The virtual currency, Bitcoin, has hit a snag when two of the largest bitcoin traders stopped service yesterday after a hacking attack. Bitcoin is now battling backlash after the hack created doubt in the Bitcoin technology.
The problem was caused by a denial-of-service attack, which means that the website was immobilized by information requests flooding the network. This left customers of two major exchanges: Bitstamp, a Slovenia-based trader, and Blockchain, a UK-based trader unable to withdraw their funds. Many other exchanges have experienced delays in their transactions.
The hack targeted what is called transaction malleability, or the possibility of transaction messages being renamed. The problem is that the bug makes it possible for transactions to look like they did not go through, when they actually did. This leaves the potential for Bitcoins to be re-sent when the recipient has already received the proper amount of currency.
Bitcoin Foundation’s chief scientist, Gavin Andresen, said that the hack is due to both the exchanges software and the main Bitcoin software. He also said that the person behind the attack is not stealing anything, but is preventing some transaction confirmations. Andresen stressed the importance that no one’s Bitcoin wallets are being affected.
Prior to the hack on Feb. 7, 2014, Tokyo-based exchange Mt Gox stopped their customer’s Bitcoin withdrawals in order to address these transaction malleability issues. Mt Gox blamed their withdrawal freeze on the Bitcoin technology, while the Bitcoin Foundation refuted the claim, blaming the exchange’s own technical issues and lack of awareness of a publicized messaging risk. Following the Mt Gox freeze, the value of the Bitcoin has dropped a reported 16 percent.
Bitcoin is working swiftly to battle the backlash after the hack created doubt in their technology. Currently, both the Foundation and Bitcoin exchanges are working to remedy the situation. Andresen said that customers should “rest assured,” as they have the problem identified and are now working “collectively and collaboratively” to solve the issue.
According to Mt Gox, the value of the Bitcoin is at $545. If compared to the highs it hit from Nov. through Jan. of $1,000, this is a significant decrease and could be seen as a potential argument in defense of the report JP Morgan released yesterday by John Normand called “The Audacity of Bitcoin.”
The report comes to the conclusion that Bitcoin is not a durable investment because it is deficient in staying power and is not a fiat currency, a currency that has value because the government has declared it. Normand argued that Bitcoin needs a collective belief in its value because, like normal currency, it holds no intrinsic value. He believes that because of Bitcoin’s instability, it is not a viable investment. With Bitcoin being hit hard from the hacking attack and with criticism from some Bitcoin exchanges, this could be seen as an example of Normand’s argument for the instability of the virtual currency.
This is not the only hurdle that Bitcoin may have to face, as New York’s financial regulator is moving to regulate the movement of virtual currency in order to decrease the ability to launder money. New York will be the first state to adapt their current regulations to include virtual money.
Bitcoin is battling backlash in multiple forms following the recent hack that left doubt in the security of the technology. Bitcoin may have some new hurdles to face, but is also quite a new innovation. It remains to be seen whether it really has staying power.
By Rebecca Hofland