The dirge of Dogecoin: Cryptocurrency doomed to failure

Summary:... and yet we still choose novelty over risk. Businesses take note: virtual currency can result in imaginary profit.

doge

Bitcoin. Considered a digital currency by some, a commodity by others.

Either way, Bitcoin has captured the imagination of investors worldwide -- so much so, that businesses have also taken an interest. Some retail outlets, including second-hand electronics stores, web hosting, bakeries and restaurants, accept the cryptocurrency in place of traditional, hard coin. Once both physical and online stores began accepting Bitcoin as currency, this then led to governmental bodies taking an interest, as due to its birth, the digital commodity has remained unregulated -- and was once used as currency on Silk Road , an online marketplace for less than savory items.

A decade ago, the price of Bitcoin was minimal. However, Bitcoin exploded in value following comments from the Chairman of the Federal Reserve, Ben Bernanke, who said the cryptocurrency may hold "long-term promise." Several months ago the price of Bitcoin topped $900, but at the time of writing, the price of BTC has tanked to $437. 

In the beginning , the general public used computers to "mine" Bitcoin via a computer's GPU. However, it is now nigh on impossible to mine for traditional Bitcoin through personal computers due to the massive amounts of processing power required. It is now likely that you would pay more in running computers mining Bitcoin than what you would earn from the process.

Mining pools are another way to hunt down Bitcoin. In a pool, such as Slush's pool, users band their resources together to increase the capabilties of singular computer systems in to a more powerful unit. If you mine Bitcoin this way, then naturally profits are shared between pool participants. 

As the popularity of Bitcoin rose, so did other forms of the cryptocurrency. Litecoin, Mastercoin, Peercoin and Betacoin are just some types of virtual currency that can be purchased or mined, but the main alternative currently in the media spotlight is Dogecoin.

Dogecoin, which features a Shiba Inu from the popular 'Doge' meme, began circulating at the end of 2013. In comparison to Bitcoin, the currency was in much faster production and millions of Dogecoin were quickly mined. The price fluctuated due to the creation of vast mining pools taking advantage of rapid mining with little computing power, and a cyberattack taking place within weeks of the cryptocurrency's official launch left users pillaged of their coins. 

While a donation fundraiser covered the stolen Dogecoin, the latest cyberattack to hit the popular alternative to Bitcoin has done little but reinforce the proposition that cryptocurrencies are vulnerable to theft and are for risk takers only -- especially if you plan to invest your hard-won cash.

Over the past week, one of the largest Dogecoin vaults, Dogevault, quietly went offline. Users began reporting that hundreds of thousands were vanishing from their accounts, with one user reporting that 950,000 Dogecoin was stolen from their single account alone. Some of the currency was later traced to megawallets containing millions of Dogecoin. At the time of writing, 1,000 Dogecoin are worth $0.46. 

On Tuesday, Dogevault announced that the service was "compromised by attackers" and this resulted "in a service disruption and tampering with wallet funds."

The cryptocurrency vault also said that the moment administration was aware of the security breach, service was stopped -- but cyberattackers had already accessed and destroyed all of the data hosted on virtual machines.

"We are currently in the process of identifying the extent of the attack and potential impact on user's funds," Dogevault states. "This involves salvaging existing wallet data from an off-site backup. We will also closely be investigating potential attack vectors, and determining the security breach which enabled the attacker's to compromise the service."

While the investigation is taking place, the team have asked for no funds to be sent to Doge Vault addresses.

Read this

The Mt. Gox bitcoin debacle: Bankruptcy filed, customer bitcoin lost

UPDATE: Mt. Gox has closed the bitcoin exchange and filed for bankruptcy in Japan.

Dogevault is simply the latest vault in a string of cyberattacks which have left holders of cryptocurrency confused, angry, and poorer. In February Mt. Gox, the once dominant-Bitcoin exchange, shut its doors without warning and refused to respond to investor inquiries. The exchange also wiped its Twitter feed clean and resigned from the Bitcoin Foundation's board.

It later emerged that Mt. Gox allegedly had been the alleged victim of systematic cyberattacks which took place over a number of years. According to the company, hackers had breached the network and pilfered Bitcoin, to the point at which Mt. Gox had to file for bankruptcy protection in both the US and Japan. It is estimated that 650,000 BTC belonging to customers were lost due to the security breach. Some claim, however, the missing Bitcoin was the result of fraud conducted by Mt. Gox.

A Tokyo-based judge is overseeing an investigation in to the closure of the exchange, and Mt. Gox CEO Mark Karpeles is wanted in the US for questioning, although no charges have been filed.

This year alone, a number of virtual currency exchanges have closed, including Beijing-based cryptocurrency trading post Vircurex , Flexcoin and Poloniex .

A recent study of the Bitcoin exchange industry conducted by computer scientists Tyler Moore and Nicolas Christin from the Southern Methodist University, Dallas and Carnegie Mellon University found that out of 40 virtual currency exchanges once established on the Web, 18 have gone out of business -- 13 without warning, and five after becoming victims of cyberattacks. In addition, four suffered major security breaches but remain open.

Meanwhile, governmental bodies are looking at ways of regulation, perhaps to capitalize on the popularity of virtual currency and control its development, or at least to help people protect their investments. 

In May, the US Securities and Exchange Commission issued an advisory warning investors to be wary of cryptocurrencies, cautioning that virtual currency is volatile and unregulated -- leaving investors at risk of fraud and theft with no means of gaining compensation if funds are lost. The commission said:

"A new product, technology, or innovation -- such as Bitcoin -- has the potential to give rise to both frauds and high-risk investment opportunities. Potential investors can be easily enticed with the promise of high returns in a new investment space and also may be less skeptical when assessing something novel, new and cutting-edge."

China has taken the matter further and banned activities relating to the trade of Bitcoin. The country's largest bank, the Industrial and Commercial Bank of China (ICBC), said on May 8:

"From this date, any institution or individual must not use accounts set up with our bank for the deposit and withdrawal [..] and transfer of funds for Bitcoin and Litecoin trading."

In addition, the China Guangfa Bank and Shanghai Pudong Development Bank have also stated that accounts belonging to customers trading in virtual currency will also be frozen. This, in turn, has caused virtual currency exchange rates to tumble.

Read this

Singapore broker urges 'light touch' Bitcoin regulation

Governments should adopt a light touch approach in regulating virtual currencies and instead allow technology to help protect consumer interests, says Singapore-based Bitcoin broker, Coin Republic.

What can we learn from all of this? There are few investments without risk, for a start. Many accept this premise every day while dabbling on the stock exchange, and in this manner, cryptocurrency is no different. However, risk is not based on the value of a company, but rather the perceived value of an unregulated cryptocurrency which can rise and fall based on investor popularity and the individual security of trading posts which may -- or may not -- have the capital to provide strong security for stored funds. 

There is often a divide between different virtual currency camps as to whether or not governments should become involved in the development and future of Bitcoin. Regulation could protect investments, but on the other hand, would remove one of the ideals of cryptocurrency -- the desire to remove bank and governmental control. However, the financial ecosystem currently in place for Bitcoin is fragmented, disorganized and divided, which does not herald well for Bitcoin's future.

Business is about profit and loss. While accepting digital currency may cause a sensation and give a company additional advertizing, it shouldn't be done just as the 'thing everyone's talking about.' If you insist on doing so within your firm, it is advisable to research Bitcoin, learn about it, and ask the right questions first, rather than jump on the bandwagon and hope for the best. 

It may be that in the future, cryptocurrency will be properly protected and turn out to be a successful alternative to hard coin. However, investors have to rely on the security of individual exchanges to protect their virtual currency -- but without the security that banks offer should a cyberattack or fraud take place and wipe an account clean.

Until there is a sure-fire way to protect such investments and currency fluctuations stabilize, it is simply not worth it for companies to support cryptocurrency. Accepting it instead of standard money is a risk, as exchange rates may be good this week, but tank in the next due to the latest closure of an exchange or a bank's declaration that they will not support accounts belonging to those who trade in it. We simply don't know until it hits. 

There are many who enjoyed the profits of Bitcoin's sudden rise to fame and exchanged the contents of their virtual wallets for traditional cash -- setting themselves up for life. However, the cryptocurrency scene has changed and hackers are taking advantage of often poor security to pilfer the funds of unwitting investors. It is no longer lucky speculation which resulted in heavy winnings, but a risky prospect that only the brave should undertake -- and businesses should have no part of it until security catches up. 

Topics: Security, Tech Industry

About

Charlie Osborne, a medical anthropologist who studied at the University of Kent, UK, is a journalist, freelance photographer and former teacher. She has spent years travelling and working across Europe and the Middle East as a teacher, and has been involved in the running of businesses ranging from media and events to B2B sales. Charli... Full Bio

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