On June 8, 2011, the same day Ars Technica ran its first story about Bitcoin, the peer-to-peer digital currency's value jumped to an all-time high of $32. Bitcoins had been worth less than $1 just two months earlier, and that day proved to be the peak of the bubble. The value of a Bitcoin fell below $20 within a week, and by November it had fallen to $2.

But since it hit bottom late last year, the cryptocurrency has defied skeptics (including me) who predicted it would prove to be a passing fad. The currency regained some of its lost value, and the price has become much more stable in recent months. In the last three months, the value of a Bitcoin fluctuated in a narrow band from $4.50 to $5.50. As this is being written, the currency has just hit a three-month high of $5.60.

The one-year anniversary of the popping of the Bitcoin bubble is a good occasion to take stock of the currency's progress and explore where it might go in the coming year. This year's stable Bitcoin prices haven't made headlines the way last year's volatility did, but innovation and experimentation have continued below the radar.

Playing defense

Work on the flagship Bitcoin client has continued under the leadership of developer Gavin Andresen. He told us that shoring up the Bitcoin network's defenses has been a high priority for the development team. "People have found various ways to flood the network with bad transactions or data to knock nodes off the network," he said. "The last year has been spent trying to be more proactive about that type of thing so that it's much harder to attack the Bitcoin network."

Andresen said that most of the attacks focused on exploiting unanticipated edge cases. No changes have been required to the core Bitcoin protocol. That, he said, is "a good indication that the core concept is holding up. Nobody's found any theoretical reasons why it can't scale up and why it can't continue to process transactions and be secure."

Andresen also said his job has become more complex as the Bitcoin network has grown more diverse. "More and more people are running alternative implementations of Bitcoin that don't require you to be connected as a full-fledged host," he said. Also, "several people are working on complete re-implementations of the Bitcoin system."

Despite the new challenges this creates, Andresen sees it as "really healthy from a network stability and security standpoint. If we have diverse implementation, then a bug in one client doesn't mean the entire network blows up."

Mobile Bitcoin apps for Android are now available. Unfortunately, he said, "iOS has been a struggle just because Apple for whatever reason has decided they don't like Bitcoin handling on their platform."

A major focus in the coming months will be enabling multi-device authentication. Bitcoin-stealing malware is a common problem. Future Bitcoin clients will support multisignature transactions, in which a user's private key is split up among multiple devices. With this feature enabled, compromising any single device won't allow an attacker to spend the Bitcoins in a user's wallet.

Girls Gone Bitcoin

A wide variety of new Bitcoin services have popped up over the last year. Andresen pointed to BitInstant, a startup firm that offers fast, hassle-free transfers of funds between dollars and Bitcoins. It raised seed funding in December.

Other uses for Bitcoins have been less wholesome. A year ago, Sen. Chuck Schumer (D-NY) denounced Bitcoin for its use by Silk Road, a website that offers anonymous purchase of illicit drugs.

More recently, a major source of Bitcoin transactions has been Satoshi Dice, a virtual Bitcoin casino. Players place bets by transmitting Bitcoins to fixed Bitcoin addresses corresponding to various "games." For example, if you send Bitcoins to the address 1dice2zdoxQHpGRNaAWiqbK82FQhr4fb5, they promise you a 0.0977 percent chance that you'll get 1,003 times as many Bitcoins back.

Then there's "Girls Gone Bitcoin." In this reddit subforum (reddit shares a parent company with Ars Technica), women post naked pictures of themselves along with Bitcoin addresses, in hopes of receiving tips. (We're not going to link to it, but we trust interested readers know how to use Google.) Andresen calls this "the high-tech equivalent of putting a dollar in a G-string."

These developments don't surprise Jerry Brito, a researcher at the libertarian Mercatus Center at George Mason University. For most uses, he said, dollars (or other countries' official currencies) are simply more convenient, so it's hard for Bitcoin to gain traction. But he argued that Bitcoin's relative anonymity and the lack of intermediaries gives it a crucial advantage for "illicit stuff: drugs, gambling, pornography, getting money out of countries where there are restrictions on moving funds. That's where it'll establish itself first."

"Regulators should be hands-off"

Of course, there are significant unanswered questions about the legality of Bitcoin itself. One Bitcoin exchange closed its doors in February, citing regulatory problems as a major factor in its failure. An FBI report has raised concerns about the potential applications of Bitcoin for money laundering.

But while Bitcoin may be subject to legal restrictions in some jurisdictions, Andresen and Brito agree that there's unlikely to be anything the world's governments could do to shut down the Bitcoin system altogether.

"It's not clear how you'd write that regulation without banning a lot of other things," Andresen said. For example, he said, regulations that tried to ban "transmitting numbers that represent some value over the Internet" could hit startups that offer gift card trading or mobile check cashing. "It's a real challenge for regulators who are working with laws that were written for atoms, not bits," he said.

Brito agreed. "It would be as difficult to take down the Bitcoin network as it would be to take down the BitTorrent network as a protocol," Brito argued.

And he thinks that's a good thing. "Regulators should be hands-off," Brito told us. "Bitcoin has potential to be a very useful tool. Let's not kill it while it's still in the cradle."

Disclosures: The author owns some Bitcoins. Also, he is contributing a chapter to a forthcoming book on copyright edited by Jerry Brito.

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