• Federal Reserve, central bankers, online criminals undermining Bitcoins

By Keith Johnson

Do alternative currencies stand a chance of surviving in a world monopolized by powerful central banks, regulated by control-freak governments and gamed by techno-savvy criminals?

Earlier this month, several online services dealing in the popular digital money known as bitcoins were subjected to coordinated cyber-attacks that caused them to either experience temporary interruptions or shut down altogether.

Instawallet, a website used to store the popular alternative currency, recently announced that it was forced offline and will remain down indefinitely until its administrators can protect its database.

Although Instawallet has declined to divulge full details of the attack, security experts are claiming that unidentified hackers stole an undisclosed number of bitcoins after they infiltrated the service and obtained personal information on account holders.







“Users trusted Instawallet like a bank to hold their ‘gold’—their bitcoins—and their safe was cracked,” says respected computer security expert Mark Hopkins.

Mt. Gox, an online currency exchange that handles the majority of bitcoin trades, also came under cyber attack. A recent Computerworld article quoted a Mt. Gox representative as saying that unprecedented demand for bitcoins has “caused malicious opportunists to try and game the system” by waiting until bitcoin prices reach a high, then selling them off while launching a cyber-attack to destabilize the exchange.

According to the article, “They hope bitcoin holders will panic and sell, causing the price to drop. The attackers can then buy the cheaper bitcoins and try the attack again when the price floats higher.”

And that may have been what happened. On April 10, bitcoins lost half its value in one day.

This is not the first time the bitcoin community has fallen victim to criminality. “The six biggest hacking, theft and fraud incidents involving bitcoin exchanges, wallets or investment vehicles have resulted in a total 1.2 million coins being stolen,” wrote Jeremy Liew for the magazine American Banker. “This means that more than 10% of all bitcoin in circulation has been stolen, and this does not include many smaller thefts and losses from individual wallets.”

The recent banking crisis in Cyprus, coupled with waning confidence in the United States dollar and euro, have sparked considerable interest in alternative currencies. Prior to the attacks, bitcoins surged in value from $90 to $142 over the course of just a few days.

“Its total value in circulation was $1.4B as of [April 5],” Bloomberg recently reported. “That’s equivalent to the currency stock of a small nation—somewhere between Iceland and Uruguay—and just one thousandth of the total value of U.S. dollars in circulation.”

Today, there are roughly 11 million bitcoins in circulation. After the attacks, the market performed sluggishly but has since recovered with a vengeance. As of this writing, bitcoins are trading for $160, up quite a bit from just 30 days ago.

Bitcoin was launched in 2009 by an anonymous computer software designer who wanted to create a fiat currency that can be traded over the Internet without going through a central bank or financial institution. Bitcoins are produced using complex algorithms generated by users who run a “mining” application on their computer. The software was designed in a way that makes it difficult to create new coins and has a built-in cap that guarantees there will never be more than 21M in circulation.

Bitcoin likens this limited supply to the scarcity of precious metals. “Think of the analogy with gold,” says lead technician Gavin Andersen. “There is only a limited amount of gold atoms in the world, and its rarity is what makes it a commodity that is useful to exchange.”

Some consider that analogy to be a bit of a stretch. Economist Nikolay Gertchev of the pro-free market Ludwig von Mises Institute recently wrote: “Virtual monies, of which bitcoins seem to be the most perfected specimen up to date, do not allow acting individuals to manage the uncertainty of the future as well as material monies do. They could serve to intermediate exchanges among those who invest in the technology that creates them, stores them and transfers them. Nevertheless, they could never achieve that degree of universality and flexibility that material monies carry with them.”









“Success of bitcoin would mean the demise of central banks, Wall Street and the Washington insiders who trade on inside information and market manipulation,” wrote financial analyst Max Keiser on his website. “My thought is that as bitcoin and the exchanges become more prevalent we’ll see Wall Street and the central banks challenge the exchanges on intellectual property grounds. They will argue the technology for trading in virtual securities with a virtual currency is a patented technology owned by Wall Street and that virtual market making is violating this patent.”

It would appear that bitcoin is under attack from all fronts. In late March, The Wall Street Journal reported that the U.S. Treasury’s Financial Crimes Enforcement Network is set to apply “money-laundering rules to ‘virtual currencies’ amid growing concern that new forms of cash bought on the Internet are being used to fund illicit activities. The move means that firms that issue or exchange the increasingly popular online cash will now be regulated in a similar manner as traditional money-order providers such as Western Union.”

Any way you look at it, alternative currencies like bitcoin face an uphill battle and significant pressure if they come anywhere close to competing with the well-heeled and powerful establishment banking structure.