After Mt Gox: Bitconned

After Mt Gox: Bitconned

Mar 5th 2014, 17:45 by P.H. | SEATTLE

JUST over a week ago, Schumpeter wrote about the collapse of Mt Gox, the once-dominant Bitcoin exchange that disappeared in late February along with almost half a billion dollars of customers’ cryptocurrency (and $65 million of its own)—all presumed stolen. Schumpeter’s reward for his article was open warfare in the comments section. A large minority of commenters pilloried Schumpeter for daring to criticise their belief in the almighty Bitcoin. The remainder questioned the sanity of anyone believing in what one commenter described as “the currency equivalent of unicorns.”

Mt Gox subsequently filed for bankruptcy, after which the formerly elusive Mark Karpeles, Mt Gox’s chief executive, stated that “There was some weakness in the system, and the Bitcoins have disappeared. I apologise for causing trouble.” Given the scale of Mt Gox’s apparent incompetence and the cyberheist itself, this may qualify as understatement of the year.

In the wake of Mt Gox’s implosion, the Bitcoin community closed ranks, with everyone from rival exchanges to the Bitcoin Foundation, the virtual currency’s trade group, assuring Bitcoin users that their funds were safe and, in a crypto-nutshell, that “it couldn’t happen here.” All this while being painfully aware of the many serious bugs, holes and other weaknesses in the Bitcoin ecosystem—and while many virtual-currency businesses were quite visibly under attack from hackers eager to get their hands on the approximately 93% of Bitcoins that remained in circulation after the Mt Gox theft.

On March 3th it became clear that the hackers may be winning. Canada-based flexcoin, which calls itself “the Bitcoin bank”, said it was shutting down after all 896 Bitcoins (worth about $570,000) in its “hot wallet” were stolen. A “hot wallet” is a form of Bitcoin storage that is connected to the internet to facilitate transactions, as opposed to offline “cold storage”. Keeping large amounts of Bitcoin in the hot wallet is generally seen as poor security practice, as those coins are vulnerable to attackers. Flexcoin, it turns out, had a serious flaw in the code that enables transfers between its users. By sending thousands of simultaneous transfer requests, a hacker was able to “move” coins from one user account to another until the sending account was overdrawn, before balances could be updated. This was then repeated through multiple accounts, snowballing the sums involved, until the attacker withdrew all the coins.

The next day Poloniex, which describes itself as “a fast, secure exchange” for trading virtual currencies, said a hacker had exploited a flaw in its software and made off with 12.3% of its Bitcoins. Tristan D’Agosta, Poloniex’s owner, said he takes “full responsibility”, and is “committed to repaying the debt”—eventually. In the meantime the exchange has reduced all its users’ balances by 12.3%, and has frozen withdrawals. Not exactly a triumph for liquidity.

And so the bad Bitcoin news keeps on coming. Japan’s government says it may tax Bitcoin transactions and profits, although keeping track of either will be a challenge. Rumours continue to abound that other Bitcoin businesses are in trouble—some seriously. And on February 28th 28-year-old Autumn Radtke, chief executive of First Meta, a Singapore-based virtual-currency exchange, was found dead in her home, a suspected suicide. As yet, nobody knows if her death was related to her business. No hacks against First Meta have been reported or rumoured.

Rumours, beliefs, flaws, bugs, hacks, heists, exploits… Sometimes it seems that the lingua franca of Bitcoin consists of very little else. Safer, perhaps, to believe in unicorns.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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