Bitcoin Update

Last week trading was halted on three crypto currency exchanges after it was revealed hackers stole 4,474 Bitcoins from the Silk Road 2.0 website.  Silk Road is a drug-selling black market whose technical staff blamed the loss on a “transaction malleability” bug in the Bitcoin software. The loss was valued at $2.6 million, according to an article in  Forbes.

Bitcoin developer Greg Maxell responded to concerns about Bitcoin security in a Q&A with Coin Desk News. He said coding done by the exchange is to blame. He admitted there is a known bug in early versions of the Bitcoin software, first identified in 2011. The bug has been fixed and old versions previously installed on servers are gradually being replaced but “this wouldn’t make the top ten list of dangers in the Bitcoin technology.”

Experts advise against keeping digital coins in an exchange or other online wallet services. Keep your coins in your own encrypted wallet to keep them safe from hackers. An escrow account with millions of coins is a tempting target for hackers.

Bitcoin has a current market valuation of nearly $1 billion but this is highly volatile. The valuation spiked in December then plummeted on regulatory concerns voiced by several governments. In January Bitcoins were listed at more than $900.

The incident involving Silk Road 2.0 has since led to questions about Bitcoin’s ability to prevent fraud. Last week the value of the currency fell 10% percent in a single day. TechCrunch writer Alex Wilhelm noted the “price of Bitcoin on Mt.Gox has cratered, again. It now rests just above $110. That’s down from around $260 the day before. Users are betting more heavily now that their Bitcoin on the exchange is never coming back.” The weighted value of Bitcoins based on multiple exchanges was $621.1 Feb. 23. Mt.Gox was excluded from the calculation as of Feb. 10.

Mt.Gox is a Tokyo, Japan-based firm that claims to be the largest of several exchanges trading Bitcoins. Mt.Gox suspended trading in mid-February due to technical difficulties leading to security concerns.

In a Feb. 17 open letter to its customers Mt.Gox announced it has a workaround that will use a unique identifier created by Blockchain to show whether transactions have been modified or not. This will prevent any fraudulent use of the malleability bug and “protect the assets of our customers.”

Mt.Gox added a new login system that emails customers accessing the account and advised customers to use two-step authorization.

Withdrawals will be permitted at “a moderate pace” and with new daily and monthly limits in place “to prevent any problems with the new system and to take into account current market conditions,” according to Mt.Gox.

Mishaps like the above will either strengthen merchant and consumer confidence in the ability of Bitcoin and similar currencies to address security issues or lingering uncertainty will sink them.

Learn more: Reddit, Tea Biz and Crypto Coin Talk

In January India’s central bank warned against the use of Bitcoins shutting down several exchanges and China has directed its banks and other financial institutions not to deal in virtual currencies. Germany’s Bundesbank voiced a similar warning while in Canada the first of five Bitcoin ATMs opened in a Vancouver coffee shop.

Germany’s central bank later joined several other European banks in warning of the “enormous” risks due to speculation but regulators have not banned the trade of digital currency.

The Reserve Bank of India expressed concern that trading Bitcoins could violate the country’s Foreign Exchange and Payment Systems laws and regulations since the currency has yet to be authorized by the central bank. Last week several Bitcoin exchanges halted trade in response.

Following these news reports India’s Commerce Ministry and Tea Board announced a review of transactions by tea growers accepting Bitcoins as payment for small consignments of tea. The country permits shipments of up to 4 kilos of tea without mandatory surveillance if sent by International courier.  Tea growers selling direct benefit using Bitcoin by avoiding currency and bank fees and service charges for credit cards.

Globally there are about 100,000 Bitcoin transactions a month according to the Bitcoins Association of India (BAI) but fewer than 1000 are made in India. Billions of transactions are concluded daily making it unlikely trade in Bitcoins and other cryptocurrencies threaten the stability of world currencies, provided that money creation remains at a low level. The BAI’s legal advisers said that trading in Bitcoins is not illegal, citing legal precedent in the U.S. and U.K.

Last month Ben Bernake, chairman of the U.S. Federal Reserve, echoed concerns that digital currencies present speculative risks but said “there are also areas where they may hold long-term promise.”

The Canadian ATM is operated by Vancouver-based Bitcoiniacs using a kiosk designed by Nevada-based Robocoin. It converts Bitcoins into Canadian currency and accepts Canadian bills, according to a report by CBC News. The ATM scans the user’s palm before transferring money from an online wallet via a QR code read by your smartphone. It then issues a paper voucher for the transaction. The machine is installed at the Waves Coffee House. Bitcoins are accepted by at least two dozen Vancouver retailers.

The machines “make it easier for people to buy and sell Bitcoins and hopefully will drive the adoption of Bitcoin, and make it more accessible,” Bitcoiniacs owner Mitchell Demeter told CBC News. The company plans to install four additional ATMs in major cities including Toronto and Montreal. Rules of the Financial Transactions and Reports Analysis Centre of Canada — also known as FINTRAC — aren’t as strict as regulators in the U.S. The coins are traded on Canada’s VirtEx exchange.

While not against the law, trading in Bitcoins is speculative. In December Bitcoins demonstrated their volatility after rising to a high of $1242 (the price of gold) before falling to $600 in 48 hours between Dec. 5 and Dec. 7 on word the Chinese government would not allow its banks to trade directly in Bitcoins. China blocked the country’s Bitcoin exchanges from accepting new cash in what has been Bitcoin’s largest market.

In February Bitcoins are trading at $621 making the cumulative value of the 12 million outstanding Bitcoins about $13 billion in U.S. dollars.

See: Bitcoin Primer

To insure scarcity the supply is capped at 21 million coins, a number that is expected to take 126 years to digitally mine. All currencies are volatile and subject to inflation over time but few could fall to zero since they are backed by governments large and small.

Meanwhile an increasing number of retailers are accepting Bitcoins. To minimize risk the coins are quickly exchanged by online ventures such as www.bitplay.com which processes payments for more than 12,000 retailers in 30 countries. Participating retailers are typically online ventures that range from small companies like Mad Over Coins and the Bitcoin Mega Store to Hawaii-based Tealet and giants like Overstock.com with more than $1 billion in annual revenue.

Timothy Lee in Forbes argues that Bitcoin is less useful as a retail currency and more likely to find its place serving niche segments like transferring funds without the expense of hiring Western Union or as a meta currency facilitating the exchange of world currencies since Bitcoin allows wealth to be transferred across international borders without the expense or government scrutiny that comes with traditional wire transfers.

Are you considering accepting Bitcoins? Click this link to see TIME Magazine’s informative video introduction and share your thoughts with Tea Biz readers below.

Sources: Bloomberg BusinessWeek, TIME, CBC News, The Hindu Business Line, Forbes

Learn more at:
Bitcoin.org and Bitpay.com and BitcoinFoundation.org and BitcoingCharts.com and BitcoinMagazine.com

Last updated: Feb. 24, 2014