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Bitcoin Security The Almighty Buck News

Hacked BitCoin Exchange Sued By Customers 361

Posted by Unknown Lamer
from the damages-issued-in-monopoly-money dept.
judgecorp writes "Bitcoinica, an exchange for the BitCoin virtual currency, is being sued by former customers, after it was hacked. Thieves stole around $180,000 worth of BitCoins in two attacks. The site is now closed, and customers are suing to get their money back."
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Hacked BitCoin Exchange Sued By Customers

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  • LOL (Score:4, Funny)

    by Anonymous Coward on Monday August 13, 2012 @07:58PM (#40979183)

    But Bitcoins are secure and stuff! Not like that stoopid fiat currency.

    • by Taco Cowboy (5327) on Monday August 13, 2012 @08:39PM (#40979611) Journal

      The Bitcoin infrastructure might be secured, it's just that the weakest link is in the server

      When the server is hacked, and all the info (Bitcoin is made up of encrypted information, please correct me if I am wrong) contained within it is stolen, it's as good as the Bitcoins were stolen and can be used elsewhere

      Therefore, the one crucial thing for the Bitcoin infrastructure designers to do is to find ways to shore up the security of the Bitcoin servers, and make it as difficult as possible (it's impossible to make _any_ server 100% guarantee secured, I know) to be hacked
       

      • by Anonymous Coward on Monday August 13, 2012 @08:54PM (#40979789)

        You know what the biggest current problem with bitcoins is? Scarcity. The current model has them scaling back logarithmically as the number of transactions increases. What this means is that every generation it becomes that much harder to mine bitcoins and thus that much more lucrative to steal them instead. Combine this with the new FPGA mining rigs and the lowered electricity cost to generate them as a result and what you have is a digital representation of modern financial society.

        The lower-class, with ineffecient rigs unable to produce more bitcoins than it's costing them.
        The middle-class, with rigs just good enough to break even.
        The upper-class, with rigs that provide a net benefit in bitcoin mining compared to cost, thanks to efficiency and scale.
        The black market-class, hacking the latter three, disadvantaging the lower two, and having the uppers pass the buck back down.

        In that light, it makes an excellent sociology and economy experiment given how well it reflects the various groups involved in modern global society.

        • Re: (Score:3, Funny)

          by Taco Cowboy (5327)

          Dear Sir,

          Thank you for a very insightful and very thoughtful reply.

          It definitely deserves an equally thoughtful reply, which unfortunately my brain isn't qualified to do so, at this junction of time.

          However, I will give it a very detail and step-by-step re-thinking and hopefully I may be able to find some new insights.

          Thank you again, Sir (or Madam) !

          • Re: (Score:3, Funny)

            by Whiteox (919863)

            I just got some spam email from a Nigerian lawyer who is offering me 2.5 million bitcoins if I pay 150 bitcoins to help him get it out of the country.
            Does this mean that the deal is off?

        • by iluvcapra (782887)

          There are definite rentier problems, particularly because the system pays people to not spend, and the biggest long-term threat to the system are speculators, but people who own slower hardware can join a mining pool, and thus the proceeds of mining can be doled out with much more granularity than you describe.

          Also you're confusing the pipe with what runs in it. BTC are a value medium, they don't create value per se -- the slow inflation is an artifact of the money volume phasing-in to existence, the minin

        • by retep (108840) on Monday August 13, 2012 @10:22PM (#40980487)

          I think you're really missing the point of Bitcoin mining. It's like gold mining, in an economy using Gold as a currency; you'd never expect the majority of economic effort being involved in digging the stuff out of the ground. Rather a small segment of society does that, and the rest of society does whatever they do in the economy, buying gold from other people as needed.

          Bitcoin mining was *never* meant to be the way that the majority of people would get their Bitcoins. Rather it's a way of securing the network, namely in that Bitcoin essentially consists of an accounting system, where value is exchanged by writing public key crypto signed messages saying things like "Alice gives 10 bitcoins to Bob". Mining is required because there needs to be some canonical way of ordering those transactions in time. That's done by saying that whatever at least 51% of the computing power in the network thinks is true, is. So long as no one party ever controls that 51%, you can determine if coins have been spent to another party before you decide to accept them.

          Look at the pool hashrate diagram [blockchain.info]. Each of those pie slices is a group of dozens to hundreds of users, each with at least a few hundred dollars worth of mining hardware, securing the network. Do I care if they are making more in Bitcoins than their rigs are costing them? Heck no. I just want a secure network so when I receive some Bitcoins I can know that they haven't been spent before. FPGAs and the upcoming ASICs are good for that, because they perform so much faster than off-the-shelf CPU's that any attacker would have a hard time getting enough computing power to attack the network.

          Besides, if I did want to become a miner, all I'd have to do is spend about $600 on a Butterfly Labs [butterflylabs.com] fpga platform and I'd gradually have Bitcoins trickle in. But it's a lot faster to just buy them from someone else, just like it's a lot faster to buy gold from someone than mine it.

      • Re: (Score:2, Informative)

        by Anonymous Coward

        This is mostly accurate.

        Bitcoins themselves are wholly virtual. What was stored on the server was the private key enabling one to spend the coins.

        Bitcoin designers have found a few ways to shore up the security issues the servers face. Two-factor authentication was introduced a few months ago to address just this scenario.

        Also, Bitcoinica itself had some hilarious security practices (very bad and reused passwords, passwords exchanged in plain text e-mail) and have been hacked successfully a number of time

      • by Bert64 (520050) <bert@NoSPaM.slashdot.firenzee.com> on Tuesday August 14, 2012 @04:20AM (#40982007) Homepage

        The bitcoin infrastructure itself, ie the system which processes payments is whats secure...
        An organisation which was storing bitcoins was found not to be secure...

        This is no different to a bank getting robbed, and is down to poor security on the part of the bank rather than anything to do with the actual item that was stolen.

    • Re:LOL (Score:5, Interesting)

      by stephanruby (542433) on Monday August 13, 2012 @09:07PM (#40979919)

      And good luck suing for untaxed, untraceable, and unregulated currency.

      Generally speaking, even internet income or internet capital gains is supposed to be taxable for US citizens, so don't expect the Californian/US justice system to come running to help you if you give them any inkling that you purposefully invested in bitcoins to avoid giving them a piece of the action.

      If I had been one of the victims, I would have sued the site directly in Singapore court. A small tax haven and tax shelter like Singapore is much more likely to want to encourage this type of industry and therefore encourage straight dealings in those types of transactions. Furthermore, it will be much easier to demand discovery and collect damages from a Singapore company in Singapore than trying to do the same remotely from a Superior Court in San Francisco.

      • by Taco Cowboy (5327) on Monday August 13, 2012 @09:45PM (#40980257) Journal

        If I had been one of the victims, I would have sued the site directly in Singapore court. A small tax haven and tax shelter like Singapore is much more likely to want to encourage this type of industry and therefore encourage straight dealings in those types of transactions.

         
        Dear Sir,
         
        I do not know where you get the notion that Singapore being a tax heaven
         
        Before anybody else gets hurt, I need to say that Singapore is NO tax heaven.
         
        Never was, never is, and the way it looks, not likely to be in the future, either
         

        • by stephanruby (542433) on Monday August 13, 2012 @11:12PM (#40980761)

          Before anybody else gets hurt, I need to say that Singapore is NO tax heaven.

          I said "haven", not "heaven". A "heaven" for taxes in my opinion is too strong a word.

          In any case, you're right for the most part, but Singapore still has no capital gains tax [cnn.com] and so this fact may apply in this very special case of accrued imaginary BitCoins, just like it applied to the co-founder of Facebook and the imaginary capital gains of his stocks during Facebooks' initial public offering.

      • Re:LOL (Score:4, Interesting)

        by qubezz (520511) on Monday August 13, 2012 @11:18PM (#40980783)
        Interesting. You seem to be under the impression that only Bitcoins were deposited with Bitcoinica, when in fact USD were the only available deposit method until recently in the site's operation. It was a leveraged brokerage that allowed trading and short-selling [wikipedia.org] in Bitcoin. People deposited cold hard government cash into their accounts there through bank transfers and had USD balances that were stolen by the operators when the site was secretly bought by other investors and closed down without announcement.
  • FDIC insured (Score:2, Insightful)

    by Anonymous Coward

    why would anyone willing to put their life saving in something that is not even FDIC insured?

    • Re:FDIC insured (Score:5, Informative)

      by lightknight (213164) on Monday August 13, 2012 @08:34PM (#40979545) Homepage

      I could answer this one two ways, but I'm going to go with blaming the victim on this one. There have been a rash of thefts surrounding BitCoin wallets in some of the stupidest ways (any number of BitCoin sites, for God knows what reason, have been using MySQL for their backend, and more than a few have been using PHP) -> show of hands on /., if you were designing / developing a website that dealt primarily with money, would you use MySQL? And why not?

      Your wallet.dat file is your wallet. BitCoins = cash. Think about online areas the same way you think about offline areas -> there this dude who wants to hold my wallet for me, I don't really know him, but everyone else seems to trust him, even though he's only been standing on this street corner for about 5 minutes, and has all the wallets in a 20 gallon transparent plastic bag...should I trust him as well? Fuck no. Put your wallet on your cellphone or usb keychain or anything that you can see, and PHP encrypt it. Don't know what PGP is? Good news, it's the equivalent of Fort Knox, has been around for a long time, and is the key to not hating yourself if / when you store over $1,000 worth of BitCoins in your wallet and have it stolen because you couldn't be troubled to lock the f*cking door. Takes like 30 minutes, possibly less, to find a helpful tech (something above the level 1 hell-desk types, find a domain / network admin, bring tea as a peace offering), have him / her generate the key and set you up.

      Bonus question -> since I know a few of you are interested in getting into the financial district -> what is the natural consequence of using floating point data types for fiscal transactions?

      • Re:FDIC insured (Score:5, Interesting)

        by arose (644256) on Monday August 13, 2012 @08:49PM (#40979733)
        To be fair bitcoins are quite a bit more traceable than cash, you'd need a fair amount of resources to untangle all of the dummy accounts (if peope are smart enough to use dummy accounts), but at some point or another a good number of users will turn the anonymosly traceable bitcoins into less traceable cash (tracing by serial numbers is really hard). If you can get your hands on that information (by, say, running a bitcoin exchange or two and hacking a few more) and correlate to bitcoin tranaction logs you will get a fair amount of information. AInvolved, but not impossible for a government or large corporation.
        • Re:FDIC insured (Score:4, Interesting)

          by Taco Cowboy (5327) on Monday August 13, 2012 @09:19PM (#40980035) Journal

          What you said rings true.

          Bitcoin can't exist by itself - the world we live in, whether we like it or not, still runs on cash (fiat money) and at the places where bitcoins are converted into real cold-hard-cash that makes it traceable.

          But that also opens up one new possibility, for some one to set up a untraceable (or not that easy to trace) bitcoin/cash exchange.

          Personally I do not know if that could ever become a reality, tho.

          • Re:FDIC insured (Score:4, Interesting)

            by arose (644256) on Monday August 13, 2012 @09:48PM (#40980277)
            Exchanges are currently the most obvious targets. However even in a world where bitcoins are used not only for all online transactions, but also for all in person transactions (smartphones), you still need to receive your purchases either via delivery (addresses and P/O boxes are traceable for powerful adversaries) or personally (loyalty cards, face recognition, license plate correlation, cellphone triangulation, etc.). If those are available to an adversary when you pay cash, then even with serial number tracking it would be quite hard to figure out who you interact with outside of the scope of the surveillance. With bitcoins the flow between positively identifiable transactions is still a mater of public record by design.
      • by dissy (172727) on Monday August 13, 2012 @08:54PM (#40979785)

        Bonus question -> since I know a few of you are interested in getting into the financial district -> what is the natural consequence of using floating point data types for fiscal transactions?

        Answer: The plot to a cheesy super-villain world domination movie about stealing the rounded off pennies on the transactions of his employer, where something always goes wrong and hilarious shenanigans ensue.

        • by Taco Cowboy (5327)

          Actually that happened in real life - not floating-point round-off, of course, but there were cases (back in the 1980's, if I remember correctly) of bank insiders setting up fake accounts collecting pennies from the banking transactions and ending up with sums worth millions of dollars
           

        • Bonus question -> since I know a few of you are interested in getting into the financial district -> what is the natural consequence of using floating point data types for fiscal transactions?

          Answer: The plot to a cheesy super-villain world domination movie about stealing the rounded off pennies on the transactions of his employer, where something always goes wrong and hilarious shenanigans ensue.

          I thought it has something to do with red staplers.

      • ... but I'm going to go with blaming the victim on this one. There have been a rash of thefts surrounding BitCoin wallets in some of the stupidest ways (any number of BitCoin sites, for God knows what reason, have been using MySQL for their backend, and more than a few have been using PHP) -> show of hands on /., if you were designing / developing a website that dealt primarily with money, would you use MySQL? And why not?

        While I agree with you that the victims on this case should share a portion of the blame, we need to understand that not all the bitcoin users are super tech-savvy

        Sure, compare with the Joe Sixpacks on the back alleys the average bitcoin users do comprehend more tech terms, but that does not make them super-tech-savvy - I bet that there _are_ users who do not know which database engine a particular site they visit is using

      • Re:FDIC insured (Score:5, Interesting)

        by retep (108840) on Monday August 13, 2012 @09:38PM (#40980203)

        Also, many in the community think that Zhou Tong, the buy behind the site, was the one who stole the money in the first place. For instance, after the initial hack and after Bitcoinica shut down, a bunch of money was stored with a legit exchange, Mt Gox. Well those funds got conveniently hacked, and another exchange noticed Zhou Tong trying to transfer the same amount of cash, as well as the fact that an email address associated with the hack was in control of Zhou Tong himself. Source [bitcointalk.org]

      • what is the natural consequence of using floating point data types for fiscal transactions?

        Using floating point data types to store fiscal data is not so bad as long as you aren't running too close to the limits of precision.

        The problem comes if you use standard floating point operators to manipulate them. Those operators will almost certainly not apply financial rounding rules and so you may end up with answers that are slightly different from what a human accountant or a programmer following the rules for a human accountant would come up with.

      • by iluvcapra (782887)

        Bonus question -> since I know a few of you are interested in getting into the financial district -> what is the natural consequence of using floating point data types for fiscal transactions?

        I'm not sure what you're saying here, but Bitcoins are denominated as 64 bit integers. This value modulo 10e8 gives the value of a transaction in BTC.

    • why would anyone willing to put their life saving in something that is not even FDIC insured?

      Aren't most investments not FDIC insured?

      Besides, governments rise and fall, but bitcoins are forever.

      • by schnell (163007)

        Besides, governments rise and fall, but bitcoins are forever.

        Exactly, who wants fly-by-night currencies backed by national governments of stable countries? That's why I invested my life savings in Bitcoins, Flooz [cnet.com] and Beenz [cnet.com].

        Retirement FTW!!!!!

  • by ad454 (325846) on Monday August 13, 2012 @08:03PM (#40979237)

    I wish them the best of luck, they will need it!

    That is a problem a virtual currency not official backed by any government, bank, or mega-corp, and is not legally tied to any hard valued currency, fungible commodity, or hard product.

    Maybe Bitcoinica will offer a store credit good for their own non-transferable virtual currency?

    • Re: (Score:2, Interesting)

      by cpu6502 (1960974)

      Gold stored in a bank is the only money you can count on. Virtual money isn't real (and isn't insured). Paper money is devalued through inflation of the supply. Gold is the way to go, though even that loses some value (-0.1%) over time as more of it is dug from the mines. Ditto diamonds.

      • by Solozerk (1003785)
        Right up until nuclear transmutation makes it as worthless as dirt. And it *is* coming fast.
      • by Richy_T (111409)

        Yeah, in a bank, sure...

        Good luck with that.

      • by Sir_Sri (199544) on Monday August 13, 2012 @08:45PM (#40979693)

        Gold stored in a bank is the only money you can count on

        not really no. Gold can float in price wildly (http://goldprice.org/charts/history/gold_10_year_o_usd.png ). That's only a 10 year, during which gold has done very well, until the 2008 crash, and then it's been down 15% or so since then.

        Gold (and diamonds) are just commodities like any other. Sometimes they do well, sometimes they do badly. In the same 10 years gold has gone from the 300-400 ish (not sure exactly for 2002) to 1600 roughly a factor of 4-5, oil has gone from 22 to 93 dollars a barrel (with a spike in between just like gold) which is a factor of 4 and a bit.

        http://inflationdata.com/inflation/inflation_rate/historical_oil_prices_table.asp If you notice, in 1998 oil was just under 12 dollars a barrel. It went up to 27 in 2000, dropped to 20 ish and then has a long climb since.

        So ok, we looked at some 10 year trends and proved lots of commodities swing wildly, including fake money (gold). Now lets have some real fun. Lets look at the price of gold since the unification of germany (1871) on an inflation adjusted (rather than just nominal) basis http://www.vanguardblog.com/2010.07.26/gold-rush.html now that's interesting. Notice the batshit crazy spikes in the late 70's and 2010. Uh huh. That doesn't mean it will go down, but if you'd bought gold in 1981 and needed to retire 20 years later you would have lost most of your buying power.

        • Re: (Score:3, Insightful)

          by Anonymous Coward

          Its the value of the currency you are comparing gold to that is fluctuating wildly. Go compare the price of oil in gold, the price of other commodities in gold, etc. It is a stable store of value when compared to actual other valuable things.

          • by Sir_Sri (199544)

            Uh... hence the inflation adjusted.

            On a nominal basis you would be correct. But on an inflation adjusted basis, no, it's not, and suggesting that it is is simply untrue. That's the point of using inflation adjusted data at all. You could do equivalent to one ounce of gold for the same effect, but the graph would be equally bizarre. One 'unit' of gold quadrupoled in buying power and then tanked.

            Gold goes crazy in prize as various wars are fought (south africa anyone?), mines are found, fraudsters convinc

        • Re: (Score:2, Offtopic)

          by cpu6502 (1960974)

          That's nice. Gold fluctuates, yes, but not as many as the paper dollar which has lost 95% of its value since 1913. You can take one-third-ounce of gold and buy yourself a nice wool suit. Ditto back in 1920. The value has remained almost constant. Suit == 1/3 ounce of gold.

          In contrast it would take ~500 paper dollars to buy the same suit that would have only been ~25 dollars in 1920. The dollar's devalued.

          The way to preserve your savings over the long term is to dump the Federal Reserve Note, which the

          • Re: (Score:3, Informative)

            by pcgc1xn (922943)

            Can you please explain your "gold does not fluctuate as much as the paper dollar" stance in light of the price of gold falling from USD850 per ounce in January 1980 to below USD300 in June 1982. Close to a 2/3 loss in value in two years counts as "remaining almost constant?"

            Your comments regarding the relative price of a suit and an ounce of gold a century ago are irrelevant, for a number of reasons:
            Past performance is no indicator of future performance.
            You were not buying a suit with any form of money in

            • In response...perhaps that's why they're so against an audit of the precious metal supply @ Ft. Knox?

          • by MightyYar (622222) on Monday August 13, 2012 @09:54PM (#40980327)

            Why would you store your savings in ANY currency? Currency is meant to facilitate transactions... to make barter more efficient. It is not meant to store your savings in the long-term.

            In other words, dumping the Federal Reserve Note buys you nothing. You can buy gold right now - why would you wait for the government to base money upon it? And anyway, the government ALREADY sells gold currency (and silver and platinum). American Eagle coins have been available since the 80s. Every time you save $1500 in fiat currency, you can trade it for a platinum American Eagle and stick it in a safe deposit box (or have it held for you).

          • by Sir_Sri (199544) on Monday August 13, 2012 @11:19PM (#40980795)

            but not as many as the paper dollar which has lost 95% of its value since 1913.

            Which is completely irrelevant. Dollars today aren't the same as dollars 99 years ago, and no one would expect them to be. This is why governments have things like social safety nets that they index to inflation (government pensions, health care etc.).

            Remember, if you have debt, any debt, the devaluing currency has real benefits. And by the way government debts are your debts. So are your dollar denominated direct assets (cash, bank savings, but not stocks or mutual funds) worth *more* than the debt you owe through your government.

            which they are steadily eroding in value

            which as I say, is reducing the relative value of your debts too.

            The way to preserve your savings is to own things that can draw income. Owning *some* gold isn't a bad plan, but just owning gold is stupid because if you didn't know, the US doesn't control world gold production, that would be china australia and south africa (and south africa and australia are particularly problematic because of their per capita production being able to wreck havoc on bigger countries).

            Gold has all of the problems real money does, and a few others, which is why no one sane still uses it.

            The value has remained almost constant. Suit == 1/3 ounce of gold.

            Precisely as I showed, the buying power of one ounce of gold has been all over the place, from 1920-30 it tanked quite a lot, now it's worth almost 4x what it was 100 years ago, but 30 years ago you could have said the same thing, and 3 years later it dropped 3/4 of its value. That's what's wrong with it.

            Oh and the price of a suit has changed over time too as labour has changed.

      • by kamapuaa (555446)

        Just because something is shiny doesn't mean it inherently has value. And far from stable, gold's price goes up and down against the dollar. For instance $4,500 of gold purchased in the early 80s is currently worth around $1000 [goldprice.org], after you take inflation into account.

        If we ever live in an apocalyptic society where paper has lost all its value, I imagine a bank certificate for a shiny metal won't be worth nearly as much as maybe oil or a car or maybe a cool Master Blaster style outfit that comes with a dwar

        • by cpu6502 (1960974)

          >>>$4,500 of gold purchased in the early 80s is currently worth around $1000, after you take inflation into account.

          And how much is $4500 of 1980s dollars worth? Back then you could have bought a luxury car like a Chrysler at that price. Today you couldn't even buy a low-end car. (Point: I'd sooner have the gold, as it holds wealth..... the dollar does not.)

      • by Sarten-X (1102295) on Monday August 13, 2012 @08:51PM (#40979755) Homepage

        Gold isn't feasible. There simply isn't enough of it available to back all the money necessary for the modern economy.

        With a gold-backed currency, a billion-dollar deal needs a billion dollars' worth of gold. That's about 0.5% of the world's total supply of gold, currently valued at about $180 billion. For reference, the United States alone currently has a money supply of about $2 trillion, more than ten times the world's supply of gold. Since the amount of available gold is relatively fixed (growing slowly, but nowhere near as fast as the economy grows), the increasing demand for money far outpaces the supply of gold. That means the gold standard deflates, where by simply holding on to money its value increases. Since trade is unlikely to be as profitable as doing nothing, the whole economy grinds to a halt. That means no commerce, no jobs, and a massive recession. But at least you have a shiny chunk of metal!

        Diamonds are just as bad, but differently. Diamonds aren't rare. They aren't even particularly uncommon, except for enormous ones. Rather, their scarcity is artificially maintained by DeBeers, whose existence depends on maintaining that scarcity. Heck, synthetic diamonds are cheaply available for industrial use, so any use of diamonds as money is effectively turning tools into cash overnight.

        • by Shados (741919)

          Diamonds are just as bad, but differently. Diamonds aren't rare. They aren't even particularly uncommon, except for enormous ones. Rather, their scarcity is artificially maintained by DeBeers, whose existence depends on maintaining that scarcity. Heck, synthetic diamonds are cheaply available for industrial use, so any use of diamonds as money is effectively turning tools into cash overnight.

          And jewelry grade synthetics are starting to show up. The ones I've seen were still brutally expensive (relatively sp

        • Re: (Score:2, Offtopic)

          by cpu6502 (1960974)

          >>>Gold isn't feasible. There simply isn't enough of it available to back all the money necessary for the modern economy.

          Everytime I hear this, it makes no sense. You fix the dollar to the amount of gold you have. Most likely that means one ounce of gold equals 5000 Fed Reserve Notes. And then you hold it there..... no more running of the printing press. The supply of notes is fixed.

          Oh well. You can continue holding onto your paper, and watch as it loses ~75% of its purchasing power from the t

          • by Sarten-X (1102295) on Tuesday August 14, 2012 @12:38AM (#40981143) Homepage

            Okay, Macroeconomics 101. We'll start with the way things work now, then explain the difference, then discuss why fixing it won't work.

            Currently, with fiat money, billions of dollars every day are "created" and "destroyed" through the fractional reserve banking system. Like virtual particles of matter and antimatter, there is an equal amount of debt created and destroyed as well. The net value of what the banks hold does not change, because their created debt and created assets cancel each other out. If a bank's brought in only $1 million in deposits, its net assets are only $1 billion, regardless of how much the bank has borrowed from the Federal Reserve Bank.

            When someone (Acme, Inc.) wants to do something that they don't have money for (develop a new model of rocket-powered roller skate, for example), they can get a loan for it from a bank. Thanks to fractional reserve banking, that loan is practically unlimited in size, as long as two conditions are met:

            1. The lending bank is willing to loan out that much
            2. The lending bank has enough other loans out that the risk of this one loan defaulting is not a threat to the bank's stability

            By creating a sufficient supply of pure cash, the desired transactions can take place - contracts are signed, parts are ordered, workers are paid, and paychecks are deposited in the bank, just in time to pay back that bank's loan from the Fed. In the grand scheme of things, Acme gave money directly into the workers' accounts, and now has a huge debt to fill. Fortunately, those workers will soon be working, parts will be delivered, the contracts fulfilled, and sales will bring in enough revenue for Acme to negate that "anti-money" debt.

            Of course, with debt effectively being "anti-money", it can function just like money can... Contracts can be arranged for deferred payment, and Parts can be bought on credit, and workers' checks can be delayed until after the work is done. Debt works just like money, with the only difference being who gets to hold it while obligations are fulfilled.

            Note that through this whole process, the only money involved that doesn't have a loan to counter it is what the eventual customers pay Acme, Inc.for the shiny new roller skates. That's perfectly fine, since money is just a tool for facilitating trade. Why mandate that money be attached to a shiny metal when it's not going to exist as anything more than a placeholder for a few days before being annihilated?

            Whew.

            Now let's contrast that with a fixed currency like a gold standard. Since all money must necessarily be tied to something real, there is no possibility for a large loan. Banks simply cannot loan out more than they've been given by depositors, and since they'll need to keep cash on hand to cover bank runs, their capacity for loans is effectively crippled. When Acme asks for a loan to cover the investment to make new roller skates, too bad. The money for a loan simply isn't available, and never will be. After all, if a depositor comes asking for their money and the bank can't provide it, the bank goes bankrupt, so their fraction of loan-able money is measured against the risk of a run.

            Without the loan to Acme, the contracts aren't signed, parts aren't made, and workers aren't paid. All trade is effectively limited by how much money one company can gather at one time, and then how much it's willing to spend to make some product. That's a liquidity crisis.

            Liquidity crises are bad. The majority of damage in 2008 and 2009 (which we're still feeling today) was caused by a liquidity crisis. With no trade, jobs are lost, people get worried, and they turn to the savings in the banks... raising the risk of a bank run, and therefore lowering the amount the banks will loan out, which damages trade even more.

            So why not simply declare an ounce of gold to be worth $1,000,000, so the government could still make huge loans?

            No matter how much gold is valued at, the economy's growth will always eventually outpace it. As

        • I'm having a really tough time following this logic?

          You say a gold-backed currency would be a bad thing because the standard deflates (because the demand for money far outpaces the supply).
          Ok, except when you look at the whole point of having some sort of standardized currency in the first place, isn't it really nothing more than a symbol of one's labor?

          It seems to me the assigned value for a certain amount of it is rather irrelevant, as long as it's agreed upon by all parties. If the demand outstrips the s

      • by arose (644256)
        How in the world do you goldbugs manage to ignore the hundreds if not thousands of years of silver currency? And since when do you trust a bank to not lie to you if some of their gold gets stolen? It's not even money, just another commodity (and no, that is not the same at all), I'd rather have proper, diversified investments.
      • by stymy (1223496)
        If you really want a safe investment, then it should be something with intrinsic value. Gold does not have many industrial applications and so it is NOT a safe investment, as once people realize that it is almost worthless, it will be. In contrast, platinum has many industrial applications and so while its price is more volatile, it will always retain a good part of its value.
        • by MightyYar (622222)

          Gold would have a lot more industrial applications if it weren't so expensive. We are abandoning it where possible - but it is far easier to work with than copper when making certain kinds of electrical connections.

      • Gold stored in a bank is the only money you can count on.

        So, what, our entire economic system is a mistake? Because there's not enough gold to keep the world economy going.

        BTW, it's simply not true that gold never loses value except through increased supplies. Look at the price of gold in the markets — it goes up and down all the time. Fluctuations with respect to fiat currency may not impress you, but these shifts represent real changes in gold's ability to be exchanged for stuff you really need.

        Yeah, gold backed currency is more resistant to inflation tha

      • by PopeRatzo (965947)

        Gold stored in a bank is the only money you can count on.

        What property of gold gives it its value? The fact that it's a limited commodity? Does that mean any limited commodity would make a good currency?

        How much gold do you think there is in the world? Do you know that the derivatives market alone is worth about $800 trillion? How much would an ounce of gold have to be worth if the entire economy were to be backed with gold? And if it was made valuable enough to support the entire economy, a person's s

      • Re: (Score:3, Insightful)

        by Mr. Slippery (47854)

        Gold has no more intrinsic value than paper money. In the event of a total social and economic collapse, no one is going to trade you food, medicine, tools, land, weapons, or services for shiny metal.

        If we avoid total meltdown over the next few years, the value of gold will fall just like it did after its peak in the early 80s.

      • by downhole (831621) on Monday August 13, 2012 @09:30PM (#40980117) Homepage Journal

        Gold doesn't have any more intrinsic value than any other form of currency - from US Treasuries to Bitcoins. Just like everything else, it has value only because we think it does. Storing gold for an apocalypse of some sort doesn't make much sense - gold only protects you from a very specific kind of economic collapse (massive inflation). And even that is only worthwhile if enough of a modern economy remains in existence for there to be people willing to create things that do have intrinsic value (food, medicine, shelter, assorted luxuries, etc) in exchange for bits of shiny rocks that may or may not have any value tomorrow.

        I personally think that stockpiling stuff out of paranoia of some sort of collapse is dumb, but if you're going to do it, at least stockpile stuff that will be useful in said collapse - non-perishable food, manufactured goods that are of direct value in a collapse situation, supplies and knowledge to help rebuild parts of society, etc.

        • IMO, currency has its value because people put trust in it. There's a collective agreement going on that it's assigned a value that's universally recognized.

          There lies the problem with paper currency.... You can't just come up with billions or trillions of dollars worth of gold out of thin air. The world's supply is essentially fixed. When your symbol of wealth is simply paper printed by some central authority or body, you have to entrust its "caretaking" to that central authority.

          Especially in more recent

          • by downhole (831621) on Monday August 13, 2012 @11:46PM (#40980907) Homepage Journal

            I'm not a hardcore economics geek or anything, but the argument that I've found the most persuasive is that gold and other fixed-supply currencies are a bad idea because the economy itself is growing and increasing it's value. If your currency supply is fixed and your overall economic value is growing, then you get deflation, which discourages people from spending or investing their money because letting it just sit there will increase its value just as fast as investing it would. Apparanly, you get a nasty boom-bust cycle when large economic activity creates lots of extra wealth, but the money supply is fixed so it all deflates, then nobody wants to spend anymore, and the economy crashes again until total wealth drops back down to where it makes sense to invest again. I'm not completely sure if it's true, but I've heard that the whole European colonial period really came about because the societies at the time were creating lots of extra wealth and they had to find more gold to represent that wealth in order to avoid deflation, and it seems to make a kind of sense.

            Essentially, to have a economy that it stable in the long term, you must inflate your currency at a controlled pace to create low but positive inflation. Thus, you must have a Fiat currency, and it basically has to be controlled by the Government.

            Also persuasive is that we have hundreds of countries with all sorts of governments and economic policies. If the gold standard was such a great idea, then wouldn't some country somewhere try it and out-compete everyone else, or at least their neighbors/local rivals?

            Now whether recent government have done a lousy job of running the economy and the currency, that's a whole different argument...

      • by dkleinsc (563838)

        No it isn't. For instance, in the waning days of the Roman Empire of 408 C.E., the city of Rome stripped all the gold they had against the invading Visigoths. That bought them 2 years before the Visigoths came in and sacked the place. What really matters in a serious crisis: 1. Having arable land, and stuff you can plant. 2. Having weapons, so you can hang onto the land and the crops. 3. Having people who will use those weapons on your behalf. Bonus: Have some defensive fortifications so it's harder for att

        • by cpu6502 (1960974)

          >>>What really matters in a serious crisis: 1. Having arable land, and stuff you can plant. 2. Having weapons, so you can hang onto the land and the crops. 3. Having people who will use those weapons on your behalf.

          Yeah but if you have gold you can BUY the land, BUY the weapons, BUY the soldiers when the time is right. There's no way for me to buy & store away 2 million dollars worth of guns or corn seeds. My house ain't that damn big.

      • Gold isn't worth ANYTHING inherently, it's only valuable because people say it's valuable, just like the "fiat currencies" that people rail against. If it suddenly goes out of style, you've lost everything.

        "Gold will always hold its value" sounds far too much like "real estate will always hold its value", and we saw how well that turned out. The major difference is that you can still live in a worthless house, you can't do anything with worthless gold.

    • by whoever57 (658626)
      Does anyone really know if the site was actually hacked and the site owner did not just do a runner with the deposits held by Bitcoinica?
      • by retep (108840)

        Does anyone really know if the site was actually hacked and the site owner did not just do a runner with the deposits held by Bitcoinica?

        I posted this [bitcointalk.org] link elsewhere in the thread. Myself, I'm pretty convinced it was the guy who made the site. After all, it was a 17 year old immature kid.

    • by retep (108840)

      Maybe Bitcoinica will offer a store credit good for their own non-transferable virtual currency?

      Transferability is the very point of Bitcoin. Sure it'd be nice to have a stack of gold, but good luck sending that over the internet without involving any trusted third parties. Look what happened to e-Gold services, all shutdown by the Feds. Possibly the only alternative will be trusted devices such as the in-development MintChip [wikipedia.org], although the final version is likely to be restricted to very small amounts and not as anonymous as claimed.

      Of course, hilariously on the MintChip Challenge website, the most co

  • by Lieutenant_Dan (583843) on Monday August 13, 2012 @08:06PM (#40979273) Homepage Journal

    +/- $180,000.

    Other estimates calculate the loss at "ham sandwich and a glass of milk".

  • Scooped (Score:2, Insightful)

    By every other tech site on the web days ago.

  • The only catch is that the settlement will be paid out in Trepidicoins.

  • Good timing (Score:2, Informative)

    by Anonymous Coward

    I guess if you're going to claim damages for a virtual goods, the inflation phase of a bubble is as good a time as any.
    Wouldn't do to wait too long either, or you'll get your damages in shoe strings and bubble gum.

    I note too the hilarious claim in TFA that "BitCoins have generally hovered at a price of around $14 to $17".
    Bitcoins have generally hovered around zilch, except for a brief investment bubble around last July, after which they have hovered around $5 until a recent and presumably temporary uptake.

  • I never thought this would happen.
  • bet (Score:4, Insightful)

    by shentino (1139071) on Monday August 13, 2012 @08:59PM (#40979845)

    Who wants to bet that the SEC will stomp in and claim that bitcoins are an illegal security?

  • Back when this happened there was a sizable number of people claiming that this was merely a small fraction of Bitcoinica's volume and how it's not a big deal at all, etc. Care to explain why they are now closed and being sued?
  • by Anonymous Coward on Monday August 13, 2012 @09:13PM (#40979985)

    Note that on this so-called "exchange" you could never actually convert Bitcoins to any other currency. Sure you could "sell" your coins, but you had to buy new Bitcoins to ever get your money out. Mainly Bitconica was used by people trying to short Bitcoins or dollars. This kind of arrangement is known as a bucket shop [wikipedia.org] and has been illegal for a very long time for very good reasons. Namely the people running the site can always manipulate the exchange rates to clean you out, and therefor pocket all your money.

    Of course, the 17 year old kid running the whole thing always said that trades went out to real exchanges, but the volume on other exchanges never was anything near what was required for that to be plausible. Meanwhile the whole time people were "zoutong'd" whenever the alleged exchange rate went against their bets.

    The whole thing is shady as fuck, although to the credit of Bitcoin people, a lot were asking questions about the thing right from day one, see here [bitcointalk.org] and here [bitcointalk.org]. (the latter is one of Bitcoins main developers)

    • by makomk (752139)

      Actually, you've got it backwards. Bitcoinica used US dollars as its main trading currency and originally you had to sell any bitcoins you held for dollars through Bitcoinica in order to get your money out. Other than that, spot on.

  • by retep (108840) on Monday August 13, 2012 @09:29PM (#40980109)

    Ever heard of the term "bucket shop" [wikipedia.org]? That's exactly how Bitconica functioned. Sure you could sell, or sell on margin, your Bitcoins for imaginary US dollars, but you couldn't never withdraw or deposit anything but Bitcoins. What went on was people would use the margin given to them by Bitconica to speculate on the price of Bitcoin, then they'd conveniently lose their whole positions whenever the market went against them, which is quite easy to do if you happen to have everyones Bitcoins to manipulate the market with. This happened so often that a new term was invented for it: zhou tonged [reuters.com], named in honor of the 17 year old kid running the site. (seriously, 17!) Hell, even in the Bitcoin community lots of people were calling them out on this right from the start, for instance here [bitcointalk.org] is a post by one of the main devs, obviously concerned about all the other scams that of course have cropped up using bitcoin. Speaking of, wait'll you see the press when the pyramid scheme known as "Bitcoin Savings and Trust" fails, as it of course will given it pays out %3400 a year. [bitcointalk.org]

    Personally I'd suggest you use your Bitcoins for something reputable, like buying pot, getting cash out of Argentina or donating to wikileaks. All this investment non-sense, as opposed to just using the currency for moving value around digitally, is getting out of hand.

  • by Animats (122034) on Tuesday August 14, 2012 @12:07AM (#40980991) Homepage

    Just about every "Bitcoin exchange" has had some huge problem. Either they take the money and run, or they get broken into and lose the money.

    Tradehill sounded like the most legitimate of the exchanges. Then, in February 2012, Tradehill shut down with no notice, after a big chargeback from Dwolla. They did refund the money, though.

    Bitcoinica collapsed and lost customer funds. There was the Bruce Wagner fiasco. Below that level, there were about a dozen other "exchanges" and "online wallets" that lost customer funds.

    Mt. Gox is almost the only exchange that hasn't yet lost customer funds or collapsed. Even there, one wonders. They're vague about who's really behind the organization. Mt. Gox started as "Magic, the Gathering Online Exchange."

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