities we’re familiar with. But did you know you can get cancer under your fingernails? Or in your appendix? There is even a cancer of the heart. (Don’t worry, it’s very rare.)

I bring this up because I’ve noticed an analogous ubiquity on the internet: Just about everything online could be a scam. This observation isn’t revolutionary; you’ve known to be on the lookout for internet scams since the first time you made friends with a Nigerian prince. The internet is a global gathering of strangers and money, which means that a fraud, a trick, a swindle, a grift or a graft is obviously never far.

And yet it is surprising how often, and how completely, many of us can be deluded into letting our guard down, thinking that what we see online really is on the up and up.

Take Bitcoin. This week, John Griffin, a noted investigator of financial frauds, reported that the huge run-up in the price of Bitcoin last year was not just the product of authentic interest in Bitcoin. Instead, at least half of the price jump was most likely caused by a price-manipulation scheme organized by people associated with Bitfinex, a large Bitcoin-trading service, Mr. Griffin wrote in a lengthy paper. (Bitfinex has denied any wrongdoing.)

Bitcoin, you’ll recall, is the decentralized cryptocurrency whose proponents argue that it represents the future of currency. Its key innovation, they say, is radical transparency that ensures trust among strangers. In other words, the point of Bitcoin and its underlying technology is to eliminate the kind of fraud alleged here. Every Bitcoin transaction is recorded in a ledger, called a “blockchain,” that is maintained by a network of computers rather than by a central institution, like a bank or an accounting firm. Proponents of Bitcoin and blockchains argue that centralized ledgers are inherently prone to trickery and fraud; look at Bernie Madoff or Enron.

A decentralized ledger, they say, creates a much more efficient way to ensure trust on a network like the internet. Blockchains “could drastically reduce the cost of trust by means of a radical, decentralized approach to accounting — and, by extension, create a new way to structure economic organizations,” wrote Michael J. Casey and Paul Vigna, the authors of a book called “The Truth Machine: The Blockchain and the Future of Everything.”

The fraud alleged by Mr. Griffin does not suggest any flaw in the blockchain itself, but it does go far in undercutting the high-flying rhetoric about how blockchains might usher in a new era of far-flung trust. Even though all of Bitcoin’s transactions are recorded on a blockchain, the transparency didn’t seem to inhibit trickery here.

Mr. Griffin spotted patterns that suggested manipulators were using another virtual currency, Tether, which was issued by Bitfinex, to prop up the price of Bitcoin when it sagged. These apparent manipulations were recorded on the blockchain — that record is how Mr. Griffin’s team came to its conclusions. But even though the possibility of manipulation was mentioned often last year, it took months to put together detailed evidence that it had happened.

And in that time, the whole world — the financial press, ordinary investors, anyone looking for the next windfall — put more money into Bitcoin. Even though lots of people should have known better — even though we all know the internet is lousy with scams — Bitcoin, we were told, was different.

Nope, it wasn’t. Scams are everywhere online. Never let your guard down.

Other stuff:

■ Ben Thompson had a fine analysis this week on the economics of shared scooters. The sudden invasion of electric scooters has caused a lot of angst in San Francisco and elsewhere, but Thompson dives into the financials and finds a phenomenon that is rare in digital businesses: This market doesn’t seem to be headed toward monopoly.

■ The Washington Post had a fascinating look at how WhatsApp is changing politics in Brazil. Because the messaging app, which is owned by Facebook, lets citizens create instant and flexible organized groups, it is undermining traditional political players like unions and “injecting a level of unpredictability and radicalization into a country beset by economic and political crises.”

■ In the hours after news of Anthony Bourdain’s suicide, Newsweek rushed out lots of stories “optimized not for humanity but for search engines,” Bijan Stephen wrote in The Verge, in a disturbing look at the soul-crushing incentives of online publishing.

Farhad Manjoo writes a weekly technology column called State of the Art. You can follow him on Twitter here: @fmanjoo.

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