A shadowy, new technology emerges, seemingly out of nowhere, but actually the result of decades of intense research and development , which initially had profound implications for making most financial institutions redundant. A lot of people—me included—have trouble understanding Bitcoin. People ask what it is. There is no “it,” really. People expect it to be an organization, but it’s not. It’s also not a piece of technology or a program. Bitcoin is a protocol. It’s a set of rules for keeping score, which creates a payment system.
Bitcoin is one of the most fundamental level breakthrough in computer science – one that builds on 20 years of research into cryptographic currency, and 40 years of research in cryptography, by thousands of researchers around the world. It is a network that allows for digital payment between its members without third party intermediation. Payment is irreversible, initiated by the payer and virtually costless and instantaneous. The ground breaking innovation of Bitcoin is that it is the first technology for the transfer of actual digital “goods” from one location to other.
In 2008, a man named Satoshi Nakamoto posted a research paper to an obscure cryptography listserv describing his design for a new digital currency that he called bitcoin. None of the list’s veterans had heard of him, and what little information could be gleaned was murky and contradictory. No one knows who Satoshi is, or who invented Bitcoin for real, all we do know is, while Nakamoto himself may have been a puzzle, his creation cracked a problem that had stumped cryptographers for decades.
When Nakamoto’s paper came out in 2008, trust in the ability of governments and banks to manage the economy and the money supply was at its depths of despair. The US government was throwing dollars at Wall Street and the Detroit car companies. The Federal Reserve was introducing “quantitative easing,” essentially printing money in order to stimulate the economy. The price of gold was rising. Bitcoin required no faith in the politicians or financiers who had wrecked the economy—just in Nakamoto’s elegant algorithms. Not only did bitcoin’s public ledger seem to protect against fraud, but the predetermined release of the digital currency kept the bitcoin money supply growing at a predictable rate, immune to printing-press-happy central bankers and Weimar Republic-style hyperinflation.
It’s fairly easy to make electronic payments if you’re willing to have a central party keep track of who owns what. Bitcoin aimed to set up something that has the convenience of electronic money transfers but where no one is in a position to interfere with payments. If I want to pay you, no one can stop me. Hence, the financial payment system found a remarkable leap in its progress.
There is a growing number of businesses and individuals using Bitcoin. This includes brick and mortar businesses like restaurants, apartments, law firms, and popular online services such as WordPress, Reddit and Flattr. While Bitcoin remains a relatively new phenomenon, it is growing fast. At the end of August 2013, the value of all bitcoins in circulation exceeded US$ 1.5 billion with millions of dollars’ worth of bitcoins exchanged daily.
However, even the purest technology has to live in an impure world. Both the code and the idea of bitcoin may have been impregnable, but bitcoins themselves—unique strings of numbers that constitute units of the currency are vulnerable and faced severe security issues.
Ever since a single Bitcoin became worth a small fortune, there have been many people trying to steal them. Sure, there have some small-time thieves who’ve stolen a few hundred dollars’ of Bitcoin here and there. But there have also been heists. Massive, highly orchestrated attacks that lead to millions of dollars’ worth of cryptocurrency changing hands. And they just keep happening.
How many heists? Well, in the last three years alone—sort of the relevant lifetime of Bitcoin—there have been really major robberies amounting from thousands to millions of dollars’ worth of Bitcoin getting snatched. Think of these examples as the best reasons to NOT invest your life savings in Bitcoin.
Pony Botnet: $220,000
The most recent Bitcoin heist also happens to be the least severe, at least in terms of heists over the $100,000 mark. Researchers at the security firm Trustwave uncovered a massive attack involving the Pony Botnet, a particularly nasty piece of malware that has been used to steal two million login credentials for websites like Facebook and Twitter. This time around, the botnet infected over 700,000 accounts of varying types between September 2013 and January 2014, including the login information for 100,000 email accounts. It also compromised 85 Bitcoin wallets. That doesn’t sound like much, but it actually amounted in $220,000 worth of cryptocurrency going missing. And there’s no reason to believe the Pony botnet won’t strike again.
Silk Road: $127.4 million
Though while Bitcoin purists and pseudo anarchists would call this one a heist, some might just call it justice. Last year, the FBI shut down the ‘Silk Road’ black market because of the threat it posed. In doing so, they seized 29,655 Bitcoins from the website itself and an additional 144,000 from Silk Road’s founder, Ross Ulbricht. The Feds still has them which means that the FBI has $127.4 million worth of cryptocurrency. That means that the FBI now has the single largest Bitcoin wallet in the world.
But the U.S. government probably doesn’t want to get into Bitcoin speculation does it? Probably not. That’s why the FBI announced in January that it would be offloading the near 30,000 Bitcoins it seized from Silk Road. Meanwhile, Ross Ulbricht filed claim for civil forfeiture action saying that he owned his 144,000 Bitcoin fair and square. Good luck winning that lawsuit, Ross.
Bonus Heist: Project: Black Flag
And finally, as a bonus, we have what may be the ultimate Bitcoin heist. It’s not the ultimate Bitcoin heist because it involved the largest amount of money or the most dramatic back story. It is, however, the funniest.
Not long after Silk Road got busted, a hacker named MettaDPR started a replacement marketplace called Project: Black Flag. There wasn’t much for sale on Project: Black Flag, but the users came. And so did their Bitcoins. Just three weeks after starting the site, however, MettaDPR simply announced that he would be closing the marketplace, and he would be taking all those Bitcoins with him.
Pretty funny right? Well, the users didn’t think so. They responded with anger (obviously) and threats. But the money was long gone and lost forever. The thieves were able to get away with this because of the fact that Bitcoins have not been embraced as an alternative currency and governments could care less, probably because of the decentralized threat it poses. Hence it actually serves a Government’s interest to have bitcoins stolen because it further undermines their value as an alternate currency.
This instance in mind, you can really see why U.S. senators want to ban the crypto currency altogether. So if you still think crypto currency is the future just be careful where you’re stashing it. More disasters followed. Poland-based Bitomat, the third-largest exchange, revealed that it had—oops—accidentally overwritten its entire wallet. Most significantly, all these incidents have shaken the confidence of the community and inspired loads of bad press. In the public’s imagination, overnight the bitcoin went from being the currency of tomorrow to a dystopian joke. The Electronic Frontier Foundation quietly stopped accepting bitcoin donations.
We can’t blame all these disasters on Bitcoin only, as the creator- Nakamoto himself was never trusted, who remained mysteriously silent as the world he created threatened to implode. Although Nakamoto has forsaken his adherents, they are not prepared to let his creation die. Even as the currency’s value has continued to drop, they are still investing in the fragile economy.
Bitcoins have received a bad rap by many economists and journalists. Bitcoin is facing another crackdown from government authorities after the El Banco Central de Bolivia banned any currency that is not issued or regulated by the Bolivian government. Many countries such as Australia, USA, Canada are curbing the use of Bitcoins in order to keep control over its currency and save the economy from being debased and have warned that the widespread adoption of crypto currency Bitcoin could bring serious risks to the established financial system.
In conclusion, Bitcoins could assist in money laundering, but so is any other currency in the world, but that doesn’t mean we will see the FBI shutting them down. Bitcoins are simply electronic cash. The long sweep of financial history tells us that many extremely valuable innovations were initially viewed with suspicion. But without them, we’d still be engaged in barter. Bitcoins may play an important role in bolstering much-needed economic growth with proper monitoring. Far from a mere libertarian fairy tale or a simple Silicon Valley exercise in hype, Bitcoin offers a sweeping vista of opportunity to reimagine how the financial system can and should work in the Internet era, and a catalyst to reshape that system in ways that are more powerful for individuals and businesses alike. Bitcoins may well be one of the truly major financial innovations that brings the world together and forces long-needed fiscal and financial reform. Let’s give it a chance.