Bitcoin’s New Problems: Death, Meltdowns, and Warren Buffett’s Disapproval

Mt. Gox is gone, but Bitcoin’s problems have just started, with a high-profile CEO suicide, two new security breaches, and Warren Buffett’s seal of disapproval for the virtual currency.

Mar 7, 2014 at 7:34AM

In a previous article, I stated that the collapse of Mt. Gox was only the tip of the iceberg in Bitcoin's troubles. Although several exchanges issued statements assuring their account holders that Mt. Gox was an isolated incident, the bad news keeps piling up for the virtual currency.

Ominous new developments...
On Feb. 28, 28-year old Autumn Radtke, the CEO of virtual currency exchange First Meta, was found dead in an apparent suicide in Singapore. First Meta trades various virtual currencies including Bitcoins, Second Life Lindens, and IMVU credits.

On March 2, Bitcoin exchange Flexicoin announced that hackers "attacked and robbed of all coins in the hot wallet (the account accessible by the Internet)," and that the site was closing its doors immediately, as it did not "have the resources, assets, or otherwise to come back from this loss."

Account holders who kept their Bitcoins in "cold storage" (not accessible by the Internet) could still withdraw their money, while other users were directed to the site's Terms of Service agreement, which clearly stated that the exchange was not "responsible for insuring any bitcoins stored in the Flexcoin system."

Largest Bitcoin Exchange Suspends Withdrawalssi


The following day, Warren Buffett slammed the virtual currency on CNBC, stating, "It's not a currency. I wouldn't be surprised if it wasn't around in the next 10 to 20 years."

Lastly, on March 4, digital currency exchange Poloniex, which trades Bitcoin and other virtual currencies, lost 12.3% of its Bitcoins in another attack. Poloniex owner Tristan D'Agosta tried to calm concerned users by explaining the details of the hack, but temporarily froze the exchange's accounts to avert a mass panic.

It's painfully obvious that Mt. Gox's demise has given hackers across the world the confidence to accelerate their attacks on these virtual currency exchanges.

Is the writing on the wall?
Despite these ominous warning signs, the price of Bitcoin has recovered to the mid $600s level, according to the latest prices on CoinDesk.

Bitcoin enthusiasts love to debate endlessly about computing power, mining, sustainability, supply, and demand, but the virtual currency's future will really be decided by two much bigger issues: trust and security.

Mt. Gox and Flexicoin have shown that they are not accountable for losses caused by hacks. Despite the joint promise issued by Coinbase, Kraken, BitStamp, Circle, and BTC China that "appropriate security safeguards" will be used, the harsh reality is that these exchanges might not stand a chance against legions of highly skilled hackers.

Major retailers, such as Target (NYSE:TGT) and Neiman Marcus, have fallen to these hackers, who stole millions of credit card accounts last Christmas. Major websites, such as Yahoo (NASDAQ:YHOO), Kickstarter, Facebook (NASDAQ:FB), and Adobe (NASDAQ:ADBE) have all been recently hacked as well. According to a Bloomberg Technology report, these hacks are originating from all over the world -- 41% of these attacks originated from China, 10% from the United States, and nearly 5% from Turkey.

In other words, trusting your hard-earned money with these exchanges, which are often much smaller than they appear, is risky business. In the past, it took meticulous planning and lots of manpower for bank robbers to pull off a single heist. These days, robbers can achieve much higher returns behind a veil of anonymity, with technology exponentially boosting their effectiveness.

The Catch-22 of Internet security
Considering that people are placing a lot of blind faith in the opaque "security safeguards" employed by virtual currency exchanges, the number of attacks on poorly protected exchanges will continue.

In the end, the only way to secure these exchanges will be to employ the people who are attacking their systems, similar to the way that the U.S. government and antivirus companies employed expert hackers to secure their defenses. Yet this will lead to a never-ending cycle of new attacks and new defensive measures, as seen in the daily or weekly updates that antivirus software suites require to remain effective.

Why Bitcoin must be regulated
Therefore, individual countries should decide how to regulate Bitcoin.

If Bitcoin is regulated in America, it could solve three key problems -- exchanges will be forced to comply to stricter digital security standards, accounts could possibly be insured to some degree, and shady accounts used for money laundering and illegal activities would be flushed out.

Bitcoin Accepted Here


Benjamin Lawsky, superintendent of New York's Department of Financial Services, recently revealed new details regarding his agency's plans to regulate virtual currency businesses within the state. The centerpiece of the plan is a "BitLicense," which can be issued to businesses that accept the new currencies and prevent their use for illegal purposes. If the proposed plan is approved, New York will be the first state in the U.S. to regulate virtual currencies.

While that may be a baby step in the right direction, true regulation of Bitcoin will have to happen on a global scale, since the currency is now used all over the world. It's likely that world leaders will discuss the regulation of Bitcoin and other virtual currencies at an upcoming G7 meeting.

The bottom line
The simple truth about Bitcoins is that no one really knows what they're worth. The price has already surged from around $40 a year ago to over $1,100 last December, then fallen back to the mid $600s. Supply and demand have become increasingly irrelevant, since the last Bitcoin (out of 21 million possible to mine) won't be mined until 2140.

Only three things really matter now -- trust, security, and regulation. Without these three things, widespread adoption of Bitcoin and other virtual currencies will be nearly impossible. Until these three goals can be reached, buying Bitcoin is akin to investing in a stock without an underlying company to support the price. No wonder the Oracle of Omaha disapproves.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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