Building startups that enable ecosystems is a waste if Bitcoin's fundamental flaws cannot be addressed. Mt. Gox has gone offline and Web rumors are swirling about what is going on inside that troubled exchange. The central problem in this drama is "transaction malleability," a flaw in a Bitcoin digital signature that fails to hash all of the transaction's data. This allows a malicious party to invalidate a hash and render a transaction incomplete even though a transaction record exists in the blockchain. This gaping flaw would never be possible in normal transaction processes that use conventional currencies but it is endemic to crypto-currencies. Validating an incomplete Bitcoin transaction makes the Bitcoins subject to theft. This is a critical vulnerability of crypto-exchanges that rely on separate "hot" and "cold" wallets with public and private keys. Of course, Bitcoin transactions aren't reversible, so when someone steals Bitcoins and masks them with an invalid transaction record in this manner, they are gone forever.
Another huge flaw in Bitcoin is the inexorable growth of the blockchain. That consolidated transaction record gets longer as more participants grow the market for Bitcoin. This is the only financial market where further adoption of the technology makes the technology more unwieldy. The computing power needed to process a single transaction grows with each transaction. Eventually, with enough participants, the blockchain will become too large for a user's single computer to process and unlocking a private wallet won't be worth the time it takes.
Bitcoin miners have ignored the potential for mining duplication built into the algorithm. Ignorance is bliss, until another miner claims the Bitcoins someone else already mined. Claim jumping happened in the California Gold Rush days. Disputes were settled in court if a court existed, or they were settled with violence. Bitcoin miners running huge server farms in cold climates have a huge advantage over smaller miners if they ever wanted to artificially duplicate someone's existing claim to Bitcoins. Read once more about transaction malleability to see just how easy it is to fool the blockchain, and then realize how easy it is to duplicate mining. Changing Bitcoin's source code with open hacks won't solve the duplication problem; it just forks the code into a new currency even weaker than Bitcoin (i.e., the joke called Dogecoin).
Anything goes in the absence of regulation. The US Treasury may or may not tolerate Bitcoin, based on what I heard Treasury Secretary Jack Lew say last week at the World Affairs Council. Bitcoiners are counting on regulators to write rules around whatever precedents they set themselves. What hubris! Real precedents matter when trade associations adopt industry standards and lobby for regulatory acceptance. No way is the IRS or SEC going to take Bitcoin seriously if a bunch of hackers can't even clean up a blockchain. None of the established industry associations from the banking or brokerage sector will take up the Bitcoin cause where a bunch of developers can't get the job done.
Google Wallet is easier to use than any crypto-currency and works within existing regulatory regimes for finance and telecom. Regulating Bitcoin may create more problems for its users than it would solve. Bitcoin's promoters in the venture investing community have admitted in public that government regulation of Bitcoin as an asset subject to capital gains tax means users would have to record its dollar value in a separate ledger. They would have to maintain this record at the beginning and end of each Bitcoin transaction. In other words, the blockchain is insufficient to establish valuation for tax purposes. The tautology of using a ledger to track another ledger is unbelievably stupid, but that's what legitimization of Bitcoin requires. The whole thing is such a Rube Goldberg mechanism, but techno-idiots and crypto-losers insist on playing around with it.
People who still take Bitcoin seriously after all of its exposed problems don't have to listen to me. They can check out this awesome LOLpic instead. I'll quote Oliver Cromwell: "I beseech you, in the bowels of Christ, think it possible you may be mistaken."
(Image credit: Caspar de Crayer [Public domain], via Wikimedia Commons)
The amorphous group of developers in transit through San Francisco's hackathons and tech gabfests should find something better to do than work on crypto-currencies. Stick a fork in this one because it's done, and don't fork it into some new crypto-coin. It is time for the fin-tech community to wake up. It is time to abandon the Bitcoin fantasy.