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Security breach brings more bad news for bitcoin

Last year was not kind to bitcoin. And 2015 already looks as if it could be just as tough for the digital currency: Bitcoin exchange Bitstamp went offline this week as it investigated a multimillion-dollar security breach, and bitcoin prices fell from about $320 to $270 in the first week of the year.

The news about BitStamp is particularly alarming. The company, based in Slovenia and Britain, is the third-largest bitcoin exchange by volume.

A statement on Bitstamp’s website says the company has “reason to believe” that one of its “operational wallets” – a place connected to the Internet where some bitcoins being processed were stored – was compromised Jan. 4. The message also said that Bitstamp maintained “more than enough” offline reserves to cover the funds in the operational wallet. A later update said the lapse resulted in the loss of 19,000 BTC, worth more than $5 million at current exchange rates.

The incident harks back to the collapse of Tokyo-based Mt. Gox, the once-popular exchange that imploded spectacularly last spring. The company announced in February that it was filing for bankruptcy, saying it had lost the equivalent of nearly a half-billion bitcoins. Just last week, Japanese authorities told a local newspaper that only a tiny fraction of the missing bitcoins could be attributed to hacks from outside the company, according to CoinDesk, a news site for digital currencies.

The Mt. Gox catastrophe was one of several high-profile incidents involving bitcoin that helped drag down currency’s price in 2014. Last January, bitcoin prices pushed above $900 a pop, but by the end of the year they hovered at a little more than a third of that price.

Bitcoin has continued to struggle with its association with online black markets, as well as regulators’ efforts to oversee it. The Bitcoin Foundation, a nonprofit group formed to promote the cryptocurrency that counted Mt. Gox chief executive Mark Karpeles as a founding member, lost another founder to bitcoin’s black market ties: Former vice chairman Charlie Shrem resigned after being arrested for supporting an illicit bitcoin exchange for Silk Road, the notorious digital black market. (He later pleaded guilty to a count of aiding and abetting the operation of an unlicensed money-transmitting business.)

Which government laws apply to bitcoin also remain murky – although financial regulators in New York state are working on hammering out some requirements for bitcoin and other virtual currencies. The proposed rules would apply only to companies that transmit funds from one place to another, and not to retailers that simply accept bitcoin or private individuals who invest in the digital currency.

All in all, as the digital news outlet Quartz noted last month, the fallout from these kinds of high-profile headaches helped make bitcoin among the worst possible investments of 2014. However, there were other bright points for those in the industry: Outside investments in bitcoin-related technology, and services and merchant acceptance of the payment method, all rose last year.

But for bitcoin to really take off, it must become more popular among users, not just investors. As bitcoin backers try to get the public engaged with the digital currency by sponsoring such events as college football bowl games, the number of transactions per day – currently about 80,000, according to Blockchain.info – suggests it hasn’t quite caught on yet.

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