Bitcoin is down but not out

Regular readers will know that I’ve had my doubts about Bitcoin. Recent events in the Bitcoin world, especially the failure of Mt. Gox, the biggest Bitcoin exchange, have caused further problems for the crypto currency. But I’m oddly cheered by these events and am beginning to think Bitcoin may actually have a chance of surviving as a currency.

Willy Sutton, who made his career robbing banks, once explained that he robbed them "because that’s where the money is". Well recent bad news in the world of Bitcoin follows a similar theme: yes there have been thefts, corruption, and a suicide, but all this is based not on Bitcoin’s failure but on its success. The wonder isn’t that Mt. Gox lost $460 million in Bitcoins but that it had $460 million in Bitcoins to lose.

These events are growing pains, nothing else, and the fact that Bitcoin values have staggered each time and then quickly recovered shows that the market also believes this to be true.

All the recent breaches (if they are breaches -- there’s some question now in the case of Mt. Gox) have been based on bad security at these sites. Mt.Gox was run by a Magic the Gathering site. Big money attracts sophisticated teams of hackers, which is why real banks hire sophisticated people to protect them. Dudes running Magic the Gathering sites aren’t that. They don’t have a chance. So look for more Bitcoin exchanges to fall until security standards rise enough to make such thefts less attractive.

Bitcoin itself has remained secure so far.  Owning your Bitcoin yourself (encrypted, on your own machine with backups) is still quite safe.  The issue is that if a machine with Bitcoins on it can be compromised, the Bitcoins can be sent away anonymously.  They are ridiculously easy to fence.

The bottom line is there appears to be a real niche for pseudonymous currency, even if mainly for the subversive world.  Also, it opens new doors for electronic payments.

Famed economist Nouriel Roubini -- Dr. Doom from New York University -- claims Bitcoin is a Ponzi scheme which makes me like the currency more and more. It makes sense he’d see it that way but then the Argentinian peso feels pretty Ponzilike today, too. Only time will tell but if the value endures then it’s not a scheme. It’s weird, but not a scheme.

So if Bitcoin gets killed it will probably be because of something that replaces it.