Will Bitcoin Thefts Hurt the Cryptocurrency’s Growth?

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When Bitcoin was making news back in 2012, fascination seemed to be fueled by either crypto-anarchist dreams or Ponzi scheme fears. Anonymous, secure, and insulated against fiat currency inflation, it had the feel of a tool that only tech junkies and cypherpunks would embrace. It was anti-establishment. Now, just as Bitcoin finds itself being ironically absorbed into the establishment, it is going through its Wild West period.  

As predictable as that process was, observers should have also foreseen how greed would raise Bitcoin’s valuation up to unprecedented heights, and lead to Surface and Deep Web thefts. After all, Bitcoin is like digital gold. And like any gold rush, people will do almost anything to get their hands on it.

The various heists of Sheep Marketplace, one of Silk Road's successors, illustrated this truth in brilliant fashion. Billed as a virtual black market, though more infamous as a drug bazaar, it was in one way or another highly vulnerable. Whether the site’s vendors, unknown hackers, or its creator(s) ultimately took the bitcoins is almost immaterial. The cryptocurrency’s $1,000+ valuation practically guaranteed digital heists. Sheep Marketplace was but one of them. It's ironic given assurances that Bitcoin is highly secure as a digital currency. Not secure enough, apparently, to stop scammers and hackers.

Before hastily concluding that Bitcoin’s vulnerability to theft is symptomatic of doing business on the anonymous Deep Web, consider that many thefts have occurred on the surface web too. Sure, in the dark regions of the hidden web, anonymous cheats can create a black market, let a certain reputation build, then pilfer bitcoins with little risk of being caught. But on the surface web, everything is exposed. That includes entities dealing in bitcoins.

In November alone there were at least four major Bitcoin thefts. Denmark-based Bitcoin Internet Payment System (BIPS), the dominant Bitcoin payment processor in Europe, found itself the target of a DDoS attack, resulting in the theft of 1,295 BTC, or $1.5 million by today’s currency valuation. The Czech website Bitcash.cz suffered a security breach that allowed a hacker to convert the site’s entire balance of up to 4,000 wallets, totalling around $100,000. Australia-based TradeFortress saw $1.3 million worth of bitcoins vanish, while Polish Bitcoin exchange Bidextreme’s entire portfolio was stolen, though the exact amount of pilfered bitcoins and litecoins isn’t known.

 

“In this brave new world of cryptocurrency, caveat emptor takes on a whole new meaning.”

By Bitcoin Talk’s running tally, there have been over 40 major and minor Bitcoin thefts going back to 2009, the year the cryptocurrency launched. They include everything from the relatively minor Bitscalper scam to the major Bitcoin Savings & Trust virtual hedge fund pyramid scheme created by pirateat40, the so-called “Bernie Madoff of Bitcoin”.  That makes for an average of ten thefts per year, and that's probably a conservative estimate.

At this point, the question shouldn’t so much be whether Bitcoin is secure against manipulation of the blockchain, but how secure it is at its critical transaction points: exchanges, wallets, markets, etc. Bitcoin was bound to go through such growing pains, and perhaps it’s necessary that this happens. Regardless, many people, clearnet and darknet users, must be questioning how secure these exchanges truly are. And that is not good for the currency or for business.

In this brave new world of cryptocurrency, caveat emptor takes on a whole new meaning. Does it need to be this way? If a growing number of people feel that cryptocurrencies are vital in a world of currency manipulation, then shouldn’t the way these currencies are bought, sold, stored, and otherwise transmitted be just as secure? It’s somewhat baffling that in this high-tech age there are no undisputed innovators, no Googles or Apples, of the Bitcoin marketat least not yet.

Maybe it will take several entities as robust as, say, PayPal for these vulnerabilities to diminish in frequency and scope. With all of the angel investor and hedge fund money being thrown at Bitcoin startups, perhaps we’re set to see an explosion in approaches to this problem that will rival the Internet’s monetization during the dot-com bubble. From there, digital Darwinianism should take over: the weakest will wither and die, while the most creative and robust will flourish.

If that happens, then the recent rash of Bitcoin thefts and scams will become footnotes in cryptocurrency history. Assuming, of course, that Bitcoin itself survives through government regulation and free market competition. Indeed, maybe Bitcoin will turn out to be the AOL or Netscape of cryptocurrency—something new, hyped, and the best thing on the block at the moment, but most important as inspiration to legions of developers who will be able to do it better.

Topics: cryptocurrencies, bitcoin, sheep marketplace, thieves, hackers

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