Bitcoin Insanity

I've been following Bitcoin passively for more than a year since it came into my awareness. It is an interesting experiment with some good goals and good technology behind it. At least, the cryptography part of it is good.

I considered buying one BTC just to get familiar with the tools last year, but never bothered for two big reasons. One, there is still very little you can buy with bitcoins and two, I was always concerned about the implementation of supporting sites and services.

Giant commercial banks with large and well paid IT departments have a hard time keeping electronic theft under control. A lot of bank hacks and losses are never reported because of black eye it would give the industry. Think of the ongoing rampant identity theft problem and credit/debit card issues. It is not really getting better.

Now, compare that to a start up like Instawallet with a small staff who has to deal with an unknown number of attack vectors. None of the online wallet services or bitcoin banks seem remotely safe. It just seems like a giant disaster waiting to happen. Sure enough, Instawallet was robbed today and the service suspended indefinitely. This is not the first bitcoin wallet site to be hacked and it won't be the last.

Bitcoin is a small market and hot money can sweep in and destroy it. That also appears to be in progress as the price of a bitcoin in dollars has gone from $13.51 on January 1, 2013 to a high of $147.00 on April 3, 2013. That is a 988% increase in a little over 3 months and nothing other than out of control speculation can explain it, not even the forced Cyprus bail-in. Bitcoin price stability makes gold, oil, and almost everything else look tepid. Spikes like this usually result in a waterfall drop on the other side once the mania stalls.

It has been fun watching it play out, but I think a lot of people are going learn some hard lessons about currencies, market size, and bubbles when this ends. Protect yourself.