2015 has not started well for Bitcoin (BTC-eUSD) with prices having fallen 12%, from $320 to $288. The cyber attack on a leading bitcoin exchange is the latest challenge for the fledgling digital currency.
Bitstamp, Europe’s leading bitcoin exchange – and third largest globally – has been off-line following a breach in their system by hackers on Sunday night. The UK based company has suspended lodgements and withdrawals and reported that roughly $5.1 million, around 19,000 BTC, had been ‘lost.’ The revelation follows the disclosure that Bitstamp’s wallet system has been compromised, prompting it to halt deposits and later shut down its platform entirely according to Coin Desk.
Today, Bitstamp said it expected to resume trading within 24 hours after suspending operations because of the ‘security breach.’
The bulk of the digital currency units are in cold storage – on computers not connected to the internet – and are therefore safe from further predations, the company has said. “Bitcoin customers can rest assured that their bitcoins held with us before temporary suspension of services . . . are completely safe and will be honoured in full,” Bitstamp said.
2014 was a tough year for bitcoin with prices falling from over $800 to just over $300. At its height, Bitcoin was trading at $1240. But in the run-up to and following the bankruptcy of the leading Mt Gox exchange, it has declined in value to around $285.
Some say this reflects a steady loss of faith of it’s users in their ability to trade the currency safely due to exchange and technology risk. Others say it was a speculative bubble and was destined to burst and it is healthy it did.
We see the value in owning bitcoins as a form of cash diversification and see merits in owning and having a very small allocation to bitcoin. It is slowly proving itself as a means of exchange. However, whether it will become a store of value is another matter.
Given the fact that we live in an era of currency wars and bail-ins – having a small allocation to such a liquid and fairly easily traded currency that is independent of debasing fiat currencies is not a bad idea.
When the chickens of government and central bank profligacy finally come home to roost, as they always do, alternative digital currencies may serve as an accepted medium of exchange.
But today’s news highlights the vulnerability of any form of “virtual wealth.”
By virtual wealth, we mean many of our investments and savings today which are either in digital form – deposits – or intermediated by digital platforms – most investments including gold ETFs and digital gold trading platforms.
It is imprudent to rely on any asset which derives its value from or can only be accessed through the internet and certain online platforms and websites.
This includes bank deposits in our modern digital banking system. In the event of a systemic crisis involving issues with ATMs, online bank accounts, capital controls and bail-ins – it will be prudent to own some assets that are outside of the financial system and indeed outside of the technological grid.
As tensions mount geopolitically – thankfully the consequences of military confrontation between nuclear-armed superpowers makes war a last resort – the Western bloc, Russia and China have all been experimenting with non-conventional warfare which include disabling the internet in target countries to collapse the economy.
If the internet and the financial system was brought down through unconventional warfare, criminal cyber attacks or simply a major glitch in the system – which has grown so complex that it is incomprehensible even to specialists – the assets of many people would be ‘erased’ and inaccessible.
Technology is a great enabler. But it can also be a great disabler. It is important to be aware of this.
Cyber and technology risk in the modern era is another reason to own physical coins and bars in an allocated and segregated manner, in the safest vaults, in the safest jurisdictions in the world.