Category Archives: Bitcoin

Bitcoin value versus search volume

I overlayed a graph of the Bitcoin-USD exchange rate (red/green/black), with a graph of search volume for the phrase “bitcoin” (blue), between January and September 2011:

A striking correlation, no?

In fact, its what you’d expect, surprisingly so in fact. Since the supply of new Bitcoins is regulated such that it is essentially constant, you’d expect the value of a Bitcoin to grown and shrink in proportion to the rate at which people are seeking to acquire Bitcoins.

Bitcoin’s Most Serious Challenge Yet

MtGox, the most popular way to convert US dollars to and from Bitcoins, has just been hacked, resulting in an immediate market crash, and the usernames, email addresses, and information that can be used to determine people’s passwords (but not the passwords themselves).

It appears that a hacker gained access to an MtGox account with a very large number of coins was compromized.  The hacker sold these coins, and took advantage of the resultant market crash to buy bitcoins very cheaply.  It is likely that the hacker was able to withdraw thousands of dollars worth of these bitcoins.

This is likely to be a fatal blow to MtGox, who some estimate were making $2m/year in revenue from transaction fees. An exchange relies on people entrusting them with money and bitcoins, and it is hard to see that trust surviving this incident.

MtGox have said that they will roll-back transactions from when the incident began, but it seems unlikely they’ll be able to put the toothpaste back in the tube completely, which may result in a dramatic and lasting drop in value for Bitcoins.

While the security principles behind Bitcoin itself appear to be sound, there have been repeated security issues with the various tools and services around Bitcoin.  For example, the official Bitcoin client does not yet encrypt the user’s wallet, meaning that anyone that can access this file can effectively steal that user’s entire balance in a relatively untraceable way, given simple precautions.

However, this incident is perhaps the most serious.  MtGox is probably the most popular mechanism to both purchase and sell Bitcoins, and its credibility is now in ruins.

It isn’t necessarily the case that this will destroy Bitcoins themselves.  It will, however, demand dramatically better security for the various tools and services that grew up while Bitcoins remained an obscure pursuit of enthusiasts.

The list of accounts and their email addresses and password hashes can be found on Freenet at CHK@nQPmGQwCzInR1hYef3I4SYYfT3yfkBobBu0hiwOOmLw,72t6NbXIUnKDELYdFP8Y6LuAe-A6-0yiwnlKAdkyEN8,AAIC–8/mtgox-accounts.csv.gz (this link will only work if Freenet is installed and running).

Would you keep $500k of untraceable cash in your bedroom?

Probably not, but reportedly a user of Bitcoin kept about half a million dollars worth of the new decentralized cryptographic currency on their Windows laptop, and somebody stole it.

Misappropriated Bitcoins are, by design, difficult to trace, and with appropriate precautions, almost impossible.

To steal your Bitcoins, all someone needs is access to your “Bitcoin wallet”, a small file that by default, will be stored unprotected on your hard disk by the official Bitcoin software.  Having a backup of your wallet doesn’t help, anyone that can read your wallet can empty it.  They don’t even need to modify your wallet file to do this.

If someone gains access to your wallet, your only defense is to empty it before they do.

Even simple precautions, like storing your Bitcoin wallet in an encrypted disk, will be scant defense against someone who can gain physical or digital access to your computer (as they can use a keylogger to discover your passwords). Worse, with the large dollar values we’re talking about, extortion also becomes a real threat.

Indeed, the ease with which someone can steal something so valuable, with so little threat of getting caught, is almost unmatched. The very things that make Bitcoins such a powerful concept, are the very things that make it a tempting target for smart thieves.

Additionally, as the value of Bitcoins has skyrocketed since the online currency’s initial creation 2 years ago, many early adopters now own hundreds of thousands, even millions of dollars worth of Bitcoins. Many of these people probably have nothing like the kind of protection that would be employed to protect any other commodity of this value.

At this point it is difficult to know what to do, except perhaps rely on safety in numbers.

So if you are one of the “Bitcoin wealthy”, don’t tell ANYONE!

p.s. Oh and unfortunately for me I’m not one of those people, honest!