Monday, April 1, 2013

How Bitcoin Could Die

While the bitcoin platform is theoretically sound--the decentralized blockchain makes it near impossible to counterfeit--vulnerabilities do exist at a few key junctures. Continuing Motherboard's Bitcoin guide from the weekend, here's some crucial ways the whole thing could unravel.

The first is market-based. With only a one billion dollar market cap, manipulating the market requires limited investment. If someone suddenly sold off a few million bitcoins--a highly unlikely event--it would bring the price crashing back down to zero.

The second is technological. Someone could conceivably take over bitcoin mining, the process by which bitcoins are produced and new transactions are verified and added to the blockchain, by commanding 51 percent of the overall processing power. Given the current rate hashrate, the combined processing power of all bitcoin miners, such an event would require only a few million dollars investment. In fact, Avalon, the company that delivered the world’s first purpose-specific bitcoin miner, already has this capability, having monopolized the specialized bitcoin-chipset market.

Both the market-based and technological vulnerabilities are protected from the profit-motive perspective, in that any person or group wouldn’t be incentivized to corner the bitcoin market or monopolize mining since it would subsequently destroy bitcoin’s value. On the other hand, you can’t rule out bitcoin terrorism, say, some pissed-off bank with ulterior motives. Such vulnerabilities are mitigated with further adoption as the required investment would increase in lockstep.

The open source development of bitcoin also creates its own issues, as we saw recently with the software glitch that created a fork in the blockchain and temporarily crashed the system. These problems would need to be addressed at an organizational level, which can be tricky when no one is technically in charge. Read more here:

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