The Bitcoin market reeled last week when Bitfinex, one of the largest exchanges of the new cryptocurrency, was hacked. Thieves made off with some $71 million in Bitcoins.
Even though it was a targeted attack against certain customers-- who were cleaned out, while everyone else wasn’t affected-- the exchange decided everyone would share in losses equally.
Part of the appeal of Bitfinex was each customer would have their own individual Bitcoin wallet, rather than lumping everyone’s Bitcoins in one big wallet, as most other exchanges do.
The value of Bitcoins plunged on the news, falling from more than $600 each to less than $520 in a few short hours. The currency has since recovered most of those losses, however, with prices going back to $580.
Still, this shows a couple of weaknesses in the whole Bitcoin concept.
The first one is hacking. If an investor has cash in a bank or gold in a vault, it’s much less susceptible to being taken by mysterious men hiding behind a computer. Sure, bank accounts get hacked all the time, but the financial institution will usually make them whole.
There’s also the issue of price swings. Bitcoin fell more than 10% on news of this hacking, which is just the latest of many 10%+ moves in just a short period of time. The asset is extremely volatile, in other words. U.S. Dollars are downright boring in comparison.
Bitcoins are supposed to offer inflation protection. But until the price of the asset starts behaving more like a currency and less like a speculative investment, it’s easy to see why many investors won’t touch it.
