There is simply no way I can let this week pass and not comment on Bitcoin. It would be criminal… (though certainly not the first criminal thing associated with Bitcoin).
First of all, I have to say I applaud the movement. In fact, I even cheer for the movement. Bitcoin itself need serious work if it is to find a place in that movement long term. It lacks community governance, certification, accountability, regulatory tension, and insurance—all of which are necessary for a currency to be successful in the long run. And precisely why the past week has seen:
- $400+ million worth of bitcoins stolen from—or by depending on how you look at it—the Japanese outfit Mt. Gox.
- Online wallet provider Flexcoin was hacked for a mere $580,000 in bitcoins, forcing it into liquidation. That anyone would trust their company with a deposit manager with such limited liquidity is beyond me, but that’s part and parcel of the way Bitcoin operates.
- Poloniex, another exchange provider, was hacked by means of an exploit in poorly written withdrawal software, and at least 12% of its coins appear to have been taken.
That the underlying technology was never at issue in these attacks and the many dozens of attacks that have preceded them is neither here nor there. The structure of the Bitcoin world is such that each implementation brings its own unique flaws and exploits. And when those systems are breached, your money is gone. You will. Never. See. It. Again. Because Bitcoin is a bearer instrument, once someone controls the machine that holds the bitcoins, they are free to transfer them to themselves.
Still, the idea that there could be a currency free from the whims of autocrats or bureaucrats without all the many drawbacks of using commodities like gold in this digital age is tempting. In reality a more evolved version of the currency will need come about for the dream to come true. It’d have to be one that is managed privately with input from several governments, but no authority over it from any single one. Which would be a remarkable advancement if it can be achieved.
Still, before any such real adoption can happen, we’ll have to eventually give up on this notion that the average person will own or manage bitcoins in an obvious and direct way. This is flawed logic that derives from an underlying misunderstanding of just how Bitcoin works. I can tell you this because I’ve spent hours on the phone explaining and re-explaining the concept to reporters in the past few days, the ones who are trying to quickly come up to speed on the technology in the wake of the Mt. Gox fraud. At least they’re truly trying to understand what happened, as opposed to those who blindly report back the many press releases and sound bites spouted unchallenged by the Bitcoin investor community.
What’s become obvious in those conversations is that too many more people (media and individuals alike) are all to content to swallow the line, “Don’t worry—the technology ensures Bitcoin’s security.†Uh huh. The last time someone told you not to worry, your money was perfectly safe, what happened?
“These price increases largely reflect strong economic fundamentals,†Ben Bernanke observed about housing in October 2005, when working for President Bush’s housing program
“No! No! No! Bear Stearns is not in trouble. If anything, they’re more likely to be taken over. Don’t move your money from Bear,†Jim Cramer told viewers of Mad Money at the onset of the financial crisis.
Exactly.
Bitcoin may make it through the current turbulent times intact. It may not. Regardless, during any such crisis, it’s important to look to history. The past has taught us numerous lessons about hanging on to one’s newfound wealth. After all, examples abound of people and their paper fortunes being rapidly parted during turbulent times.
Let’s see what we can learn from a few of them.
Bitcoin Savings and Trust
I love this former company’s name. Really, I do. Basically it says, “Trust us! We’re called a savings and loan, after all.†Anyone who lived through the 1980s outside of diapers—and in the Bitcoin community I’ve come across many an “expert†who did not—knows of the S&L scandals that shook the banking industry to its core.
Bailing out Security Pacific National Bank cost taxpayers $628 million. Imperial Savings: $1.6 billion. Silverado Savings and Loan: $1.3 billion. Midwest Federal Savings & Loan: $1.2 billion. Home State Savings Bank. Old Court Savings and Loans. Lincoln Savings and Loan. You get the point.
Many safe-sounding investments have proven—not just in the S&L scandal, but over many hundreds of years—to be little more than money pits. That scenario has played out in the Bitcoin world, too. A total lack of governance—even from the community which purports to “manage†the standard—has allowed for dozens and dozens of faulty implementations that resulted in massive thefts of bitcoins.
