Bitcoin Bourse

Worth a Virtual Fortune

Betting on the bitcoin. Source: Photothek via Getty Images
Betting on the bitcoin.
  • Why it matters

    Why it matters

    Bitcoins are rapidly gaining acceptance in the wider commercial world but many companies remain concerned about the virtual currency’s security.

  • Facts

    Facts

    • Bitcoins were created by a mysterious Japanese group that used NSA encryption methods to protect them.
    • One bitcoin is currently worth about €230 ($250).
    • The system’s greatest vulnerability lies in exchanges, where users convert bitcoins into paper money.
  • Audio

    Audio

  • Pdf

The digital revolution is supposed to begin in northern Germany, specifically in the provincial German town of Herford, not far from Bielefeld.

It isn’t easy to visit Germany’s only exchange for bitcoins, a popular virtual currency. There are no directions on its website, and there isn’t even a sign on the door. Oliver Flaskämper, the head of Bitcoin.de, apologizes for the game of hide-and-seek. “As an online business, we have almost no visitors,” he said.

Bitcoin owners can exchange their virtual coins into euros – or the other way around – at Bitcoin.de. The few employees at the Herford office are there to respond to customer inquiries. Most of the business takes place automatically.

For security reasons, Mr. Flaskämper is unwilling to reveal the location of the computers that bring together buyers and sellers of the virtual cryptocurrency. It sounds a little paranoid, and Mr. Flaskämper is aware of that. “Our earlier projects were definitely not as nerve-wracking,” he said. But that was before he launched the bitcoin exchange.

At this story went to press, one bitcoin was worth about €230 ($250). This is remarkable for a currency you can’t actually touch. Bitcoins are cybermoney. Rather than being printed by a central bank, their value is calculated with computers using cryptographic algorithms.

The most important feature is that the same algorithm that creates new bitcoins also monitors the currency’s trading. Someone who wants to pay for something with the virtual coins can transfer them to the recipient with a few mouse clicks, almost like sending an email. This is an advantage. For the same reason, however, they can also be stolen, almost like cash – and that is a drawback.

Some 98 percent of all bitcoins are stored in so-called "cold wallets" – storage devices that are not connected to the Internet.

The software behind the bitcoin is considered quite reliable. Its creator, the mysterious Satoshi Nakamoto, presented the virtual currency at a forum for cryptography experts in November 2008. The bitcoin protocol is based on an encryption mechanism designed by the U.S. National Security Agency, or NSA.

But digital thieves also have an easier time compromising those places where users convert their bitcoins into real money: Exchanges like the one in Herford.

Mt. Gox, a Japanese marketplace, declared bankruptcy in the spring of 2014. Since then, there has been no trace of about 640,000 bitcoins, worth about €430 million at the time. Virtual money worth €5 million disappeared from the European Bitstamp exchange in early 2015, and the Cryptoine bitcoin exchange was hacked just last week. Ironically, after promising users security and anonymity, the exchange itself was robbed.

The circumstances of the thefts are nebulous. Errors in the software the exchanges use often contribute to the problem. To address the issue, Mr. Flaskämper has offered a reward to anyone who discovers and reports security flaws.


Video: Explanation of Bitcoin for German users.

But the threat can also come from within. In the Mt. Gox case, investigators assume that an exchange employee siphoned off customers’ bitcoins.

The incident prompted Bitcoin.de to institute a principle of redundant supervision similar to procedures at a regular bank, explained Mr. Flaskämper. Several individuals are required to transfer larger sums. And this isn’t the only commonality between the digital currency and real money.

Just as most bank branches hardly keep any cash on hand, only a fraction of the virtual coins are kept on the computers at Bitcoin.de. Some 98 percent of all bitcoins are stored in so-called “cold wallets” – data storage devices that are not connected to the Internet.

For security reasons, Mr. Flaskämper explains, even he is unaware of the various storage sites. To ensure that his customers believe him when he says that there are in fact bitcoins in the virtual safe, he has an auditor check inventories once a year.

But why all the trouble? Bitcoin.de currently processes about 15,000 transactions a month. The trading system at the German Stock Exchange does this in half an hour. But Mr. Flaskämper remains undeterred and is convinced that bitcoins will have a brilliant future. Analysts with Juniper Research estimate that the number of bitcoin users worldwide will increase to about five million by 2019.

Large corporations in the United States have also become interested in the new technology. For instance, computer maker Dell and the Expedia travel site now accept payment in bitcoins. U.S. stock market operator NASDAQ OMX has just announced that it intends to get into the bitcoin business, and bitcoin startup Noble Markets is using mainstream Wall Street trading software.

Mr. Flaskämper is convinced that the virtual currency will eventually triumph. “The last time I was so excited about something was in 1998,” he said.

At the time, the digital entrepreneur went to a bank to apply for a loan. He had just invested a few thousand Deutsche marks to acquire an Internet address, and he needed money to buy additional domains. “How do we know that the Internet will even exist in five years?” the banker asked him.

“It will,” Mr. Flaskämper told him.

 

Michael Brächer is a reporter for Handelsblatt. To contact him: braecher@handelsblatt.com

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!