[The following post is by TDV Chief Editor, Jeff Berwick]
In the early morning on January 5th, one of the largest bitcoin exchanges, Bitstamp, stated, "We have reason to believe that one of Bitstamp’s operational wallets was compromised on January 4th, 2015. As a security precaution against compromises Bitstamp only maintains a small fraction of customer bitcoins in online systems. Bitstamp maintains more than enough offline reserves to cover the compromised bitcoins."
This made headlines, however, because Bitstamp is important. Just this summer Forbes called Bitstamp "the backbone" of bitcoin.
The total amount claimed to be lost – and that can actually be verified here at the exact bitcoin address where the coins were transferred – is 18,871.69566651 bitcoins… worth approximately $5.2 million fiat dollars at the time of this writing with bitcoin trading near $280 USD.
This, of course, had bitcoin opponents screeching in laughter. Especially after the most egregious bitcoin hack (or inside job which Bitstamp may be as well), Mt. Gox said it lost 850,000 bitcoins on February 10th, 2014.
Some are decrying it as the ultimate proof that bitcoin is a "scam". But, thus far, this won't prove a massive deal for bitcoin itself and is certainly no proof whatsoever that bitcoin is a scam. Once again, bitcoin itself wasn't hacked but an exchange with lax controls apparently was… at least from the information we have.
If the total loss was around $5 million then this should be manageable by Bitstamp. Bitstamp raised around $10 million in venture capital funding in March, 2014, and some insiders say that their trading commission revenue is around $10 millon per year… meaning that a $5 million loss is far from a death knell for the exchange and should be painful, but manageable. However, the numbers could be much different, thus changing the situation entirely.
In other words, the amount of bitcoin said to be lost by Bitstamp is 2% of what was said to be lost by Mt. Gox and Bitstamp is far better capitalized to withstand this breach.
We were contacted by a TDV source, who had just deposited 2% of the total amount lost by Bitstamp and could see his funds almost instantaneously whisked off this to bitcoin account soon after, who told us that he is not overly concerned about his funds, stating, "It is somewhat inconvenient to be cut off, but I see no grounds to believe that [Bitstamp] is insolvent. And besides, I wonder if the thief will have difficulties actually using the stolen money."
Which brings us to the next point in this process of the ever-evolving bitcoin currency.
TAINTED COINS
All eyes will be on Bitstamp to see if they can prove that the limit of bitcoins lost were approximately 18,000 and whether they will repurchase those coins on the market from their funds to refund to their clients. There is definitely some evidence of a leak of this information prior to January 4th which spiked the bitcoin price from $320 to a low of near $260.
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But as I write, the price is currently near $285 which has some wondering if the price rise is due to a purchase on alternative markets of BTC by Bitstamp.
In any case, the issue of "tainted coins" has come up during this process. The bitcoin community has been through numerous thefts and has begun to install fail-safes wherein certain coins can be denoted as "tainted". Who and how those coins become denoted as tainted is still being worked out by the market… but whoever stole these coins from Bitstamp will have a very hard time selling or exchanging their coins without a plethora of hackers and private investigators searching out every detail of the transaction.
In this sense, bitcoin is a true proving ground for the free market… devoid of government interference, laws and violence.
To clarify, if you can get the private key to a bitcoin account and transfer them to another private account there is ABSOLUTELY nothing that anyone can do about it in terms of negating that transaction. Here-in lies the beauty and some of the negatives of bitcoin.
All it takes is for one person at an exchange like Bitstamp to somehow get the private keys to a wallet with a large amount of bitcoin for them to instantly transfer it to another wallet with no technical recourse available.
In response, the market has begun to mark certain bitcoins as "tainted coins". And in one very nice example, a hacker who found a hole to steal 267 bitcoins returned them to their rightful owners with a warning that they need to be more careful.
This is the current state of bitcoin. It is a new, cutting edge technology with all manner of free-market issues that need to be resolved by the market.
This, also, is one of the reasons we love bitcoin so much here at The Dollar Vigilante. It is a true, free market experiment in money. We have never stated that it is as secure as gold.
These are the infant stages of a world-changing currency based entirely on the free market. There are no government police to try to chase down thieves. There is no government backed insurance if you lose your bitcoins. But what we are starting to slowly see is how the market is getting better at protecting itself via theft, how the market is pointing out flaws and fixing them and, soon we think, private policing and insurance institutions to help guard against problems.
It is simply fascinating.
So, what does the Bitstamp hack/theft mean for bitcoin? If it is limited to the 18.8 thousand coins said to be stolen… very little. If Bitstamp can cover that loss and show the market that they have corrected the hole that enabled that they should recover. The bitcoins that have been stolen are now mostly seen across the bitcoin network as tainted and will be tracked by thousands of bitcoin enthusiasts and private investigators if/when they are moved.
With that said, this is far from over with Bitstamp, as their trust has been lost to a certain degree and they will now have to prove themselves to the bitcoin community. Mt. Gox's decline started with many seemingly small losses which grew worse over time. Naturally, the Bitstamp situation has a lot of people on edge. Are we seeing the same? Only time will tell.
What's for sure, for now, is that it is very hard to develop secure systems with bitcoin. These losses will continue on an ongoing basis until the market catches up and creates securer systems.
Welcome to the free market. It's wild, crazy and full of ups and downs. And, we have a large part of the global bitcoin and cryptocurrency coming to Anarchapulco (click here to find out more) from February 27th to March 1st to discuss all these implications and how this new technology could and will change the world.
It's exciting, intriguing and rife with risks and rewards. For those who "hate" bitcoin we only ask, what is it you hate about the free market attempting to create a much better form of currency transaction devoid of fasco-communist overlords?
Comments or questions on BitStamp? Let us know in the comments.
