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IMPACT OF ATTACKS ON BITCOIN PRICES IS LESS THAN FEARED

By Mike Johnson on 11/28/2016 7:29 PM
The Impact of Attacks on Bitcoin Prices is Less Than Feared

Bitcoin traders have been on high alert following the $65 Million dollar attack on Bitfinex in early August. Trading continues in spite of insecurity, with prices stabilizing around $580 dollars over the past three weeks. This nearly 20% price dip from the beginning of the month, reflects in part lukewarm confidence levels in Bitcoin’s ability to protect itself from future hacks.

In fact, Bitcoin.org itself issued a binary safety warning on August 17th. It warns users against state-sponsored attacks coming from China. With public confidence in Bitcoin security crumbling, investors speculate if Bitcoin prices will fall again.

Historically, attacks on Bitcoin institutions have had minimal direct impact on the prices of Bitcoin. The impact is more long term, with a general erosion of confidence in the currency itself. Bitcoin needs large scale recognition by private companies as well as governments in order to remain a credible currency. After each attack, public outcries for improved security and traceability to catch hackers, undermines the core values of Bitcoin: decentralization, anonymity, and free trade.

Over the past nine years since its conception, Bitcoin has been attacked countless times. Some of the most notorious hits were Linode hack in 2012 when 46,000 BTC were stolen. Next was the Mt. Gox attack in 2014, resulting in 744,000 BTC or $409M USD in losses. Bitstamp was hacked in 2015 for 18,866 BTC or $5M USD. Most of the distributed denial of service or DDoS attacks, including the Bitfinex attack, would be difficult to prevent without stricter Bitcoin accountability.

But there lies the rub, Bitcoin’s success is built on its lack of accountability. Infamous for its role financing shady activities on the dark web, Bitcoin’s biggest supporters depend on Bitcoin’s lack of traceability which mirrors their own need for anonymity. Will further attacks occur? Of course. Are major Bitcoin consumers willing to take that risk? Of course.

The rise and fall of Bitcoin prices have less been impacted by attacks, and more so by different government’s attempt to regulate and tax Bitcoin exchanges. When Bitcoin prices exceeded $1,000 USD in 2013 it was following the endorsement of People’s Bank of China and the US Senate. When the Chinese government banned Bitcoin later in the year, prices plummeted and have not yet recovered from those historic highs.

In fact, Bitcoin prices peaked in 2013 in part because of actor Jet Li’s endorsement. He created the Jet Li One foundation to help victims of the Lushan Earthquake. He requested donations in Bitcoin, raising over 230 BTC in just two days. The impact on Bitcoin prices was fleeting, but it shows how public confidence in Bitcoin is the foundation for its rate.

Another example is when Bitcoin prices nearly doubled in 2013 as a result of the Cyprus bailout. Investors rushed to convert funds to Bitcoin in attempts to shelter funds from European levies. Bitcoin was instrumental in moving money out of the country without significant losses. The increased trading volume from the giant buy-in of Bitcoin caused prices to spike.

As governments struggle to find ways to get their piece of the pie, decisions about taxation have also had large impacts on Bitcoin rates. The United States decided in 2014 to tax Bitcoin as property, not currency, meaning that it is not exempt from capital gains taxes. This decision caused Bitcoin to drop nearly one hundred dollars or 25%.

On the other hand, in 2015 the European Union exempted Bitcoin from VAT or value added taxes, causing Bitcoin prices to soar. These policy decisions have long-term impacts on Bitcoin credibility and thus value. Potential policy reversals would cause prices to crash.

Bitcoin developers need to decide whether it should remain a shadowy, volatile currency, prone to attacks, but necessary to the web’s underworld. Or, does it want to walk the straight and narrow, fix security leaks and become a reliable, tax-paying, state approved currency. In that case, who would use it? If Bitcoin is hacked again, which it most likely will, prices will dip and recover as they have historically done. If Chinese, European or US governments feel threatened by Bitcoin’s success and decide to change policies, Bitcoin prices will definitely fall.

Endorsement of Bitcoin by reputable companies like Microsoft, Dell and Paypal did in 2014, may improve Bitcoin’s reputation and cause a durable surge in price.