Somewhere in a lavish Mediterranean villa a drug lord wearing an off-white suit had a heart attack. Elsewhere a tech whiz in Silicon Valley refreshed his browser multiple times as his heart sank further with each reloaded page. And a banker in New York put a hold on an equity trade and cursed louder than he ever had before. Like the beginning of a classic joke, the drug lord, the tech whiz and the banker had all been fooled. Through each of their minds, the question raced: “Dude, where’s my bitcoin?”
In early August, hackers stole almost 120,000 bitcoins (worth approximately $72 million at the time) from client accounts of a high-profile Bitcoin exchange, Bitfinex, based out of Hong Kong. This caused Bitcoin prices to briefly plummet and followed a similar attack in 2014 on Mt. Gox, which was then the world’s largest Bitcoin exchange (of note, Mt. Gox subsequently went bankrupt).
This latest heist comes on the heels of Bitfinex CFO Giancarlo Devasini’s very forward-thinking proclamation, “With our BitGo wallet solution it becomes impossible for our users to lose their bitcoins due to us being hacked or stealing them.” With such a bold statement, combined with the impervious view of hindsight, one must carefully ponder the future tenure of the CFO, or the future of Bitfinex, or even that of Bitcoin itself.
The theft is obviously a problem for those customers whose precious cryptocoins were stolen, fans of digital currency generally, operators of Bitcoin exchanges and various Bitcoin “banks” or “wallets.” Bitfinex’s response to the hack is unlikely to resonate with its clients after they indicated that losses would be spread across all customer accounts, amounting to an approximately 36% generalized loss. Despite attempting to assure their clients that they would be made whole at some point in the future, a potential investor might be prone to pause at this juncture in any bitcoin venture.
But what of the rest of the world that employs their faith in good, old-fashioned cash and credit cards, and the role of government regulation? Perhaps they see this rather ingenious heist as a matter of mere curiosity only of interest to early adopters of Bitcoin technology. But it is so much more than that. The technology that underpins Bitcoin is supposed to offer vast and powerful security when conducting transactions and represents one of the greatest leaps in the ability to conduct financial transactions since 1871 when Western Union introduced the now ubiquitous wire transfer technology. And not surprisingly, many of the world’s largest financial services institutions and central banks are looking at using the technology for everything from currency exchange and transfers to securities and derivatives clearing as a means of increasing speed, reducing cost and allegedly raising security.
The digital currency of Bitcoin was founded relatively recently in 2009, and is operated by a decentralized authority. Attempting to explain how it all works is a deeply complex business, fraught with peril for mortal attorneys, business-minded folk and the general public. It is said to involve math—a great deal of math— such as the random-number generation that lies beneath cryptography. Effectively, when using Bitcoin, a credit card is not required, a central bank is not required, there are no intermediaries involved and there are generally no fees involved for conducting a transaction. Per Investopedia, Bitcoin balances are kept using public and private “keys.” The public key (comparable to a bank account number) serves as the address which is published to the world and to which others may send Bitcoin. The private key (comparable to an ATM PIN) is meant to be a guarded secret, and only used to authorize Bitcoin transmissions. Ultimately, all of the (anonymized) transactions are stored in a publicly distributed ledger, known as the “blockchain.”
Bitcoin (including the technology behind it) is supposed to usher in a new era of efficiency, transparency and safety when it comes to financial transactions. However, attacks on platforms that employ the technology like Bitfinex raise serious questions regarding this particular currency model at precisely the time that financial institutions appear to be rushing to embrace it.
Which begs the question: Dude, is Bitcoin really ready for prime time or, more importantly, your savings account?