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Latest Heist Highlights Cryptocurrency Trading Risks

By Scott Malone, Capital News Service

The most recent bitcoin theft involving one of India’s largest cryptocurrency trading platforms serves as a reminder of the risks associated with buying and selling internet money.

Coinsecure fell victim to a heist in April, resulting in the loss of 438 bitcoins – roughly $3.6 million at current bitcoin prices.

According to Coinsecure’s website, the stolen tokens were siphoned off to a bitcoin address, also known as a wallet, between 12:35 a.m. and 6:29 a.m., April 9. Though a chief security officer notified the platform’s technology head, questions remained over what happened and how it was handled.

Coinsecure’s incident is the latest of a growing list involving cryptocurrency exchange thefts – one of the major issues that leave proponents and critics divided on the future of such decentralized digital currencies, which don’t require a central bank but rather function through individual transactions.

Supporters believe that cryptocurrencies, like bitcoins, are the wave of the future – a paradigm shift from the traditional banking system. For example, Tim Draper, a bitcoin supporter and founder of venture capital firm Draper Fisher Jurvetson, predicted on Twitter in April that bitcoins will be worth $250,000 each by 2022.

As a major investor in bitcoins, Draper’s optimistic prediction shouldn’t be shocking, but sharply contrasts opinions held by other Wall Street powerhouses, among them Warren Buffett and Charles Munger of Berkshire Hathaway Inc.

Skeptics, or “nocoiners” as they are called in crypto-culture, are accused by critics for opposing bitcoin because of competitive reasons. But many observers consider the speculative value of the cryptocurrency to be a major problem.

“In most markets, when you trade an instrument there is some purpose to the instrument underneath. You buy a stock because there’s a company that has earnings, you buy currencies because there’s a country that has a gross domestic product – imports and exports,” said David Golumbia, an associate professor at Virginia Commonwealth University and author of “Politics of Bitcoins: Software as Right-Wing Extremism.”

“Bitcoin is just bitcoin; there is nothing that drives its value.”

Concerns over speculative value are one possible reason these e-coins have received a risky image. Other factors include the hacks and heists that spotlight security issues within the platforms many coin-holders use for trading.

For example, Coincheck, one of the largest cryptocurrency exchanges in Asia, suffered a hack in January that resulted in roughly $530 million of stolen funds, overtaking the disappearance of $480 million worth of bitcoins from an exchange called Mt. Gox in 2014.

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Golumbia, these exchange companies are one of the major ways individuals make off with millions of dollars’ worth of bitcoins. In many cases, he said, the exchanges themselves were responsible for the thefts.

The popularity of the exchanges gives a glimpse into understanding the difficulties associated with buying and selling cryptocurrencies.

A bitcoin owner who wants to sell it for U.S. dollars would have to use a blockchain, a digital list that allows people to transfer cryptocurrencies and also publicly records the transactions.

“There’s no organization associated with that; there’s no company,” said Golumbia, whose book examines the influence of libertarian and conservative thought in the cryptocurrency movement. “All you can do on that network is send bitcoins from one address to another and there’s a fee associated with that. That’s all you’re doing – moving the money.”

However, there’s no guarantee someone will accept the transaction on blockchain. This is where exchanges come in. Cryptocurrency exchanges, such as Coinsecure, connect buyers and sellers for a price. They act as middlemen, taking a fraction of the currency as payment for making the trade happen.

“Roughly speaking, you pay a little bit more than you would on the blockchain network,” Golumbia explained, and “the transactions will happen relatively quickly because it’s kind of internal to [exchanges], as opposed to putting [a transaction] up on the blockchain where it could literally never happen.”

Not only that, there may also be concerns about Russian involvement in blockchain technology. Last year, members from over two dozen countries attended a meeting in Tokyo to discuss standards for blockchain. When asked why Russia was so interested in the technology, a Russian intelligence agent said that “the internet belongs to the Americans – but blockchain will belong to us,” according to the New York Times.

Because there is no guarantee that a buyer will actually pay for the bitcoin, exchanges have become popular for trading cryptocurrencies, but they also “essentially hold your bitcoin, and that isn’t how the bitcoin network was supposed to work,” Golumbia said. Someone who owns cryptocurrency tokens and uses an exchange to buy and sell must rely on the exchange’s security.

“These securities have been shown to be real places of failure,” Golumbia said, “either because people can hack them, or because the operators have been dishonest and walk away with a lot of the [tokens].”

Naval Ravikant, CEO of AngelList, a website for company start-ups and investors, views the issue differently. “Blockchains are a new invention that allows meritorious participants in an open network to govern without a ruler and without money,” he said in a 2017 tweetstorm.

The Mt. Gox hack serves as an example of the cybersecurity risks associated with using these exchanges.

Short for “Magic: The Gathering Online Exchange,” Mt. Gox was created in 2006 to buy and sell trading cards online for the fantasy game, Magic: The Gathering. In 2010, Mt. Gox switched to exchanging bitcoins instead of trading cards, soon becoming the largest bitcoin exchange on the planet.

When Mt. Gox began exchanging bitcoins, the company “started to have huge amounts of money in their accounts,” Golumbia said. “Those accounts are like bank accounts, but they don’t have anything like the security infrastructure that a bank has.”

By the beginning of 2015, Mt. Gox was bankrupt, $480 million in cryptocurrencies had vanished, and Mark Karpelès, the chief executive of the company, was arrested by Japanese police in connection to the company’s collapse.

While cryptocurrency exchanges add a level of transaction security, there’s no guarantee the exchanges themselves are legitimate or have proper security in customer holdings.

Considering the security risks associated with the buying and selling of cryptocurrencies and that nothing truly backsthem, a question remains: Are these currencies anything like the yen or dollar? Or is the trading just glorified gambling?

Golumbia leans toward the latter and believes regulators will likely think the same.

But Peter Thiel, the PayPal co-founder and venture capitalist, has said that bitcoins were like “bars of gold in a vault that never move” and that it’s a “hedge of sorts against the whole world falling apart,” according to CNBC.

So far in 2018, a few companies have stopped allowing bitcoins as acceptable payment, including Microsoft and Steam, a large video game distribution platform, according to Forbes magazine. In January, the North American Bitcoin Conference stopped allowing individuals to pay for the conference’s tickets with cryptocurrencies, according to Business Insider.

Regulation could be a crucial step for the future of cryptocurrencies, potentially convincing more companies to accept it as a form of payment.

Goldman Sachs understands this, which is why they soon hope to trade bitcoins if the company can receive regulatory approval, according to the New York Times.

However, regulation could come with a catch.

“If [regulators] did allow a market, it would be because the currency didn’t move very much,” Golumbia said. “In which case, who would care?”

This is a double-edged sword for cryptocurrencies. If bitcoins were to become a stabilized currency, they would lose some of their appeal. If someone bought a bitcoin for $250,000 in 2022 – assuming Draper is correct about his prediction – and sold it for $251,000 in 2023, traders would no longer have the huge earning potential that made cryptocurrencies so popular.

“This has been the paradox of the bitcoin stuff from the beginning,” Golumbia said.

Meantime, Coinsecure has been assuring customers that funds held by the company are safe and that an investigationis underway. The company also stated that all bitcoins will be returned to customers if recovered. If the bitcoins are not recovered, 10 percent will be refunded in bitcoins and 90 percent in rupees.

“We are working with global exchanges and experts to help us track the movement of funds,” the company stated on its website.

Opponents and Supporters Disagree on Future of Cryptocurrencies

As bitcoin grows in popularity as a standard for internet money, becoming a common topic in mainstream media and economic communities, skeptics and supporters disagree where the future of cryptocurrencies is headed.

Bitcoin supporters see benefits in a currency market untethered from traditional regulation.

Mike Novogratz, the former manager of Fortress Investment Group, is starting a $500 million cryptocurrency hedge fund. Novogratz believes that people “can make a whole lot of money on the way up, and we plan on it,” according toBloomberg.

Milton Friedman, the Nobel Prize-winning, free-market economist, made remarks in the 1990s that seemed to presage cryptocurrencies, according to Coindesk. “The one thing that’s missing, but that will soon be developed, is a reliable e-cash, a method whereby on the Internet you can transfer funds from A to B, without A knowing B or B knowing A,” Friedman said.

But many experts and economists are skeptical of anonymous internet trading using cryptocurrencies. They cite such concerns as the drug trade, tax evasion, and market instability.

Charles Munger, vice chairman for Berkshire Hathaway, called bitcoins a “noxious poison” at a Daily Journal Corp.meeting in February. Warren Buffett, Berkshire Hathaway’s multi-billionaire CEO, told MarketWatch that “you can’t value bitcoin because it’s not a value-producing asset.”

Only time will tell how cryptocurrencies will integrate into future markets – if bitcoins are “Enron in the making” as billionaire Saudi Prince Alwaleed bin Talal said on CNBC, or if they’ll soon be worth a quarter of a million dollars each as bitcoin supporter and venture capitalist Tim Draper predicted.

As of May 3, the price of a single bitcoin was just over $9,500.

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