Many people prefer Bitcoin as well as various other cryptocurrencies because cryptocurrency can mean freedom. Unfortunately, Bitcoin is experiencing the exact problems that it was created to solve. Global cryptocurrency markets are overrun with large-scale exchanges that function the same way a bank does. Cryptocurrency markets are not regulated and they make up their own rules for their currency exchange. In short, bitcoin is not all it is cracked up to be.

Historic Attack Makes Price Of Bitcoin Plunge

In early August of 2016, hackers stole over 119,756 bitcoins from various Bitfinex financial accounts. These accounts are also called wallets and they are owned by the company’s clients. The security of Bitnifex was seriously and severely compromised through an insidious system breach. An unknown hacker was able to gain access to many bitcoin wallets at Bitnifex as well as override the company’s preset withdrawal limits. Bitfinex is a small company based out of Hong Kong. It is a bitcoin exchange that seeks to cultivate the same type of relationships with their clients that banks develop. With the current conversion rate, 119,756 bitcoins translates into approximately 72 million US Dollars. The massive bitcoin loss is especially damaging for a small business such as Bitnifex.

This particular bitcoin theft is considered to be one of the biggest hacks in history due to the high dollar amount stolen during the heist. There is only one other bitcoin heist larger than this attack. The largest bitcoin theft occurred in 2014 when MtGox lost the bitcoin equivalent of over 600 million US Dollars. MtGox did not survive the substantial losses incurred by the hack and the company filed for bankruptcy. The Bitnifex bitcoin theft was a highly coordinated attack that required a substantial amount of planning. Bitcoins were quickly moved around to various addresses and there was not anything Bitnifex could do to stop the heist.

The Bitnifex hack is not the first bitcoin hack but it is a unique hack. Many companies keep all bitcoins in one place but Bitnifex created a separate bitcoin wallet for each client. This means that hackers did not steal 36% of all of the bitcoins for all clients. It means that 36% of all Bitnifex clients had all of their bitcoins stolen. Despite the allure of cryptocurrency, the Bitnifex heist is demonstrative of the biggest risks and vulnerabilities associated with unregulated currency. Hacks and other data breaches are the biggest threats to anyone who has a holding in a cryptocurrency wallet.

Free Markets Can Be Very Expensive After Massive Breaches

In response to the massive hack of Bitfinex accounts, the company responded by spreading the losses across all of its client accounts. It did not matter if the client’s individual accounts were hacked or if a client even had any bitcoins in their wallet. The accounts of all of Bitnifex’s clients were impacted and all clients were required to share in the massive loss. Some experts speculate that this is one of the first attempts made by bitcoin that is intended to address unexpected financial issues.

Bitcoin Hack Creates Massive Shared Losses

Free markets lack the regulation of traditional banking systems. They make their own rules and sometimes anything goes. In response to the Bitcoin heist from Bitnifex, the comapany deducted 36% of every client’s holdings from their wallets. Bitnifex replaced the amount they deducted with shares and clients are not allowed to trade their shares. Clients must hold these shares and hope that Bitnifex recovers from this breach. The market must stabilize or Bitnifex clients will be forced to take the losses. This is considered to the very first bitcoin bail – in. Clients impacted by this bail – in received shares of Bitnifex in the form of tokens. These tokens are essentially useless. The tokens can be redeemed for shares in Bitnifex’s parent company.

Bitcoin Bail-In Is Similar To Bankruptcy

Spreading out the losses sustained during the bitcoin heist functions in the same way as a bankruptcy. This is especially true when the cryptocurrency company offers some sort of equity to clients. In this sense, Bitcoin fails to provide innovative currency solutions and alternative financial systems. The bail – in concept is not new. It has been tried many times by traditional banking systems. It is likely that bitcoin will continue to experience instability and crisis due to theft and mayhem.