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3/12/2014
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Bitcoin, Meet Darwin: Crypto Currency's Future

First-movers rarely survive, but some experts see a real future for government-issued crypto currency.

In five years, might the Bitcoin market be little more than a smoking ruin?

That's the dystopian future facing crypto-currency traders, if the current pace of attacks against Bitcoin exchanges and holders continues. Both could see a never-ending onslaught of distributed denial-of-service (DDoS), hacking, and malware attacks designed to drain their virtual currency coffers.

But the possibility that Bitcoin might burn is good news for anyone who cares about crypto currencies, as well as the future of our monetary system. In other words, just because one cryptographic currency gets pummeled, the odds are that the next "Satoshi Nakamoto" will build an even better one.

Beyond Bitcoin, which has the world's largest virtual currency market capitalization (nearly $8 billion), there are at least 100 other crypto currencies, ranging from Ripple ($1.4 billion) and Litecoin ($453 million) -- also at the high end -- to Deutsche eMark ($106,000) and Grumpycoin ($88,000) at the low end. Even criminals have begun to diversify into homemade crypto currencies, because they see Bitcoins as being too volatile for storing their ill-gotten gains. Meanwhile, a Lakota Indian named Payu Harris is even promoting a new crypto currency called Mazacoin, which he hopes will provide the Lakota nation with greater independence.

[Can new regulations be a good thing? See Snowden, Bitcoin, Data Breaches Foretell New Regulations.]

When it comes to the prospect of nations minting virtual money, Harris might be on to something. According to former Central Intelligence Agency CTO Gus Hunt, in the future, the dollar could well become a crypto currency. "Government's going to learn from Bitcoin, and all the official government currencies are going to become crypto currencies themselves," he said during a recent panel discussion in San Francisco hosted by information security firm eSentire, for which he sits on the board of advisers.

Eventually, however, Bitcoin itself may be supplanted. "I believe that Bitcoin is going to go the way of Napster: it ended up being a commercially viable idea that infringed upon very, very well-financed [music industry] organizations," said G. Mark Hardy, president of National Security Corporation, speaking at the same panel discussion as Hunt. "[That industry] did rent-seeking, they went to Washington, they got the DMCA [Digital Millennium Copyright Act], and a couple of other pieces of legal action to go ahead and smack down Napster, but then [resurrected] it as a profit-oriented thing called iTunes, which generates billions in revenue for Apple," Hardy said.

Image credit: zcopley on Flickr.
Image credit: zcopley on Flickr.

From an evolutionary standpoint, what crypto currencies can offer us, as well as how they must be improved to become safer to use, is being highlighted via people's embrace of Bitcoin. "The concept is great, [but] the execution has a couple of things -- the deflationary currency, there's no central bank to be able to regulate the amount of coins that are in there... that would be good to have in there," Hardy said. "As a result... my recommendation -- and this was back when [a] bitcoin was [worth] about 900 bucks -- was to sell-sell-sell because you're going to get the chance to buy-buy-buy something else that's going to offer stability. Right now, you're playing a casino game."

Accordingly, anyone who focuses on Bitcoin as the bellwether for the crypto-currency concept's success is ignoring how business uses of technology typically evolve. "All you've cited is the myth of the first-mover advantage, right?" said Hunt, the former CTO of the CIA. "The real advantage goes to the second-mover: AltaVista, Google; Napster, iTunes."

To use a medical analogy, battlefields -- whether during the Civil War, Vietnam War, or the recent wars in Iraq and Afghanistan -- typically produce major advances in emergency medicine and trauma surgery, because the quantity of casualties leads to new innovations. Might not the same be true for Bitcoin and future crypto-currency systems?

"I didn't realize Bitcoin is a land war in Asia," said Dan Kaminsky, chief scientist of White Ops, in response to that question. The expert penetration tester spent four months trying and -- surprisingly, he said -- failing to find exploitable weaknesses in the Bitcoin protocol.

While Kaminsky is neutral on Bitcoin itself, on the innovation front, he said, it's "fascinating technology that can inform a lot of future development," for 

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Mathew Schwartz served as the InformationWeek information security reporter from 2010 until mid-2014. View Full Bio

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Saturation
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Saturation,
User Rank: Apprentice
3/12/2014 | 3:16:27 PM
Bitcoinitis
Currently all the furor over Bitcoins assumes it will the top player in the growing field.  But anyone can create another Bitcoin protocol, each upgrading either the protocol's flaws or flaws in the human component: regulation and organization.  Even if a less regulated, less traceable version of bitcoin survives to allow clandestine money flow, countries can easily outlaw it to create and nurture their own bitcoin currency or at least, those it sanctions.  A true world wide currency can exists that in science fiction were referred to as 'credits'.  In a global market, as all country economies are affected by each other's economic activities, it more unlikely for a currency to exists outside of the world system; consider the effect of being outside the world economy to the North Korean won or the Cuban peso.  The bottom line is the government controlled versions are more likely to flourish, so there is even more odds for bitcoin to not succeed in the long term.

 
Lorna Garey
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Lorna Garey,
User Rank: Ninja
3/12/2014 | 3:26:33 PM
So, is the model a DMZ?
Is the big-picture that you store your cryptocurrency offline, then when you want to spend some, you move it into a "DMZ" or airlock en route to the payee? Only a small amount is vulnerable, and only for a short period of time?
Laurianne
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Laurianne,
User Rank: Apprentice
3/12/2014 | 3:32:47 PM
Bitcoin/Napster
What do you think of the Bitcoin/Napster comparison, readers? Will the second movers be more likely to win your trust?
Thomas Claburn
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Thomas Claburn,
User Rank: Moderator
3/12/2014 | 4:11:02 PM
Re: Bitcoin/Napster
The analogy is somewhat fair, though while Napster clearly violated copyright law, I don't think Bitcon is illegal outside of separate incidents of money laundering or other financial crimes.

The thing I find difficult to understand is why one would want a currency that exists outside of a government. Governments exist in part to protect those who pay into the system. If you're rejecting governance out of some libertarian notion of freedom, it seems odd to expect any help from the government when the hackers come for your Bitcoins. You're on your own, for better or worse. And lately Bitcoin seems to have more worse than better.
ZedicusJones
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ZedicusJones,
User Rank: Apprentice
3/12/2014 | 5:38:18 PM
Re: Bitcoinitis
You could probably ban exchanges effectively, but the peer to peer nature of the blockchain means that there's no effective technical way to prohibit or reverse a transaction.

 

The beauty of these various blockchains is that they operate by consensus. If a government sticks thier hands in it, and modified it to protect the role of banks,  and mucks it all up (to put it politely), why would anyone go for it over current supplies.

Banks and big corps are never going to willingly accept the public nature of the blockchain either.


So at best we can expect governemnts and banks to adopt some of the technological measures that bitcoin uses, but they aren't going to adopt any of the big revolutionary ideas.
ZedicusJones
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ZedicusJones,
User Rank: Apprentice
3/12/2014 | 6:05:33 PM
Re: Bitcoin/Napster
Bitcoins are not more worse than better. The markets are learning and improving. Hardware devices are appearing to make transactions more secure.  The free coinage of money is going to be a wonderful boon the the market economy, and the idea of this public distributed blockchain is what makes this idea practical. 


This is a case of buyer beware. The weaknesses of the Bitcoin system that these attacks are expoiting are well known and publicized, and are for the most part easily avoided.

 

It is logically possible to believe government should punish criminals but should not issue money. People are expecting the government to track down the theives as theft is a crime, however nobody sane is expecting the government to indemnify losses due to theft, as those by default are borne by the owners of a property. Just as if I take cash out of the bank, I'm responsible for losses, but I'm still going to file a police report if somebody mugs me and takes my wallet.
g33ksupport
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g33ksupport,
User Rank: Apprentice
3/13/2014 | 9:09:32 AM
Re: Bitcoin/Napster
I guess first we would need to distinguish between second movers and copy cats.  There are plenty of other cryptocurrencies that have tried to jump on the band wagon yet offer little more than Bitcoin.

The biggest issue it currently has is the comparisons and exchange rate with fiat currenciesl.

For example, if I buy an some components for 1 btc and then sell the assembled item for 2 btc, I have made 100% profit.  But when I start factoring in exchange rates, depending on when I obtained the bitcoin will massively impact my profit.  For it to work, everyone using it has to be on the same page and not be interested in cashing in when things are good or bad.
Whoopty
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Whoopty,
User Rank: Moderator
3/13/2014 | 11:00:29 AM
Re: Bitcoinitis
That's a good point and I'm not really sure Bitcoin could ever go the way of Napster and in essence be killed off in its original form. Even if Bitcoin doesn't become a world wide, regularly used currency, as long as it maintains some semblance of stability, whatever that value is, it has potential for use a way of trading instantaneously. There might be better alternatives in the future, but I think Bitcoin is going to be arounnd for a long time. 
ZedicusJones
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ZedicusJones,
User Rank: Apprentice
3/13/2014 | 2:32:19 PM
Re: Bitcoin/Napster
In a way cryptocurrencies are the second movers of non-governmental electronic payment systems, after failures like e-gold.

 

Stability should increase as more vendors and employeeds accept it at payment, and as secondary markets mature (being able to against hedge agains sudden shifts in value). In some ways these cryptocurrencies have been too successful, increasing in value faster than you want in a unit of account.
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