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Bitcoin Security Modeling


  • A look at bitcoin's security model, including defenses against state-based attacks.
  • An overview of how bitcoin's security model will evolve over time, with some key risks to be aware of.
  • A breakdown of where bitcoin derives its security from, including an overview of some of the literature on the topic.
  • Investors should understand bitcoin's details and risks if they want to invest. I remain bullish, and this article analyzes what I consider a key risk.
  • Looking for a helping hand in the market? Members of Stock Waves get exclusive ideas and guidance to navigate any climate. Learn More »
Glowing dark background with bitcoin symbol.
Photo by peshkov/iStock via Getty Images

Over the past decade, the bitcoin network has been the most secure public blockchain.

This is because it has by far the highest market capitalization and hash rate in the asset class, along with customized hardware required to mine it, meaning that

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This article was written by

Lyn Alden Schwartzer profile picture
With a background that blends engineering and finance, I cover value investing with a global macro overlay. My focus is on long-term fundamental investing, primarily in equities but also in precious metals and other asset classes when appropriate.


My work can be found at LynAlden.com, ElliotWaveTrader.net, and within the Seeking Alpha marketplace where I work with the Stock Waves team to blend their technical analysis with my fundamental analysis for high-probability long-term setups.

Analyst’s Disclosure: I am/we are long GBTC, BTC-USD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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Comments (336)

E.D. Hart profile picture
How do you model regulatory risk?
sdlombardi profile picture
@Lyn Alden Schwartzer what are your thoughts on cryptocurrency security after the Colonial Pipeline Co. hackers had their accounts seized by the United States? Isn't the Bitcoin narrative created around the security and privacy of fund transfers and cryptocurrency ownership? Hasn't at least this part of the narrative now been vaporized?

"The Justice Department on Monday recovered some $2.3 million in cryptocurrency ransom paid by Colonial Pipeline Co, cracking down on hackers who launched the most disruptive U.S. cyberattack on record.

Deputy Attorney General Lisa Monaco said investigators had seized 63.7 bitcoins, now valued at about $2.3 million, paid by Colonial (COLPI.UL) after last month's hack of its systems that led to massive shortages at U.S. East Coast gas stations.

The Justice Department has "found and recaptured the majority" of the ransom paid by Colonial, Monaco said.

An affidavit filed on Monday said the FBI was in possession of a private key to unlock a bitcoin wallet that had received most of the funds. It was unclear how the FBI gained access to the key."

HamishMacEwan profile picture
@sdlombardi asked "Hasn't at least this part of the narrative now been vaporized?"

They didn't get the Darkside share, and the affiliates are not the first to discover anonymity is more than not having to register your private key.

"Elliptic’s analysis shows that this represents the bulk of the affiliate’s share of the ransom."


PS. What is quaint is the obfuscation of the leading characters of the address in the belief that will prevent identification. Since the address has been used on the blockchain, the trailing characters will easily identify the address. If they have the key, seems likely to be a "$5 wrench" solution.
Again, cryptocurrencies are great "trading" vehicles, but ridiculous investments. Tesla investors need to require the Elan cover the trading losing that is lost in bitcoin trading. And to think of cryptocurrencies as a currency is a joke. Now, before you off your rocker, no one is saying anything bad about blockchain technology. It is a tool, and is extremely useful in certain situations like inventory control. The exchanges have been NOT been secure and fraudulent in many cases. Cryptocurrencies are a program . . . code - that's all. NOT A CURRENCY.
@nowintexas - riiiiight, so ridiculous as an investment that even with this crash bitcoin *still* has the highest sharpe ratio of *any* investment since its inception. That simple fact has torpedoed your entire (not well thought out) post. As Biden would say, c'mon man!
@clrodrick Bitcoin is one of thousands (maybe as many as 7,500) of cryptocurrencies. If the discussion is about Bitcoin alone, you ignore that entire market. Bitcoin is a cult where 99.9% of the owners don't even understand the code, the control group, or the history. FOMO owners!!!! Elan Musk's recent comment about coal used to generate power is a shot at China. Are you investing in all 7,500 cryptocurrencies or just Bitcoin? Proponents look at this as a "black box" . . . like it just magically happens, but when you look at the three distinct, unrelated pieces, bitcoin is just code. Code that can be changed, that has already been changed. China's warning today about using cryptocurrencies for payment rattled prices. The US government has started tracking down accounts to collect taxes and when that effort escalates, demand will fizzle.
@nowintexas - whatever man, you've obviously made your mind up so good luck to you
sdlombardi profile picture
Look at tonight's story from CNBC, "Elon Musk impersonators stole more than $2 million in crypto scams, regulator says PUBLISHED MON, MAY 17 20211:11 PM EDTUPDATED AN HOUR AGO"
"Impersonators of Tesla CEO Elon Musk have stolen at least $2 million from cryptocurrency investors in so-called giveaway scams, according to the Federal Trade Commission.
Musk, the self-proclaimed “dogefather,” has been a big supporter of digital currencies like bitcoin and dogecoin.
Crypto fraud surged to record levels since October, according to the FTC. Nearly 7,000 people reported bogus investments since then and lost more than $80 million total."

Mr. Musk is too willing to play the markets with his on-again and off-again pronouncements. The level of trust given to what comes out of Mr. Musk's mouth about cryptocurrencies should be rated at near zero.
HamishMacEwan profile picture
@sdlombardi quoted: "Impersonators of Tesla CEO Elon Musk have stolen at least $2 million"

Much less than the original.
sdlombardi profile picture
@HamishMacEwan What do you think the original amount was? And if you are saying a $2 million loss isn't important, then I would agree so long as it is your money and you don't care about the loss.
HamishMacEwan profile picture
@sdlombardi asked "What do you think the original amount was?"

I regret I wasn't clearer about meaning the original Elon Musk.
The success of cryptocurrencies like bitcoin/doggie has not been largely due to its good qualities.
You can sell a piece of shit for 1 million if there still has buyers.
Buyers are attracted by a high price because they think it's profitable. In fact, what they want is to get margin from the next buyer.
If monetary authority do not take an action, the injured are those who add the lever but get no inside dope.
sdlombardi profile picture
@primary_learner In real estate this is commonly known as the Theory of a Greater Fool. A buyer will pay a high price today because tomorrow a bigger fool will pay them an even higher price.

"The greater fool theory states that you can make money from buying overvalued securities [or real estate] because there will usually be someone (i.e. a greater fool) who is willing to pay an even higher price."

We saw this from 2004 to 2008 in the real estate and the investment markets. In 2004 I repeatedly asked where all this money was coming from with a willingness to pay lower and lower cap rates for riskier and riskier tenant-sometimes-filled properties. The 2008 financial crisis gave us NINJA loans. (No Income, No Job, or Assets Loan)

The loan qualification process amounted to fog on a mirror. The borrower simply had to produce fog on a mirror that was put under their nose, to qualify for the loan.

I don't expect this to end well. And to make a full disclosure, I own no cryptocurrency.
sdlombardi profile picture
Here is an example of a government moving to protect its currency and monetary authority. Every government appreciates the necessity of protecting its currency and in turn, its monetary authority. There’s a big difference between blockchain and cryptocurrencies like Bitcoin.
When any cryptocurrency impacts the national currency it embarks on a journey that will lead to a dead end. Unless of course you are playing a carnival game.

As China widens crackdown on fintech, industry could see fundamental shift
"When any cryptocurrency impacts the national currency it embarks on a journey that will lead to a dead end. Unless of course you are playing a carnival game."

There are a lot of carnival games out there.

Many fiat currencies could charitably be described as carnival games.
@sdlombardi Wherever BTC leads, China will be 10 years behind. Personally I'm not looking to China for any leadership in this space.
sdlombardi profile picture
@grendelbane which currencies would you place in the category of being a carnival game?
Gold, because of its superior qualities of durability, scarcity and preciousness, has overcome all its competitors (silver, iron, cattle, tobacco, seashells...) to become the dominant preferred global Store of Value. It has amassed a global market cap of some SEVEN trillion USD after a brutal evolutionary process that has lasted some TEN THOUSAND or so years to this point.

Bitcoin, because of *its* superior qualities of durability, scarcity and preciousness, has amassed a global market cap of about ONE trillion USD...in about THIRTEEN years.

Do this arithmetic:
7,000,000,000,000 / 10,000 = ?
1,000,000,000,000 / 13 = ?

And compare those two numbers. Then divide the first one by the second one.

If you don't think these numbers justify an open-minded attempt at comprehending what is going on, then please send my condolences to your financial future.
Surprising how many commenters here seem to have all the answers, and aren't confused at all about what's going on with crypto, and seem to know where it's all headed.

For those of you, I advise keeping in mind this old saying, which I believe may have originated from an anonymous Oil Industry guy:

"If you are not confused, you don't know what is going on."
sdlombardi profile picture
Coinbase customers with hacked accounts get no justice from 'horrible' US laws: Fintech lawyer

"In four minutes, cyber looters pilfered $34,123 worth of virtual currency from a Virginia resident's Coinbase (COIN) account, the 38-year-old told Yahoo Finance. "
"Ben's loss is one of dozens reported over the past five years concerning breached accounts on the popular trading platform, which started trading publicly on Wednesday, April 14, and has become the world's most popular exchange for buying and selling digital currencies. While its popularity may make it a target, Coinbase is not the only cryptocurrency trading platform with consumer accounts that have been hacked."
"For its part, Coinbase emphasizes the trading platform itself has never sustained a breach by hackers. Moreover, Coinbase says, unauthorized transactions are rare. In 2020, just 0.004% of customers experienced transactions where their email accounts were taken over, SIM swaps attacks occurred on their cellphones, or other personal information unrelated to Coinbase was breached, according to Coinbase."
"It has become harder and harder to protect all of your online accounts, given the amount of personal information that has become available to bad actors," Coinbase chief technology officer Philip Martin acknowledged in a recent interview with Yahoo Finance."


“A chain is no stronger than the weakest link.” It's an axiom we've understood since childhood. No matter how strong the strongest links of a chain are, no matter how many strong links there are in it, a chain will break at its weakest link.

Say what you want about cryptocurrency platforms, but remember this. Each of us, on any given day, is the weakest link.
@sdlombardi - that's a good reason not to hold on public exchange but in a private wallet that (when properly set up) is nigh unhackable
this is on crypto in general, but rebuttals? www.currentaffairs.org/...
grok42 profile picture
@mtm265 Read the current affairs article. Thanks for posting it as I find it important to read contrary analyses to avoid confirmation bias. There are some useful observations in it, but the overall article was pretty biased and failed to cover key aspects of crypto currencies, both pro and con. The author completely ignored the basics of currencies, specifically the stock to flow dynamics and the risk of high and hyper inflation and the current state of the US government debt and deficits and risks those pose.

The author starts out with the thesis that cryptocurrencies are a fraud and cherry picks specific points to make his case. I felt his approach was "look at this isolated fact - BTC obviously is useless; look at this next isolated fact ...". As the article went on I found myself trusting the author's facts and assessments less and less due to the highly biased cherry picking approach. It seemed to me to be a very incomplete picture selected to support a predetermined conclusion that BTC is a fraud.

The article did a very poor job in laying out what currencies are and the dynamics of how they evolve and the risks they present. In particular, the author completely ignored the crucial stock to flow aspect of currencies and the risks presented by governments jacking up the flow aspect resulting in high and hyper inflation and confiscation of wealth. Those are very real things in many parts of the world today.

As an example of his approach, the author states "The fact that U.S. dollars are not “scarce,” in that the government can create more of them, is actually a good thing ...". He then completely fails to discuss the current extreme federal debt levels and extreme deficit levels adding to that debt every day. He also ignores the fact that interest rates on federal debt are at historical lows. If they return to just the average the US deficit is going to skyrocket. There appears to me to be a very real risk of serious inflation in the US dollar due to these factors and the currently somewhat out of control US debt and monetary policies.

There has already been huge inflation. The dollar has depreciated 90%+ since 1950, for instance. So his statement that the "government can create more of them, is actually a good thing" appears to me to be seriously wrong with regards to the ability o create more of them without any limit.

So the article has serious problems, imho. But I do agree with the author that the "operational" aspects of using BTC as a currency do have serious shortcomings. What would be better is an analysis that lays out the entire picture on currencies as a store of value, a unit of measurement, and a means of enabling transactions. Then rate fiat currencies, various crypto currencies, and gold against that framework. There is most likely a number of competent articles on that topic. I need to do some searching on that.

Anyway, my two cents. I have a long ways to go in really understanding all this stuff. Whole thing is somewhat mind blowing.
@grok42 - You grok'ed out the article very well. As you say, paying attention to *intelligent* bear commentary is important to keep one's brain aligned with the risk you are taking on in an investment. This article however was not an intelligent bear commentary.
@grok42 thanks for your thoughts! From what little I know, my impression is that one indicator a Bitcoin bear - although bear is mild when applied to someone who is claiming the entire crypto universe is a fraud - is overly biased is the journo hasn't bothered to understand the differences between different crypto 'assets' and assumes all are versions of Bitcoin without doing the minimum amount of digging. Ethereum appears to be a much more interesting animal with many features that distinguish it from Bitcoin. It is disappointing to see how much crypto commentary is really focused on Bitcoin and fails to recognize crypto is much more than that, probably because - indicator 2 - this journo in particular, along with other crypto critics seem to be blinded by his/her attempts to make direct comparisons with fiat currency - or something that seeks replace it, which I can't see happening for the simple problem of pricing crypto without the USD.
sdlombardi profile picture
Today's News: Turkish crypto exchange boss goes missing, reportedly taking $2 billion of investors’ funds with him
PUBLISHED FRI, APR 23 2021 9:58 AM EDT UPDATED FRI, APR 23 2021 10:03 AM EDT

@wzwz8221 @Cedrick
The biggest issue I see with Bitcoin is that 2.5% of holders own majority (95%) of the coins. One does not have to attack the Bitcoin blockchain itself but the laptops / home networks of the top holders, then take over some of the bitcoins silently and manipulate the prices unless a bitcoin holder save the bitcoins on a portable disk outside his laptop. But then the risk of losing the disk or damaging the disk needs to be taken into consideration.
sdlombardi profile picture
@wzwz8221 What is your source for 2.5% of the holders owning 95% of the coins?
@wzwz8221 First of all your statement is false, show a source. And even if you have a source you have misinterpreted the information because you do not understand how Bitcoin functions. Second of all you state "One does not have to attack the Bitcoin blockchain itself but the laptops / home networks of the top holders" This is not how Bitcoin works... You are very ignorant if you think wallets holding Bitcoin worth almost 1 trillion USD is located on some laptops / home networks... lol
"But then the risk of losing the disk or damaging the disk needs to be taken into consideration"

Stamp your private key on a thin piece of stainless steel.

Now, you have some thing which resists rust and corrosion, and can withstand very high temperatures.

Should still be around even for a young person's lifetime.

Fancy technology is not needed. The Sumerians could have recorded private keys on their clay tablets. Many of those clay tablets are being read today.
sdlombardi profile picture
With all due respect to the author, Ms. Schwartzer, and trust me when I say I enjoy what she writes, MasterCard has been around since 1966 (18,600 employees), Visa since 1958 (19,500 employees), and American Express started as a freight forwarding company in 1850 (64,500 employees).

Bitcoin, on the other hand, was created after some unknown person going by the pseudonym Satoshi Nakamoto, in 2008 created an idea for a protocol. It was on August 18, 2008 the domain name bitcoin.org was registered. In January 2018 Bitcoin had 54 employees. That's a five and a four, meaning fifty-four.
The number of people Russia's Foreign Intelligence Service employs is classified, but I will take a guess it is more than 54.

The Russian GRU operates in more than twenty-five foreign countries.
Iran's Islamic Revolutionary Guard Corps has at least 250,000 "military personnel".

Ministry of State Security of the Democrat People's Republic of Korea and all the rest of the rogue nations are all trying to hack the cryptocurrency systems.
So what is this system and why should it be so important to the world?
Cryptocurrencies are nothing more than a token mechanism of exchange. They are like the tokens we would buy to play Skee-Ball at a carnival or in an arcade. This system of currency exchange does not seem all that necessary to me.

Are a lot of people being fooled into "investing" because there is money to be made gambling on the theory of a bigger fool?

Bitcoin as a company has been in business for fewer than thirteen years and is supposed to be smarter than all the rogue nation hackers on the Planet Earth? That is not a bet I am willing to take. Am I to believe all the different cryptocurrency systems have security that a rogue nation cannot hack? Think again.

"State of the industry – February 2020: As it stands, 2019 saw a record number of twelve crypto exchanges being hacked. That being said, across the board the amounts of crypto stolen were worth less. In total, $292,665,886 worth of cryptocurrency and 510,000 user logins were stolen from crypto exchanges in 2019." selfkey.org/...

I wonder if it is possible to mirror enough transactions in the chain to fool the entire system? Why can I hear Trump's "Russia are you listening?"

Could it be possible to hack an end-user's computer to steal the user's passcode as he/she enters it into what they thought was the real system?

I am not so sure I would put much money into this cryptocurrency system.

Instead, you might want to apply for a Visa or MasterCard. You might even qualify for free air miles and luggage for a trip to Las Vegas where you can really gamble. But, with tokens they call "chips".
@sdlombardi Bitcoin isn't a company
@sdlombardi Could you summarize all that into 2 sentences?
sdlombardi profile picture
@Race To The Bottom Bitcoin or any other cryptocurrency is nothing new; and it being on the Internet and digital, it is unproven and therefore untrustworthy of your hard earned savings.
When I take a gold coin in my hand I see that this coin have been mined and coined, then it can be used for storing value and for many transactions as needed from now to eternity without using significant additional energy. It is hard to understand a currency which coins should be mined using a significant among of energy every time a transaction is produced. It is like we give for warranted the electricity and internet ( as if they were are actually human rights, the idiocy without limits).
The millennials argue that it is a high technology that boomers don't understand, and at the same time deny the possibility that a new algorithm could be invented that reduce the BTC value to zero. I say to them there is more technology in a gold coin than in all blockchain coins together, a technology that have not been invented yet, that allow the gold atoms to be formed to give it properties of gold, when alchemist technology is invented in the future requiring less energy that mining gold I'll will say that gold is doomed.
Excellent article on the details on Bitcoin blockchain security, and it would be great to understand whether current Bitcoin blockchain security represents a low, medium or high complexity security implementation vs other blockchains. I ask because as the blockchain gets longer and longer the hashing needed to verify the chain also goes up (and the hashing rate also goes up with transaction rate). Given the current increasing hashing rate (www.coinwarz.com/...) and energy footprint (digiconomist.net/...) and the current political climate, it would be interesting to understand the cost impact if a carbon tax was implemented in the USA. Especially given that post the 3rd halving, and depending upon mining platform, energy costs (image.tokeninsight.com/...) need to be less than $0.08/kwh for a S17+ miner or less than $0.035/kwh for an older S9 miner to not be losing money.

So if the overall blockchain design, including security, is overly complex it could essentially put itself out of business as it grows and matures, depending upon energy costs. Especially since semiconductor density has pretty much reached the limits of optical resolution and Moore's Law scaling will be very hard to maintain going forward.

More generally, the blockchain with the lowest hashing energy costs, that still maintains security, may very well be the real LONG term winner.
HamishMacEwan profile picture
@sfastert asserted "as the blockchain gets longer and longer the hashing needed to verify the chain also goes up (and the hashing rate also goes up with transaction rate)"

Both claims are nonsense.

1. Hashing is performed on the 64 byte header of a candidate block. Other blocks have no effect, particularly not the length of the blockchain.

2. A block, empty or full, is emitted on average every 10 minutes by managing the difficulty. Transaction rate is irrelevant.

The hash rate is a reflection, consequence, of the competition to find the next block. A lot of competition, a large hash rate.
@HamishMacEwan thank you for pointing out my poor choice of words. Your statements on block hashing are obviously correct. The question I was trying to get at was for a user coming in wanting to trustlessly validate the entire blockchain vs just the latest block, which is also an important security function, are there meaningful computational differences between blockchain implementations which might have implications in the long term
HamishMacEwan profile picture
@sfastert clarified "for a user coming in wanting to trustlessly validate the entire blockchain"

Here are some results for Bitcoin IBD (initial block download, bitcoin.org/... conducted by Jameson Lopp:

"2020 Bitcoin Node Performance Tests"

Best result:

"Synced Bitcoin Core 0.15.1 (w/maxed out dbcache) in 162 min w/peak speeds of 80 MB/s."

It's not hashing but "ECDSA verification operations" that take the time and increase, as the blockchain lengthens, if you want to verify the entire chain.
Sandy Lighthouse profile picture
Lot of moving parts and leverage in the bitcoin trade.
Non-Repudiation is one of the main benefits of bitcoin...

...so why would we want to put transactions on the "Lightning network" or any such "layer 2 protocol"?

For such transactions don't we lose Non-Repudiation?
E.D. Hart profile picture
Nixon Seminar: "Even though I'm a pro-crypto, pro-Bitcoin maximalist person, I do wonder whether if at this point Bitcoin should also be thought of in part as a Chinese financial weapon against the U.S.” says paypal
co-founder Peter Thiel.
NotVeryGoodAtThis profile picture
@E.D. Hart Typical Thiel waffle IMO. He said nothing as usual.
E.D. Hart profile picture
@NotVeryGoodAtThis yes, I find that I dismiss the comments financial titan billionaires also. I wonder, who do you pay attention to?
NotVeryGoodAtThis profile picture
@E.D. Hart I don't ignore everything he says and have stock in two of his companies. However he said nothing here; "wondered, perhaps, should be". If he had a point he should have made it instead of just rambling.
E.D. Hart profile picture
Peter Thiel is worried about BTC and national security:
“I do wonder whether at this point, Bitcoin should also be thought [of] in part as a Chinese financial weapon against the U.S.,” Thiel said during an appearance at a virtual event held for members of the Richard Nixon Foundation. “It threatens fiat money, but it especially threatens the U.S. dollar.” He added: “[If] China’s long Bitcoin, perhaps from a geopolitical perspective, the U.S. should be asking some tougher questions about exactly how that works.”

My thoughts exactly. www.bloomberg.com/...
sdlombardi profile picture
@E.D. Hart how much money do you have in BTC? What is your cost basis in USD?
E.D. Hart profile picture
@sdlombardi Currently, zero, and zero.
sdlombardi profile picture
@E.D. Hart Me as well. Zero and zero. I have seen too many cases of fraud and heard too many narratives that I could not substantiate to be able to accept the premise of how this will end.
ggig2000 profile picture
Might quantum computing or another technology disrupt bitcoin?
@ggig2000 short answer is not anytime soon: podcasts.apple.com/...
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