What's Wrong With Bitcoin? Mt. Gox and Everything Else
By William Peacock, Esq. on February 27, 2014 11:59 AM
On February 7, a series of distributed denial of service (DDoS) attacks hit a number of Bitcoin exchanges, causing many to shut down temporarily. The DDoS attacks repeatedly pinged their servers with fake transactions, overloading their servers' abilities to processes legitimate transactions.
Mt. Gox, (formerly) the world's largest exchange, never reopened, and probably never will. At this point, due to a "malleability" leak in their transactions, the company suspects that 744,400 bitcoins, presently worth about $400 million, have been stolen from the company and may never be recovered, leaving investors in the backed-by-nobody currency with little recourse.
What's the state of Bitcoin? Shaky, at best.
Mt. Gox Rocked
According to Business Insider, Mt. Gox's failures stem from a hack that spoofs failed transactions. A code tweak tells Mt. Gox that the transaction didn't go through, and a second request is sent, resulting in an automatic double-payment, at least with Mt. Gox. (It is unclear how other exchanges handle failed or fake failed payments.)
It is suspected that this slow bleeding has been happening for months, if not longer.
DDoS Attacks and A Conspiracy Theory
DDoS attacks aren't unique to Bitcoin. Ask any major website, and they've likely been targeted at some point. DDoS attacks have even crashed Nasdaq in 2012 and 2013, sending more "legitimate" investors in to a panic.
The February 7 DDoS attacks forced at least three exchanges to halt trading, reports Reuters. The value of Bitcoin in comparison to other traditional currencies has plummeted to a closing price of $588 at closing yesterday, versus the pre-DDoS price of around $800.
Was the DDoS attack an intentional means of causing deflation in the currency in order to manipulate the market? Or was this mere cybervandalism?
Subpoenas Sent Out
According to Reuters, the U.S. Attorneys' Office in New York has already started tossing out subpoenas to multiple bitcoin exchanges, with particular attention paid to Mt. Gox, for obvious reasons.
Meanwhile, Japanese officials are also looking into Tokyo-based Mt. Gox's failures, reports Agence France-Presse. Investigations and subpoenas probably won't help those whose Bitcoins were lost in the crash, but it may reduce changes of a similar failure in the future.
Senator Wants Bitcoin Banned
Senator Joe Manchin (D-W.Va.) sent a letter to federal regulators seeking a national ban on Bitcoin, noting that China and Thailand have already done so, while European Union officials are gazing on the currency with a suspicious eye.
He cites the recent massive deflation (98 percent) and its ability to harm the U.S. economy as reasons to ban the crypto-currency. What's left unsaid is that the current market capitalization of Bitcoin is about $7.2 billion -- a not insignificant sum -- but not nearly enough to cripple a nation's economy, especially since Bitcoin is popular worldwide.
What happens when a bank fails? The FDIC steps in.
What happens when a Bitcoin exchange fails? Investors are up a creek, so to speak.
Bitcoin is fun, as far as gambling on a a volatile pseudo-currency goes, but "investors" should be aware that, much like a craps table, there's no guarantee that they'll walk away with even part of their bankroll intact. Then again, you could say the same thing about slinging stocks.
What do you think? Is Bitcoin here to stay, or will instability lead to its demise? Tell us about it on Facebook.
Shutdown of Mt. Gox Rattles Bitcoin Market (Wall Street Journal)
Bitcoin Not Safe From Hackers, Prosecutors or Regulators (FindLaw's Technologist Blog)
It's Official, Bitcoin is Money, Honey (FindLaw's Technologist Blog)
Risky Business: More Law Firms Taking Bitcoin (FindLaw's Strategist Blog)