EDITORIAL: Bitcoin works out fine until a smart hacker comes along

FresnoMarch 5, 2014 

Follow the money," the Watergate informant Deep Throat supposedly advised Washington Post reporter Bob Woodward. Back in the 1970s, they were following cash and checks. Today, it's a bit harder to track because of Bitcoin, the virtual currency favored by libertarians and people who don't want anyone to follow their money.

Bitcoin is a kind of monetary commodities market. The value of a Bitcoin unit can rise and fall depending on demand. The price can swing wildly between $1 per Bitcoin to more than $1,200. The current rate is about $848.

Some Bitcoin aficionados, however, aren't operating within the law. For example, Silk Road, the recently busted Internet drug marketplace, used Bitcoin enthusiastically. Other, more reliable businesses, such as Overstock.com, accept Bitcoin. But recent events should cause them to reconsider.

The news that Mt. Gox, the Japanese virtual currency exchange, had lost 850,000 Bitcoins, worth $480 million, through hacking, is extremely troubling. This led Mt. Gox's chief executive officer Mark Karpeles to seek a non-libertarian solution: bankruptcy.

Last Sunday, the Canadian virtual currency outfit Flexcoin announced that it, too, had lost $600,000 through hacking.

Bitcoin originated on the fantasy gaming website, "Magic: The Gathering Online Exchange," which is how the acronym Mt. Gox came about. Intended as a way to exchange fantasy cards, Bitcoin morphed into its own fantasy game, except there were real winners and losers who will not see their $480 million again.

The fantasy of a completely free market works great until it doesn't. The notion of intrusive government is truly dreadful until one needs to hide from one's creditors. Karpeles did say he was "very sorry" to the people who lost all that money.

Nor is a Bitcoin a nice, boring Federal Reserve note backed by the full faith and credit of the U.S. government. It's not a credit card or a check guaranteed by an established bank, nor is it protected by the feds. At the moment, given a choice, we suspect that Karpeles and his magic money friends might run right into the real embrace of Federal Reserve Chairman Janet Yellen.

Bitcoin is a lesson for anti-government nihilists. We create institutions to protect common people, and, with heavy oversight, most of them work. We can have real currency backed by governments, readily traceable, or we can have virtual currency. Bitcoin, for the moment, works just dandy until the next smart hacker comes along.

Doesn't seem like a good exchange.


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