Bitcoin wallet Bitstamp’s suspension calls Bitcoin’s viability into question

Update: “On January 4th, some of Bitstamp’s operational wallets were compromised, resulting in a loss of less than 19,000 BTC.  Upon learning of the breach, we immediately notified all customers that they should no longer make deposits to previously issued bitcoin deposit addresses.  As an additional security measure, we suspended our systems while we fully investigate the incident and actively engage with law enforcement officials,” Bitstamp CEO Nejc Kodrič  said in a released a statement.

Late last night Bitcoin wallet Bitstamp announced it would temporarily disable its service in light of a potential breach. This is just the latest evidence of Bitcoin’s instability, and the media has been quick to descend on the coin. Already, comparisons to Mt. Gox are being thrown around.

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Despite the launch of many Bitcoin companies, 2014 wasn’t exactly a good year for the cryptocurrency. Over the course of last year, Bitcoin’s price dropped more than 70 percent. As of this writing $271.10 will buy you one Bitcoin. Some even hailed 2014 the year of Bitcoin’s death march.

Bitstamp’s announcement certainly doesn’t help to boost the coin’s legitimacy. Early this morning Bitstamp posted that it had reason to believe that one of its operational wallets had been compromised. As a result, the company is shutting down its service until it can verify the wallet is safe to use.

Bitstamp also highlighted that deposits made after today are at consumers’ own peril:

“IN THE MEANTIME, PLEASE DO NOT MAKE DEPOSITS TO PREVIOUSLY ISSUED BITCOIN DEPOSIT ADDRESSES. THEY CANNOT BE HONORED!”

Prior to today’s revelation, the U.K. based company was held in pretty high esteem. The second largest USD Bitcoin exchange, Bitstamp has gone out of its way to prove it won’t be the next Mt. Gox. In May of this year the company got independent developer Mike Hearn to conduct a proof of reserves audit — essentially verifying that Bitstamp has the funds it says it does.

“With Mt. Gox there was a black hole of information. We’re still nearly a year later trying to find out what went on there,” says Grace Caffyn, assistant editor at Coindesk.

Unlike Mt. Gox’s execs, Bitstamp CEO Nejc Kodric has been very vocal about what’s going on with the company publicly via Twitter:

https://twitter.com/nejc_kodric/status/552090819659071488

But despite Bitstamp’s best efforts to mitigate the situation, the hack may still be a big turnoff to potential Bitcoin users. Many in the Bitcoin community are trying to shrug off the coin’s association with black markets on the dark web in order to broaden consumer adoption — without which Bitcoin doesn’t have much hope for gaining traction.

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Bitcoin’s full potential hasn’t been realized. Aside from making relatively fast peer-to-peer transactions, there’s no good case for using Bitcoin over traditional currency for most consumers. Plus, there still isn’t a wide array of merchants that accept it. What’s more, Price volatility is another major barrier to getting consumers on board.

That might not change anytime soon. At the moment Bitcoin is mostly in the hands of speculators and investors, and they’re playing the market like traders, which drives more volatility, says Caffyn. In the long term though, there are other factors that may keep the price low. Bitcoin miners are dumping 3,600 Bitcoin into the economy everyday. There’s a low demand for the coin, because merchants who accept Bitcoin often cash out immediately, and consumer adoption is low. Over time that can lead to depreciation.

The Bitstamp hack is unfortunately timed and while the company may pull through with minimal damage to consumers, it may take a lot longer to heal lacerations to Bitcoin’s overall reputation.

*This article has been updated to refer to Bitstamp as a Bitcoin exchange. A previous version of this article called it a wallet.

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