If you have followed the Bitcoin price lately, you might be wondering why it lost over a third of its value. Here’s what happened.
Bitstamp Proves Yet Again That Bitcoin Exchanges Are Not Secure
A group of hackers attacked one of the largest Bitcoin exchanges called Bitstamp on January 4th. Fortunate for Bitstamp users, the hackers only managed to get access to one part of the infrastructure that was in place.
Bitstamp reacted promptly by taking the entire exchange offline for a few days and moving the entire platform to a different locality and new hardware. But the damage was done. Hackers may have only gotten 5 million USD (3.4M Pounds), but this security breach triggered a massive sell-off. It was the final blow to a currency that was already experiencing immense selling pressures from huge online retailers like Overstock and even early movers like Microsoft. After dropping below the $250 mark, the price went as far down as $150, only to recover to approx. $200 at the current time.
Why This Won’t Kill Bitcoin, But Will Delay Digital Currency Adoption
While this may not kill Bitcoin (it was only one exchange after all) it has certainly caused a massive stir and a loss of confidence in the currency.
I was personally involved in the Bitcoin space last year and from what I’ve seen this will only make the currency stronger. Other exchanges will once again try to improve their security to avoid becoming the next big headline. Bitcoin adopters are mostly idealists and will stop at nothing to make this currency work, but this recent sell-off means a lot of startups may not come into fruition and it also means that the adoption rate will be slower.
Bitcoin As We Know It May Not Be Around In 10 Years
However, one also has to be rational and see the many complications of this particular currency. Bitcoin is incredibly slow. Other currencies such as XRP allow for almost instantaneously transfers and are backed by venture capital.
Bitcoin has the early-mover advantage and of course already has been implemented by many businesses, but that doesn’t necessarily mean it will be around in the future as we know it if the Bitcoin foundation does not address the many issues and even dare to do a hard-fork.
One of the advantages (for consumers) of a decentralized currency is that governments cannot effectively control it. Banks and heavy industries built the US and are effectively controlling all other industries. Believing that the banks would just sit there and allow a decentralized currency to take over is unrealistic. Banks are already working on own currencies or are investing in centralized currencies that are easier to control.
Startup Stripe is backing a currency called Stellar and Ripple Labs, the company behind XRP, is backed by Google Ventures, IDG Capital and Andreessen Horowitz. The Bitcoin foundation may have big pockets, but can’t possibly compete with that unless they are willing to make major changes to a currency already used by millions and a volume of up to 90 million on a busy day.
(Image: Bitstamp CEO Nejc Kodrič visiting Ripple Labs in SF, October 2014)
Other Currencies Flawed Too
Anyone investing in digital currencies has to be aware of the inherent risks. Exchanges are flawed and we will see more security breaches in the future. I have absolutely no sympathy for the hackers, but exchanges and gateways are an easy target for small groups of hackers and will be exploited as long as the developers are still building up their infrastructure.
Double spending is another issue that other currencies have to face. A centralized currency has even more risk factors. Bitcoin has the advantage that exchanges are becoming more secure day by day and will be impregnable before their competition can hope to say the same, but over a longer-term no one can really say what happens. It’s a fast-changing landscape that no one can predict.
Although, Bitcoin may not recover from this sell-off so quickly, prices above $300 and $400 eventually are a possibility should the price bounce back. Please note that this sell-off will affect competing currencies in a big way. A lot of early adopters are now looking into STR, a non-profit fork of XRP and many Bitcoin startups are now building up infrastructure for competing currencies.
Disclosure: I am long STR, XRP and may initiate a position in BTC within the next 72 hours