Bitcoin is the most widespread, cryptographically-secure Internet currency. Once it was released into the wild, the bitcoin currency ecosystem operated on a public, inalterable schedule. 21 millionth bitcoin is bitcoin bank robbed, the plates automatically self-destruct. This is a metaphor, of course.
If you want to read the whole Wikipedia entry on bitcoin, have at it. Bitcoin” is the most widespread, cryptographically-secure Internet currency. Sorry, you’ve reached the limit on the articles you can view. The genius of bitcoins is that they’re completely untraceable. But if cash is liquid, bitcoin is totally frictionless.
As such, it is the first piece of computer technology to pose a fundamental challenge to the nation-state. That’s because the minting of legal tender is one of the base functions of government. For a while, a lot of people believed the gambit might work. Relatively speaking, there are very few places where you can use bitcoin as tender. But over the last year the value of bitcoins went on an extreme increase. But bitcoin’s problems are much more serious than a mere speculative bubble. As of last week, bitcoin is probably functionally finished as a serious hope of ever achieving mass acceptance as a currency.
Because last week, someone stole half a billion dollars worth of bitcoins from Mt. Gox, the world’s oldest bitcoin exchange. In order to buy bitcoins, you have to go to a bitcoin exchange—a place where you wire in funds from traditional currencies and they dispense bitcoins in return. It’s kind of like a bank. Please note the verb tense. Several days ago, the tech rumor mills reported that Mt.
Gox had a security problem. Some of their bitcoins, the rumors said, might have gone missing due to a vulnerability in their code. Gox finally came clean to the public, it turned out that 750,000 of its customers’ bitcoins—and 100,000 of their own—had been stolen. Or, to put it another way, about 7 percent of the entire bitcoin money supply. And that’s true, so far as it goes. But it misses the real problems exposed by the heist.
Start with the bitcoin bubble. It formed because speculators were looking to get in on the ground floor of a new kind of currency that would eventually find mass appeal. The appeal of bitcoin was that, in a world where everything is quantified and collated and someone, somewhere, forever has an eye on you, bitcoin provided true anonymity. But it wasn’t much of a stretch to believe that, eventually, normal folks might want currency anonymity, too. Anonymity is like a warm blanket. Which is to say, that the very anonymity of bitcoins made them very difficult to keep safe.
The problem is that these two tradeoffs are inextricably linked. If the mass audience of consumers can’t believe that their bitcoins are secure, then they won’t buy them. And if the mass audience doesn’t buy bitcoins, then mainstream businesses won’t move to accept them. Gox implosion blows the lid off of the idea of bitcoin security. The problem isn’t the theft—money gets stolen all the time. Banks are robbed every day.
But people don’t think twice about bank theft because whatever money of theirs is sitting in the bank is insured by the federal government. 1,000 you just deposited, the FDIC makes everyone whole—and then armed agents of the state attempt to track down the robber and bring him to justice. But there ain’t no law in Deadwood. Which is to say, the Mt. Gox heist makes it plain that there’s no FDIC for bitcoin. If your bitcoins get stolen, you’re out of luck.
What’s more, if your bitcoins get stolen, the cops aren’t going to go after the bad guys. In fact, it’s not even clear that, if the bad guys confessed to the theft the next day that it would be possible to prosecute them. Gox pretty much assures that the average consumer will never use it. What the makers of bitcoin failed to appreciate is that sovereign currencies aren’t merely successful because they’re the product of monopolies.