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Bitcoin Bubble May Be Over

Wow, the Bitcoin bubble blew up fast.

Bitcoins were trading for as high as $266 earlier this week and as low as $77 today.

Trading activity overwhelmed exchanges like Mt. Gox and trading was halted twice, as shown in the chart below from CNN Money.

“The rather astonishing amount of new accounts opened in the last few days…made a huge impact on the overall system that started to lag,” said Mt. Gox. “As expected in such situations, people started to panic, started to sell Bitcoin in mass…resulting in an increase of trade that ultimately froze the trade engine.”

This comes on the heels of Bitcoin theft and DDoS attacks on the exchange.

Bubble photo by Visual Artist Frank Bonilla used under Creative Commons license.

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Will Bitcoin theft call into question trust and confidence in the system?

A Mt. Gox user bitbully was surprised to see his account suddenly pillaged, later learning that the Java chat client he had enabled was actually an exploit to steal Bitcoins. He reported his experience on the Bitcoin Forum.

There are mixed opinions on the web about who is to blame for this.

On Bitcoin Forum, there’s an empathetic view that suggests Mt. Gox should reimburse the loss.

I expect Mt. Gox to come up with an analysis and refund him and any other affected clients.
bitbully – I advise emailing a link to this thread to Mt. Gox support.

In the tech communities, they blame the user. Here’s one point of view from Hacker News.

Since I don’t have an mtgox account, and I have a fair degree of confidence that the code posted can’t possibly escape the Java sandbox, I decided to live dangerously and try loading the page.

Here’s the warning screen that comes up when you load it: http://i.imgur.com/sXDoFLt.png Note the self-signed certificate from “North Sumatra”.

Gotta say, I have no sympathy for someone who clicks through that warning screen and then complains that their credentials got stolen.

On Reddit, some users give advice about browser configurations.

1) Disable Java, it’s crap. 2) Enable 2-factor authentification.

Don’t use IE.

Here’s the challenge with this type of theft. It’s anonymous and irreversible by nature of the Bitcoin system. bitbully’s funds are gone.

But a bigger issue is trust and confidence. If an early adopter techie can be exploited, what about a regular retail investor? Exchanges like Mt. Gox will need to prove that they are safe for trading if they hope to grow.

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Bitcoin Venture Capital Heats Up

Lightspeed Venture Partners’ Jeremy Liew published his perspective on the incredible opportunity to invest in companies that are building new ideas for the Bitcoin ecosystem. It looks like the Bitcoin venture capital is heating up.

There are three key markets in Bitcoin:

Wallet. Holding your Bitcoins for you, serving some of the checking account functions of a bank.

Exchange. Converting from USD to Bitcoins and back.

Payments. Helping merchants accept Bitcoins for their transactions.

As a rule of thumb, VCs like to see billion-dollar markets to get excited. How can each of these markets get to be a billion dollars in size?

To build multi-billion dollar opportunities, the Bitcoin economy needs to grow 100X from where it is today, Liew goes on to say. But to put that in perspective, it grew more than 10X in the last year.

These opportunities are not without risk. Liew acknowledges that in its short existence, Bitcoin has been the target of theft and over 10% of the Bitcoins in circulation have been stolen. This and other risks will make it hard to be build sustainable businesses, but not impossible.

Via TechCrunch.

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