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Tuesday, February 25, 2014

The Risks of Bitcoin

Bitcoin, the virtual currency used by traders, speculators and those wishing to duck under the watchful gaze of the police and financial authorities, has suffered a few setbacks recently.

Aside from Bitcoins falling in value, not great news for those who speculated that it was an easy way to make money, a major Bitcoin exchange platform (Mtgox.com) has gone offline this morning.

Seemingly the exchange has been hit by technical issues, and recently (7 February) halted all customer withdrawals of the digital currency after it spotted what it called "unusual activity". MtGox said that it had found a loophole that thieves could use to fool the transaction process into sending double the correct number of Bitcoins.

To add to MtGox's woes, six other major Bitcoin exchanges (including Coinbase and BTC China) issued a joint statement distancing themselves from MtGox. Quoted by the BBC:
"This tragic violation of the trust of users of MtGox was the result of one company's actions and does not reflect the resilience or value of Bitcoin and the digital currency industry.

As with any new industry, there are certain bad actors that need to be weeded out, and that is what we are seeing today."
The suspension of the site has exacerbated the decline in value of Bitcoin, as a currency (virtual or tangible) is of no use to man nor beast if it cannot be exchanged for goods, services or other currencies.

MtGox claims that it will resume activities soon. However, wired.com claims that MtGox is "insolvent" and has lost 744,408 Bitcoins (worth about $350M).

As with all tangible currencies, if people lose faith in the currency or the institutions that manage/control the currency then that currency will lose value and people will not wish to hold it or use it.

Bitcoin is unregulated and uncontrolled, ie it is like the Wild West, that is part of its appeal. However, that lack of control and regulation is also its Achille's heel. Those who hold or use Bitcoins do so at their own peril, no central bank will ride to the rescue if people's Bitcoin savings are wiped out.

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