The new online currency Bitcoin has always been proud of its lack of government oversight. But that might be a less touted feature now that Bitfloor, the currency-trading environment for Bitcoin, has been robbed.
Bitfloor founder Roman Shtylman posted an open letter on the Bitcoin forums admitting that: “Last night, a few of our servers were compromised. As a result, the attacker gained accesses to an unencrypted backup of the wallet keys… This attack took the vast majority of the coins Bitfloor was holding on hand.” A later update stated that the hackers transferred 24,000 Bitcoins — around $250,000 in U.S. currency — to an unknown location, clearing out all of Bitfloor’s virtual cash reserves.
Shtylman promises to pay back users who’ve lost their Bitcoins using “current available funds.” The speed of that repayment may be an important factor for users: Over the span of only months, the value of Bitcoins has been up and down more than a yo-yo on a roller coaster. In the last 18 months, a Bitcoin went from being worth $15, to $3, to a few cents, to today’s $10 value. So 24,000 Bitcoins tomorrow could have a very different value from 24,000 Bitcoins today, leaving even repaid users very unhappy.
Equally upsetting to those who’ve parked their money in Bitcoin wallets was what the security breach implies about the company’s internal security. The fourth response to Shtylman’s open letter read simply: “Unencrypted backup???” Shtylamn immediately explained that the unencrypted backup was created when he “manually did an upgrade,” but reiterated that he wanted to “focus on the future.” This is not the first time Bitcoin has lost money to hackers, but the discovery that they have user information stored in unencrypted files might be what finally prompts a full-fledged run on the Bitcoin bank; no one’s eager to keep their money in an unlocked vault.
Mainstream economics writers are enjoying a good chuckle at the crushing of Bitcoin’s libertarian dreams. Solidly centrist website The Atlantic was happy to point out that U.S. banks are FDIC insured in order to guarantee that in the event of a robbery, account holders don’t have to depend on the goodwill of the bank manager to get their money back. Bitcoin’s popularity as currency of choice for skeevy sites like drug-dealing marketplace Silk Road further ensures that getting robbed doesn’t win it much sympathy, and there’s no word on whether Bitcoin will turn to the government agencies it previously scorned in order to track down the thieves.
Bitfloor is shut down while Shtylman scrambles to repay users. He promises that international users who wish to withdraw their money can send him an e-mail requesting withdrawal, a weirdly informal system for currency exchange which calls to mind disturbing images of Depression-era banks understaffing their teller windows so customers couldn’t take out all their money at once. There would be a certain delicous irony if the latest debacle reminds the idealistic libertarians of Bitcoin exactly why government currency regulations became popular in the first place.
Update: Roman Shtylman is not being sued, the article in question referred to Bitcoinica founder Zhou Tong. We regret the error. The story has been updated to correct this inaccuracy.
“But considering that he’s currently being sued by users who say he never repaid the money lost in a previous security breach,” and then you link to bitcoinica? thats not bitfloor. Please correct your article.
Yup, just did. I also wrote to Shtylman to apologize for the error.
So let me get this straight. You’re upset about some sloppy security leading to a $250,000 loss for a bitcoin bank’s depositors, and you’d rather have a system in which people who have nothing to do with cheating banks have trillions of dollars taken from them and handed over to politically powerful fat cats?
I’m not necessarily a fan of having money handed to “politically powerful fat cats” (though I think the Detroit bailout was absolutely the right thing to do for ordinary Americans). But I’m also not a fan of unelected and therefore unaccountable business owners putting people’s money at risk with no insurance.
“unelected and therefore unaccountable business owners”
The public could put WalMart out of business tomorrow.
The public could not put Obama out of office tomorrow.
Who is more accountable to the public?
We get to vote on our elected leaders on quite a regular schedule. In fact, we’re guaranteed that right (much as certain GOP operatives try to change it). But Wal-Mart, well, if I live in most of the country, I have to buy from Wal-Mart (because they’ve put everyone else out of business in the area) and I have absolutely zero say over their behavior unless I’m on the company board. No question who’s more accountable.
Well you could always buy a few shares and vote as a shareholder, which would give you about the same power you have voting for your politician. If you want to be on the board of the USA, you’d have to be a congressman or a senator.
The difference is, Walmart can’t just take your money, they have to earn it by providing you with a better service than everyone else.
“There would be a certain delicous irony if the latest debacle reminds the idealistic libertarians of Bitcoin exactly why government currency regulations became popular in the first place.”
“In the first place” they “became popular” because laws where mady to enforce that popularity.
A fair comparison would have to compare a currency like bitcoins that is only a few years old to currencies from like the 18th century.
A fair comparison would acknowlegde that not the currency itself was breached but a bank.
That being said: I don’t think highly of bitcoin. But the political part of this news text seriously lacks quality.
In the case of Bitcoin, the currency and the bank are synonymous. Which is part of the problem with a privately-developed currency.
Daniel, I’m not sure I understand. Why do you say that the currency and the bank are synonymous? Bitfloor is just one, relatively small, Bitcoin exchange. You can actually use Bitcoin without relying on any third party banks or exchanges, and you certainly don’t have to do business with Bitfloor.
Sure, Bitfloor is just one part of the Bitcoin economy. But any non-gold-backed currency is, in practice, backed by the market’s faith in the issuer. The dollar, for example, is backed by trust in the ability of the U.S. government to exchange currency, and for all the caviling about our current deficit, the bond markets have made a clear judgement that investors have plenty of faith in the U.S. governments ability to maintain the value of the currency. Bitcoin is backed by trust in Bitcoin’s ability to maintain its own monopoly on its currency and to monitor its transfer, and the company has failed to demonstrate competence in those abilities. Maybe someone else will come along and promise to be Bitcoin without the security problems, but I’ll continue to have a lot more faith in the credit of the U.S. government than some dudes at an internet company, and I imagine markets will feel the same way for the foreseeable future.
I’m really happy you picked up on this story early, and I hope you’ll continue covering Bitcoin as it grows. I think you’ll find there’s a lot more to it than is apparent at first blush.
There is no Bitcoin company, and there is no Bitcoin organization that attempts to maintain a monopoly on anything. There has never been a breach of the Bitcoin software itself. In this case, Bitfloor simply left the keys in the ignition, and someone drove off. While this says a lot about the operators of Bitfloor, it says nothing about the Bitcoin software. And since Bitcoin’s value against the dollar has almost tripled since January of this year, I’d say people have some faith in the currency.
As for the US bond market, since about half of the bonds are bought up by the Fed, and Bernanke is apparently planning QE3, it seems more like a desperate attempt by the government to keep interest rates low by buying up their own bonds with printed money.
Wait, no Bitcoin company? So who is empowered to issue Bitcoins? And if Bitfloor is just, like, some random trading exchange, is there any reserve where a holder of Bitcoins can be assured that he’ll be able to exchange them for another currency?
Bitcoins are issued by bitcoin miners successfully discovering a block that satisfies the current difficulty. If you want to know more and learn about the system so you can understand it and make valid criticisms I’d suggest reading the original whitepaper that Satoshi published. There is no central issuing authority. And the number of infinitely-divisible bitcoins will never exceed 21M.
I read the white paper, and it made so little sense I concluded there was a scam. If anyone can make Bitcoins, you’ve got a recipe for inflation. If everyone can make Bitcoins but there’s a ceiling, you’ve got a recipe for even worse deflation. And either way, you’ve got no protection if something goes wrong, as it inevitably will. I’m eagerly awaiting the point where the Bitcoin story goes full Bioshock.
So you wrote an article about a technology that you do not understand and then claim that one code vulnerability means that the currency’s “Libertarian dreams” are dead?
Well done sir. Well done.
And next time you should try to UNDERSTAND the white paper and not conflate libertarianism with anarcho-capitalism.
maybe I can help you understand any parts of the whitepaper that didnt make sense to you. the first time I tried to read it it made little sense to me, but after months of further research and another reading things became much clearer. to address your question about if anyone can make bitcoins and inflation, you have missed the part about the difficulty. yes anyone can make bitcoins, but to do so they have to produce a block that satisfies the current difficulty. understanding what this means is fundamental to understanding how new ledger entries get added to the “official” blockchain and why this mechanism ensures that there will only be 7200 new bitcoins produced every day no matter how many FPGAs and ASICs the world throws at the system.
The issuance and continuity of Bitcoin is comparable to the issuance and continuity of a precious metal, like gold. There is a certain amount of refined gold in the world. Miners dig up new gold, and the cost of digging up new gold increases as the lowest hanging fruit are systematically plucked. There is a fixed supply of gold ore within the planet, circumscribing how much can ever be mined.
Bitcoin functions in the same way. Miners must expend computational effort to “mine” new bitcoins. Basically they win a race to solve math problems. The math problems are made easier or harder over time so that one gets solved on average every 10 minutes. All of these rules, including how hard the problems are and who wins each “contest”, creating a new transaction block and how much they’ve won are prescribed by an algorithm and enforced by the decentralized swarm of miners, who all run the same software and publish their work for all eyes to see. Absolutely zero individuals exercise direct control over this process, absolutely anyone can participate and absolutely anyone can (and loads of people do) check the work. Anyone who tries to publish invalid results is simply ignored by everyone else.
Collectively this represents a decentralized supercomputer crunching numbers 24/7 at a present rate of 20.3 trillion hashes per second, which is more processing power than the Utah Data Center. This vast effort serves to secure and notarize the transactions proposed by the present owners of Bitcoin balances (in turn signed by their private keys), and to make double-spending and counterfeiting baldly impossible.
The Bitcoin economy currently has a 110 million dollar market cap, and while many individual companies doing business in bitcoin and holding bitcoin on account on their customer’s behalf have either been hacked, embezzled their clients’ funds or performed other acts of malfeasance, the core system has suffered zero known exploits in the past 3 years. The protocol is completely open source, and has been examined by every cryptographer in the world who does not live under a rock, and nobody even *knows* of a way to attack the core protocol, or abuse it for any purpose other than it was intended. If they did, there would be up to 110 million usd in it for them to demonstrate such an art.
1. Don’t write an article on a subject when you have really no clue on what you are talking about (you even admit it).
2. Check you facts Bitfloor and Bitconica are NOT the same person
3. There are still a lot of Bank robberies nowadays does that mean that USD, EUR and Co are worse than Bitcoin in that regards?
Anyway you article is pure bad journalism, please consider either looking for another job or to get proper training.
Understanding Bitcoin and how it works requires wrapper your head around two distinct cryptographic concepts; a hash function and public/private key cryptography. Searching Google for how these things work will get you a lot closer to understanding Bitcoin. Without understanding these concepts, you cannot understand the core of Bitcoin. Bitcoin is surely a curency that will result in price deflation, but not all economists think this is a death sentence. We will se who is right.