Bitcoin's Tug Of War

This seems to have been a bad week for Bitcoin. Bitstamp.net got hacked, CEX.IO suspened their mining operation and the BTC/USD price plummeted below $200 for the first time since 2013. However, at RTWire we are more excited than ever before.

It's wonderful to see a technology and global economic forces at work and evolve so clearly. Who needs an economics textbook when you can tune into Bitcoin news and see it unveil before your eyes. I'll address each of the above bitcoin 'disasters' and tell you why we view them in such a positive light.

Tug Of War - Robert Clements

 

Bitstamp Hacking

Bitstamp, one of the most well respected Bitcoin exchanges, was hacked with 5 million USD equivalent of bitcoins stolen. This is obviously not great, however unlike the MtGox exchange hacking a year ago, they are back up and running already with minimal/no loss to customers' funds.

This is great because it clearly shows the direction companies that hold bitcoins for customers should be going in. Bitstamp held over 80% of their customers' bitcoins in cold storage. This meant that the hackers could not steal all Bitstamp's money without requiring physical human assistance by the Bitstamp personnel. In the end the hackers could only take less than 20% of the bitcoins that Bitstamp owned from their hot wallet.

What does this mean for RTWire and companies like us that store customer bitcoins?

  • No matter how good/secure we think our systems are we should treat the prospect of being hacked as an inevitability.
  • We should store as many bitcoins as possible in cold storage.
  • We should have enough reserve to cover potential customer losses if our hot wallets are compromised.
  • Our cold storage security policies should be uncompromisingly sound.

 

CEX.IO Mining Suspension

CEX.IO issued a blog post last week saying that their Bitcoin mining operation was no long profitable for them and has suspended it indefinitely until the price is sufficient to generate a profit.

This a great example of market forces in action. The computational power required to generate bitcoins has risen almost exponentially since the first mining operation started 6 years ago. At one point you could generate bitcoins on your slow home computer. Then you required dedicated computers with fast graphics cards in order to have any chance of creating a bitcoin. Next came the companies like CEX.IO and GHASH.IO that used specifically made hardware for mining bitcoins.

Why is CEX.IO's announcement good for Bitcoin? It indicates the mining difficulty might continue to level off. This will mean that a whole new class of mining companies get onboard that were previously too risk averse to contend.

 

Bitcoin Price Plummet

Bitcoin's price falling below 200 USD is good or bad depending on which side of the line you are. What is good to see is liquidity increasing. If Bitcoin were a tug of war then the game we are currently playing is equivalent to two people on each team. If one person loses their footing when pulling the rope then it moves dramatically in favour of the other team. What we want to see is 100 people on each team. Then it doesn't matter if one or two people loose their footing, the rope will still stay steady.

We hope RTWire and its simple API will allow hundreds or thousands of people to play the Bitcoin tug of war and create the strongest most dependable currently the world has ever seen. It has the potential.

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Tug of War – Robert Clements