Whoops there goes another Bitcoin

Confidence. It’s what makes the world go around. Money too, as the song goes, but that’s pretty much an index of confidence. Watch the stocks plummet and you can be sure there’s lack of confidence there, or even the presence of panic. See the indexes climb and there will be some pretty confident people behind them. It’s certainly not love. Don’t you just wish the financial markets would hire more confident, less panicky, more loveable people?

So the latest Bitcoin hack – to the tune of $1.75 million, from Chinese Bitcoin exchange Bter – is another knock to the confidence behind the cryptocurrency. Bitcoin hacks have been coming thick and fast of late, or perhaps that’s just because the media spotlight switched onto them when James Howells threw away four million pounds’ worth of Bitcoins when he dumped his hard drives. Or it could have been when the major exchange MtGox was forced to close, taking 850,000 Bitcoin out of circulation (and then finding 200,000 of that in a discarded offline wallet).

I became intrigued by Bitcoin quite some time ago, as I do by most new shiny things that promise new ways of working. It seems to have come straight out of someone’s head (and we don’t know exactly which someone that is, although Newsweek once thought it did) and into the world quite literally without intermediation.

Bitcoin is a currency that exists outside of centralised government control, with a limited number of Bitcoins in existence. New Bitcoins come about by solving tough computational problems. The more computation thrown at the problem, the tougher the problems get. It is decentralised and self-balancing. The problem is, it doesn’t seem to work.

As a virtual currency it brings into sharp relief the idea that money doesn’t really exist. The money I have sequestered in bank accounts isn’t really there. It’s just ones and zeroes. Not even that – it’s actually just some magnetic impulses on a storage device somewhere. (No wonder some people still keep their money under a mattress).

The difference between Bitcoin and ‘real’ money is that ‘real’ money – even if it’s just magnetic polarisation – is backed up by the government. If a huge sunspot were to wipe all our hard drives tomorrow then hopefully the banks will have contingency plans, such as back-up centres behind lead-lined vaults buried miles beneath mountain ranges.

But virtual currency holds no such backup, by definition. OK, so the trace of payments is distributed across all peers, but as we’re finding out, rapidly, this is no protection against hacking, it would seem. Online wallets are insecure. Offline wallets can wind up in the local recycling facility. Entire exchanges go ‘pop!’, like balloons.

So another hack, another knock to the confidence of what was once supposed to be a brave new world of currency exchange. Strange isn’t it how these brave new worlds can turn so sour? Remember how the web was supposed to facilitate creative freedom? Or how social media was going to give everyone a voice? I pretty much gave up blogging because I realised my voice was being drowned out by the noise, so I had to come up for air. I’ve only started again because I need to exercise my writing muscles once in a while.

What now for Bitcoin? Let’s take it from Gavin Andresen, chief scientist at the Bitcoin Foundation, the closest thing to a central bank for the nascent cryptocurrency: his opinion is that Bitcoin is dangerous and people should steer away from using it. That’s one of the most important figures in Bitcoin as reported by the highly credible FT. So, that gives me confidence. Don’t even approach the glass. For now.

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