Does 2014 mark the beginning of the end for Bitcoin? Is this the end of the road for electronic currency?
Why the melodrama? Well, Mt. Gox, the Bitcoin exchange, was allegedly hit with a series the of thefts totaling an astonishing 745,000 Bitcoins. It was probably just a matter of time, as hackers had been working diligently at breaking into Mt. Gox servers for years and grabbing the loot. Other exchanges claimed that the issues were isolated only to Mt. Gox servers, but that didn’t prevent investors around the world feeling a bit on edge about the security of this particular investment.
An internal memo from Mt. Gox stated in no uncertain terms that Mt. Gox was on the brink of bankruptcy, and that the credibility of Bitcoin was destroyed, to the extent that the theft, “…could be the end of Bitcoin, at least for most of the public.”
Is this actually true? Are current and potential Bitcoin investors going to shy away from the new electronic currency in favor of much more stable and secure investments? Or, is this only a bump in the road along the evolution of this new form of currency? This is the topic of this month’s MUO debate.
Is this the beginning of the end for Bitcoin?
James Bruce — Rubbish!
Rubbish. It’s a well-known flaw in Bitcoin protocol that the transaction ID could be changed after a transaction was completed. Most exchanges and wallet software dealt with this by not using the transaction ID to verify transactions; Mt.Gox was using the TX ID as their database key, so when it was changed maliciously, they could no longer find it. At least, that’s my understanding of the problem.
It was a known problem, from years ago, which they chose to ignore despite mounting evidence that it was being abused on their systems. The Bitcoin developers washed their hands of it simply by fact of it being known by literally everyone. In fact, much of these stolen coins may have been stolen over a period of years — they may have supposed they could cover their losses and hide the fact with other investors’ money, but that’s just conjecture on my part.
It would be very difficult to deny that they knew about the problem though, if they had any form of checks on their books. It’s important to realise this was a Mt. Gox specific issue, and not a central exchange issue in general, since Mt. Gox ran their own custom software which didn’t deal correctly with the flaw. I’m not against the idea of P2P exchanges — anything more secure against DDoS attacks is always a welcome addition — but I don’t think a single flawed implementation will drive developments away when everyone else is managing just fine.
In the long run this is but a tiny blip on the cryptocurrency landscape. Mt. Gox already had a fairly bad rep among the community, so this didn’t come as a huge shock. The price remains around $600-$700 on other exchanges, so it really hasn’t had that much impact even in the short term. Prices of other cryptocurrencies, like Dogecoin, remain completely unaffected.
However: the only form of secure holding for cryptocurrencies is an encrypted, backed up, offline wallet. You should only ever keep a minimal amount strictly for trading online to diversify risks. If someone threw their life savings into Mt. Gox, they need psychological help for absurd risk analysis.
Andre Infante — Some Cryptocurrency Will Become a Success
If not Bitcoin, then some cryptocurrency will eventually be a runaway success, regulation or no regulation. It’s just a stronger value proposition than flat currency on multiple axes, and, eventually, it’ll win out. The bad PR might slow it down a little, but maybe not. As the saying goes, there’s no such thing as bad publicity. Bitcoin’s controversies provide an awful lot of free advertising.
Mt. Gox was a particular sort of disaster enabled by the Bitcoin industry’s relative youth, but it’s the same sort of disaster that befell many of the early American banks experimenting with fractional reserve lending, before federal policy was developed to protect that business model. The sort of negligence exhibited by Mt. Gox is also wildly illegal, and it’s likely that both civil and criminal charges will eventually be bought against Mike Karpele and others.
tl;dr: Mt. Gox isn’t indicative of a fatal flaw in Bitcoin, and Bitcoin will be fine in the long run.
Guy McDowell — Virtual Currency is Here to Stay
It seems to me that crypto or virtual currency has been with us since the dawn of computerized banking and will, therefore, be with us until the Great EMP disables all electronics. I say that somewhat tongue in cheek.
Bitcoin may fade, but being so heavily bought into, I doubt it. What most people don’t realize is that what happened to Mt. Gox happens to businesses using state-backed digital currencies on a daily basis. We just never hear about it, or our confidence in such businesses and currencies might wane. Have a look at something called Special Drawing Rights. It’s a purely digital currency that is used by the World Bank, countries, states, and major corporations. It will continue as long as the World Bank continues, but I digress.
Bitcoin and other virtual currencies will continue to exist as long as people are developing them and continue to place value upon them. It’s not different from placing extraordinary value on tulip bulbs or Pokemon cards. They’ve just dressed that sort of will-to-value in some highfalutin’ technical terms and people bought it and will continue to buy it.
Chris Hoffman — Still Skeptical of Bitcoin
This is the sort of thing that will scare people away from such alternative currencies. The most well-known Bitcoin exchange collapses because of sheer incompetence, and people lose all the money they stored in it. If this happened to a government-insured bank, people would keep their money. It also likely wouldn’t happen because of regulation. Banks are held to a higher standard than Bitcoin exchanges built on top of Magic: The Gathering card websites.
Cryptocurrency is interesting and a fascinating experiment, but it’s still a Wild West and this sort of thing shows that. The alternative is keeping your own local copies of your Bitcoin files — yikes! If Bitcoin really is the future, I can’t imagine a scenario when we’ll all just be placing a USB drive under our mattresses like we would cash. I’d rather have my money in an insured bank than lose my life savings when I misplace a USB drive. Maybe I’m just short-sighted and we’ll all be using Bitcoin for everything in a few decades, but it’s clearly an extremely unstable, Wild West currency right now.
Bitcoin tries to promise more financial stability after all the financial problems the world has had in these past few years, but Bitcoin seems more unstable than anything — whether it’s the wildly fluctuating prices or the biggest exchange collapsing. I remain extremely skeptical of Bitcoin.
Daniel Price — The Bitcoin Trailblazer Coming to an End
The obvious red flags would be the risk of deflation, the total lack of regulation, lack of savings protection, and all the hallmarks of a speculative bubble that’s about to go bang.
Joe Bloggs with his mortgage, 3 kids about to go to uni, and the ever increasing squeeze on living standards has no incentive to use it. Big-business can’t widely adopt it unless the issues are solved.
Solve these issues (make more than 21 million, have a central bank, government control, etc…) and the currency will slowly morph and become just like any other. Already, we hear about Bitcoin ATMs and the potential introduction of physical coins.
Will some people use it? Sure. But with ~65% of the world without Internet access, the idea of a predominantly online currency suddenly becoming the de-facto currency of choice seems a bit wild.
Cryptocurrency may have a future in some capacity, but Bitcoin’s run as the in-vogue trailblazer is surely coming to an end.
Andre Infante — A Rebuttal
As far as Daniel Price’s objection goes, I hear this one a lot from economists not familiar with the actual implementation of cryptocurrencies, and it misses a key insight, notably that hashing power is a finite resource. Hashers will go where the currency they’re mining is most valuable (which, in a mature market without the rampant speculation, is determined by how much trade is done with the currency).
When the speculation dies down, the hashing power will tend to congeal around the market leader, and will only shift if something comes out that’s substantially better that the market thinks is worth switching to. Currencies other than the market leader will suffer from hashing-power starvation and implode as they rapidly fall victim to 51% attacks. Cryptocurrencies aren’t literally backed by nothing; they’re backed by computational power.
As far as the deflationary argument goes, I’ve written about this before. Suffice to say that I’m very skeptical of the Keynesian argument that a low rate of deflation is inherently economically apocalyptic. We don’t seem to have seen the sort of “sky-is-falling” scenarios that the Keynesians predict in, for example, the historic gold economy. Certainly, it’s worth noting that Bitcoin is inflating, and will continue to do so for the next century as mining continues. Nothing that we’re seeing with regard to its price instability has anything to do with Bitcoin’s deflationary properties as a currency.
Lastly, on the point of lack of regulation, one side effect of Mt. Gox that I’ve found interesting is the push for increased transparency among the major cryptocurrency exchanges. Many of them are implementing tools to allow their customers to prove that they aren’t operating on a fractional reserve basis by analyzing the block chain, which is super cool. It’s a case of software replacing regulatory infrastructure, and that warms the soul of the tiny cryptocrat who lives in my heart.
What Is Your Opinion?
So you’ve heard all sides of the argument from us. What’s your take on cryptocurrencies? Are they inherently insecure and doomed to fail, or is it part of the natural evolution of money?