Depth chart for Bitfinex, one of the largest BTC/USD markets. Source: Bitcoincharts“Someone could buy a bunch of bitcoins and then proceed to dump those coins on various exchanges and it would dip the price,” says Matt Young, who helps run Counterparty, a decentralized financial market that runs on an abstraction layer of bitcoin.
There was widely held apprehension that this would happen after the recent US Marshal’s auction of about 30,000 BTC. However, those fears proved unfounded, as the winning bidder, investor Tim Draper, afterwards revealed plans to use the coins to increase adoption in emerging markets.
However, Fabio Federici, whose startup Coinalytics studies block chain data, said that attacking bitcoin’s price would not be a significant blow.
It is debatable, he said, that the use of bitcoin as a currency is what holds its true worth. Instead, it is the distributed system behind bitcoin that will have the biggest impact.
Federici noted:
“The true disruptive power behind bitcoin is the decentralized trust. This technology is here to stay and will disrupt many other industries.”
Attacking the miners
With bitcoin, price and infrastructure are closely related. If the price drops as sellers unload coins onto the market, it leaves less incentive for miners to operate their energy-intensive equipment – and miners are fundamental to the bitcoin network, processing transactions and creating new coins.
At the same time, if the infrastructure of mining is attacked, investors could begin fearfully selling massive amounts of coin, further dropping the price of bitcoin.
Experts agree, though, that any sort of infrastructure-related attack on bitcoin would likely require millions of dollars to pull off, an amount that continues to increase total network power.
Hashing power has risen by 100,000,000 GH/s in just the last six months. Source: BlockchainDave Hudson, whose blog Hashingit and work at PeerNova are focused on bitcoin infrastructure issues, says that it would be a very expensive proposition, and would draw a lot of attention, which might be counterproductive to such an effort.
He pointed out:
“Any sort of overt attack on bitcoin would seem likely to add more legitimacy to [it] in the eyes of many observers, surely this must be really important if [someone] is prepared to spend $100m to attack it.”
But, again, what cannot be killed is the idea of value and distributed trust that these cryptographic systems now present to early adopters.
“While [a hijack of some sort] would be devastating to many bitcoin investors initially, in the end, we will be left with the protocol which is where the value is, and people will continue to rally around that,” said Counterparty’s Matt Young.
Banning bitcoin
In many countries, governments have a lot of control over major economic sectors. Banking, telecommunications and energy are common industries that are state-owned in places where executive power is tightly held.
Furthermore, many countries that have a lot of government resources tied up in banking generally have a contentious relationship with cryptocurrencies.
Thailand was one of the first countries to take a hostile stance towards bitcoin after a domestic exchange owner presented the digital currency to that country’s central bankers. The Bank of Thailand now says digital currencies are not illegal, but warned bitcoin has the potential to become worthless and is not a viable form of payment.
Furthermore, in June, Bolivia’s central bank banned bitcoin. These types of moves could be interpreted as hostile actions, used by government policymakers to deter citizens from thinking about using novel digital money.
The developed world is not immune to the possibility of clampdowns, either. For example, in Russia, a bitcoin conference in Moscow was canceled in April over fears that country would ban the digital currency.
More recently, a Bank of Russia deputy chairman hinted that the country would take a wait and see stance, although the country has recently used its state-owned banking system to influence the region with billions of dollars in loans for Ukraine and other former Soviet countries.
(Click to Enlarge) Thailand, Russia and Bolivia rank low on financial freedom heat map. Source: Heritage FoundationFlavien Charlon, the founder of Predictious, a bitcoin prediction market, says that bitcoin will someday be as ubiquitous as the Internet. As such, there will be deeper implications for economies in the future when governments try to take such bold steps.
Charlon said:
“[Banishment] would certainly harm bitcoin. [But it really means] some other country would become the new hub for bitcoin startups and investments.”
What a major hijack might look like
Probably one of the worst things that have happened in bitcoin’s short history was the cautionary tale of the collapse of Mt. Gox. It’s the closest thing to what a full-blown exchange hijack might look like.
There have been other exchanges that have run off with people’s money, one of the most notable being GBL, which stole $4.1m in customer funds by simply disappearing overnight. And while Mt. Gox went through a long slow decline, people still kept money in its hosted wallet until the end believing that it wasn’t a scam.
It’s hard, however, to look back and not consider serious misgivings about the exchange. Mt. Gox used to have an influential role in the markets, and its foibles caused a bitcoin price crash in April 2013 as well as its complete meltdown earlier this year.
Last February, Mt. Gox allegedly lost 744,400 BTC, according to a leaked document. If true, that would mean the failed exchange had lost almost 6% of all the bitcoin in existence, based on 12,560,925 BTC in circulation at the time.
Coins mined into circulation vs Mt. Gox loss in February 2014. Data: BlockchainHowever, while investors losing sizeable chunks of bitcoin in the event was problematic for the industry as whole, it did not spell a death knell for the rise of cryptocurrencies.
The fall of Mt. Gox may have been a black mark in the eyes of mainstream press, but in order to move forward, sometimes a bit of destruction is required.
It’s important to note that since the Mt. Gox implosion, bitcoin’s price has risen back to the level it was at prior to the exchange’s halting of BTC withdrawals and its subsequent halt of trading activity.
Bitcoin price over the time of the Mt. Gox collapse. Source: CoinDeskYoung, whose work on Counterparty is an effort to build decentralized cryptocurrency exchanges to prevent Gox-like calamities, thinks that while the drama in February was an awful event, it proved resiliency.
With so many stakeholders, a scenario where the cryptocurrency community wouldn’t rally around bitcoin seems unfathomable to him. Hopefully, Young is right: Gox is the best example yet that many are driven to keep bitcoin thriving no matter how dire the situation may seem.
“The bitcoin community handled [Mt. Gox] extremely well and that incident may provide an indication of what will happen if a hostile party [has] intent of crashing the market,” he said.
Hooligan image via Shutterstock
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Original author: Daniel Cawrey