It now appears that the heist of close to $500 million in bitcoins that prompted the Mt. Gox exchange to file for bankruptcy on Friday may not have been the result of a single event but a methodical hack of the Tokyo-based exchange.
The world’s largest Bitcoin market seems to have been hacked and slowly bled of funds over a period of months, according to BusinessWeek. The code was most likely altered to create duplicate transactions, one paid to the intended recipient and the other paid to, well, who knows?
Perhaps the most surprising thing about the meltdown is that nobody seems surprised that it happened. While it’s still unclear whether the breach was the result of a bug in the Bitcoin protocol, inadequate protections at Mt. Gox, or both, what is apparent is that something like this was bound to happen sooner or later.
In an interview last summer, Bitcoin entrepreneur Erik Voorhees said, “Bitcoin is absolutely the Wild West of finance … It represents a whole legion of adventurers and entrepreneurs, of risk takers, inventors, and problem solvers. It is the frontier. Huge amounts of wealth will be created and destroyed as this new landscape is mapped out.”
If that isn’t prophetic enough for you, when it comes to the security – or lack thereof – of digital wallet technology, including bitcoins, I wrote this just a couple of week ago:
“If the recent Target security breach taught us anything, it’s that any card, any bank, any retail chain, any anything no matter how big or small, can and will be hacked. The good news is your liability is limited unless you routinely use debit cards – which you shouldn’t.”
And therein lies the rub. The one thing all the security breaches involving bank and credit card information have in common is that consumers are generally protected. With rare exception, the system keeps individuals from losing their money.
That, as I wrote, is decidedly not the case with bitcoins, “Unless you’re a drug dealer, an accomplished currency speculator, or paranoid that the global monetary system will collapse overnight, you should probably steer clear of bitcoins. It’s a long story; you’ll just have to trust me on this one.”
You see, one of the reasons why Bitcoin is such a hit with the illicit crowd is that the digital currency is more or less unregulated in most countries and transactions are hard to track. That’s why the 750,000 bitcoins lost in the Mt. Gox hack will likely never be recovered. In other words, real people are probably really out most of that money.
While Bitcoin’s enthusiastic proponents do their best to isolate the Mt. Gox meltdown and keep it from tainting the entire movement – and make no mistake, that’s very much what Bitcoin is, a movement – the loss of half a billion dollars, or roughly 7% of the currency’s total market is, without a doubt, a loud and undeniable wakeup call.
Just as the Bitcoin faithful view the demise of Mt. Gox as inevitable, so is the crossroads where they now find themselves.
The real question is this: Does Bitcoin continue to lurk in the shadowy fringes – an exhilarating and terrifying rollercoaster-like adventure for risk-takers, speculators, gamblers, and drug dealers – or does it allow itself to settle down and become regulated, safe-guarded, and who knows, maybe someday, a mainstream currency?
In any case, if you ever had any doubts about whether Bitcoin is ready for prime time, now you know. It’s not. End of story … at least for now.
Steve Tobak is a management consultant, former senior executive, columnist and author of the upcoming book, “Real Leaders Don’t Follow." Tobak runs Silicon Valley-based Invisor Consulting where he advises executives and business leaders on strategic matters. Contact Tobak.