When Bitcoin digital currency is stolen, who you gonna call?

In the movies, when thieves plot to steal hard cash, a few guys are responsible for taking out communications networks, someone else rounds up the bystanders, a couple others round up the cash as a cohort awaits in a car, speed boat or helicopter.

It’s all part of an intricate plan to escape with the money, balancing the greed of hoarding the loot with the need to disappear before law enforcement arrives.

But if thieves steal digital currency, as one Bitcoin user says happened to him, there’s little evidence left behind — and no need for a get-away car. Ars Technica’s Timothy Lee writes that a Bitcoin user known as allinvain claims that someone stole $500,000 worth of Bitcoins from a computer.

Bitcoins are a type of digital currency that allow users to anonymously purchase the funds at an exchange rate for hard cash. As of June 16, the exchange rate is about $20 per bitcoin, writes Money Morning’s David Zeiler. Government agencies aren’t likely to accept Bitcoins as a legitimate form of payment for anything, but the technology has caught the eye of at least a couple of senators, who consider the use of Bitcoins to resemble money laundering.

The value of Bitcoins comes from their limited supply, Zeller writes, adding that only 6.5 million Bitcoins exist. The currency’s creators intend to cap availability at 21 million Bitcoins.

Lee writes that allinvain had worked for more than a year to support the creation of Bitcoins, which occurs once every 10 minutes. The user had amassed about 25,000 Bitcoins, which did not equal much money until the exchange rate skyrocketed in recent months, jumping from a few pennies to $20, Lee writes.

Gavin Andresen, leader of the Bitcoin software project, told Lee that the anonymous nature of Bitcoins makes it difficult to confirm the user’s claim that someone stole them. The lack of third-party regulators has enticed users who exchange Bitcoins for a range of products, such as illegal drugs. However, the free-roaming cash also exposes users to a costly security breach without any hope of financial restitution.

Even if Bitcoin security were to be trustworthy, some say the economics of such a strictly limited currency will doom it.

Brian Reiter, a business systems developer who has worked with major companies such as Comcast, Coca-Cola and Deloitte Touche, wrote in a blog that the extremely limited number of Bitcoins creates a deflationary system. In other words, users are encouraged to hoard the currency in hopes that the exchange rate skyrockets, while merchants have fewer incentives to accept the currency — and they actually could end up losing money through the transactions. Reiter cited the Great Depression and Panic of 1837 as examples of financial crises propagated by deflationary currency.

Although users such as allinvain might be able to gain a small fortune by amassing thousands of Bitcoins as the exchange rate mushrooms, the security risks and economic volatility could scare away more conservative investors. As Andresen told Lee, Bitcoin is an experiment that is not for the faint of heart.

About the Author

Michael Protos is a web content editor with 1105 Government Information Group.

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