Let me say this up front: I have no stance on Bitcoin. It seems really cool, and it’s a lot of fun to cover.
But Bitcoin evangelists are surely deluding themselves if they think this week’s hacks were anything less than a huge setback for widespread Bitcoin adoption.
The worst part is, everything seemed to be going so well. Many, including us, had noted how January had seen the longest period of price stability in months. Everyone had passed around megainvestor Marc Andreessen’s huge op-ed in the New York Times about Bitcoin’s imminent takeover. And while some were spooked at the prospect of the first real regulations coming down from the New York Department of Financial Services, most believed they would be a good thing.
Then the hack hit: An unknown entity exploited a glitch in Bitcoin’s core protocol to disrupt the entire Bitcoin ecosystem. It actually started late last week with MtGox, but then quickly spilled over into other major exchanges, including the world’s largest USD-traded one, BitStamp. All had to suspend withdrawals, though today most resumed.
Bitcoin was supposed to be immune from this sort of thing. It had often been noted that previous hacking attempts had failed. “By all extant metrics in security system review, this system should have failed instantaneously, at every possible layer,” infamous “white hacker” Dan Kaminsky wrote in a piece we published last year. “But the core technology actually works, and has continued to work, to a degree not everyone predicted. Time to enjoy being wrong.”
Now we know that’s entirely true. And it will take a while for mainstream interest in Bitcoin to recover.
Even before the hack hit, we got a warning that Wall Street is not so enthralled with Bitcoin as some have made it out to be. JP Morgan’s chief global forex strategist John Normand said investors should limit exposure to it. “As a medium of exchange, unit of account and store of value, it is vastly inferior to fiat currencies. Since governments are quite unlikely to accord it the status of legal tender, Bitcoin or other virtual currencies would not reach the scale and scope to render them worthwhile for widespread commerce, payments or investment.”
He added that “many market participants would prefer the accountability of known but fallible entities to one based on a mathematical code.”
As we wrote this week, the committed Bitcoin community refused to see the hack as anything other than a buying opportunity, and said the coming fixes were simply part of Bitcoin’s evolution. Even the largest mainstream adopter, Overstock.com, is still all-in. A spokesman emailed us that, “Around here, most people feel that the fact that Bitcoin has managed to withstand these assaults is a good sign of its resilience. I guess we’re a ‘glass half full’ kind of operation.”
But if Bitcoin is still evolving, it’s probably not somewhere you want to be, unless you truly, madly, deeply believe in it. As Oleg Andreev, a Paris-based programmer, told us in an email:
“Exchanges could be better, personal wallets could be much better, ATMs are highly desired and not widely deployed yet, education is very lacking (technical, economical, political), easy website integration is lacking etc etc etc. Everyone who invests understands that to some degree. If Bitcoin appeared to be ‘ready to use by your mum’, then it’d be $US1000000/BTC already and 20% of the world would use it daily.”
That does not scream something that’s ready for the masses.
Jesse Powell, the head of Kraken, a Bitcoin exchange that was unaffected by the hacks, also admitted that, “Bitcoin is complicated — there’s a lot that can be screwed up, which is why people should steer clear of amateur operations.”
He was referring to places like MtGox, which continues to be the singular focus for how it portrayed its problems. But again, Gox wasn’t the only exchange forced to temporarily shut down.
It’s possible new regulations could smooth over some of these edges. In comments made this week, NYDFS Superintendent Benjamin Lawsky said major Bitcoin businesses may be subject to capital requirements that presumably would help cushion customers from future events like these.
But if even Bitcoin’s savviest players are subject to these kinds of vulnerabilities, we are a long way away from the global Bitcoin takeover.