Bitcoin is back, and the price in USD hit an all-time high again today.
There are two developments you need to know right now because they are potentially related, and could destroy Bitcoin as we know it. First, the Chinese have discovered it:
The exchange, called BTC China, has been growing rapidly for the past few months as demand for bitcoins has surged. Today, BTC China accounts for just under 33 percent of trades. That’s ahead of long-time bitcoin exchange Mt. Gox (23 percent) and another rival, the Slovenia-based BitStamp (25 percent). Mt. Gox has long been the most popular exchange — and the most well known — but it has now fallen behind not one but two rivals.
BTC China seems to be riding a speculative mini-bubble that has boosted bitcoins’ value by more than a third since the federal government shut down the Silk Road online drug market, which accepted payments in bitcoin, about three weeks ago. On Tuesday, bitcoins crested over $200 for the first time since their wild runup last spring. That’s about ¥1,220.
“There’s been huge pickup in trading of bitcoins this year,” says Bobby Lee, the CEO of BTC China. At one point, during the currency’s last price surge last April, bitcoins were trading at the equivalent of $308 on his exchange, Lee says. That’s about $50 above their peaks at other exchanges.
Second, is the fact that BITCOIN IS BROKEN. Cornell professor/hacker Emin Gün Sirer has, along with Ittay Eyal outlined a hack in a paper that spells doom for Bitcoin:
Specifically, in a paper we placed on arXiv, Ittay Eyal and I outline an attack by which a minority group of miners can obtain revenues in excess of their fair share, and grow in number until they reach a majority. When this point is reached, the Bitcoin value-proposition collapses: the currency comes under the control of a single entity; it is no longer decentralized; the controlling entity can determine who participates in mining and which transactions are committed, and can even roll back transactions at will. This snowball scenario does not require an ill-intentioned Bond-style villain to launch; it can take place as the collaborative result of people trying to earn a bit more money for their mining efforts.
The paper has received little press except in science journals:
“Once there’s an incentive to join your selfish mining group it’s going to grow in number. If you were to achieve the majority status, that’s actually very dangerous because Bitcoin would effectively be under your control,” says Sirer.
Bitcoin has traditionally been understood as relatively safe to invest in. It is extremely difficult, for example, to counterfeit. However, Eyal and Sirer’s findings are now being investigated by members of the Bitcoin community.
“The attack is very clever, and unfortunately it will work,” says Bitcoin developer Peter Todd. “There’s been a tendency for the Bitcoin community to assume miners always have the best interests of Bitcoin in the long term in mind. So far this has generally proven to be true, but as mining becomes less profitable due to the inflation rate dropping (it halves every 4 years) I think we’ll see more and more selfish behaviour.”
Another Bitcoin developer, Mike Hearn, adds that if the technique worked, it would have a negative impact on Bitcoin as a whole, leaving everyone, including the selfish miners, at a loss, just when the currency was starting to be taken seriously by the international community: “If miners were to start attacking the system or seizing control of it, confidence in Bitcoin would be severely hurt and the value would fall.”
The bottom line is this: Bitcoin has now been globalized. There is so much money in it that it’s not hard to imagine a scenario where PLA Unit 61398 selfishly mines it, accelerating the race to the bottom. But not before controlling it first.