A software glitch, distributed denial of service attack or my personal favourite, 'transaction malleability', were reasons cited over the past few days for shutting down major exchanges for everyone's favourite digital currency - Bitcoin.
Bitcoin, as you've heard, is the decentralized digital currency and payment system that has captured worldwide attention since its introduction in 2009. Based on open-source software and protected by military-grade encryption, Bitcoin can be used to buy things such as food, beer, clothes and even web hosting services, electronically. Of course, you must have a Bitcoin wallet before you can send and receive payments, which are basically free of processing charges since no banks or other third party financial institutions are involved.
Regulated exchanges such as Mt. Gox in Japan, which has suspended external transactions due to massive technical hacks at time of writing, or VirtEx based in Canada allow the purchase of Bitcoins by linking to your traditional bank account. Or if you live in Vancouver, Toronto or Ottawa, you can visit a Bitcoin ATM, which will accept cash in exchange for your Bitcoins.
If all that seems a bit complicated just to buy a burger, there are millions of people who will agree. One of the big selling points of Bitcoin lies with speedier, less expensive transactions for merchants. Consider that use of debit or credit cards may cost retailers 3 percent, or more in many cases, per transaction to the issuing bank. Some retailers are enjoying 1 percent for transactions in Bitcoin.
Understandably, there are now more than 143 Canadian businesses accepting the digital currency, according to the Canadian Bitcoin Business Directory. Well-known companies such as Overstock.com, Zynga and Wordpress have already agreed to accept Bitcoin.
The security advantage of Bitcoin has been another major consideration of retailers especially in light of the massive credit card breach experienced by Target and millions of its customers worldwide. Target's computer systems were hacked and credit card numbers, names, home addresses and PINs were stolen and sold to criminals over the Internet. But using Bitcoin instead of credit or debit cards would have prevented such data from being compromised since transactions employ public-key cryptography. In Bitcoin transactions only the unique address of the sender and recipient plus the amount of Bitcoin being transferred are revealed, not the private key information.
That's not to say that Bitcoin doesn't have any shortcomings. For one, Bitcoin payments are irreversible meaning that since no central authority or processing agency exists, the only way to get payment back is from the person who received the Bitcoin funds. Also, if you lose your wallet, there's no way to get it back. If your phone or computer gets lost or stolen, there goes your Bitcoin balance. Those in the know, store their wallet in multiple and different locations and conduct regular backups.
But the biggest stumbling block are the wild swings that occur because of hacking and various software flaws that wreak havoc on the exchanges. The transaction malleability flaw is the top concern right now. This glitch currently lets someone change the unique ID of a Bitcoin transaction before confirmation, thus allowing someone to pretend that a transaction didn’t happen. In addition to Mt. Gox stopping transfers, Slovenia-based Bitstamp and Bulgaria's BTC-e exchanges have been shut down as of Feb. 12 while the problem is being fixed.
Bugs in the Bitcoin infrastructure doesn't bode well for mainstream acceptance or to confidence in the whole concept of the virtual currency. Should this continue we might be discussing the Bitcoin breakdown very soon.
