Bitcoin roiled by yet more bad news. Can it survive?

Another Bitcoin exchange has folded, and a Bitcoin entrepreneur appears to have committed suicide. But experts continue to insist that it's too soon to write off the upstart crypto-currency.

As hyperbolic headlines go, the upstart crypto-currency Bitcoin is having what could only be called a seriously bad week.

On Tuesday, yet another exchange bit the dust – the Vancouver-based Flexcoin closed, taking all its online cash down with it. On Wednesday came news of the death of a Bitcoin entrepreneur in Singapore, probably by suicide.

Then on Thursday, the entire Bitcoin world was upended by the revelation in Newsweek that the elusive creator of the Bitcoin code – known for the past six years as Satoshi Nakamoto, thought by most to be a pseudonym – is actually just that: a 64-year-old Japanese-American by that name, living quietly in Los Angeles.

These events have roiled the Bitcoin community to its cyber toes. But do they spell the end of the digital payment alternative to conventional cash? Not so fast, say most knowledgeable observers.

“I wouldn’t write them off yet,” says economist Mark Zupan, dean of Simon Business School at the University of Rochester in New York. “It’s akin to the Navy, which has what it calls a ‘dead sailor rule,’ which basically means you have to have something bad happen to learn what needs to be fixed.”

Noting that the two exchange failures (the first being MtGox) were the result of theft by hackers, Professor Zupan says exchanges that deal in Bitcoin are going to have to match fire with fire. “It’s like the old spy versus spy game; you have to match their game and improve security.”

Whether the many dozens of exchanges that exist on the Internet can rise to this security challenge is only one part of the problem facing the new currency.

“They may be able to stay ahead of the hacking,” says William Norton, an attorney in the business technology group in the Nashville office of the law firm Baker Donelson. 

Compared with previous issues, he notes, such “transaction malleability” glitches are relatively minor. What they have done is expose bugs in the software. However, these bugs do not affect the integrity of the Bitcoin protocol itself, Mr. Norton points out. Rather, they affect the way third-party vendors process transactions.

“But there is an open question as to whether they can restore the lost confidence after such losses,” he adds.

The recent losses of bitcoin at the MtGox exchange, valued at roughly half a billion dollars, have already produced at least one class-action lawsuit against the site and its owner, Mark Karpeles.  

Chicago attorney Jay Edelson, who filed the suit on behalf of US holders of MtGox bitcoin, says there are many unknowns. 

"Here is what we see as the key question: If the Bitcoin industry perceives MtGox and other past incidents as evidence that there is an inherent flaw in the Bitcoin currency, then the incident becomes existential,” he says via e-mail, meaning the future of the digital cash may be threatened. 

But if the market instead perceives this latest incident as only about MtGox and other sites not properly minding the store, he says, “then the industry will take a hit but will continue to be a viable concept.”

Anecdotal evidence suggests that the recent perturbation of the Bitcoin exchanges is not deterring some enthusiasts. 

University of Alabama finance professor Benton Gup relates this real-time story about awaiting the arrival Thursday afternoon of an undergrad. “He just sent me an e-mail asking if he could come talk to me because he wants to open his own Bitcoin exchange,” he said with a laugh, during a phone interview from his Tuscaloosa campus office.          

It's too soon to tell whether Bitcoin will be a flash in the pan or a growing force in the global economy, says Jason Weinstein, a partner at Steptoe & Johnson LLP and a former deputy assistant attorney general of the Department of Justice’s criminal division, where he supervised cases on computer crime and intellectual property.

Imposing regulations on the digital currency, he says, could either spell the untimely death of a new idea or yield an alternative payment method that becomes widely accepted. New York held hearings in January on whether to regulate virtual currencies, and the US Congress did likewise in November.

“What remains to be seen is whether regulation will help Bitcoin thrive by giving Bitcoin exchanges greater legitimacy and stability, or whether regulation will drive away users who were drawn to it precisely because it's unregulated,” Mr. Weinstein says via e-mail. Right now, “there are a lot more questions than answers."