Bitcoin Turmoil: Proof of Concept or Fatal Flaw?

It turns out that there seems to be tiny little vulnerability in the bitcoin protocol. Aren't there supposed to be built-in safeguards with the exchange mechanisms?
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You know the term trial by fire. Of course you know the phrase fatal flaw. Now what do these two phrases have to do with bitcoin? Take a look at recent events in the digital money world and decide for yourself. When you see not one, not two, but three bitcoin exchanges throwing up the STOP sign and halting withdrawals -- When you find out that there was a reported $2.7 million theft involving bitcoin you have to wonder what is going on, don't you? Is this some sort of twisted Revenge of the Nerds tale or something else entirely?

The storyline so far is starting to look like a tale from the Wild Wild West. First there is the reported theft of 4,474 bitcoins from the Silk Road 2.0 site. The market value of that number of bitcoins works out to about $2.7 million in cold, hard cash. Shortly afterwards, bitcoin exchanges started closing their doors to real money withdrawals. The current top three bitcoin exchanges, BitStamp, BTC-e and Mt. Gox all said no way, not today. Not till we get a handle on what's going on here.

What is going on indeed? It turns out that there seems to be tiny little vulnerability in the bitcoin protocol. Enterprising hackers stumbled upon a backdoor into bitcoin wallet transactions. Officials in Tokyo from Mt. Gox were more blunt. They termed the issue a "bug" in the bitcoin software. Apparently this so-called "bug" can be exploited to withdraw more, much more, than should be allowed. In ordinary, non-tech language you can look at it like this: Even a mediocre hacker could exploit this "bug" to send multiple withdrawal requests to the same bitcoin wallet.

How is this possible? Aren't there supposed to be built-in safeguards with bitcoins and the exchange mechanisms? Yes. However there is one tiny little software issue that that needs to be fixed. Much like big software developers such as Microsoft or Apple who continually updates their operating systems as software bugs are identified, bitcoin software works the same way. And it is not just Microsoft or Apple that work this way. Major software providers release their products knowing full well they will have to issue fixes and patches later on. An entirely new payment technology based on software can be expected to have some issues that need to be addressed.

This bitcoin bug is euphemistically referred to as "transaction malleability." Doesn't that just sound like a term that a software engineer would come up with? Anyway, the point is that this malleability issue allows the evil doer to mask or hide what is referred to as the transaction identification number. Once this ID number is masked, the hackers move on to the next step. Multiple withdrawals are sent again and again. This process continues as long as they continue to be processed or until the time that bitcoin wallet is completely empty. Unfortunately for Silk Road 2.0, they found this out the hard way, to the tune of a $2.7 million heist.

What does it mean for bitcoin and the future of digital money? The naysayers will glumly point upwards and mumble that "the sky is falling, the sky is falling." Like the proverbial Chicken Littles of the world, they are more than happy to remind you that they told you so.

Hold on there. That's only one way to look at it, one side of the coin (pun intended). Think about how it goes at your favorite hangout spot. Picture a mug of beer staring back at you from your table. You say the mug is half-full and your buddy says you're nuts, it's half-empty. Meanwhile the barkeep mumbles, "get over it."

Seriously though, take a minute and at least take a peek at the other side. The use of digital currencies is only growing. Even our esteemed officials in our federal government are recognizing the real potential of alternative payment methods. So, if it is true that the use of digital currencies is growing, what does that mean for you?

Perhaps this is your chance. What if these recent events with bitcoin is seen as an opportunity to make some extra cash from all of this turmoil? You know what the investing gurus always say: buy low and sell high. Follow along the thinking here. Recent negative news has not helped the market value of bitcoin. However, if you are an investor, that's a good thing isn't it? You know, like buy low and sell high when bitcoin starts to gain momentum again?

As outlined above, bitcoin has been under attack lately. As the new kid on the block, that is to be expected and that is to be welcomed. It is through these growing pains that bitcoin will prove itself as a viable alternative currency. In other words, bitcoin is in the midst of proving itself as a new payment alternative. At the same time, you may want to consider the bitcoin turmoil as an opportunity.

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