finance cryptocurrency insider-trading
How does insider trading law affect bitcoin exchanges?
<p>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.</p>

<p>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.</p>

<p>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).</p>

<p>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, </p>

<ol>
<li><p>Generating new bitcoin and accumulating it just slowly enough to avoid arousing suspicion</p></li>
<li><p>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)</p></li>
</ol>

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

<p>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 <em>certainly</em> 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?</p>

<p>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.</p>

<p>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.</p>

<p>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.</p>
