Tuesday’s collapse of pioneer Bitcoin exchange Mt.Gox has been widely covered by the international tech and general media. There’s no doubt quite a story behind its demise. The rumored theft of hundreds of millions of dollars in bitcoin will provide plenty of fodder for journalists and investigators. The pain of those who lost their bitcoin entrusted to Mt.Gox has to be severe.
This is not, however, an existential event for Bitcoin as some news outlets have claimed. A few observations:
Bitcoin is Healthy
The Mt.Gox closure has everything to do with how a particular business was operated and nothing to do with the Bitcoin protocol itself. The math-based process is still chugging along just fine. Don’t take my word for it. Look at the tiny downward blip that the Mt.Gox news (below) caused in the USD/BTC exchange rate. The participants in the Bitcoin ecosystem, presumably those that know it best, hardly noticed the Mt.Gox departure, despite its once dominant role.
A Bitcoin Business Transition is Underway
I’ve written about this before. We’re going through a phase change in the Bitcoin business ecosystem. The first generation of operators is leaving the field and a second generation of businesses, more focused on compliance, scale, and security, is moving in. Throughout history, the cycle of pioneers and free thinkers being replaced by more sophisticated business operators, regulated within tighter boundaries, is a constant. We’re just at that stage in Bitcoin business evolution.
Internet Security is Really Hard. But Doable
Every theft of bitcoin, every data breach affirms once again how hard it is to secure Internet transactions. Without a security-based set of design principles, a website or a service is vulnerable. But it can be done. The security track record of Amazon, PayPal, and Apple, to pick a few examples, is strong, proving it can be done.
Don’t Leave Security Up to the Cloud
Bitcoin is digital cash, not an account protected by zero liability guarantees and a vigilant set of network-based fraud detection tools. If you own bitcoin, protecting it is up to you. That requires a major shift in one’s security mindset. Data encryption, offline storage, and the use of multi-factor authentication when accessing cloud services are necessary.
As if we need more confirmation over the weakness of user IDs and passwords, read Bruce Schneier’s post on how to create a strong password. Right as it is, it’s too hard for most of us and worth the effort to protect precious assets. Like bitcoin. But his final comment says it all:
“One more piece of advice: if a site offers two-factor authentication, seriously consider using it. It’s almost certainly a security improvement.”
Bitcoin’s experimental phase is over. We’re at the end of the beginning. With so many banging on and relying upon the protocol for long enough, I’m convinced, as are many others, that Bitcoin is sound. There is a remarkable degree of resilience in the protocol and the confidence levels of those who invest in and transact with bitcoin. The Mt.Gox fiasco hasn’t shaken that confidence. Bitcoin is just getting started.
Join Scott, Erin, and me at our Bitcoin: Basics and Beyond workshop in Mountain View, CA on March 26. Learn how math-based currencies work and how you could apply them to what you do today or build for tomorrow’s markets.