What the Bitcoin theft might look like in the real world

Would a US$74.5 billion theft bring down the Greenback?

rhettigan / Flickr

The Mt. Gox caper, in which 744,408 Bitcoins disappeared from the Tokyo-based cryptocurrency exchange, doesn’t mean Bitcoin is destined to die,  but it probably will.

If you want a backgrounder on the theft, try this or this.

A lot of people are asking whether this theft means the end of the once high-flying pseudo-currency. Others have suggested Bitcoin’s demise is not a fait accompli.

Looking at it that way, an argument might—might—be made that this theft won’t be fatal.

At the current exchange rate, the lost Bitcoins—equivalent to about six per cent of all the Bitcoins in circulation—are worth US$395 million. What would it be like if a similarly-sized theft of U.S. dollars occurred? According to the St. Louis Federal Reserve the total value of Greenbacks in circulation is $1.24 trillion. So you’d be looking at a theft of around US$74.5 billion. (The total money supply in the U.S. is far higher, at close to US$14 trillion, but while the money supply of Bitcoins will technically hit its upper limit of 21 million units by around 2020, some have argued the actual supply of the currency could theoretically exceed that. A long-winded way of saying, let’s stick with what’s in circulation.)

Now, US$74.5 billion is a whopping sum. But even if someone mounted the crime of the century and made off with that amount from a bank, it would probably kill the bank, but wouldn’t collapse the U.S. dollar. In fact, if you you look at some of America’s biggest white collar frauds (Enron springs to mind) the losses to shareholders would be in that range.

But let’s face it, Bitcoin isn’t an established currency like the U.S. dollar, backed by the “full faith and credit of the United States.” It’s a plaything of corporate anarchists that exists solely on the faith its users place in it that their investment/deposit isn’t going to walk out the virtual door in someone else’s pocket. The only hope I can see for Bitcoin’s survival after this is the creation of a deposit insurance system, similar to the FDIC in the U.S. or the CDIC in Canada, which protects a bank customer’s deposits up to $100,000 in the case of failure. But I have no idea who would ever bankroll such a scheme since a Bitcoin’s value could be anywhere from zero to infinity.

UPDATE: So my initial belief that the name Mt. Gox was a play on Fort Knox was so very wrong. It’s an acronym, for Magic: The Gathering Online Exchange. Good grief.

UPDATE 2: Duncan Stewart goes much deeper here in looking at bank thefts vs Bitcoin exchange thefts. After tallying up all the Bitcoin thefts since 2011, and drawing on FBI bank robbery stats, he concludes “the annual losses due to theft in the Bitcoin currency would have been roughly 1,000 times greater than the equivalent losses in the U.S. dollar currency ecosystem over the same time period.” An interesting read.

 




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What the Bitcoin theft might look like in the real world

  1. Didn’t a theft much lager than 74 billion happen bit by the banks themselves.

    • You mean the bank bailouts?

      That was theft from the taxpayers by the government, in order to pay off the banks for thieving off the taxpayers, after the taxpayers had no more money to pay off their loans to the banks.

      • Yep, taxes are meant for common good but Ottawa spends less than 1/2 our money on common good. Ends up in back room deals, bailouts, inflated contracts and money for nothing deals.

        Bailing our banks, unions, auto, other with our taxes and grand kids debt is immoral and unethical, but power, greed, crooked politicians. But greed, envy, otehr peoples money blinds people in that lack of ethics that Ottawa has become.

        I even will say taxation for all this corruption is modern day slavery as we don’t have any options on the statism rigged ballot to stop it. IT is slavery when you have no options to stop it.

        • Now this is a first, other than the last paragraph, I agree with what you’re saying about taxes here.

          I think your final paragraph is simply being defeatist however. If you see no options to stop it, then doesn’t it behoove you to create such an option? Or get inside one of the established parties and make them create such an option?

    • Yep, take Quantitative Easing (QE). Fancy name to print trillions of no value money to dilute the value of currency. Inflation devaluation tax really. A quiet fraud on the holders of money.

      Government Motors lost more than this, governemtn just printed it to dilute the currency. A chart no “government statism” economist wants to talk about:

      http://www.xe.com/currencycharts/?from=USD&to=CNY&view=10Y

      As it shows the real reason why the depression started. US Fed printed no value money (electronic counterfeiter) causing inflation. People had less value money, so they could spend less on each others jobs, it kicked off the crdit crisis too as no savvy investor buys debt below real inflation+taxes for a negative value return. Statism economists ignored this, 2008 we got the crash.

      Governemtn can’t fix the problem to this day as they are still busy being the problem and not the solution. People with less money after all taxes, hidden and realized, with less jobs, will spend less on each others jobs.

      Jobs is about affordable exchange of desired goods and services. Having government statism bloat consumption of low value, greed of cheap debt sort of killed the economy.

  2. Bitcoin will survive this. The problem is not with the Bitcoin protocol itself, but with the way that Mt.Gox operated. Other exchanges have become much more careful since this has happened, and will not be vulnerable to the same type of theft. These are growing pains for this new currency, and in the future it will become much more secure — perhaps even more secure than so-called “real money”. This might actually be a good time to buy-in…

    • What this proves is that Bitcoin is really no more safe than real money. (but no less, either) At least for the moment. But indeed, it could be a good time to get in.

      • Yep, bitcoin is no different than USD, CAD and other fiat currencies. Bitcoin is a fiat currency like the others.

        Fiat currencies have no guaranteed value. And all fiat currencies are susceptible to the same frauds.

        One of the biggest reasons in fact that he western G8/20 economies of debt fraud are in trouble as for the amount of fraud they do in currency devaluation.

        Not sure it is a good time to get in, I prefer physical in hand gold, put it in a safety deposit box….in 20 years it will be worth only a ounce of gold as an ounce of gold, but it will be worth more in any fiat currency today, including bitcoin.

        Or if you like fiat currency. do Yuan. $100,000 USD into Yuan in 2006 would be about $130,719 USD today just from currency exchange alone as US Fed prints (QE) too much dilutive money. And if you invested it in a large Chinese telecom or business, could have increased to $200,000.

        Debt is never cheap and easy, its just a mater of who and how its really paid for. $9 trillion of Obama-debt isn’t free. It comes as devaluation of US money and economy.

  3. It’s a little premature to call for the death of Bitcoin based on recent events. If you want something with a higher probability try betting on the death of traditional media based on low-quality writing like this which is absolutely devoid of any value or information. If there is anyone reading this who is not already better-informed than the author, please don’t mislead yourself into believing this is an accurate and realistic representation of facts.

  4. Being essentially an electronic currency (until it is redeemed for other currency or merchandise), one would think that bitcoin has a distinct electronic trademark in terms of ownership and should be trackable.

    If that is the case and bitcoin transactions can be traced, as they should be, for accurate use, it should be easy to apply an in-house solution that would have world-wide effect more easily than the international banking system could do. MtGox flagged bitcoin should be frozen until ownership is proven.

    If, as is likely, there was an ‘inside job’, once again the perpetrator(s) should be relatively easy to trace, when the bitcoin, last flagged in Tokyo, is ”redeemed” at another exchange.

    A scam can hurt bitcoin. Government regulation will destroy it.

    • A scam can certainly destroy Bitcoin if the scam destroys people’s faith in it. Maybe that’s the reason why the lamestream media is blabbing so much about it? Maybe this is an effort to discredit Bitcoin for what Mt.Gox did, or didn’t do?

      But indeed, government regulation will definitely kill it.

      • True, government hates competition in fraud fiat money management. And bitcoin is a fiat currency just like CAD, USD, Euro….

    • Yes, theoretically the stolen coins could be tracked. The problem is that even if they were to be tracked to a single wallet address, there’s absolutely no way to identify who owns that wallet address. Likely the only way it would be found is if the owner of the wallet committed some other crime and authorities were able to recover the wallet that way.

      • What i’m saying is ‘freeze the wallet’. If the owner’s legit, they’ll make themselves known. The ‘crime’ part is less consequential than the ‘trust’ issue for bitcoin. If it can be shown that it’s able to ‘police’ itself as a trading currency, it would be better than most.

    • Yep, government rather you accept its fiat fraud money and depreciation in value.

      Its why I don’t lend money any more. All the returns are below real inflation and taxes yeilding a negative value return. Why buy a US Treasury for 1% when real inflation is 3-5%? To lose value?

      Better off buying a stock in a stable economy/currency like China, Chile, Mexico….a non G8/20 corrupt banking economy of ponzi debt fraud.

  5. The bottom line seems to be that Bitcoin will survive if it take on the trappings of a “real” currency, which seems to me to argue against the concept.

  6. Since the USD is losing its value real fast over the years, an alternate currency is the wave of the future. It will come back, maybe as another name.

    • Yes, we need an alternate currency. But bitcoin isn’t it as it is a fiat currency like the rest.

      The needed currency needs one property no fiat currency offers, and that is immutable constant value without the central banking fraud and government corruptions.

      Closest currency to this is physical in hand gold. And ounce of gold will be an ounce of gold in 30 years. Currencies can fail, devaluae but one ounce of gold is one ounce of gold. In Roman times, it bought a statesman’s toga and sandals, today it buys a nice executive suit, shirt and loafers. Survived wars, government frauds and retains value.

      The currency we need has to have immutable value over time. No bitcoin or other fiat currency can do this. As fraud will occur from our own governments as is happening today. It is why the western system is economically sick, too much fiat currency and debt fraud.

      • An oz of gold is currently sitting around $1400. You’re right. That’d get you a nice suit these days.

        In 1999, however, that $1400 suit would have been worth about $1000. Meanwhile, gold was sitting at $200. You would have needed 5oz then.

        Just because it’s up now doesn’t mean it’s not subject to market fluctuations

  7. Fiat currency has no future – as its implemented.

  8. Bitcoin will survive but I have no intention of using it.

    Other fiat currencies like USD and CAD have fraud going on all the time. USD prints trillions of no value money diluting its currency all the time, they call it “Quantitative Easing” but it is electronic counterfeit fo the currency none the less. As if you or I did it, lend ourselves photocopied money to pay the bills we would be arrested.

    Fiat money comes with fraud, bitcoin is no exception. Its why gold is a better investment than fiat money, as physical in hand gold as it cannot be counterfeited, diluted or electronically stolen.

    No fiat currency is worth investing in as a currency. There are better returns elsewhere. Banks don’t pay interest of fiat money any more is they know the future value of fiat money will be less in value. Will buy less, and less stuff. Fiat money is a depreciating asset in the long term as it has no guaranteed value, that includes bitcoin.

    • I’d consider using it, but only like cash, just like any other fiat currency. Physical gold is still the best bet for the long term. Always has been. Always will be.

  9. I had 74 Bitcoins at an average cost of $128 Canadian. I then wrote a valuation on Bitcoin as an exercise to see how my ability to value intellectual would work with probably the most difficult piece of intellectual property in the world.

    I estimated value at $500 to $1000 within a year.
    I estimated it higher for the future to perhaps as much as $10,000 each.

    My stock market investor friends laughed themselves silly.
    They made fun of me so much I was embarrassed to publish.

    Then Bitcoin went down to about $100 and they laughed harder and told me if Bitcoin ever recovered just a little I should sell and mitigate my losses.

    One night it got up to $160 and I put in an order to sell if it went down to $157 which of course it did and I got out with a $2,000 profit.

    I will know in the future to follow my own advice and not listen to the so called smart market guys.

    And I am all done with Bitcoin.
    Risk was one of the things I was totally worried about. How to store it. I left mine with the exchange in Calgary and crossed my fingers they would stay in business and be secure.
    Still the biggest risk in my eyes today. HOW TO SAFELY STORE.

  10. “Bitcoins aren’t destined to die, but they probably will.”

    Then you go on to provide no reason for this prediction but to discourage people from taking it seriously. Poor article at best.

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