Despite a Tumultuous 2014, Bitcoin Still Has Value

By Sean Michael Kerner  |  Posted 2014-12-30 Print this article Print

NEWS ANALYSIS: Bitcoin had a difficult year in which its value declined by two-thirds, but there is still much reason for optimism in 2015.

On Jan. 6, 2014, one Bitcoin (BTC) was valued at approximately U.S.$951, according to Coindesk, and has not rebounded to that level. On Dec. 29, BTC was valued at approximately U.S.$312, down by $639, or 67 percent, from its Jan. 6 high.

Despite the dramatic decline in value, there is still much reason for optimism in the Bitcoin world.

Though the 2014 fluctuation is extreme, it isn't the first time Bitcoin's value has declined. Bitcoin's value was halved overnight on Dec. 18, 2013, from just above U.S.$1,000 to U.S.$500 per BTC. The decline was due to a policy decision from the government of China to ban payment companies from providing financial clearing services for BTC and other virtual currencies.

Bitcoin recovered from the 2013 China policy decision, and its value rebounded in January 2014. But a new crisis of confidence emerged in the Bitcoin world. The crisis, which had nothing to do with an external nation-state, was initially driven by Bitcoin's largest exchange, Mt. Gox.

Until February 2014, Mt. Gox was the world's largest Bitcoin exchange and one of the best-known brands in the space. The first signs of trouble at Mt. Gox appeared Feb. 7 when the Bitcoin exchange began to experience withdrawal delays for its customers. That day, the full extent of Mt. Gox's troubles were not yet known, but in the days that followed, a twisted web of facts emerged that would spell doom for Mt. Gox.

On Feb. 10, Mt. Gox blamed the withdrawal delays on a protocol flaw with Bitcoin that was identified as "transaction malleability." The flaw could have allegedly been used to alter a user's transaction details to make it seem as though BTC were not sent to another user's BTC wallet when, in fact, the coins were actually sent. The Bitcoin Foundation disputed the allegations that the protocol was at fault and blamed Mt. Gox's own software implementation.

By Feb. 28, three weeks after the first reports of trouble at Mt. Gox, the truth emerged and the full extent of trouble became known. Mt. Gox revealed that it had suffered a technical breach, and 750,000 Bitcoins valued at $473 million were stolen.

The catastrophic failure and theft devastated Mt. Gox, resulting in the once-leading Bitcoin exchange to declare bankruptcy. Mt. Gox customers have been trying to recover lost coins over the course of 2014. The most recent meeting of Mt. Gox creditors was held in Tokyo on Nov. 26, and the next meeting is scheduled for April 22, 2015.

Bitcoin is a distributed system that relies on the power of the many to validate and process transactions. There is a theoretical risk in Bitcoin that one group could potentially control 51 percent of the processing power and, thereby, somehow hold undue influence. This risk was of particular concern in June when the Bitcoin mining collective, known as, achieved 51 percent of the Bitcoin mining power. To date, there have been no public reports of any sort of 51 percent attack.


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