The Bitcoin Collapse: Can Hackers Save Their Favorite Currency?

$8.75 million of Bitcoin has gone missing after a major breach

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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.

This article is from the archive of our partner The Wire.