The Bitcoin rush

Bitcoin shares one major principle with gold: its value is just based on its scarcity. Its generation model is based on an open source code implemented in “Bitcoin Mining” software.

These software are portable and can be launched on a mere laptop or a powerful server in order to perform a huge amount of calculations dedicated to solve a “block”. This operation is known as “Mining”.

At every “block” solved, Bitcoin are spread proportionally among the “miners” who helped solving the block in a significant way or not.

In contrast with bank notes issued by national banks, whose value is based on the users’ trust in the financial system, digital money does not depend on any state or banking authority.

Who’s behind Bitcoin Mining ?

The cryptographic model related to Bitcoin generation entails a raising “Mining” complexity. On a mere laptop, the cost of the electricity used is approximately the same that the Bitcoin value earned, which make Bitcoin mining barely profitable. Two solutions stay viable :

• Having a dedicated appliance. The cost to acquire such equipment is significant but its specific chips allow generating several billion of hashes per second. Therefore, this possibility is only given to enthusiasts and professionals.

• Running a botnet. Cybercriminals use their networks of infected hosts to operate in a distributed way. Each infected machine is a node which “mines” on behalf of the cybercriminals. They thus benefit from an important computing power without related electricity, material and cooling costs.

Bitcoin, for who ?

Since 2010, Bitcoin value increased from 4$ to approximately 100$ per Bitcoin as of today.

Despite the significant fluctuations of its price caused mainly by technical issues, this increase can be explained by the users’ enthusiasm as well as speculative orders made on the market. The demand is high and the offer limited (a maximum of 21 million of Bitcoin will be put into circulation)

If we look beyond the “miners”, Bitcoin can be used by:

• Part of the population from countries in crisis who does not wish to see their savings requisitioned by the government and see in Bitcoin a loophole offering a fully independent money (see the closure of Chypriot banks)

• Cybercriminals who value the anonymous process of “mining” and the weak traceability of Bitcoin transactions to launder money

• Investors. Forbes announced [3] recently that a Maltese society offered the choice of Bitcoin within their portfolio. Bitcoin is indeed particularly subject to speculation.

Bitcoin, an unregulated Market ?

The increasing weight recently took by digital money worries the various regulation authorities:

• The European Central Bank, in its October 2012 report alerts on potential negative effects, including in term of reputation that digital money could have on the different central banks.

• On May, 13^th, the Department of Homeland Security issued a warrant against a subsidiary of MtGox, the main buy&sell platform of Bitcoin because of license issue. The payment system named “Dwolla” already blocked all the transactions coming from or going to MtGox.

• The FinCEN (Financial Crimes Enforcement Network) described in its press release [5] of May 28, the closure of the Costa Rican platform “Liberty Reserve” allowing the transactions of its digital currency named “LR”, indexed on dollar, and widely used by cybercriminals. The press release points out the fact that 6 billion dollars may have been laundered through this platform.

Within this emerging market, the exchange and payment companies must adapt and harden their policies if they wish to avoid bringing upon them the wrath of the authorities:

• Some companies refuse any new subscription from customers based in the US to avoid falling under the US jurisdiction and regulation.

• Some others tend to comply to “traditional” regulations, particularly to anti-money laundering ones. For instance, MtGox changed its policies and now offers a strong authentication mechanism and forces its users who want to exchange Bitcoin to real currencies to provide an ID and a proof of address.

Conclusion

No one can tell what the future of Bitcoin will be.

The « Mining » clearly attracts cybercriminals. In an ironic way, they mostly used to steal the savings of the victims through malware and now they also directly generate money through the embezzlement of the compromised machines.

Regarding the use of Bitcoin, the increasing interest of the banks and states to regulate this market will probably not stop cybercriminal and speculator activities, but may help trusted platforms to emerge for citizens and companies.

Starting from scratch, the Bitcoin market indeed still has significant efforts needed if it wants to become a major actor in the financial sector, even though, in an apparent self-contradiction, its goal is to get as far as possible from it.