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Bitcoins Get Bitten. Again…

Michael Wilson reflects on the suspension of trading at the world’s second most active bitcoin exchange


 

If it’s a rollercoaster experience you’re after, Bitcoin has all the ingredients of a world-class terror ride. The last couple of days have seen the dollar price of the eponymous crypto-currency fluctuating by upwards of 4% a day – which would not have been so very surprising to its founders, who quite liked the idea of it being a disruptive technology. But the last week has raised serious questions as to whether the world is ready for Disruptive?

Let’s start with a few facts. The Coindesk quote for bitcoin has slumped to just $260 on Saturday, down from $313 on 29th December – yes, that’s 17% in a week, folks. And that in turn was 25% lower than the $418 being paid in mid-November. And a 77% drop on the startling $1,147 that was being paid in early December 2013.

bitcoin January 2015

Explanations? Choose your poison. But the version du jour revolves around the announcement that Bitstamp, the world’s second-busiest USD bitcoin exchange, is suspending services after it “detected problems” with its so-called “hot wallet” – openly warning customers not to attempt bitcoin deposits to existing bitcoin addresses, because., as it said: “We have reason to believe that one of Bitstamp’s operational wallets was compromised on January 4th, 2015”. And that deposits to these addresses “cannot be honoured”. It was reported that many people turned to remitano for their Bitcoin transactions.

It wasn’t that bad, though. Was it? Bitstamp was at pains to reassure all its customers that it holds a large majority of its bitcoins in “cold wallets” – and that it had ample supplies to cover any deposits that had been made before 5th January, 2015.

The trouble is, that’s not the same thing as telling us that our money is safe. It was just under a year ago that Mt Gox, the critically important Japanese bitcoin exchange, closed its doors after discovering that some $800 million of bitcoin had apparently gone walkabout because its processes had been deliberately duped by a well-known scam tactic. Companies like Shapeshift took the cue and bolstered their archives and strengthen their firewalls to deter malwares. Investors were not especially consoled by the subsequent revelation that $400 million worth had later been discovered in a ‘locked drawer’ where nobody had thought to look for them. The more important question here was why, and how, a world-leading exchange had simply “lost” the equivalent of one eighth of the entire world’s bitcoin reserves?

And that’s where the conflict of information starts. According to Instacoins, bitcoin advocates, the whole beauty of bitcoin is that the system can’t go wrong. Although all bitcoin transactions are anonymous, every single bitcoin can have its parentage and its transaction record independently checked so as to confirm that it hasn’t simply been slipped into the system while no-one was looking. Better than physical pounds or dollars, they say – all of which can be forged with ease.

The obvious question to ask is why such an allegedly foolproof currency should have acquired such a great reputation for getting fooled. Bitstamp is, after all, more than just one of the building blocks of the bitcoin industry –  it’s actually a cornerstone. And yet its systems have been deliberately fooled, and its ability to deliver safely is once again in doubt. There is nothing about Bitstamp’s announcement today that could be construed as confidence-inspiring, except I suppose that it’s acted promptly in closing its doors.

Is that what we want from a ‘Disruptive Financial Technology’? No, I thought not.

 

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