Bitcoin Is Dead
11:35 AM, Mar 5, 2014 • By JONATHAN V. LAST
Mind you, only some sorts of people really need anonymity—which is why bitcoin was the currency of preference on quasi-illegal exchanges such as Silk Road. But it wasn't much of a stretch to believe that, eventually, normal folks might want currency anonymity, too. (As Vanessa Redgrave coos in the criminally under-appreciated Mission: Impossible, "Anonymity is like a warm blanket.")
The only tradeoffs consumers would make in order to take advantage of bitcoin's privacy protections were (1) security and (2) acceptance. Which is to say, that the very anonymity of bitcoins made them very difficult to keep safe. And that bitcoins weren't (yet) accepted in all that many places.
The problem is that these two tradeoffs are inextricably linked. If the mass audience of consumers can't believe that their bitcoins are secure, then they won’t buy them. And if the mass audience doesn't buy bitcoins, then mainstream businesses won’t move to accept them.
The Mt. Gox implosion blows the lid off of the idea of bitcoin security. The problem isn't the theft—money gets stolen all the time. Banks are robbed every day. But people don't think twice about bank theft because whatever money of theirs is sitting in the bank is insured by the federal government. If a guy sticks up the Wells Fargo and steals the $1,000 you just deposited, the FDIC makes everyone whole—and then armed agents of the state attempt to track down the robber and bring him to justice.
But there ain't no law in Deadwood. Which is to say, the Mt. Gox heist makes it plain that there's no FDIC for bitcoin. If your bitcoins get stolen, you're out of luck. What's more, if your bitcoins get stolen, the cops aren't going to go after the bad guys. In fact, it's not even clear that, if the bad guys confessed to the theft the next day that it would be possible to prosecute them.
And here's the thing: These downside risks aren't just a quirk of bitcoin being in its infancy—they're design features that will always be with the currency.
All of which is why I'm convinced that while bitcoin (or something like it) is likely to hang around as a niche commodity for certain kinds of gray- and black-market transactions (it offers something like the anonymity and compressibility of diamonds for the low-end crook), Mt. Gox pretty much assures that the average consumer will never use it. Because there is no way for you to ever ensure that your bitcoins are completely safe.
What the makers of bitcoin failed to appreciate is that sovereign currencies aren’t merely successful because they’re the product of monopolies. Governments give them all sorts of competitive advantages (the techies call them “network effects”) that non-state actors will never be able to match.
If you can steal seven percent of the total circulation of a currency with total impunity, then that currency will always represent an intolerable security risk for most people.
The speculators may not realize it yet, but you can stick a fork in bitcoin. It's done.
Recent Blog Posts