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The dramatic fall of BitCoin: No end in sight

We’ve discussed BitCoin at some length on Memeburn, including how it works, its potential downfalls, and its genuine merits. BitCoin has experienced its ups and downs in the few years that it has emerged as an online currency. Last year, a major ‘pick-pocketing’ scandal when an anonymous BitCoin user claimed that thieves had managed to steal nearly US$ 500 000 worth of BitCoin. Although the case was unverified, a series of similar incidents caused the BitCoin exchange rate to crash at the time.

This year, a number of new attacks on BitCoin have raised further concerns for the online currency. The first major incident was when Linode, a linux-based hosting provider, was hacked and BitCoin wallets of eight users were pilfered to the tune of nearly USD $228,000. Last week, servers owned by Bitcoinica, a BitCoin trading site, were hacked and more than USD $87,000 worth of BitCoin was stolen by online thieves.

Proponents of the online currency claim that there is no fault with the currency itself. In principle, they’re right, each of these attacks seem to have been simple theft operations. The currency itself still functions without a breach, in the sense that nobody (as far as we know) has been able to fraudulently generate usable BitCoins. In fact, due to the currency’s strength and the speed with which it is being adopted on the Internet, along with many of its unique features, the FBI has published a report damning the currency as a tool that facilitates illegal activity on the internet. Certainly the FBI is not the only organization that has called the digital currency into question. Last year the Electronic Frontiers Foundation (EFF) backed out of using the currency as questions over its legality came to light.

While BitCoin proponents fight hard against any critique of the economic viability of the currency (see comments), some more serious technical challenges are slowly emerging that may not bode well for BitCoin’s long-term survival.

Recently, a paper was published online, showing a ‘double-spending’ attack that could be achieved using BitCoin. This attack relies on what the paper calls ‘fast-payments’, which are transactions that take place where the exchange between the money and the goods takes place within a few seconds. The attack results because BitCoin payment verification actually takes time to complete.

Currently, BitCoin suggests that for fast-payments of relatively low value, vendors should provide service without verification of the transaction. This isn’t quite as bad as it sounds, since the actual BitCoin will appear within the vendor’s wallet almost immediately and it only takes a few seconds for the transaction to be noted by the rest of the network and this should be sufficient proof that the payment will ultimately be properly verified.

However, if the attacker has enough nodes within the BitCoin network to verify a second transaction made to a colluding account within a very short space of time, the BitCoin network will ultimately refuse the payment to the original vendor. The paper concludes that as BitCoin stands at the moment, it is possible to achieve double-spending on fast-payments and this could prevent uptake by vendors who need to be able to process transactions quickly. To be fair, the paper does suggest a way to get around the problem with a minor modification to existing BitCoin clients, but until this is done BitCoin cannot be relied on to handle these kinds of payments.

Another interesting paper was published recently, discussing the anonymity that BitCoin advocates and adversaries both see as a feature that is facilitated by the peer-to-peer technology that underpins the whole currency. While BitCoin developers have tried to make it clear that anonymity is not a feature that exists by design, it is something which appeals to many BitCoin users and is also one of the points that its opponents use to attack it. Notably, in the FBI’s recent paper, they suggested that the anonymity afforded by BitCoin makes it difficult to track illegal cyber-activity.

The problem is that it is actually very easy to build a profile of a BitCoin user and all of their transactions using a combination of the information that is actually available within the BitCoin network and by gathering publicly available information from off-network resources. This paper shows a brilliant analysis of the ‘pick-pocketing’ theft that I mentioned earlier, where the equivalent of a half-million US dollars were stolen from a BitCoin user. Using a combination of techniques, the researchers are able to draw some interesting conclusions about where the money went and what actually took place prior to and after the theft. In this case, the researchers only studied BitCoin using passive analysis, however they warn that by ‘marking’ BitCoins or by collaborating with interested parties, it would be relatively easy to discern much more detailed information about users within the system.

This attack on anonymity is not particularly new, and certainly, the FBI makes a point about it within their own paper. As I have already said, it is not meant to be a designed feature of the currency, but many people use the currency as if their anonymity is assured. As researchers spend more time investigating the currency, BitCoin’s future (at least from a technical standpoint) becomes increasingly uncertain.

Author Bio

Rowan Puttergill: Columnist
Rowan Puttergill is a technology evangelist and software engineer with a long career working in enterprise environments. He brings with him the experience of being the Technical Editor at SA Computer magazine, and a career history as a technical author. He is a huge advocate of open-source technologies, and... More
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  • Anonymous

    A bunch of FUD.

  • herzmeister

    The dramatic fall of Goldcoin: No end in sight

    Proponents of the noble metal claim that there is no fault with the metal itself. In principle, they’re right, each of these robberies seem to have been simple theft operations.

    While GoldCoin proponents fight hard against any critique of the economic viability of the metal, some more serious technological challenges are slowly emerging that may not bode well for GoldCoin’s long-term survival.

    Recently, an article was published in a newspaper, showing a ‘tungsten adulteration’ attack that could be achieved using GoldCoin.

  • Robert578


  • http://goks.myopenid.com/ gregmy

    This is just silly.

    “In principle they [the proponents] are right” you say. And why are they wrong? Inexperienced web programmers create financial websites and their sites get cracked. That’s hardly shocking.

    Granted though, better tools are required for inexperienced developers to create safer applications. However, keep in mind that storing money purely as data hasn’t been possible before. Give it some time.

    Bitcoin cannot be relied on to handle fast small-transactions? It’s already pretty straightforward to prevent the hypothetical attack described in the mentioned paper without any modification of the client. No such attack was successfully performed in a real life environment.

    Pure FUD. If I were you, I’d focus on obvious scalability issues. But it seems you’re just picking on random things.

    So, Bitcoin doesn’t claim to have anonymity as a feature, but the FBI warns that the potential anonymity it provides can be hard to track, researchers show that stolen coins can be traced but are unable to find who stole them, there is a huge online drug market running for more than a year with no one even traced so far, there has been numerous investigations of thefts you yourself mentioned which never reached a conclusion, and you think it’s a weak spot of Bitcoin because people think their anonymity is assured even though Bitcoin developers say the opposite? And do they really think their anonymity is assured? Do you have data to support that?

    Covering your tracks with Bitcoin is easy, not because Bitcoin is an anonymous network, but because it’s flexible.

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  • Diddly

    Just another shit stirring journalist.

  • Wtfisgoinonlarry

    looks like all the commenters here are butthurt bitcoin owners who are going to ride the ship to the lehman-end

    • Dfasldfasldfds

      looks like all you commenter-to-the-comments here are butthurt bitcoin-hater who is going to ride the ship to the lehman-end

    • Dfasldfasldfds

      looks like you lonely commenter-to-the-comments here are butthurt bitcoin-hater who is going to ride the ship to the lehman-end

  • Dfasldfasldfds

    well, the writer only see the facts he want to see and distort them in the way he likes.

  • Monster9998

    This article and those like it are just trolls that want hits on their page. There is really no substance here to support the title. What about the stabilization of the Bitcoin price? If Bitcoin is really going away why is the price not plummeting? 

  • http://blademccool.myopenid.com/ BladeMcCool

    Bitcoin is doing just fine. Want to avoid a 0 confirmation double-spend and still accept 0 confirmation transactions? make sure you only listen to mining nodes that YOU trust! Don’t blindly accept incoming transaction information from any asshat on the internet. … Or … wait for 1 confirmation on asshat supplied transactions. Problem solved. Also … don’t leave your wallet lying around where anyone can juts read it. Encrypt it etc. If you operate an online service with Bitcoin, guess what , you have to secure it! fun time! live and learn. Thats not a problem with Bitcoin, thats a problem with idiots thinking they know how to secure a server. Would you trust some bozo to also operate your online banking site? …. Want to attach my physical body to a bitcoin address? Good luck. I can push out transactions from various online wallet systems with obscured IP traceability thanks to VPN and TOR etc. And that address I gave you for payment … not mine … lol. The first court case involving attempted tracing of Bitcoins ought to be a bag of lulz as the prosecution gets made to look like morons and the jury sits there with a confused look on their faces.

  • John

    I sell on eBay and lose a lot through reversed payments up to 90 days later. ie to be 100% certain of a paypal payment I would need to wait 3 months before accepting the payment as non fraudulent.
    To be 100% certain of a bitcoin payment I need to wait 1 hour. to be 99.9% certain I need to wait 10 minutes. To be 99% certain I need to wait 1 second.
    How much have people lost in the last year by using paypal?

  • Jonathan

    You should be more informed before writing this article. I’m disappointed. 

  • Stephen+memeburn

    Bitcoin is the bees knees.  It’s simply awesome.  I love it.

  • Michael

    This article was written to provoke, and it succeeded. Sure bitcoin has a seedy beginning but new technologies often do. 15 years ago the internet was only really used for porn!

  • Byronlolspam

    Bitcoin is going to fall forever?

  • Jack Alderson

    What a shitty article.  Author obviously has no grid for what he’s talking about.

  • Jaded

    Completely clueless… Did his cat type this by accident or is this an actual article?

    Can somebody please wake the editor before this guy (or his cat) types anything else?

  • John Mitchell

    what a twit!

  • Tbudha

    Problem. Reaction. solution

    Problem: Bitcoin can be hacked! Stolen! Oh dear!!!
    Reaction: dumb articles like this
    Solution” More regulations!!

    The Bitcoinica Consultancy are obvious tools of the big banks. The story about getting hacked was contrived and a false flag – they’re just stealing coins and setting up stories like this.

  • Dickwad

    Puttered-gill is known for writing crap he barely understands.