Bitcoin collapses on malicious trade
Mt Gox scrambling to raise the Titanic
The fragility of the Bitcoin peer-to-peer crypto-currency has been thrown into sharp relief when a large sell transaction sent the trade value of Bitcoins to zero.
According to the Mt Gox exchange, the sell order came from a compromised account. Mt Gox has taken its exchange offline (however, a screen grab of Bitcoins’ collapse is here) and is attempting to recover.
Its approach is to roll back all transactions to their state before the sell order was placed.
“The bitcoin will be back to around 17.5$ / BC after we rollback all trades that have happened after the huge Bitcoin sale that happened on June 20th near 3:00am (JST)”, (sic) says the Mt Gox posting.
As the comments beneath that posting reveal, not all users are pleased about the rollback attempt – for example, those who spotted the collapse happening and decided to load up with cheap Bitcoins.
El Reg Comment: This attack on the Bitcoin follows increasing instability in the crypto-currency. After quietly making its own way in the world for a couple of years, sudden attention from mainstream media started driving large rises and falls in Bitcoin value.
Last week, what was called “the first” Bitcoin heist was reported (whether it was the first is impossible to verify), after which malware came to light that’s designed to steal users’ credentials and wallets.
This latest crisis, however, is a disaster for Bitcoin boosters, many of whom considered themselves “Bitcoin millionaires”. Their status – and the viability of Bitcoins as a genuine alternative currency – depends wholly on the ability to trade out of Bitcoins at a given exchange rate.
Bitcoin’s design is supposed to make its value self-regulating. The supply of Bitcoins is limited by their underlying algorithm: the more Bitcoins exist, the slower new ones will be created.
This purely-internal mechanism doesn’t regulate how Bitcoins interact with the outside world, once a user tries to trade out Bitcoins for “real-world” currencies. Those trades are outside the scope of Bitcoin’s design.
This attack on Bitcoins may simply reflect the stupidity of the thief: instead of trading out quietly and slowly, he attempted a double-grab: first, steal the Bitcoin account, then use a large trade to drive the value down, buy the coins back at the new, lower value, and then try to trade out completely.
However, it illustrates the problem confronting Bitcoin users. Not only do they have to implement personal security better than the likes of Sony, Nintendo or RSA can manage: they also know that only a relatively small transaction – $1,000 worth of coins, which at the pre-collapse level was fewer than 60 Bitcoins – constitutes a “run” on the currency.
How well the Bitcoin recovers in the short term depends on how well Mt Gox can restore the currency to its state before the attack. In the long term, however, Bitcoins will have to solve the kinds of problems that confront currencies in the real world. ®
Update: Since I began writing this, it has emerged that details of more than 60,000 users have been stolen from the Mt Gox exchange. The compromised information includes hashed passwords.
A reader has suggested El Reg post links to lists of cracked passwords. I'll pass on that, but if you want to know how users feel about the Bitcoin crash, the forums are here. ®
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COMMENTS
BitCoins are defective by design.
BitCoins are defective by design. Their backers confuse potential (dubious) value as an investment with usefulness as a currency; the two attributes are inversely proportional. It is NOT a sign of success when your currency, in relation to the Dollar, Euro, Pound, oz gold, whatever shoots up like a rocket.
You want investments to appreciate in value, or, at the least, remain stable. Currency, on the other hand, you want to remain relatively constant in value in relation to something you want to exchange for. (Unstable currency inhibits the credit market. Nobody in their right mind wants to take out a loan in a currency that is subject to annual deflation of several hundred percent... it'd make a loan shark look cheap.)
Keeping the value of currency stable is the primary reason virtually every modern economy uses fiat currency. (Some central banks are better at it than others admittedly.) Fiat currency allows the supply of money to increase (or decrease) with the size of an economy. BitCoins, due to the poorly chosen supply curve are extremely deflationary by design, putting the "currency" into a trap where it MUST massively deflate to be anything more than a niche toy, but that very same predictable attribute prevents their wide adoption.
It's kind of funny... whenever you point out deflation to a BitCoin fan, they invariably point out that it can be subdivided into tiny units, and therefore deflation isn't a problem. As if illiquidity due to unit size is the only issue caused by deflation... (and, due to small trading volumes, the liquidity issue isn't really solved.)
If people want to trade BitCoins as a hobby, more power to them... they just need to realize that when the fad wears off, somebody going to end up holding the bag, and that's likely to happen sooner rather than later. At least Beanie Babies were cute...
(On technical grounds, I also have doubts about the scalability of the system once the BitCoins are subdivided.)
Fiat lux
A fiat currency (virtual or paper; as if there's a difference these days) relies on people believing that it's worth something--so sure, the more people believe, the more stable it will be, and it takes a Soros-sized manipulation to screw around with it as an individual. However, there is still the problem that fiat currencies rely on faith alone... which is why currencies that have been successful in the long term are backed with gold or (less stably) silver--if you get antsy you can (at least in theory) march into the back, plunk down that piece of paper, and get a chunk of precious metal you can take home. The funny thing is that when people know they can do this, they rarely actually do it, but the currency is much more stable. Unfortunately, after World War II the influence of Keynesian economics tempted governments to move away from backed currencies to fiat currencies so they, being the government, could print more money whenever they wanted to buy the votes of the indolent, ignorant, and unproductive, and we are now paying the price, both with the Euro and the dollar.
Before everyone downvotes me, a couple of points: 1) I am aware that both the gold/silver standards and the move away from them are more complicated than what I've just stated--to the point where technically we're not quite at fiat currencies--but the basic principle holds true. 2) I realize that backed currencies are NOT immune from manipulation--just look at the Byzantine devaluations; but at least it takes a government to do it... you don't have Soros moments when your currency represents something real, and government manipulations are very clear to all... much more difficult to pull Fed type smoke and mirrors
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