Bitcoin’s “stress test”

Bitcoin, which was hyped up recently, has been called "a modern tulip mania that has not bloomed beautiful flowers". But in February, it suffered a devastating disaster. If it can continue to survive in the future, today's crisis is destined to change its course forever.

On February 28, Mt. Gox, a bitcoin trading platform headquartered in Tokyo, Japan, officially filed for bankruptcy protection at the Tokyo District Court, confirming the ominous rumors about this world-renowned trading website that had been circulating on the Internet for some time. On March 10, it was granted bankruptcy protection in a U.S. court.

Mt. Gox was once the world's largest Bitcoin exchange. According to its own claims, it accounted for 80% of the world's Bitcoin trading volume at its peak. Since the beginning of 2014, it has continued to experience technical failures and had to suspend traders' cash withdrawal services on February 7. From noon on February 25, Mt. Gox suddenly closed and its website was deleted. For investors who stored Bitcoin in Mt. Gox's digital wallet, the closure of Mt. Gox was equivalent to the collapse of a bank, and depositors' deposits were wiped out. This not only caused the Bitcoin exchange rate to plummet, but also cast a heavy shadow on the prospects of this virtual currency.

The day before Mt. Gox closed, a piece of news went viral on the Internet saying that the long-standing theft caused Mt. Gox to lose nearly 744,000 bitcoins, which is about 6% of all bitcoins currently on the market. But the real situation is more serious than the rumors: Mt. Gox CEO, young French geek Mark Karpelès, apologized to the public at a press conference held in Tokyo on February 28, saying that a total of 850,000 bitcoins were missing, including 750,000 held by users and 100,000 held by the company. According to the bitcoin exchange rate on February 25, the total value of the lost bitcoins is equivalent to US$ 425 million.

It is not clear whether the bitcoins were stolen by skilled hackers or "disappeared" due to technical defects. Federal prosecutors in New York have issued subpoenas to Mt. Gox and other bitcoin trading platforms and companies engaged in bitcoin business to understand how they responded to recent cyber attacks. Japanese Chief Cabinet Secretary Yoshihide Suga later said that Japanese authorities are investigating the circumstances of Mt. Gox's sudden closure.

In response to the growing concerns of investors due to the Mt. Gox incident, the CEOs of six global Bitcoin exchanges - Bitstamp, Krak-en, Blockchain, Coinbase, Circle, BTC China - as well as payment processor Coinbase and wallet provider Blockchain.info issued a joint statement in late February, promising to ensure the safety of customer funds. The statement distanced themselves from the Mt. Gox incident, saying that Mt. Gox's violation of user trust was a single company's action and did not reflect the value or resilience of Bitcoin and the entire industry.

But no matter what, if Mt. Gox eventually disappears and its lost bitcoins cannot be recovered - which now seems very likely, it will not only be bad news for investors who have bitcoins stored there, but will also be a heavy blow to this most influential virtual currency, which was born only five years ago.

But how big will the impact of the Mt. Gox incident be? Will it trigger a systemic crisis or cause limited damage? It is still difficult to predict.

The Anarchist's Holy Grail

On March 6, 2014, a magical scene took place in the gloomy world of Bitcoin.

Just after 6 a.m. Eastern Time, a report was published on the Newsweek website that the inventor of Bitcoin, Satoshi Nakamoto, had been found: a 64-year-old Japanese American living near Los Angeles, whose real name is Satoshi Nakamoto, a graduate of California Polytechnic State University, and a physicist. However, the usually obscure Satoshi Nakamoto denied any connection with Bitcoin through the Associated Press later that day, and he also said that he did not know what Bitcoin was.

The reliability of this report by Newsweek is indeed very questionable. People in the Bitcoin community generally speculate that the founder of Bitcoin should have a market value of up to 650 million US dollars in Bitcoin. Because some people have studied that the founder himself received a considerable amount of Bitcoin when the project was launched. It is hard to imagine that such an astronomical amount of windfall did not have the slightest impact on the life of Satoshi Nakamoto!

When I saw this news, another conspiracy theory immediately crossed my mind: Why did Satoshi Nakamoto, who had disappeared for nearly four years, suddenly reappear at a time when Bitcoin trading was in turmoil? I am not saying that Newsweek deliberately created fake news, its integrity and professionalism are fully trustworthy. But it cannot rule out the possibility that Bitcoin defenders tried to use such a dramatic "blockbuster news" to save Bitcoin - as we all know, these knights in the virtual world are cryptographic masters with superhuman imagination, and Bitcoin is the holy grail they rely on to save the world.

On November 1, 2008, a person who called himself Satoshi Nakamoto published a paper on the cryptography mailing list of metzdowd.com, describing in professional writing the concept of an electronic currency system called Bitcoin. This new virtual currency does not require any central currency to issue, guarantee or regulate, but runs in a pure peer-to-peer network (P2P network, a decentralized distributed network).

Bitcoin itself is just a series of numbers, and its "mining" process simulates the mining of precious metals: anyone who runs the Bitcoin software on a computer can participate in the generation of Bitcoin by competing in the ability to solve complex mathematical problems. This method is called "mining." The efficiency of mining depends mainly on the performance of the computer, especially the graphics card function, and it also consumes a lot of electricity. The pattern of Bitcoin generation also simulates mineral development: as the most easily accessible resources gradually become exhausted, its supply will also slow down. Every four years, the growth rate of Bitcoin will be reduced by half. The potential Bitcoin "reserves" are expected to be completely mined around 2030, but according to the original mathematical design, the total supply is capped at 21 million.

On January 3, 2009, the Bitcoin network was officially born. Satoshi Nakamoto himself released the first version of the open-source Bitcoin client online, and the world's first 50 Bitcoins were also born. Data from Blockchain.info shows that in the four years since then, more than 12 million Bitcoins have been mined, and the market value peaked at $8 billion at the end of last year. At the current exchange rate, their total value is about $7 billion.

But after the spring of 2010, Satoshi Nakamoto suddenly disappeared from the vast Internet and never appeared again. Because this mysterious online author speaks fluent and beautiful English (it is said that the Satoshi Nakamoto who was found in Southern California on March 6th spoke English haltingly, which makes it even more difficult to associate him with the Internet Knight), and his email address was registered in Germany, most geeks on the forum believed that "Satoshi Nakamoto" was a pseudonym. The American media had conducted many investigations before, and speculations about his identity included a young British banker, a Finnish programmer, an American law professor... Others believed that given the complexity of the original idea of ​​Bitcoin, it was unlikely to be created by one person unless that person was a genius. Some people therefore suspected that Satoshi Nakamoto was actually the code name of a secret R&D team at Google, and some boldly imagined that the CIA or Russian intelligence agency was behind Satoshi Nakamoto...

However, almost all the suspects have categorically denied that they are the creators of Bitcoin. But for Bitcoin fans, it is not important who is its creator, because once the network is launched, it will start to run spontaneously, and Satoshi Nakamoto himself cannot control it.

From the original design of Bitcoin, the biggest feature of this digital virtual currency is decentralization and constant total amount. This means that the country cannot create inflation by over-issuing currency and steal the money of ordinary people in disguise; at the same time, because it is a point-to-point decentralized transaction, its system will not be completely destroyed, and there is no risk of central system failure causing the whole transaction system to be paralyzed. In addition, Bitcoin has the following advantages: 1. It circulates globally without borders, bypassing foreign exchange control; 2. There is no seigniorage, and transactions are simple and cost-effective; 3. It is easy to save (the "electronic wallet" kept by the "private key" password can be kept online or stored offline), and there is no theft problem; 4. Anonymous transactions, maximum privacy protection...

In short, the concept of Bitcoin completely subverts the so-called "legal currency" issued by the government in the past. In the eyes of anarchists who hope to build a utopian free and just society, it is the best weapon to resist the greed and exploitation of capitalism. A well-respected venture capitalist in New York once said that since the birth of the Internet, no technology has ever been seen with such great imagination and revolutionary power.

In fact, the idea of ​​virtual currency predates the birth of Bitcoin. As early as 1988, an article entitled "Crypto Anarchist Manifesto" predicted such a future in an ambitious tone: the technology of protecting anonymity makes it impossible for the government to control the market, and any item can be sold to anyone at any time, completely tax-free. In 1990, when the Internet was just emerging, American David Chaum created the concept of electronic currency (ecash), and five years later, it was used in a small bank called Mark Twain in St. Louis, Missouri. However, these various ideas were either never implemented or disappeared after a short-lived popularity.

Only Bitcoin looks like a more rigorous and feasible experiment.

From novelty to fame

The first to accept this new thing are naturally IT pioneers and network elites. Since 2011, Decrypt, Singularity Institute, Internet Archive, Free Software Foundation and other organizations have begun to accept Bitcoin donations. In November 2012, the famous blog service provider WordPress also announced that it would accept Bitcoin payments, explaining that users in Kenya, Haiti and Cuba were blocked by the international payment system, and Bitcoin could help. According to a recent survey of nearly 1,000 respondents by Tech in Motion, by the end of 2013, nearly 70% of American professional technicians had clearly stated that they accepted or were willing to try Bitcoin.

On May 21, 2010, a person named laszlo bought a pizza coupon with 10,000 bitcoins (equivalent to $25 at the time), which was the first reported transaction of using bitcoin to buy physical goods. At first, only a few places could use bitcoin, the most famous of which was a black market called Silk Road, where bitcoin could be used to buy almost anything.

The Cyprus financial crisis that broke out in 2012 became an important opportunity in the short history of Bitcoin. On the one hand, this serious crisis caused more and more people to lose confidence in the current world economic and financial system, which was riddled with holes. On the other hand, as the Cypriot government irresponsibly levied taxes on bank depositors and imposed strict capital controls, a large amount of private funds sought a way out. At this time, Bitcoin became their best refuge. Data shows that the surge in the exchange rate of Bitcoin against the US dollar was synchronized with the Cyprus crisis.

Therefore, if one day in the future Bitcoin can really replace all current legal currencies, end today's US dollar system, and become the new world currency, 2013 can be regarded as its "first year" - it was in this year that Bitcoin truly stood out and became widely known.

At present, from online social network game provider Zynga to Alvic Property Management in Brooklyn, New York, from US transaction technology company Perseus Telecom to the University of Cumbria in the UK... not only Internet companies, but more and more institutions accept Bitcoin payments.

On October 29, 2013, three young entrepreneurs opened the world's first ATM machine that can exchange Bitcoin for real money in Vancouver, Canada. This Bitcoin ATM was manufactured by Robocoin, an American machine currency manufacturer, and it converts currency online through Canada's VirtEx server. Users can spend Bitcoin with their smartphones like using a credit card, or make online purchases through currency conversion. The first batch of Bitcoin ATMs in the United States will appear in Seattle, the headquarters of the famous Microsoft and Boeing companies, and Austin, the capital of Texas; the first Bitcoin ATM in Europe will be installed in Cyprus, which is plagued by the financial crisis, to facilitate people to convert their savings that will be taxed into Bitcoin; in Asia, Singapore is expected to become the first city with a Bitcoin ATM, which is scheduled to debut in mid-March this year...

Bit-Pay, the world's leading Bitcoin payment company, released a report in October 2012 saying that at that time there were only more than 1,000 merchants in the world that accepted Bitcoin payments through their payment system. But the latest data shows that there are currently about 20,000 merchants accepting Bitcoin payments. As Bitcoin's fame grows, some merchants use its acceptance as a marketing tool, causing this number to grow rapidly.

The first time Chinese people came into contact with Bitcoin may have been on Taobao. According to reports, in June 2011, a store engaged in Bitcoin exchange appeared on Taobao. A year later, in July 2012, young financial columnist Duan Hongbin established China's first Bitcoin hedge fund. Since then, as Bitcoin fever continues to heat up, in addition to the first batch of IT players, more and more people in the financial industry and academia have also participated.

The enthusiasm of the Chinese market for Bitcoin suddenly surged in 2013. In terms of the number of Bitcoin electronic wallet downloads, China ranked 6th to 7th in the world in 2012, with only 1/9 of the United States. However, in May 2013, China surpassed the United States for the first time and ranked first in the world, and has remained in the first or second place since then. As a result, BTC China, which was just registered in June 2013, surpassed Mt. Gox and Bistamp in November of that year and became the world's largest Bitcoin trading platform. At present, it accounts for about one-third of the global market. A mysterious company called "Baked Cat" has also appeared in Shenzhen. It is a Bitcoin "miner" and also one of the fashionable Bitcoin mining machine suppliers. The most surprising thing is that the bonds and stocks issued by "Baked Cat" are all denominated in Bitcoin!

However, the situation is slightly different from that in Europe and the United States. Most Chinese investors are interested in Bitcoin not because of its beautiful ideals, but because of its skyrocketing value in April and May 2013. On the one hand, this once again confirms the gambling nature of the Chinese people - in terms of speculation, liquidity and lack of supervision, Bitcoin is undoubtedly the best chip; on the other hand, it also highlights the current lack of good investment opportunities in China. In addition, China's foreign exchange control policy makes it impossible for domestic funds to be freely remitted overseas. For those who have such needs, Bitcoin is particularly attractive.

The massive influx of Chinese investors has in turn become the main driving force behind the rise in Bitcoin prices. From the dynamic data, the Chinese Bitcoin market has always been in the leading position in the past year, driving the rise in global Bitcoin prices. Throughout 2013, the value of Bitcoin in US dollars has risen by nearly 56 times, mainly due to the significant increase in demand for Bitcoin in the Chinese market.

The value of the company has skyrocketed, but it has also fluctuated greatly

Perhaps because more and more people are optimistic about its prospects, in the less than four years since the birth of the "fair exchange rate" of Bitcoin in the summer of 2010, its "value" has skyrocketed far beyond any other investment product. On July 17, 2010, 1 Bitcoin was exchanged for 0.05 US dollars. By November 29, 2013, 1 Bitcoin on the Mt. Gox platform rose to a historical high of 1,242 US dollars; on the same day, the peak price of 7,273.47 yuan appeared on the Bitcoin China platform. After that, its price fell back.

Before the Mt. Gox crisis, the price of Bitcoin was around $800, but by the last week of February it had fallen to $500, more than half of what it was three months ago. But such roller coaster-like ups and downs are commonplace for Bitcoin, a new thing. In June 2011, the price of Bitcoin plummeted after reaching $31, and fell to $2 five months later; after the Spring Festival in 2013, the price of Bitcoin was only a little over $20, but it suddenly soared to more than $260 between March and April; after mid-April, it suddenly fell to $140; then it rose again to more than $600, fell back to below $200 in the summer, and then rose sharply again in November, climbing to the $1,000 mark...

However, what is puzzling is that, unlike other investment products, the price of Bitcoin varies greatly on various trading platforms around the world. This ironically reveals the immaturity of this future "world currency" that claims to "break through national boundaries."

Charles Schumer, a Democratic senator from New York who has a strong sense of likes and dislikes and is known for his outspokenness (he was also the most active proponent of imposing punitive tariffs on Chinese exports to the United States), once disdainfully called Bitcoin transactions "online money laundering." However, as Bitcoin transactions become increasingly popular and its value soars, governments around the world have recently turned their vigilant eyes to this new Internet thing that is determined to subvert them since its infancy.

Among the major financial regulators in the world, the European Central Bank is the earliest to pay attention to Bitcoin. In a survey report on virtual currencies released in October 2012, it stated that given the small scale of virtual currencies represented by Bitcoin, it is not enough to cause concern, but its development trend should be monitored to prevent it from posing a threat to financial stability.

In March 2013, the U.S. Treasury Department's Financial Crimes Enforcement System issued a ruling that all companies that exchange or transfer virtual currencies are "money service providers" and must register with the government, make anti-money laundering inspection arrangements, and provide employee training. At the same time, the bank accounts of several Bitcoin service companies were closed, indicating that traditional banks are increasingly concerned about the expansion of this virtual currency.

In November of the same year, the U.S. Senate held a hearing on Bitcoin, and many federal officials agreed that it was a "legitimate financial service." Ben Bernanke, then chairman of the Federal Reserve, also said that although virtual currencies do pose a risk of money laundering, "virtual currencies may have good long-term development in certain areas" and are expected to make the global payment system more efficient. This was understood as a vote of confidence from the Federal Reserve in Bitcoin, causing the price of Bitcoin to more than double in a week.

But in early December, the People's Bank of China, which had remained silent, announced that although Bitcoin is called "currency", it is not a real currency because it is not issued by the monetary authority and does not have monetary attributes such as legal compensation and compulsion. "In terms of nature, Bitcoin should be a specific virtual commodity that does not have the same legal status as currency and cannot and should not be circulated and used as currency in the market." The central bank did not ban Bitcoin, saying that ordinary people have the freedom to participate at their own risk. However, it explicitly prohibited financial institutions from conducting Bitcoin business and emphasized the related dangers - such as market manipulation, money laundering and use for criminal activities.

The People's Bank of China then interviewed more than 10 of the largest third-party payment companies and asked them to stop all transactions related to virtual currencies. Soon, China's three largest electronic trading platforms - Alibaba (Taobao), TX and Baidu - successively stopped Bitcoin payment services. And China's largest Bitcoin exchange Bitcoin China (BTC China) also received instructions from the central bank not to absorb RMB funds from Bitcoin buyers.

The no-confidence vote by Chinese regulators caused the price of Bitcoin to plummet by two-thirds, but it has since recovered. Because many investors are still secretly trading Bitcoin through other channels, China's Bitcoin trading has not come to an end.

In a nutshell, the attitudes of regulatory authorities around the world towards Bitcoin can be roughly divided into three types: EU countries represented by Germany and the United Kingdom basically adopt a laissez-faire attitude. They only claim that it is necessary to closely monitor the development of Bitcoin and protect consumer rights from being harmed; emerging developing countries represented by Russia and India are completely the opposite. They have or intend to completely declare Bitcoin illegal and completely ban it. These countries also include Thailand (it is the first country in the world to ban Bitcoin); the United States, China and Japan, as the world's top three economies, are in the middle of these two extremes. These three countries have not banned Bitcoin transactions, but have clearly banned its monetary function and simply classified it as an ordinary commodity. The Chairman of the Federal Reserve and the Financial Services Agency of the Japanese Ministry of Finance also announced that Bitcoin needs to be regulated, but they have no regulatory power over Bitcoin.

The Mt. Gox incident seems to have once again confirmed that the authorities' vigilance and concerns about Bitcoin are well-founded. For Mt. Gox, this is not the first time that a similar hacker attack has occurred. As early as June 19, 2011, Mt. Gox was hacked, resulting in the loss of 60,000 accounts and the generation of a large number of orders with an exchange price of $0.01 per BTC, while the price of a Bitcoin was more than $20 at the time. In fact, major Bitcoin trading platforms around the world, including BTC China in Shanghai, Bitstamp in Slovenia, and BTC-e in Bulgaria, have all been hacked. Since June 2011, there have been many cases of hackers stealing Bitcoin around the world, causing losses of tens of millions of dollars.

In addition, fraud is another common problem. According to Mt. Gox's own statement, hacker attacks led to the theft of its bitcoins. But the lead lawyer of the class action lawsuit accused the company's bankruptcy of being a trick, believing that the case involved large-scale fraud. This inference is not without reason - at the end of October 2013, a Chinese bitcoin trading platform called Global Bond Limited suddenly closed its website and took away investors' money worth about 25 million yuan .

What is particularly worrying is that the anonymity of Bitcoin makes it very difficult to track criminals at this stage. Perhaps it is precisely because of its anonymity, cross-border nature and lack of government regulation that Bitcoin is popular in the underground economy. In October 2013, the FBI took down the Silk Road website and arrested its owner, Ross William Ulbricht, because it was one of the largest trading markets for smuggling, drug trafficking, counterfeiting documents and other prohibited goods in the world. As mentioned above, it was also one of the first merchants to accept Bitcoin payments and the largest market for Bitcoin payments. Ironically, by confiscating Silk Road's assets, the US government has become one of the world's largest Bitcoin holders.

Conclusion: The future of virtual currency

At present, concerns caused by the bankruptcy of Mt. Gox have swept the global Bitcoin trading. Different positions determine different people's expectations of the future of this virtual currency that lacks sovereign guarantee and government supervision.

The negative views on the prospects of Bitcoin mainly focus on the following two aspects: first, this ambitious experiment ended in failure because security technology could not keep up with the needs of rapid market expansion. Bitcoin's inherent genes give it unpredictable risks (this is actually the dark side of its immeasurable value), which we have already seen in the Mt. Gox incident; second, related to this, the characteristics of Bitcoin make it a favorite of criminal activities, which makes it very likely that this innovation will be strangled by regulators due to the huge side effects it causes. Moreover, the willingness of governments to ban Bitcoin will be further strengthened because of their concerns about competition from sovereign currencies.

Fortunately, at least so far, the governments of the world's most important economies - the United States, Europe, China and Japan - have not closed their doors to it, giving it a chance to "reform."

People who used to be bullish on it still believe that Mt. Gox's bankruptcy is just an isolated case, just as the collapse of Lehman Brothers does not mean the collapse of the entire financial system. Bitcoin's most famous early supporters, twin brothers Cameron and Tyler Winklevoss (Cameron Winklevoss and Tyler Win-klevoss, who have always claimed that they are the inventors of the F... B concept, accused Mark Zuckerberg of being a plagiarist, and once took a verbal lawsuit to former U.S. Treasury Secretary Lawrence Summers, the brothers have a total market value of hundreds of millions of dollars in Bitcoin) said that the collapse of Mt. Gox "highlights the degree of evolution of the Bitcoin ecosystem." The Winklevoss brothers wrote in an email: "Mt. Gox is a thing of the past, and the smartest people in this field are working hard to create a responsible and secure future...Several trading platforms have taken over it perfectly and seamlessly, and the market price has also shown a clear recovery."

This view has even been cautiously supported by some US regulators. Benjamin M. Lawsky, head of the New York State Department of Financial Services, who has been tracking Bitcoin for a long time, believes that the bankruptcy of Mt. Gox is part of the competition for survival and may eventually make the virtual currency industry stronger. "For the virtual currency market, this is a blow on the one hand, but on the other hand it will make the entire industry mature and standardized through integration and restructuring, and bring more supervision."

Therefore, in the view of some optimists, now is even the best time to invest at the bottom.

As for the criminal risks inherent in anonymity, Bitcoin believers correctly point out that Bitcoin transactions are at least electronically recordable, and there is no currency that leaves no trace or is more difficult to track than cash, but from shells, precious metals to paper money, humans have been using cash for thousands of years and are still using it today. Therefore, the crux of the problem is not security risks, but improving the ability to prevent and control risks.

In my opinion, what Bitcoin is experiencing now is a real "stress test". If Bitcoin wants to become a truly viable and reliable currency, it must prove that it can cope with the various crises that real-world currencies face. Therefore, similar crises will not be the first, nor the last. The future is unpredictable, and Bitcoin as a "currency" may eventually be eliminated in the competition for survival, but the era of digital virtual currency it represents will eventually come, although Satoshi Nakamoto's utopian ideal of trying to completely get rid of government regulation may be greatly discounted.