The Bitcoin Foundation: Time to step up?

March 22, 2014
Bitcoins and Trade Beads

Bitcoin, the foremost cryptocurrency, has, in the past five years, enjoyed a meteoric rise; it has been seen to be, to coin a phrase, a phenomenal success. However in the recent past some observers have voiced concerns, and it is the role of the Bitcoin Foundation in seeking to deal with these concerns that I wish to seek to address. Perhaps, I simply don’t see the complexities that may be involved and the simplistic solutions, which most people would find to be blindingly apparent, will  turn out not to work. If this is the case, please feel free to tell me.

On February 28th, Mt gox filed for bankruptcy protection in Tokyo citing expected losses of almost $500 Million, this was just five days after Mark Karpeles, the CEO of Mt gox, had resigned from his role on the board of the Foundation. Interestingly, the reason Karpeles cited initially for the losses was a ” bug in the bitcoin software makes it possible for someone to use the Bitcoin network to alter transaction details to make it seem like a sending of bitcoins to a Bitcoin wallet did not occur when in fact, it did, occur. Since the transaction appears as if it had not proceeded correctly, the coins may be resent.”  Today, March 19th, version 0.9.0 is available, and the issues with transaction malleability have been tackled and have been somewhat strengthened and improved if not entirely fixed. However, Mt gox was not the only exchange to have problems.

Just one year ago, a study by Computer scientists Tyler Moore  Southern Methodist University in Dallas, Texas) and Nicolas Christin (of Carnegie Mellon University) found 40 exchanges offering bitcoin services. Of those 40, 18 went out of business — 13  without warning, including five that collapsed instantly following cyber attacks. Almost all of the exchanges that collapsed took their investors funds with them. They estimated that: “Exchanges handling 275 Bitcoins’ worth of transactions each day have a 20 percent chance of being breached, exchanges handling 5570 Bitcoins have a 70 percent chance of failure” It was calculated that in 2013 the median lifespan of any Bitcoin exchange is 381 days, with a 29.9 percent chance that a new exchange will close within a year of opening. So following their academic study, Moore and Christin calculate a 1/3 failure rate for Bitcoin exchanges… hardly inspiring.

The problems with acceptance of Bitcoin, within the general population have been widely discussed, and the general opinion seems to be that the greatest issue is that of education; people believe in fiat currency and many are unaware that the note they accept to be money is not backed by either gold, or for that matter, any other valuable commodity. Indeed, yesterday the Danish Central Bank described Bitcoin as a medium of exchange similar in many respects to glass beads. The Central Banks governor, Hugo Frey Jensen stated: “Bitcoin is a virtual currency without any value anchor and hence it may rise sharply or fall very suddenly. A core property of money is that its value is stable so that its purchasing power does not change markedly from day-to-day,” He went on to remind Danish citizens that Bitcoin possesses inherent volatility and is therefore, an unsuitable investment vehicle.

Today, we must accept that many of the vehicles we require to trade in bitcoins are inherently unstable, and bitcoins are not as safe in an exchange as they should be. We must accept that economists and journalists will be negative to cryptocurrencies and the public may well follow their lead.  The only positive is the old maxim, “When three or more economists gather together and agree on something; they will all turn out to be wrong.”

It is time for the Foundation to reveal what happened at Mt gox and their involvement in attempting to shore up the exchange. It is time for the Foundation to talk to us about their vision for Bitcoin going forward and how they will instill confidence into exchanges that seem to come and go on an almost weekly basis. Version 0.9.0 is a good first step, and we should give the Foundation the opportunity to develop a credible strategic plan but understand this: At this point in time, there is a growing number that feel that a policy of silence will no longer suffice.

Last modified (UTC): March 22, 2014 03:22

PJ Delaney @P.J. Delaney@delboyir

Masters in Public Administration, Bachelors in Mgt., I live in Ireland, I have a bit of a background in Economics and lots of opinions on everything else.