The Bitcoin Collapse: Can Hackers Save Their Favorite Currency?

A catastrophic hack shuttered the world's largest Bitcoin marketplace Sunday in a security breach that exposed hundreds of accounts and led to the theft of approximately $8.75 million worth of the virtual money. Bitcoin is an anonymous, digital currency that catapulted in value thanks to heavy media coverage in May and June, and coupled with the heist of $500,000 worth of Bitcoin currency last week, this latest megaheist of is a hyperbolic example of how unstable the market has become. As Megan McArdle notes over at The Atlantic, "This spate of bad news and volatility leaves many wondering if this is the beginning of the end for the Bitcoin movement."

The price of a Bitcoin unit fell from over $17 to pennies in a matter of minutes Sunday afternoon, when hackers broke into Mt.Gox. Handling 90 percent of all Bitcoin transactions, Mt.Gox is the world's largest Bitcoin exchange and as Timothy Lee indicates on Wired, the fall in price does not mean that Bitcoin is worthless:

The crash appears to be the fault of the Mt.Gox exchange rather than a collapse in the value of the currency itself, as the integrity of Bitcoin’s underlying peer-to-peer transaction clearing process does not appear to have been compromised. Prices at a competing exchange showed Bitcoins trading down about 25 percent to $13 per Bitcoin earlier today, although it has edged up since […]

Even though competing marketplaces like Trade Hill are attempting to woo Mt.Gox users over to their site, the novel nature of the currency and especially the market mean that users have no way of knowing how secure any of the competitors might be. Since Bitcoin works like cash--that is, if a hacker steals your digital wallet, it's gone for good--security is a big deal for the future of Bitcoin. Lee articulates this point well:

Theoretically, this weekend’s developments shouldn’t damage Bitcoin’s long-term value, since the security model of the underlying currency remains uncompromised. But Bitcoin is a fiat currency; its value ultimately depends on nothing more than public confidence. If the recent string of Bitcoin-relatedsecurity woes convinces more Bitcoin users to cash out, the currency’s value could continue to fall.
From the start, Bitcoin has been a fairly utopian project. It might sound kind of silly, but it's you might compare the experiment in democracy to the early years of the United States America. Like the gun-slinging, bandana-wearing, caravan-hijacking bank robbers in the Wild West, virtual currency thieves are finding ways into the coffers of unprotected travelers in a digital desert. The lawlessness of the Bitcoin landscape is part of what made the gold rush possible, and if the settlers can find a way to protect themselves, appoint marshalls, hunt down the bandits--or whatever other extensions to this metaphor you can think of--there's hope that it might work.

Bitcoin has gained the support of heavy-hitting online communities like Anonymous and LulzSec. And though they've been accused, apparently wrongly, of having masterminded the Bitcoin heist, the LulzSec hackers have expressed a recent interest in online security activism. Around the same time they announced their latest hack on Sega, the group released a statement that they were joining forces with the Anonymous collective in a new project called "AntiSec." Unlike their past announcement of just being in it for laughs, the AntiSec movement sounds a lot like activism that supports some of the same principles that the decentralized Bitcoin community espouses. "We encourage you to spread the word of AntiSec far and wide, for it will be remembered," the group wrote in a Pastebin posting. "To increase efforts, we are now teaming up with the Anonymous collective and all affiliated battleships. Whether you’re sailing with us or against us, whether you hold past grudges or a burning desire to sink our lone ship, we invite you to join the rebellion. Together we can defend ourselves so that our privacy is not overrun by profiteering gluttons."

Of course, the groups famous for some of the most prominent security breaches of the past year might not seem a group to trust. But they might be the only ones with the collective power to turn the Bitcoin experiment around.

Why It’s So Hard to Make a Campaign Donation With Bitcoin

Bitcoins have been making waves in banking, commerce and technology fields for years, yet remain largely absent in campaign finance. Why hasn’t it broken through?

Bitcoin, the decentralized digital currency, is surging in the banking, commerce, and technology worlds. But when you look to Washington elections, growth is anemic. Only one major presidential candidate, Rand Paul, accepts bitcoin donations, and just a handful of congressional candidates are doing the same. So what exactly is holding back the bitcoin wave in campaign finance?

Perhaps unsurprisingly for a digital currency that can trace a lot of its backing to the libertarian community, supporters say it is regulation.

They point to a Federal Election Commission advisory opinion issued last year as a major reason why bitcoin hasn’t caught on as a meaningful source of campaign finance for the 2016 election.

In the opinion, the FEC unanimously approved a super PAC’s proposal to accept bitcoins as donations. But the commission also capped those contributions at a value of $100 (based on the market value of a bitcoin at the time of donation). It also required the organization accepting the bitcoin to be able to prove that the person donating the digital currency can show that the coins they are giving are legally theirs.

Those looking to expand bitcoin’s role in political giving say this hesitancy stems from federal regulators’ doubts about the digital currency’s role in the modern economy.

“[There’s] a perception in the government that bitcoin is used for criminal purposes primarily,” said Stan Higgins, a reporter for the digital-currency-news site CoinDesk. “Certainly while there are few cases for using bitcoin as a base currency for online drug marketplaces, the reality is that the landscape of surveillance is very, very different from what it used to be two or three years ago. The attractiveness of bitcoin as a currency for money laundering or criminal purchases is just not the same game it was a couple of years back. But still, that perception is very much in play.”

It’s not just the stigma that’s holding bitcoin back. At a time when a flood of undisclosed super PAC campaign cash is making transparency advocates nervous, the use of bitcoin adds a new dimension to the struggle to track who’s giving what.

Bitcoins are designed so that the transactions can be anonymous. Bitcoin transactions are recorded in the currency’s "blockchain"—the public, “digital ledger” that serves as the backbone to the entire ecosystem—not under a person’s identifying information like name or address but under a bitcoin address, which is a pseudonymous string of letters and numbers that is unique to each user. There’s no limit on how many addresses a person can have.


The author of the original white paper that proposed the currency even encouraged bitcoin holders to use a new address for every transaction to protect themselves from having transactions traced back to them. Keeping with the theme, the founder of bitcoin is unknown, with that paper written under a presumed pseudonym, setting off wild chases to try and unmask him or her.

FEC commissioners have expressed their doubts about the currency in campaign finance in the past. Bitcoin “allows for anonymous and untraceable transactions, which would clearly undermine what is the most important, in my mind, purpose of campaign finance laws, and that is transparency and the disclosure of political spending. I am definitely unwilling to go that far,” FEC Commissioner Ann Ravel said in 2014.

This unwillingness plays out in the advisory opinion. The $100 is well below the $2,700 limit that donors are allowed to give to a federal campaign per election (typically once in the primary and once in the general). The bitcoin donation cap is more analogous to the $100 limit on cash donations that individual donors have, according to Peter Van Valkenburgh, a lawyer and the director of research at Coin Center, a D.C.-based advocacy center for bitcoin and bitcoin-based technology.

The commission also put limits on what campaigns can do with bitcoin donations—they can’t spend them in bitcoin form. Instead, they’re required to first flip them for dollars. (Campaigns can, however, hold them as a financial asset and wait to exchange them for currency until the time they find most advantageous to do so.)

That could mean some flexibility. Since the FEC handed down its opinion, the value of one bitcoin has fluctuated wildly, from $668.79 to a low of $177.28, and it currently sits around $360, according to a tracker maintained by CoinDesk.

Despite the limits, bitcoin advocates see a silver lining. The FEC didn’t ban the currency entirely, and they’re hoping that offers them an avenue to expand the currency’s use.

“It’s not so much the commission has said there’s an affirmative problem with receiving bitcoin greater than $100,” said Brian Svoboda, a campaign-finance lawyer and partner at Perkins Coie. “It’s simply that they have not yet given the express legal authority that would send a clear signal that you could. I think that’s one of the things the commission ought to revisit and look at.”

Rep. Jared Polis of Colorado was one of the most prominent politicians to accept bitcoins, but he brought in just under $2,000 in the crypto-currency for both his 2014 reelection and early 2016 fundraising, according to his office. As a point of comparison, his total 2014 fundraising haul was about $1.2 million, showing that the currency may still have a long way to go. Paul’s campaign declined to release specific bitcoin fundraising numbers, but it is a very small amount, according to Steve Grubbs, the manager of Paul’s campaign store.

“This is the cycle where bitcoin is introduced to the contribution world,” said Grubbs. “Next cycle or the following cycle, it will likely become a more significant player in campaign fundraising. … Digital currencies are coming, and they’re going to be a big deal in the future of the United States. They’re not here yet, but when they arrive, campaigns will be significantly funded through digital currency.”

It Is Now Possible to Buy Tulips With Bitcoin

You can now exchange between two of the most famously volatile currencies.

The floral startup BloomNation is now accepting Bitcoin for its products. That means it’s now possible to buy floral arrangements with bitcoin—and, more importantly, to convert bitcoins into tulips, exchanging one famously volatile currency for another.

BloomNation began to accept the digital currency last week. It’s partnered with Coinbase, a San Francisco-based startup that’s handling the formal conversion process.

“We’re setting [the price of] everything in U.S. dollars,” BloomNation CEO Farbod Shoraka told me on the phone on Wednesday. It’s Coinbase that converts the U.S. dollar price to bitcoin, accepts bitcoin from the customer, and pays the florist in dollars.

I first wrote about the Bitcoin-Tulip exchange rate in December. In the Netherlands in the 1630s, speculators pushed the price of a single tulip bulb to more than ten times a craftsman’s annual salary. Tulip prices surged, then collapsed, by a factor of 20 in two weeks. The incident—called “tulip mania”—constitutes one of the modern world’s first documented speculation bubbles.

“This is worse than the tulip mania,” a former Dutch central banker said of bitcoin in December. “At least then you got a tulip [at the end], now you get nothing.”

Perhaps my own estimate was off. BloomNation says the exchange rate is far lower: According to the company, a single bitcoin can purchase but 220 tulips. You could also purchase 130 roses with that solitary ’coin.

Even if the exchange rate has fallen, it doesn’t seem to have taken the bloom off of bitcoin buyers. The average Bitcoin customer spends $150 on the site—far more, Shoraka told me, than the average credit card-using customer. A spokeswoman for the company said there have been hundreds of Bitcoin orders since the feature rolled out 11 days ago.

BloomNation is a competitor to 1-800-Flowers and Flowers Online. It connects customers to local florists. Instead of presenting users with the “cookie-cutter” arrangements that those sites make available, each floral designer can specify the bouquets they’re best at creating, and customers can order directly from the florists themselves.

Both Coinbase and BloomNation have received funding from the massive venture firm Andreessen Horowitz. Shoraka said Coinbase made Bitcoin payments possible in the first place.

“Bitcoin in general is more volatile than any other currency at this time,” Shoraka told me. Only with Coinbase could they move money in and out of the currency.

The BloomNation staff isn’t unused to volatility, though. According to an October 2013 TechCrunch article, it was initially funded with the winnings of a Los Angeles poker tournament.

FEC Rules PACs Can Accept Bitcoin Donations

The Federal Election Commission voted today 6-0 to allow political committees to accept limited Bitcoin donations. "Limited" means $100 worth of BTC or less.

The Federal Election Commission voted today 6 to 0 to allow political committees to accept limited Bitcoin donations. "Limited" means $100 worth of BTC or less. Still, this is a nice win for the Bitcoin community. Avid Bitcoiners like to support Bitcoin-friendly politicians with Bitcoins.

Back in November, the FEC deadlocked on this issue. Vice Chairman Lee Goodman said at the time, "I think we’ve been a little bit distracted by the novelty of Bitcoins. Although they represent a unique and new type of asset, they are an asset." Now, Goodman tells Dave Levinthal at the Center for Public Integrity that the FEC "has to keep up with technology."

According to Levinthal, who was at the FEC meeting today, a PAC that accepts BTC must "either sell its Bitcoins or disburse Bitcoins to purchase goods and services." Bitcoin donations will be considered in-kind donations, like stock or property. Most importantly, if the value of Bitcoin jumps after a donation is accepted, PACs can use those Bitcoins at market value.

This ruling probably won't have much of an effect on the midterms — Bitcoin use is still pretty limited. But one Politico is looking at the big picture for 2016.

Bitcoin Learns to Love the Very Thing It Was Built to Destroy—Rules

The inevitable fall of Mt. Gox and the even-more-inevitable rise of regulation

Bitcoin was designed to be unregulated by any government or central authority. But according to some of the cryptocurrency’s biggest supporters, the crash of the prominent bitcoin exchange Mt. Gox is the latest sign that bitcoin needs to adopt some sort of oversight if it is going to survive and thrive.

“I think regulation is a must at this point,” said Todd Williams, a stockbroker and Bitcoin investor since 2010. “Maybe not for all businesses working in bitcoin, but for any company or organization that is holding a large amount of other people’s money.”

The Tokyo-based Mt. Gox, which may have lost some $340 million in Bitcoins to hackers, received a subpoena overnight from New York prosecutors, a sign that a US federal investigation is underway. Japanese authorities are also investigating.

A growing number of participants believe the nascent bitcoin industry needs to accept the fact that expanding beyond the fringe comes with some some trappings of accountability.

Compliance, Transparency, and Insurance

“Nowadays, all bitcoin exchanges are very seriously considering and implementing compliance requirements based on their local jurisdiction’s rules,” said Eddy Travia, chief start-up officer of Seedcoin, a bitcoin company incubator. His firm’s investments include MexBT, a Mexican Bitcoin exchange, where “a large part of the resources…are invested into compliance-related activities,” he said, mostly based on self-imposed rules that are “a kind of self-regulation in anticipation of any potential concerns from the local authorities.”

Bitcoin mining firm DigiMex has showed investors “where funds were invested and spent, at what rate we did the exchange from bitcoin to USD to pay our expenses, all our bank accounts, an inventory of all our mining equipment,” said founder David Shin.

Falcon Global Capital, a bitcoin investment fund launching in March, has promised to store Bitcoins in a digital vault that is “fully-insured by one of the top insurance providers in the world,” though it doesn’t name the firm. It also says it will comply with Securities and Exchange Regulation rules—not for bitcoin, because there aren’t any, but for investment funds.

Mt. Gox was “incompetent, perhaps criminally so,” said Jiten Melwani, CEO of Bitgame Labs, which is developing a payment platform. But just as bitcoin’s underlying algorithms guarantee its security, he said, ”exchanges will be required to mathematically prove their assets and protocols.”

Travia and others say exchanges and companies that exchange bitcoin and traditional money should be required to adhere to publicly-posted rules to protect their users.”There will be a consolidation of efforts to standardize security practices and earn back trust in the industry,” Melwani predicted.

The industry needs “a lot more transparency from the bigger, more liquid exchanges,” added Shin. Many of these exchanges hold Bitcoin and traditional currency floats to manage settlement of buyers and sellers, he said, and “these floats need to be regularly audited and reported.”

Arthur Hayes, a former Citigroup banker who is building BitMex, a bitcoin derivatives exchange, argued that bitcoin first needs to be recognized as a currency, and then transactions can be enforced under existing laws. “Clear and equitable contract law is one of the bedrocks of any financial system,” he said. “Knowing that malicious actions toward your customers could result in criminal and civil charges would change some of the outlaw behavior that currently exists.”

The Slow March of Regulation and Legalization

A bill has been submitted to the California State Senate that would make bitcoin a legal currency. New York state’s financial watchdog has promised to introduce a plan to regulate bitcoin by the end of the year. And Singapore, alone among major economies, has already figured out a way to tax it.

The Irish Bitcoin Association said in January it was asking the local Central Bank to recognize and oversee the currency, to make it safer for consumers. But that’s not to say that there is a unanimous cry from bitcoin advocates to invite in the world’s governments—far from it.