The Ifs and Buts of Bitcoin


It could be argued the only reason that crypto-currencies such as Bitcoin have been given any sort of house room by the markets is that, as a general rule, there is far too much money chasing too few attractive investments. And that word “attractive” is worth refining into its modern sense. By and large it no longer means, “safe” and “reliable” but “high return”. But with any security offering a large profit, there is also a large risk.

And those who have poured fortunes into the likes of Bitcoin are discovering that such risk does not simply consist of the high volatility in the value of their computer-generated currency. A new problem has emerged which, however it is sorted, is likely to undermine this supposedly ultra-secure store of value.

Bitcoins are kept in so-called “digital wallets”, offline accounts, which store the results of the online blockchain transactions using the crypto-currency. The processing of the transactions produces a permanent record of every single deal but does not identify the parties involved. The blockchain validates a Bitcoin but does not show who has title to that coin. And this very anonymity has proved a very expensive weakness.

Last December, Gerald Cotten, the founder of one of the major Bitcoin exchanges died and took with him to the grave key passwords to the strict security system on which he had built his QuadrigaCX business. No one else enjoyed Cotten’s level of privileged access. The result is that at least $190 million (some reports put the figure significantly higher) of Bitcoins cannot be accessed, because the passwords on Cotten’s computer were all heavily encrypted.

Desperate QuadrigaCX managers have been trying to crack the cyphers, so far apparently without success. This may give comfort to holders of crypto-currencies elsewhere who use the same level of password encryption. However, by the same token, given the huge figures at stake here, those who have apparently lost significant sums, will want to spend whatever it takes to decipher Cotten’s password system.

The irony is that if the codes are broken successfully, it will undermine the claim of crypto-currencies to be extremely secure. Perhaps such a debunking is long overdue. As even the US Defense Department and the Pentagon have discovered, to their extreme discomfort, there is in truth no such thing as a completely secure computer system.

Clearly those who hold these cyber-assets need to ensure that they can be accessed in the event of their death. Current solutions include multiple access, which presents an obvious risk and something called a “dead man’s key” which allows a crypto-currency account to be accessed after its owner has not logged in for a specified period of time.

In the greater scheme of investments, this artificial money remains a high-risk investment where too much security can prove every bit as hazardous as too little — hackers have already stolen millions from supposedly secured digital wallets.

And then there is the whole business of currency mining, earning bitcoins allowing your computer systems to do the transaction processing. Countries such as Iceland with cheap power have seen a massive surge in electricity demand from local Bitcoin miners. However, a Bitcoin that peaked at $20,000 is now worth around $3,000, less than it costs in the miners in electricity.

requires significant computer time