Bitcoin still standing - but panic takes over
Bitcoin still standing - but panic takes over
Written by Mike James   
Wednesday, 22 June 2011

One bitcoin exchange was hacked - a bit like one local bank being robbed. But the reaction has been more as if the currency itself had been attacked. It's time to consider just what happened and to take account of the need for security.

 

Bitcoin has been a big hit. It has been in all the media you can think of from technical blogs to scurrilous social newspapers just pretending to provide news. It's fun, it's possibly profitable and you can speculate on it in the monetary and the what-might-happen sense.

You might well already know that the story is one of rags to riches. Starting out from being worth next to nothing, the value of a bitcoin against other currencies rocketed up to $19  or more. You might also have heard that the value just crashed due to Bitcoin being hacked. The story goes that the MtGox exchange was hacked and the data used to manipulate the market.

 

bitcoinparity

 

What most of the reports don't point out is the the bitcoin algorithm and encryption are intact. The hack was on the equivalent of a bank and you don't blame the currency when a bank gets robbed. In the same way a recent report that a large number of bitcoins were "stolen" from an electronic wallet doesn't damn the original implementation of the currency. There are other exchanges that haven't been hacked and the integrity of the Bitcoin itself has not been compromised.

The problem is that the infrastructure that has grown up around the Bitcoin economy is a flakey as any website created on limited funds and in a hurry is going to be. The problem is that websites that trade in bitcoins are effectively banks and as such need similarly levels of security - not that typical bank website security is perfect nor rational.

The hacked site is rolling back its transactions to before the supposed time of the attack. What happens in the next few days will be important if the fledgling currency is going to recover and continue its remarkable rise.

The two things that this incident highlights is that, when it comes to high-profile sites guarding something worth stealing, security should be the number one priority; and when it comes to currency, psychology is everything.

Further reading

Inside Bitcoin - virtual currency

Bitcoin gains an open source client

Digital currency lets GPU cycles print money

 

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