Bitcoin's need for increased security

In an article for The Daily Ticker, Philip Pearlman writes of the need for increased security measures after bitcoin exchange Mt. Gox had $400 million stolen.  Mt. Gox was forced to file for bankruptcy last week after the recent theft, a move which caused panic among bitcoin investors and led to a temporary plunge in the virtual currency’s value.

As it turns out, Mt. Gox isn’t alone in its vulnerability to theft.  Over the last week, thefts have been reported at three different bitcoin sites.  Along with the $400 million stolen from Mt. Gox, Flexcoin had $600,000 in bitcoin stolen and the tiny exchange, Poloniex had 12% of its assets, amounting to $50,000, stolen.  Hackers have been probing for vulnerabilities at bitcoin exchanges, making them prime targets for robberies. 

As we discussed in last week’s commentary, a preliminary bottom was expected to be imminent and it came shortly after the announcement of the Mt. Gox debacle.  The negative publicity and selling panic that greeted the news was typical of the exhaustion phase of a major bear move, so it came as no surprise that bitcoin’s decline culminated last week.  Psychologically, most sellers have already exited the market and now the bargain hunters have re-entered. 

All that’s required to technically confirm an immediate-term bottom is for bitcoin to close two days higher above its 15-day moving average.  That hasn’t happened yet but it could by the end of the week. 

On a positive note, the Mt. Gox debacle has set the stage for some much-needed reforms in the bitcoin market.  As Pearlman observed, “with every attempt to hack into bitcoin operations, security officers at these companies learn more about the potential vulnerabilities inherent in running these types of operations which might potentially make them more secure” by allowing them adapt to security threats.