Bitcoin needs to prove that it’s above thieves, expert hackers and even the foibles of careless people before it can be considered a real currency.
With Bitcoin experiencing rises in value and stories of miners winning big by holding on to their coins, questions about Bitcoin’s security are also popping. Bitcoin (BTC) has no official regulatory body, never mind a regulatory body devoted to security. What it does have is a number of forum-based vigilantes who dig up the scammers who’d try to fleece you out of that sweet, sweet BTC.
Bitcoin is a decentralised, open-source currency. Great for libertarians, for whom words like “decentralisation” and “bit” are catnip. Not so good in that no one seems able or else organised enough to create a centralised regulating body. The lack of which has given Bitcoin a poor image in the mind of many governments, including power economies like China and Korea.
The value of Bitcoin has shot up recently, after a brief dip caused by the China announcement, and currently stands at about $1000 per Bitcoin, or £610. That’s a quadruple increase in market price in USD over a couple of weeks. The number of transactions have also increased dramatically.
Some people aren’t so impressed with the numbers. During the LeWeb conference in Paris this week, PayPal president David Marcus – who took up the role during the highest point of media interest in Bitcoin in 2012 – didn’t speak highly of the coinage. He said its notorious “volatility” as a currency needed to go down before the company would take a look at it. Interestingly, he also said he wanted to see an improved regulatory framework, apparently nervous that Bitcoin currently lay in a “Wild West” populated by programmers and wayward IT technicians.
The increase in value of Bitcoin means that those who hoarded the currency during the initial rush, or bought BTCs with real money during one of its waning periods, are earning a small fortune. And where there’s fortune, there are thieves.
Robbing a man of his Bitcoins is not an easy avocation. Bitcoins began because they are cryptic: a Bitcoin is covered in ciphers to deter thieves. In fact, that’s one of the main reasons a currency like this could thrive.
Better yet: Bitcoins aren’t as anonymous as a thief might hope. Every transaction, while it does not contain a first and last name like a credit card or Paypal payment, does get stored on what’s called a block chain. The chain remembers every transaction a coin has undergone, as well as how many Bitcoins were held in each new wallet. This can give security forces a lead on the robber.
This means that the Bitcoin phishing scammers and wallet stealers can only go so far; even if they’re successful in breaking into a transaction and robbing a poor miner, they’ve left a trail of block chain breadcrumbs to lead police officers to them.
But, before you jump on the bandwagon, there are, of course, “methods” that don’t involve cracking ciphers and breaking down firewalls. That Bitcoin appears to have secure transfer really should be a given before it is a legitimate currency, not a reason for celebration. If we’re looking at a digital currency which, actually, only differs from typical currency in its violent price swings, we might as well just play the stockmarket. Or worse: appreciate that it is just a novelty for the already overburdened brogrammers. Bitcoin needs to prove it’s above expert hackers and even the foibles of careless people to be worthwhile.
Just-Dice and the Whale
Just-Dice.com is a betting site for Bitcoins. It describes itself as a “provably fair gaming site”, which is an admission to having come under a lot of controversy. This admission became extraordinarily relevant when, in September this year, a person by the name of Nakowa won big on the site. After a somewhat lousy beginning, Nakowa toppled records by winning almost 11,000 Bitcoins ($1.3 million, almost £800,000).
The above video shows Just-Dice player Nakowa on his winning streak.
It seemed like an almost “supernatural” (according to one onlooker) turn of fortune. He began on a massive losing streak, which proved a boon for Just-Dice. But suddenly he started winning – and over the next few days, that streak didn’t stop. Eventually he pushed Just-Dice $2,000 into debt from his good gambling.
It wasn’t long before alarm bells started ringing. It’s worth noting right now that nothing about Nakowa has proved he won by cheating. But the remarkable and consistent luck he had suggests foul play.
The “provably” fair part of Just-Dice’s lead-in is the transparency of its gambling algorithms. But it only proves that the site can’t cheat gamblers out of Bitcoins: it can still cheat the other group of Just-Dice players, the investors. Nakowa could’ve been a disgruntled employee or (more cynically) an employee with the specific task of bleeding clients dry.
Alternatively, Nakowa himself claimed to have found patterns in the win/lose sequences during gambling and exploited them. The owner – the allegedly incompetent “Dooglus”, who accidentally misappropriated $120,000 in Bitcoins – says this is untrue. But Nakowa’s been back, and his winning streak continued.
A Bitcoin is covered in ciphers to deter thieves. In fact, that’s one of the main reasons a currency like this could thrive.
That is, however, until it didn’t. Nakowa posted on the Bitcointalk forums that “I was beaten”, and that he’d lost 5,000 Bitcoins in one day. Which seems a little strange, given his ongoing winning streak. And especially so given his following disappearance from JD. Finally, he describes in the same post altercations between him and the owner “Doog”, who was furious with the website’s losses.
There are two main lessons this story gives us. Firstly, this could only be sorted out between the two men, as there exists no rules for this sort of thing, and no one to enforce them if there were.
Secondly, there’s a lot of confusion here. As Bitcoin Investment Trust general manager David Kintisky said: “You have to figure out how to buy it, then you have to figure out how to hold it. Explain it to your compliance guys how it all works, and then find a way to report it on your taxes.” In sum, there’s a lot of balls in the air. It isn’t as simple as the transaction alone.
Kintisky’s point also lends itself to another confusion with Bitcoins – third-party legitimacy. Companies like JD spring up all the time, and there are dozens of Bitcoin gambling sites in operation. These companies rise and fall according to the gossip of Bitcoin users, who can sometimes be too trusting of the currency – believing it to be the revolution it isn’t.
In what has since been called the “BDT fiasco”, the same sort of optimism ended up taking hundreds of thousands of pounds of Bitcoins from optimistic investors. BDT stands for “Bitdaytrade”, a website for leveraged speculation on the fluctuations in BTC market price. It came along after its predecessor, Bitcoinica, had been hacked: 43,000 Bitcoins were stolen (which would now be worth $43 million).
A field day for the scammers
BDT was started by Alberto Armandi. Little is known about him, although since the fiasco it has become apparent this was not his first scam. The ploy was simple: he asked people to buy shares in his company using BTC. He promised to use the interest from that money to eventually buy back the shares at 120% of the original cost. The interest was meant to come in at 156% APR: everyone would be rich.
It was too good to be true. There were some hacks – later revealed to be staged – and Armandi disappeared. What followed was an awkward silence online as investors realised they had been scammed. His PR guy, Medi, took the fall, but in now way could make up the more than 10,000 BTCs that had been stolen.
But the saving grace of Armandi’s scam was that he, as a scammer, was horribly ineffective. First of all: everyone knew his name. Which meant that a Google search could bring up his LinkedIn and Twitter profiles. Finding this guy and slapping a big “Fraud” label on him was easy. Alberto was forced to buy back as many bonds as he was able to with the money he had remaining or face prison. It is unknown to what extent he had to go to do that: or whether everyone received their money in the end.
There’s more than a few wrinkles for Bitcoin to resolve in the future. None of these incidents – the big ones and then the peppering of little events that occurred within them – would have been quite as damaging if there had been any external body to step in. Luckily, and surprisingly, Armandi was breaching the law in misleading people into giving him currency which is only just five years old. And it looks as though Nakowa had to give back some of his money to prevent a full-blown investigation. Both parties, it seems, have made away with hundreds of thousands of dollars in Bitcoin.
Bitcoin has got a way to go until it’s a safe trading medium. Until then: hide your Bitcoins, hide your data files, and hide your hard-drives too, because they are robbing everybody.