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Bitcoin Is Dead

11:35 AM, Mar 5, 2014 • By JONATHAN V. LAST
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"Bitcoin" is the most widespread, cryptographically-secure Internet currency. It was created in 2009 by someone (or someones) who referred to themselves as "Satoshi Nakamoto." Once it was released into the wild, the bitcoin currency ecosystem operated on a public, inalterable schedule. We know exactly how many bitcoins there are in existence today (12,446,725) and how many there will eventually be in total: when the 21 millionth bitcoin is minted, the plates automatically self-destruct. (This is a metaphor, of course. There are no minting “plates,” and nothing’s going to actually explode.) If you want to read the whole Wikipedia entry on bitcoin, have at it.

The genius of bitcoins is that they’re completely untraceable. Cash-money is anonymous and liquid, but even it has limitations—it must be used in face-to-face encounters; dollars have serial numbers on them, and if The Dark Knight is any guide, paper notes can be surreptitiously marked in many ways. 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. And the person (or persons) who created bitcoin did so with the explicit goal of undermining the idea of sovereign governments.

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. In 2012, a bitcoin sold for about $10 USD. In January of 2013, the exchange rate began increasing, shooting up to $40. By December of 2013, a single bitcoin was selling for just over $1,100. You read that right.

The bubble eventually popped and before last week the value of a bitcoin had collapsed to "only" about $600.

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.

So here's what happened to bitcoin last week:

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. The largest and oldest of these exchanges was a Japanese company called Mt. Gox. 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. When Mt. 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. That's about $510 million worth. Or, to put it another way, about 7 percent of the entire bitcoin money supply.

Disappeared. All at once.

This past weekend, Mt. Gox filed for bankruptcy.

Bitcoin's evangelists keep pointing out that the exchange rate for bitcoins has held relatively stable post-Mt. Gox. 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.

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