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back to article Bitcoin bank Flexcoin pulls plug after cyber-robbers nick $610,000

Yet another Bitcoin institution has had its coffers drained by hackers and will be forced to shut down as a result. Self-termed "Bitcoin bank" Flexcoin has told its customers that the theft of its Bitcoins, valued at $610,000 (£366,000), has driven the company over a cliff. Effective immediately, the site said it will be …

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And yet...

Bitcoin values have nearly recovered to what they were before the Mt Gox fiasco. The people who bought Bitcoins a couple weeks ago when they were down under $500 are going to be laughing all the way to the bank. Except for the ones who used Flexcoin, of course.

And then there's me, who let my wife talk me out of spending the money.

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Re: And yet...

The people who are really laughing all the way to the (real) bank are the US authorities that sold all their bitcoins with the market near its peak.

Just because some gullible people see a dip in the price as a chance to jump into the market having maybe missed out on the first bubble means nada. - other than providing more opportunities for the sharks. Come back here in six months and see what the price is then.

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Re: And yet... @Tim

I agree. I do wonder if this isn't just a classic 'Dead Cat Bounce' pattern?

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Re: And yet... @Tim

Bitcoin trading volumes are pretty low. So it's relatively easy to manipulate the price. Particularly if you make your transactions on days when trading volume is particularly low, as it's also quite volatile.

I also wonder about the stats. Is somone checking to make sure the exchanges aren't price-fixing, or mis-reporting?

Also when trading volumes are listed, is that for several thousand Bitcoins per day i.e millions of dollars? Or is it transactions per day? As last time I looked at Bitstamp's prices, it listed the last 10 transactions, and the biggest was for 0.3 BTC. Also those 10 transactions moved the price from something like $618 to $622, in a few minutes. So that's a nearly 1% change in price - on transactions totalling less than $1,000.

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Re: And yet...

First bubble? If price going down means it was a bubble, Bitcoin has experienced multiple bubbles in its history.

Yet given that each low is far higher than the height of the previous bubble, this doesn't really prove the people saying "It's a bubble" right, when they've been claiming that since the price was at $10 or earlier.

The fact that people who sold at $1000 doesn't mean that people who bought at a recent low are wrong. I don't see how they are gullible - those that sell now, after buying when it was lower, have made a profit.Buying low is just as important as selling high.

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Re: And yet...

Mark.

As the saying goes, 'the markets can stay irrational, longer than you can stay solvent'.

It's probably a bubble, because the current price of Bitcoin isn't sustainable. It's artificially boosted by 'investors'. When it stops being volatile, they'll have no incentive to stay. But because the Bitcoin market is so small, they have a disproportionate effect on the price.

So if you're in it as a cheeky high-risk investment, then good luck to you. I've no sympathy if you lose your shirt, and you've got to time it so that you aren't the last one holding the parcel if Bitcoin does collapse. Which it could well do.

But if you're some kind of utopian libertarian wanting to build an international medium of exchange not subject to government whims, then watch out. As the hot money may all bugger off at once - taking a lot of your cash with them.

Yet given that each low is far higher than the height of the previous bubble

That's not true either. Hasn't it been down at $20 within the last 12 months? Or was that a few months before? One of the problems with Bitcoin is we don't have any figures as to what the economy is. Another thing governments are useful for. So we don't know how much real trade happens in BItcoin, how much it gets used for drugs, and how much it's just being hoarded. Without that it's only guesswork that it's a bubble. But good guesswork when you consider that there are several people who've publicly said they're investing tens of millions of dollars into it, and yet daily turnover rarely gets even close to the million mark.

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Re: And yet...

Hasn't it been down at $20 within the last 12 months? Or was that a few months before?

Not since I started paying attention to it again, but that hasn't quite been 12 months yet.

One of the problems with Bitcoin is we don't have any figures as to what the economy is.

What are you talking about? We have exact figures available on demand for any point in time going all the way back to when the first one was minted.

So we don't know how much real trade happens in BItcoin, how much it gets used for drugs, and how much it's just being hoarded.

'Drugs' would fall under real trade (being illegal doesn't make it any less real). Most hoarders aren't moving their BTC around from wallet to wallet, so that one's not terribly difficult to figure out either.

Without that it's only guesswork that it's a bubble. But good guesswork when you consider that there are several people who've publicly said they're investing tens of millions of dollars into it, and yet daily turnover rarely gets even close to the million mark.

I've no idea if it's a bubble or not, but I'll say this: every nay sayer to Bitcoin thus far predicting a pop in the bubble has been wrong. The market has dipped a few times, but there hasn't been anything so drastic as to call it a popping bubble, and it has recovered pretty quickly from the few events that have come close.

If everyone who's investing in it leaves at the same time then the values will tank, but isn't the same true of most investments? In that regard the value of Bitcoin is much like the value of fine diamonds. On their own they're worthless, if pretty, rocks. But because people want them (and because a certain company with a near monopoly has spent the last century manipulating the market) they have a much higher value than they otherwise would.

Bitcoin has value because people want them. Whether they want them because its an investment or because its an unregulated currency is irrelevant. If that changes then Bitcoin loses its value. If it remains true then Bitcoin will continue to have value. If the Bitcoin user base can continue to grow as it has the last year or so I'm inclined to say that it will continue to have value.

Am I going to run out and buy some? No, probably not. A volatile market is a high risk market and I don't have the money to blow in high risk markets. Do I think those who do are 'gullible'? Nope, not at all. They understand the risks and they play the game. Do I think less of they people who point and sneer at the people making these high risk investments? Yes, yes I do. Those 'gullible' people who bought Bitcoins a couple weeks ago are looking at a 3:2 return on their investment if they sell today. And if the trend holds it'll be more like 2:1 by the end of the week. That leaves the people calling them gullible looking like they've got a case of sour grapes.

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Bitcoins are forever?

The comparison with diamonds is a really good one - the market for diamonds is effectively rigged too.

At least if you buy diamonds, you can be reasonably sure that someone will pay you half what you paid.

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Anonymous Coward

I'm telling ya..

State sponsored hackers...

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Re: I'm telling ya..

100% agree.

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Re: I'm telling ya..

But which state?

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Re: I'm telling ya..

But which state?

The state of denial. Which is the state most Bitcoin fans seem to be permanently in...

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FAIL

I believe that a well-implemented cybercurrency would be a good thing...

But this ain't it! How many more of these until there is a run on Bitcoin banks? Obviously the security of these Bitcoin banks has not been validated, but at least we now get a glimpse of what life was like in the Wild West.

I hereby uncharitably dub the venture "Shitcoin".

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Anonymous Coward

Re: I believe that a well-implemented cybercurrency would be a good thing...

The problem is the freedoms and secrecy that the crims or paedos want are also making traceability and fraud prevention difficult.

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Re: I believe that a well-implemented cybercurrency would be a good thing...

Since none of the banks 'own' bitcoins it is difficult to have a run on them.

You can only have a run on a bank because it has lent out money you put in, these bitcoin banks are really either exchanges or safe deposit boxes.

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Re: I believe that a well-implemented cybercurrency would be a good thing...

The weak point of Bitcoin is how people convert into/out of proper currencies. So a 'run' in this context is lots of people wanting to sell Bitcoin while few people are prepared to stump up dollars for them. If the exchanges run out of liquidity, the whole thing grinds to a halt.

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Re: I believe that a well-implemented cybercurrency would be a good thing...

Well, Flexcoin is going out of business, so I assume they are bankrupt and the $610 k stolen was enough to wipe out the company's capital and render it financially insolvent. So between the poor security, lack of bank-style capital reserves and no deposit insurance, Flexcoin really was like a 19th century bank.

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Re: I believe that a well-implemented cybercurrency would be a good thing...

@Yet Another Anonymous coward

". . . these bitcoin banks are really either exchanges or safe deposit boxes."

Or, indeed just regular boxes it would seem. Cardboard by the looks of it.

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Roo
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Re: I believe that a well-implemented cybercurrency would be a good thing...

"The problem is the freedoms and secrecy that the crims or paedos want are also making traceability and fraud prevention difficult."

Firstly, it is important to note that many folks who are not 'crims or paedos' like 'freedoms' and 'secrecy' (aka privacy) too. Secrets can have value, and there are some fairly large chunks of the global economy that are built on this principle (eg: intellectual property).

Secondly, Snowden's leaks have shown 'traceability' isn't a problem because surveillance of electronic communications is practically universal and the guys doing the surveillance routinely work with the law enforcement (eg: the Silk Road take down).

Thirdly, Bernie Madoff demonstrated that it practically impossible to prevent fraud. Bernie managed to conduct his fraud under the scrutiny of the SEC for over a decade to the tune of a few $bn of *real* money. Experience shows that fraud is practically inevitable, and it has been accepted to the point where insurers make money out of it...

The problem is not a lack of laws, too much freedom or too much privacy, the real problem is getting the authorities to actually make good use of the more than adequate tools they already have at their disposal.

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Re: I believe that a well-implemented cybercurrency would be a good thing...

What improvements for being "well implemented" do you suggest?

I mean, a lot of the problems here are with the "cyber" aspect. Physical security is in some ways easier, you can lock it up, put armed guards on, and so on. With computer security, there are pitfalls such as people using weak passwords, keyloggers and so on.

The other issue is one of regulation and laws - it still being easier for online exchanges/wallets to say "not our problem", and difficulty of getting police to look into the theft.

What improvements to the currency itself would fix these? (Genuine question - not saying it isn't possible, but it's easy to say it could be done better, without actually explaining how.)

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Re: I believe that a well-implemented cybercurrency would be a good thing...

A better analogy would be buying gold, where it's held by a company, rather than physically owning it.

There's no central bank reserves or deposit insurance to back that up, either. But many people still invest in gold, without it being branded "19th century".

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Re: I believe that a well-implemented cybercurrency would be a good thing...

19th century banks needed capital in case the loans they made went bad and left the bank unable to cover deposits. Bitcoin (which IS a proper currency) is not debt-based no there's no chance of a run, and Flexcoin could store any amount of bitcoin without needing any capital reserve.

If you want your money from a bitcoin bank, it will always be there - unless it was stolen. But Bitcoin thefts are no more of an issue as regards people's faith in the currency than stolen paper money is. All that will happen when players fail in the bitcoin space is that the space as a whole grows stronger. Companies with better security, who allow audits, will come to the fore and are doing so.

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Re: I believe that a well-implemented cybercurrency would be a good thing...

@Roo

"The problem is not a lack of laws, too much freedom or too much privacy, the real problem is getting the authorities to actually make good use of the more than adequate tools they already have at their disposal."

Where's the fun in that? Enforcing laws/regulations is hard and requires civil servants to do actual work. Worse, if you go ahead and make the effort and find that it works then it becomes clear that a bunch of people have been doing a pretty poor job up to that point.

On the other hand, announcing 'tough new laws' makes it seem like you (as a politician) are 'cracking down on crime', or whatever alleged social ill the sensationalist tabloid-press are whipping up outrage about at the time.

Such new laws tend to be rather broad in scope and impact those not doing anything wrong in the first place but that is understandable because, again, creating laws that actually target the right people is, you know, hard.

A bit of a digression but yes, employ the tools you have first.

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Offline cold wallets would appear to be the way to go.

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Not convinced

Banks and credit card co's manage the equivalent of "hot wallets" once the fly by night merchants have been eliminated there is no reason that bitcoin banks and exchanges can't thrive.

Although dare I say it - this may only occur once these institutions are properly regulated.

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Re: Not convinced

This, from the Flexcoin website, is all you really need to read to understand the situation:

"Legal Notice: We are not a true bank that accepts USD or any national currency, only bitcoins which by their nature are not regulated, we’re not FDIC insured or regulated by any government entity."

Given that governments (esp the US) would rather people use currencies and payment methods that can be tracked, I would guess that the compromise would be for governments to set up insurance and regulation schemes whereby bitcoin 'banks' could operate with more of the security that real banks have, on the condition that they adhere to certain regulations.

That would obviously entail confirming to certain security criteria and being certified as such but also people wishing to use the services of such a bank would be required to have their details registered and their earnings (e.g. when the value of the currency increases) taxed just like any investment.

I appreciate that many people would be against this but there is almost no way to enforce government control over the currency so it would be entirely optional. I suspect there would be enough people (and businesses) who would want such protections and don't value the anonymous nature of bitcoins, simply using them for convenience or the investment value.

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Re: Not convinced

The equivalent of credit cards being 'hot' storage isn't a bad one in that you don't load a CC up with your entire fortune if you're prudent.

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Anonymous Coward

Isn't that the electronic equivalent of stuffing your money under your mattress??

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Nothing wrong with that. In order to access mattress money or a cold wallet the potential thief can't do it from a comfy chair from anywhere in the world. So location limits the pool of attackers. Then this reduced pool has to contend with physical barriers like locks and the chance of a comprehensive stabbing; which is going to put even more people off.

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So... the value of stealing a currency which then devalues?

Bitcoin stuff gets hacked, coinage gets stolen, values plummets, ill-gotten gains become worthless (ish)...

Who benefits from stealing a thing that then becomes valueless?

The people whom that thing threatens - banks, governments, etc.

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FAIL

Re: So... the value of stealing a currency which then devalues?

Oh dear god. Oh noes its a conspiracy heaven forbid it can't be the innocence / idiocy that comes with exploring new frontiers.

Reading for you G E. the history of the gold rush, banking during the Great Depression etc etc.

And finally - Occams Razor.

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Re: So... the value of stealing a currency which then devalues?

@Gordon 10

I imagine many of the researchers and engineers at the Bushehr nuclear plant thought similarly prior to identifying the Stuxnet worm.

I don't, personally, believe that these thefts were the work of the US government but we know that they (along with other governments) have, through their intelligence arms like the NSA, FBI and CIA, worked to discredit individuals in the past. It is not so large a leap to imagine them using cryptographic and covert means to discredit and thereby discourage use of the bitcoin currency.

Again, I don't believe that this is actually the case but one of the big outcomes of all the 'leaks' is that we now know that the barriers we though wouldn't be crossed have been and are being crossed on a regular basis.

The (unfortunate) corollary is that all the foil-hat folks now feel justified in claiming every conspiracy they ever foamed about is proven.

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Leading indicator...

of why you don't want to invest/use Bitcoins.

In the end, a currency needs an Army, and probably some taxing structure (sad to say).

Live and learn!

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Re: Leading indicator...

"In the end, a currency needs an Army...."

Actually, armies are the leading cause of long term destruction of a currency's value. As soon as you become the world's reserve currency, you find you've got a bottomless bank. Then you build and army because you can, go and have wars in far off places to build an empire. They over-expand, and over time find the cost of the army drains the real productive economy, but the empire doesn't actually add much value. Eventually this huge public expenditure drains the coffers, and the purchasing power of your currency shrinks alarmingly.

Roman, Umayyad Caliphate,Spanish, British, they all broadly speaking went the same way. The US are currently in the spot of having built a global proxy empire with excessive military spending, whilst watching their currency become worth less and less in real terms. Meanwhile, Switzerland get on with being rich and peaceful with no army (by international standards, that is).

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Re: Leading indicator...

Please explain why, if a currency needs an army, that there are countries without standing armies, and they don't do all of their trade in barter?

What actually brings stability to national currencies is regulation. I have said it before and I will say it again, companies which provide 'financial' services (such as banking, echanges, etc.) should be covered by national legislation. This legislation should require these organisations to prove that they have the reserves they say they have, and that they keep them offline in 'cold' wallets, to avoid the risk of theft. They should provide an audit of transactions, identifying customers if required by a country's national banking laws to do so. Direct wallet-to-wallet transfers as they are, are fine - these are the equivalent of a cash transaction, an important part of which is anonymity (although there is a good chance that a bitcoin wallet address is not as anonymous as you think it might be, if it can be associated with an IP address).

Such legislation does not (yet) exist in most coutries, but it is what needs to happen before Bitcoin sees widespread use and stable exchange rates. The fact that such legislation does not yet exist does not render the concept, or execution of Bitcoin itself worthless, it just means that you shouldn't go round trusting random 'banks' or 'exchanges' with your Bitcoins, as there is no guarantee of what will happen to them. Personally, I can see no benefit to trusting someone to 'store' your bitcoins for you, when you can do it just as securely on your own computer.

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Re: Leading indicator...

This is why no one uses Paypal - not regulated by a bank, no deposit insurance, not backed by an army.

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Re: Leading indicator...

@Herby the UK has an army and credit card fraud annually is far higher than all the bitcoin losses to date. Do you understand the difference between a private institution and a currency? Because it's a failure to make that distinction that seems to be the cause of most of the nonsense written about bitcoin.

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Re: Leading indicator...

@Herby

"In the end, a currency needs an Army, and probably some taxing structure (sad to say)."

No to the first, yes-and-no to the second.

A currency does not, ipso facto, require taxation to fulfill its function.

Taxation is, however, required for a government to be able to spend money (and thus build roads and hospitals and pay teachers, etc...) without having to print more money, which can cause inflation.

In that way, taxation can be considered a requirement of a functioning currency.

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Your numbers are gone

Not your money.

Your money was gone when you bought the bitcoins. You might, or might not get the money back with or without a profit when you sell the stuff.

But the stuff that got stolen were just bit patterns, they were not money at the time of theft.

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Re: Your numbers are gone

If you compare bitcoin to a fiat currency -where it too has no real value, and then consider that the currency is printed out of thin air, digital currencies neither have more or less legitimacy than the dollar/euro

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Re: Your numbers are gone

True in some intrinsic sense, but as a practical matter, not as much.

Any currency really only has a value in so far as it can be used as a method of exchange between parties. How 'legitimate' a currency is could be seen as a measure of how willing people are to accept it as payment. In other words, the more people who accept a currency as payment, the more legitimate that currency is.

By that measure Bitcoin is considerably less legitimate than conventional currencies.

You might say that some retailers are already accepting BTC and that more will follow but if you look closely, they don't actually accept Bitcoins in exchange for their goods. Take Overstock.com - probably the biggest retailer to claim to accept Bitcoins. They never even see a Bitcoin.

Instead, when a customer purchases a product, the USD (or whatever) price of that product is converted to the BTC equivalent at checkout. The customer transfers payment (in BTC) not to the retailer but to Coinbase, a third-party that accepts the Bitcoin payment and subsequently forwards the original USD price to Overstock.com.

In other words, Overstock.com (and others) place a value on their goods in USD and accept only USD in exchange. When you read their press releases, you will see that they have just now reached "$1 Million in Bitcoin Sales". Note that they don't say that they have reached "1100 BTC".

The reason they don't accept BTC in exchange for goods is that they cannot pay their debts in BTC because their creditors do not accept BTC and so on in turn.

This is why things are not priced in BTC as to do so would be similar to a sandwich shop in the US setting its prices in JPY. Those prices would have to change frequently to match the exchange rate as otherwise the shop will be losing money whenever the yen drops against the dollar and losing customers whenever it rises.

USD has value because you can exchange it for a sandwich. By contrast, the sandwich-buying power of BTC is dependent (and reliant) upon conversion to and exchange for USD.

The value of the sandwich should be self-evident.

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Re: Your numbers are gone

Currency 'value' is based in confidence. Most fiat currencies are backed by nations, backed by armies, backed by guns and fighter jets. It helps people feel confident in them.

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Re: Your numbers are gone

If you compare bitcoin to a fiat currency -where it too has no real value, and then consider that the currency is printed out of thin air, digital currencies neither have more or less legitimacy than the dollar/euro

I'm sick of hearing this argument. You may as well compare bitcoin to a fiat 500. The fiat 500 is more useful than bitcoins though unless you've previously signed her majestys nonce jotter in which case bitcoin is useful to you judging by a recent article on here.

It's a brilliant scam people launch these exchanges run them legitimately then run off with the 'currency' which can't be traced due to the nature of the way it has been set up and then cry that they've been hacked.

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Re: Your numbers are gone

@Cliff

"Currency 'value' is based in confidence."

Absolutely - confidence that people will accept your fat wad of cash in exchange for their goods.

People hold a portion of their wealth as the currency 'of the realm' because they have confidence that they can exchange that currency for the food they need to avoid starving, the apartment they need to avoid the wolves and the alcohol they need to avoid the crushing realisation that they are spending their lives working just to provide food and shelter and when was the last time you took me somewhere nice anyway?

There is another, more 'economics 101' component required for a functioning fiat currency and this directly influences the confidence that people will give you beer for dollars/vodka for rubles. This is the confidence that the government will control inflation, ensuring that the value of the held currency (in wallets, bank accounts and under mattresses) will be much the same when you spend it as when you earned it and therefore people can be confident that they can meet their financial obligations.

This, in turn, gives people the confidence to spend their money and so allows the economy as a whole to tick along nicely. If people are not confident that the value of their held currency will keep a steady value from one day to the next then the normal functioning of a (capitalist) society can break down.

This was of course seen vividly in Zimbabwe and no amount of military might made a lick of difference in the end. The government failed to keep inflation steady and so the currency de-valued. Measures were implemented to control it but each of these failed in succession and people lost even more confidence. In the end the confidence of the people was so utterly destroyed that Zimbabwe now doesn't even print its own money anymore and people use various other foreign currencies instead.

To start with, the Zimbabwean government made the use of foreign currency illegal, of course, but the confidence in the ZWD was gone and a black market sprung up. Eventually they had to allow it as a functioning economy (no matter how dire) with a foreign currency is preferable to a non-functioning one with a local coin.

So, confidence is indeed the important thing, but it's confidence that the government will keep inflation in check and thus currency will maintain its value. This gives businesses the confidence to accept money and the confidence consumers to, well consume; to spend a sensible amount on what they need for the present and save for the future. It gives banks the confidence to lend money, safe in the assumption that the money repaid will cover the value of the money lent*.

This need for confidence in the value of held funds, coupled with the economic importance of having a single currency for easy trade fairly insists upon government control of a that currency. It doesn't always work, of course, and the main selling-point of Bitcoin from a monetary-policy sense (rather than libertarian/privacy sense) is that it is a limited resource and thus its value is not tied to any government decisions; a government can't deliberately devalue the Bitcoins through monetary policy, for example.

But even this is misguided; a government can effectively locally devalue a currency such as Bitcoin at a stroke by banning its use and accumulation, as occurred with gold.

But even without such heavy-handed tactics, there is no way for a currency such as Bitcoin to provide the stability required for true market confidence because there is no way to ensure a steady, predictable value. This makes borrowing and lending equally unwise in the long term and thus stifles the economy.

In the end, using Bitcoin as a 'real' currency is about as sound a policy as using Twitter shares; neither are backed by any real power and both are subject to market factors. The huge gains of Bitcoin, while undoubtedly excellent for those in the right place at the right time (and good on them) are, far from being an indication its strength as a currency, are near proof of its status as an investment instrument for the financially savvy alone. It is imperative that a 'real' currency carry VERY little risk as that gives people (again) confidence to accept that currency as payment and subsequently hold it in anticipation of future outgoings.

Anyone of us might, in the 20/20 vision of hindsight, have wished they converted all their savings to Bitcoin a year ago but few would exchange their conventional currency for Bitcoin now and any that did would do so with the hope that they would be able to exchange those purchased Bitcoins for a greater measure of regular currency at some later point. I.e. they are making an investment.

Short version? Bitcoin is a synthetic forex instrument and not a real currency.

Wow - that's a long post. I would apologise but . . .

* - If a bank lends $100,000 to someone who earns $1000 a month at a time when a cup of coffee costs $5 and the inflation goes all hyper-mental, a few months later that same borrower may be earning $1,000,000 a month and that coffee now costs $5,000. The value of the loan is now 20 cups of coffee. Extreme example but illustrative and not unheard of.

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Anonymous Coward

Shitcoin is unravelling. You'd be better giving your cash to Madoff.

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ROFL

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Protocol review? Hello?

How many times will it be before these "banks" review their transaction protocols? And how long before BitCoin users will read the terms of service, and not use a "bank" that declares they aren't responsible for what you store with them?

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I do wonder

How many of these BitCoin banks/exchanges hired security/network/web admins who had formerly worked for a real bank or some other secure entity?. And how many just hired some dude whose resume they saw on monster.com? I'd think that if the purpose of your company is to deal with money (even if it's technically funny money) then you'd want fairly bulletproof systems in place, and you'd want to hire admins who actually had experience in designing, implementing, and maintaining those sorts of things.

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Re: I do wonder

"How many of these BitCoin banks/exchanges hired security/network/web admins who had formerly worked for a real bank or some other secure entity?"

What makes you think that the regulated banks are in any way more secure?!?

I have a few acquaintances among the people working in that area, and from what they tell me, the "security" in "regular" banking is hair-raisingly, and notoriously, bad!

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