Last week, the China-based virtual currency exchange Bter announced that it had lost 7,170 bitcoins to a hacking theft. The heist, which was worth about $1.75 million in actual money, was the second such major loss for a bitcoin exchange so far this year; last month, electronic bandits relieved the Slovenian exchange Bitstamp of about $5 million worth of bitcoins.
The loss at Bter came less than a week after the operators of the Hong Kong-based MyCoin disappeared with HKD 3 billion ($387 million) in customer deposits. In the case of MyCoin, however, investors were the victims of an apparent Ponzi scheme rather than hackers.
For those of you who have never seen a bitcoin, this is what one looks like:
That alphanumeric “hashcode” is actually the unique identifier for the transaction in which Bter’s bitcoins were pilfered, transferred from the exchange’s electronic wallet to one presumably belonging to the thief. Because the currency is purely digital, in a sense it only exists when it is being exchanged; if Bter’s thief wished, he could make the 7,170 bitcoins vanish by simply deleting the electronic wallet containing them. Any other transactions that are made with them, however, can be traced.
That transparency—I copied the hashcode above from a website called Blockchain.info, which maintains a public database updated in near-real time of every bitcoin transaction—is what Bitcoin advocates say is the digital currency’s security advantage over regular money handled by the conventional banking system.
It is an assertion that is made harder to refute by developments such as the news this week of a large-scale, coordinated effort by hackers to pickpocket banks all over the world for a total of at least $1 billion. Despite concerns that the nature of Bitcoin would make it vulnerable to hacking, it has turned out to be certainly no more risky than traditional money systems, and probably actually more secure; they attract a great deal of media attention, but losses like those of Bter or Bitstamp are no more frequent in the digital currency world than they are in the real-world financial system. And just as in the real-world system, the biggest losses for Bitcoin have been the result of conventional scams or, as Wired magazine pointed out in an article early last year following the spectacular collapse of the Tokyo-based Mt. Gox cryptocurrency exchange, the inevitably inept management of the bitcoin industry by executives whose expertise and professional outlook is based in software development rather than finance.
Bitcoin has not collapsed, and probably will not, but it has not lived up to its promise, either, and probably never will. The technology behind it has certainly proven to be adequately reliable, and even though there have been some big, costly scandals, the bitcoin market has persevered, and even managed some modest expansion.
But in order for that to happen, Bitcoin had to shed a lot of its ‘democratic’ aspirations and apply some elements of centralized control; a digital currency outside any government regulation and accessible to the masses was a fine plaything for computer scientists, but not for investors with real money until Bitcoin became more like, well, real money.
As currency, Bitcoin has been an unappealing investment for at least the last two years; its price peaked at just over $1,100 to 1 BTC in mid-2013, but has tumbled to an average of $240 (as of Friday). Along the way, it has been extremely volatile; for example, BTC prices gained and then lost nine percent in two consecutive days last week.
Getting businesses to adopt Bitcoin as a form of payment has been a tough sell because of the wild fluctuations in value; some companies, even a few notable ones like Microsoft, have taken the gamble on Bitcoin, but not many businesses have reserves to mitigate the serious risk of big losses on exchange rates. It is an unfortunate paradox: Businesses cannot accept the risk from Bitcoin’s speculative changes in value, and the wider public will not accept Bitcoin—which would stabilize its value by making it relative to a wider array of goods and services—until they have more things to spend it on, which requires its adoption by more businesses.
Bitcoin appears destined to be the non-alcoholic beer of currencies: A commodity with a pointless existence as far as most people are concerned, but which nonetheless has a small, loyal market. That’s actually not a bad achievement for something which its inventor produced as a proof of concept; it’s obviously not good enough for the real world, but hopefully is still enough encouragement for bright folks to keep working on it.