That pretty much sums up the demise of Bitcoin, pretty much every bitcoin "exchange" seems to be created by high school kids doing their first steps in PHP and Javascript. Wake me up when a real bank (or a renowned exchange like Ameritrade, Intrade etc) starts trading Bitcoins.
That and for me the main blocker of Bitcoin is how to exchange my currency (MXN or EUR) into Bitcoins.
While I'm not a big fan of BitCoin, I don't think this is a very good argument. You could use the same argument for banks and "get robbed". Why doesn't this happen to banks?
The difference between the bitcoin banks/cloud wallets has been that the bitcoin counterparts seldom have any law or big organization to back them but only a few hackers with a bitcoind and a web servers. Some, like the old mybitcoin.com, have been hacked mysteriously with little data released, but only millions of $ worth of bitcoins gone forevermore.
I going to pretend you are actually serious about this. Let's make a strawman that actually makes it easier to suggest that this is "the same as banks".
Let's pretend for a minute that we're dealing with a non-FDIC insured bank (like some of the original online banks), with none of the regulatory controls that obviously provide a lot of protections.
Let's pretend for a minute that the bank stupidly keeps all of its holdings as cash that are held on site at the bank. It doesn't use notes or other securities for transactions, only cash. Let's pretend that the bank also self-insures those holdings (which basically means no insurance).
Okay, so I compromise the bank's security, take every bit of cash. I disappear to some island in the Pacific with every last cent.
How badly is the bank screwed? How badly are the customers of the bank screwed?
Actually, not that badly. I only wiped out the bank's reserves. That means both the bank and its customers have a short term liquidity problem, but not necessarily a significant asset problem.
A regulated bank would have 10% of all deposits in its reserves. Unregulated banks often have far less, but let's pretend it is 10%. The bank loses 10% of its value. If it can stay solvent, then nobody loses any money, but it might take a few days before people can make withdrawals (which could cause a bank run, but that's a whole different problem). If the bank can't stay solvent, it goes bankrupt, and depositors become creditors. It'll take a while to resolve the legal process, so liquidity is killed, but when it all ends, depositors are going to get back something close to 90% of their money back.
The key thing is that the bank lends out most of the money it takes in. Even if you rob the bank of all its cash, the bulk of the "assets" of the bank are all the IOU's from lendees, which is value that is really hard to "steal", because lendees tend to only pay their lender, and then tend to do so in installments over a great deal of time.
THIS IS WRONG: Hacking Coinbase would be more akin to hacking say Visa, and redirecting all payments to you instead of the intended merchant.... if Visa's transactions were all cash based, instead of credit based... and Visa was unregulated... and even then it is kind of different because Visa is a middle man between two banks...
UPDATED: Okay, I just read they are actually storing the bitcoins in the cloud, rather than just exchange the coins between the two parties.... So actually, it's not like hacking Visa, unless Visa didn't reconcile their transactions with its customers for extended periods of time and held all of the float as cash.
So what you're saying is that banks are more stable because only a small portion of their assets are kept as reserve? In that case, what's stopping bitcoin "depositories" such as this converting the bulk of their assets to something else as well?
They can't do that because there is nowhere really safe to put the BTC. They cannot loan it out because nobody needs that much BTC, and it's unwise to invest it in USD or anything else because the currency's fickleness compared to USD(you could lose a lot of money, or possibly make some).
The problem is that the current Bitcoin "banks" aren't really banks. They're more akin to socks under a mattress than a bank.
At a very basic macro economist level, banks have two functions:
1. They are a place for clients to place their money. To incentiveize this behavior, they pay those clients interest on the money in their accounts to keep it there.
2. They take that money and give out loans to people, and charge interest over the time it takes to repay the loan.
In a healthy economy, the two feed each other. Broadly speaking, the circulation of currency works like this: People/businesses take out loans. That money is used to buy things (houses, cars, short term equipment expenses, etc.). The businesses that are paid for the goods/services pay their employees, who put the money into the bank. Note that even in this situation, banks aren't entirely necessary, because people could just buy stuff, which goes to employers, who pay employees, who buy stuff...
Bitcoin does not have either economy yet. Right now, it's used just to buy things, with BTC being converted to a "real" currency(USD, Euro, etc.) on both ends. So it's really just a single directional currency. So, right now, if I wanted to operate a Bitcoin bank, I'd have to convert it to USD or some other currency, and keep it totally separate from my liquid BTC wallets to mitigate the risk of getting hacked and the wallets getting stolen. Unfortunately, that's incredibly risky, because I would then have to deal with the exchange rate between BTC and USD.
This is not exactly true. I believe MTGox uses offline wallets for the storage of the funds, and I'd expect any other sane bank use it as well.
If someone breaks into the MTGox, they'll be only able to steal the "reserve". To get to the real money, the MTGox admin has to physically go into a vault (safe), and retreive its contents.
That isn't necessarily the fault of BTC banks though. Let us be honest here - if we (the viewing public of HN) collectively wanted to put in every effort to supplant flat currencies for BTC so nobody can print it anymore, all of us combined would not have the financial assets required to sway the supermassive giants of the world like Walmart, Amazon, Google, Apple, the big 3 car manufacturers, realtors, and more importantly than anything else, the stock markets to start trading in BTC would take the financial efforts of pretty much the entirety of the top 400 wealthiest Americans.
The markets are more resistant to currency shift than enterprises are to getting off XP and IE6. BTC will always fail because everyone is to lazy to get rid of the dollar as the reserve currency.
Well, it doesn't make them more stable, but it makes them more resilient to criminal theft.
Bitcoin "depositories" open up a pretty big can of worms if they convert their assets. Part of the point of using bitcoin is not to have to use other assets.
They could start lending bitcoins, but that's going to invite a lot of scrutiny, particularly from the regulators.
If Joe Blow rents a $20/mo. VPN and opens up the "First Federated Bank of Joblovia", chances are he isn't going to be able to take a whole lot of wire transfers to his Bank of America account before the feds move in and shut him down. In fact this is basically what happened to some of the earliest Bitcoin exchanges who were less sophisticated with how they moved currency in and out; guys like Jered from Tradehill used their personal bank accounts to take money from people, and gave them Bitcoins online. The cashflow problems and subsequent collapse stemmed more from the constant shutdown of bank accounts than from the "misunderstanding" with Dwolla as to the nature of Dwolla's chargeback policy. I think.
In any case, Bitcoin offers the ability to do exactly this: Open a completely unregulated financial institution with no accountability. Looking at this site, the first question in my head was "Where are your coins stored?" Second was, "What are the limits, and how, exactly, do you guarantee funds will transmit since every country in the world has different limits, regulations and KYC disclosures required to make that possible?"
The answer for Bitcoin businesses thus far has mostly been "don't worry about it". In Bitcoin that's slang for "I'm using my bank account, my buddy's bank account, my girlfriend's bank account...and I swear you'll get your money on time until you don't, and I'm gone, and you're fucked."
Since many people use Bitcoin specifically because it is unregulated, they won't complain to the government when their Bitcoins are stolen. What trotsky is really saying is that a Bitcoin company can just embezzle its customers' money and blame it on hackers. It's hard to know whether this has ever happened, but there have been some fairly sketchy incidents.
The truth is that all your money has already been stolen from the banks but we pretend it's still there via devaluing savings via money printing in an attempt to maintain the illusion each time the banking debt pyramid is about to collapse.
He's echoing the many, many scandals of centralized bitcoin banks that had the same thing happen over the past year. It's like the wild west out there.
google "scare quotes'' + ''dan bloom" to see inside skinny on the meaning and origins of the scare quotes term, first coined in 1934.... ! but why is SCARE part of the term? if know, email me at danbloom AT gmail
