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.

via reddit

The wildcard, of course, is some form of government action. The recent guidance from the anti-money laundering arm of the U.S. Treasury, FinCEN, addressed decentralized virtual currencies for the first time, tacitly giving bitcoin the legal stamp of approval, while also paving the way for regulations.

This appears, at least on the surface, generally harmless. Having rules in place can help protect users and prevent illegal activities. It’s impossible to predict, however, how far the government might go as we move into uncharted territory. It’s not hard to see why something like bitcoin, a value transmitter outside the direct control of government, could be viewed as a threat. And at some point, the U.S. could always play the, “well this funds terrorism” card. We can really only wait and see.

Incidentally, if governments were to destroy bitcoin--a potentially gargantuan task in and of itself if we use BitTorrent as a benchmark--the idea would live on. Such is the nature of technology that as long as people believe that this sort of digital currency is the way forward, it would only be a matter of time before someone figured out a new version that successfully subverted previously exploited controls.

@sfnuop