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.

 

 

Share this article

Related articles

NS&I’s Green Savings Bond rate rises again

NS&I’s Green Savings Bond rate rises again

Laura Suter, head of personal finance at AJ Bell, comments on NS&I’s Green Savings Bond rate rising once again: “The interest on NS&I’s green savings bond has increased again, as the Government-backed provider attempts to keep up with the savings war in the...

Diversity and Resilience

Diversity and Resilience

Why SMEs are the backbone of the UK Economy, and how VCT and EIS products can play an important role in their success. We recently sat down with Reuben Wilcock, Head of Blackfinch Ventures to talk about Blackfinch’s Whitepaper “Tapping into UK SMEs” which provides not...

Trending articles

IFA Talk logo

IFA Talk is our flagship podcast, designed to fit perfectly into your busy life, bringing the latest insight, analysis, news and interviews to you, wherever you are.

IFA Talk Podcast - listen to the latest episode