Bitcoin bursts: Hacker currency gets wild ride (Update)

Apr 11, 2013 by Raphael Satter
In this April 3, 2013 photo, Mike Caldwell, a 35-year-old software engineer, holds a 25 Bitcoin token at his shop in Sandy, Utah. Caldwell mints physical versions of bitcoins, cranking out homemade tokens with codes protected by tamper-proof holographic seals, a retro-futuristic kind of prepaid cash. With up to 70,000 transactions each day over the past month, bitcoins have been propelled from the world of Internet oddities to the cusp of mainstream use, a remarkable breakthrough for a currency which made its online debut only four years ago. (AP Photo/Rick Bowmer)

It's a promising form of electronic cash free from central bankers and beloved by hackers. It—Bitcoin—may also be in trouble, registering catastrophic losses that have sent speculators scrambling.

Although the cybercurrency has existed for years as a kind of Internet oddity, a perfect storm of developments have brought it to the cusp of mainstream use.

As crises in Europe piqued investors' interest, a growing number of businesses announced they were accepting bitcoins for an ever-wider range of goods and services. The value of a single bitcoin began racing upward amid growing media attention, smashing past the $100 mark last week before more than doubling again in just a few days.

Then came the crash.

The price of Bitcoin has imploded, falling from around $266 on Wednesday to just above $40 on Thursday, according to bitcoincharts.com, which tracks trades across the Internet. The best-known exchange, Tokyo-based Mt. Gox, has suspended trading for what it described as a 12-hour "market cooldown." By late Thursday, the currency was back up to just more than $100.

Nicholas Colas, chief market strategist for the ConvergEx Group, said it was a "great question" whether the currency could survive the wrenching ups and downs.

"At this point I would say yes, since it has before," Colas wrote in an email. But he noted that, unlike previous oscillations, Thursday's collapse was taking place in the full glare of international media attention.

"A lot more people know about Bitcoin than during the prior problems," he said.

To its supporters—tech-savvy libertarians, currency geeks, and online speculators—Bitcoin has enormous promise.

Bitcoins are created, distributed, and authenticated independently of any bank or government. The currency's cryptographic features make it virtually immune from counterfeiting, and its relative anonymity holds out the promise of being able to spend across the Internet without fear of censors, regulators or nosey officials.

The linchpin of the system is a network of "miners"—high-end computer users who supply the Bitcoin network with the processing power needed to maintain a transparent, running tally of all transactions. The tally is one of the most important ways in which the system prevents fraud, and the miners are rewarded for supporting the system with an occasional helping of brand-new bitcoins.

Cryptographers argue over whether bitcoin is well-designed, but the true test of any currency is whether it can be used to buy anything.

Increasingly, Bitcoin is passing the test. From hard drugs to hard currency, songs to survival gear, cars to consumer goods, many retailers have welcomed the money, whose unofficial symbol is a dollar-like, double-barred B.

Atlanta-based BitPay handles Bitcoin transactions for more than 4,500 companies, taking payments in bitcoins and forwarding the cash equivalent to the vendor involved, which means that its clients are insulated from the cybercurrency's volatility.

In this April 3, 2013 photo, Mike Caldwell, a 35-year-old software engineer, holds a 25 Bitcoin token at his shop in Sandy, Utah. Caldwell mints physical versions of bitcoins, cranking out homemade tokens with codes protected by tamper-proof holographic seals, a retro-futuristic kind of prepaid cash. With up to 70,000 transactions each day over the past month, bitcoins have been propelled from the world of Internet oddities to the cusp of mainstream use, a remarkable breakthrough for a currency which made its online debut only four years ago. (AP Photo/Rick Bowmer)

BitPay Chief Executive Anthony Gallippi said many of the businesses he served were e-commerce websites, but he said an increasing number of traditional retailers were looking to get into the game as well.

"We just had an auto dealership in Kansas City apply," he said.

Artists are into bitcoins too. Tehran-based music producer Mohammad Rafigh said the currency allows him to sell his albums "all over the world and not only in Iran."

There's long been a black market use for bitcoins as well.

Argentine software developer Patricio Fink described how he recently swapped bitcoins for a wad of American currency with a couple of Australian tourists at a Starbucks in Buenos Aires. The visitors wanted spending money at black market rates without the risk of getting roughed up in one of the Argentine capital's black market exchanges. Fink wanted more bitcoins to insulate his savings from Argentina's high inflation.

"It's something that is new," said Fink, 24, who described the deal to The Associated Press over Skype. "And it's working."

One of the most prominent destinations for bitcoins remains Silk Road, a black market website where drug dealers advertise their wares in a consumer-friendly atmosphere redolent of Amazon or eBay—complete with a shopping cart icon, a five-point rating system and voluminous user reviews. The site uses Tor, an online anonymity network, to mask the location of its servers, while bitcoin payments ensure there's no paper trail.

One British user told AP he first got interested in Silk Road while he was working in China, where he used the site to order banned books. After moving to Japan, he turned to the site for an occasional high.

Drug dealers aren't the only ones cashing in on Bitcoin. The hackers behind Lulz Security, whose campaign of online havoc drew worldwide attention back in 2011, received thousands of dollars' worth of bitcoins after promising followers that the money would go toward launching attacks against the FBI.

A report apparently drawn up by the bureau and leaked to the Internet last year said that "since Bitcoin does not have a centralized authority, detecting suspicious activity, identifying users and obtaining transaction records is problematic for law enforcement."

It went on to warn that bitcoins might become "an increasingly useful tool for various illegal activities beyond the cyber realm"— including child pornography, trafficking and terrorism.

That is, if the currency survives.

Bitcoin's dramatic collapse—from peak to trough, the currency shed more than 80 percent of its value—has left many enthusiasts anxious and many skeptics saying "I told you so."

"Trading tulips in real time," is how longtime UBS stockbroker Art Cashin described Bitcoin's vertiginous rise, comparing it to the now-unfathomable craze that saw 17th-century Dutch speculators trade spectacular sums of money for a single flower bulb.

"It is rare that we get to see a bubble-like phenomenon trade tick for tick in real time," he said in a recent note to clients.

One Bitcoin supporter with a unique perspective on the boom-turned-to-bust might be Mike Caldwell, a 35-year-old software engineer based in suburban Utah. Caldwell mints physical versions of bitcoins at his residence, cranking out thousands of homemade tokens with codes protected by tamper-proof holographic seals—a retro-futuristic kind of prepaid cash.

His coins are stamped with the words "Vires in Numeris"—Latin for "Strength in Numbers."

Some may wonder whether Caldwell's coins will one day be among the few physical reminders of an expensive fad that evaporated into the ether.

When asked, Caldwell acknowledged that bitcoin might be in for a bumpy ride.

"The way I look at it is that there will be bugs and there will be minor issues from time to time," he said. But barring a complete unraveling of the currency's electronic architecture, he predicted that it would continue to grow.

"Bitcoins will either be worth nothing or worth a whole lot more than its current value," he said.

For Colas, the market strategist, the most important thing to keep in mind was that bitcoins suffer from the same weakness as any other form of money. If people increasingly believe they're not worth anything, then they're not worth anything—no matter how clever the currency's design.

"The future of bitcoin is, like all currencies, going to come down to trust," he said.

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User comments : 10

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Cave_Man
1 / 5 (9) Apr 11, 2013
Eh, you can't eat money, or bitcoins, or anything but human food. So why not invest money in a garden? Or the skill of growing at least some of your own food...

Stop driving around your cars pretending like you actually worked hard enough to get them, do you ever consider that the materials had to be extracted from the raw earth and processed endlessly to reach you, and the end product has a very finite lifetime. If you had to build a car yourself would it really be worth it?
powerup1
3.6 / 5 (7) Apr 11, 2013
Eh, you can't eat money, or bitcoins, or anything but human food. So why not invest money in a garden? Or the skill of growing at least some of your own food...

Stop driving around your cars pretending like you actually worked hard enough to get them, do you ever consider that the materials had to be extracted from the raw earth and processed endlessly to reach you, and the end product has a very finite lifetime. If you had to build a car yourself would it really be worth it?


Cave Man, your comment is inane. The same thing can be said about the computer you are using right now, so why are you using it? That is why your views have no value other than to show someone whining about nonsense.
ryggesogn2
1.4 / 5 (9) Apr 11, 2013
Food spoils. Paper rots. Bits can vanish.
Au,Pt don't rot. Ag and Cu can corrode, but steps can be taken to limit corrosion.
The real bottom line, money is a store of wealth that others will accept in exchange.
I have a very pretty 10 g note. It's now worthless as the fiat currency was eliminated by the Dutch. If were convertible to euros, it would still be worthless in most places in the US.
But if intrinsic money were used, the only issue would be to know its purity and mass regardless of who created it.
This is why govts won't allow free market money.
Lurker2358
1 / 5 (8) Apr 12, 2013
Food spoils. Paper rots. Bits can vanish.
Au,Pt don't rot. Ag and Cu can corrode, but steps can be taken to limit corrosion.
The real bottom line, money is a store of wealth that others will accept in exchange.


Most reasons for using Gold as a currency are circular, and only based in other people's irrationality. The only good reason is the fact that it doesn't decay due to being both fundamental and highly inert.

However, the inert property actually rationally makes gold more suited to applications of physical preservation and lighting (think about the wooden planks in the Tabernacle in the Bible, or James Webb,) or modern electrical or nano-devices.

if Gold were evaluated according to it's non-currency related practical uses, it would have been valued much lower in most cases, and the materials cost of James Webb Telescope would be a fraction of what it has cost.

At any rate, the bitcoin currency is a joke, being even more artificial than paper currency. Should be banned.
kochevnik
2.6 / 5 (7) Apr 12, 2013
At any rate, the bitcoin currency is a joke, being even more artificial than paper currency. Should be ban
Definitely the most stupid comment of the day. Proof the poster fails to grasp even the most elementary concepts of cryptography. I would welcome an informed or well-constructed argument

Well good luck banning quantum encryption and multiverse bitcoin
grondilu
3.3 / 5 (4) Apr 12, 2013
> "The future of bitcoin is, like all currencies, going to come down to trust,

It's not exactly the same kind of trust, is it? With other electronic form of money, I have to trust banks and governments not to debase the currency. With bitcoin, I have to trust other people to agree with me that bitcoin is a better form of money. But as far as how many bitcoins there will be, I don't have to trust anyone apart from cryptographic experts who ensure me than neither ECDSA or SHA-256 is breakable.
Also, I don't have to trust the government not to steal my bitcoins, since the Cyprus story showed us that the money in a bank is not really mine. I can store bitcoins on my computer or even in my brain and that is a huge difference in trust level when compared to money I must store in a bank.
dav_daddy
1 / 5 (8) Apr 12, 2013
If bitcoin falls down around 20USD I'll jump in, maybe get back out at $100ish?

I love currency trading!
kochevnik
2 / 5 (4) Apr 12, 2013
It's not exactly the same kind of trust, is it? With other electronic form of money, I have to trust banks and governments not to debase the currency.
Yes exactly. It is about trusting some stranger who, for all you know, could be your biggest enemy vs. trust in hard science and maths. If a bankster told you you could fly naked, would you walk off a tall building? Or would you instead contemplate gravity and rely upon it?

Trust can be computed. The probability that someone with thousands of verifiable trust links will be nefarious is much lower than some unknown stranger in a skyscraper. Moreover bitcoin doesn't rely upon trust, but algorithmic scarcity that can't be overruled by a closed-door committee. http://rt.com/sho...ser-505/
If bitcoin falls down around 20USD I'll jump in, maybe get back out at $100ish?
If people see food for 90% off they will buy it. Currencies have the same dynamic, but traders think otherwise and lose
CapitalismPrevails
1 / 5 (7) Apr 12, 2013
I don't recall Physorg posting any articles about Bitcoin before the bubble burst. Why make an article only now?
ryggesogn2
1.5 / 5 (8) Apr 12, 2013
if Gold were evaluated according to it's non-currency related practical uses,

Gold, like most commodities is valued by its demand, the existing supply and the supply yet to be produced.

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