Posted by: John S Kiernan

Perhaps you’ve heard about the U.S. dollar’s recent strength as well as the torrid pace with which the stock market has set all-time records. But guess which type of asset actually performed the best in 2016. That’s right; you won big if you bet on bitcoin, with the cryptocurrency more than doubling in value over the calendar year. In fact, it wasn’t even close, as bitcoin’s 126% gain far outpaced the likes of Brent crude oil (53%), sugar (30%), silver (18%), and the S&P 500 (10%). Even more astounding, the dollar price of one bitcoin has increased from just $0.06 in July 2010 to $1,182 as of February 24, 2017.

Still, it hasn’t always been smooth sailing. The value of a bitcoin plummeted more than 78% between November 2013 and January 2015 before subsequently rebounding. And when you couple such volatility with the currency’s relative lack of regulation, dark-web origins and black-market connections, it’s understandable why many people still question its safety.

In the interest of making this cryptocurrency a bit less cryptic, we posed one simple question – “Is bitcoin safe?” – to a panel of leading experts. You can check out their bios and responses below. And if you’d like to join in the debate, feel free to share your thoughts in the comments section at the end of the page.

Bitcoin Is Not Safe

Highlights

• “Due to the nature of Bitcoin, its value is inevitably very volatile. By design, the Bitcoin supply is capped at a fixed amount in the long run. Because of its limited supply, the value of Bitcoin is destined to increase relative to the overall economic activity. This tends to encourage hoarding of bitcoin, which limits market liquidity. The result is that a small number of players, many speculators, can influence the Bitcoin value significant in a short period of time.”

  - Baizhu Chen // Associate Professor, University of Southern California

• “The perceived value of any currency is based on what is standing behind it. For example, the dollar has the reputation and the history of the U.S. economy under-pinning the value. It has been a while since we have had a precious metal (gold or silver) as a basis for our currency. That said we still have the history and reputation of the country supporting the dollar. In the European Union, they have a similar foundation for the Euro. Bitcoin has no such under-girding. The only value is a perceived value by those who use it.”

  - Ken Dick // Research Fellow, University of Nebraska at Omaha

• “Bitcoin has no real value other than the artificial value set by the people trading in Bitcoin. To me, this is like trading in stock of a company who has no product or service, only stock. People will argue that bitcoin is not like stock, but is a currency and therefore will always have value. This is a false assumption since there is nothing standing behind the value of Bitcoin. We have all seen currency being devalued overnight even if there is a government standing behind it. Also, all it would take is a major country to declare Bitcoin illegal because it supports money laundering or some other reason, to cause the value to drop.”

  - Doug Jacobson // Professor, Iowa State University

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• Josh R. Stillwagon Assistant Professor of Economics at Trinity College
• Jonathan Zatlin Associate Professor of History at Boston University
• Doug Jacobson University Professor of Electrical & Computer Engineering and Director of the ISU Information Assurance Center at Iowa State University
• Ken Dick Research Fellow in the IT Innovation and NUCIA in the College of Information Science and Technology at the University of Nebraska at Omaha
• Maurice Herlihy An Wang Professor of Computer Science at Brown University
• Baizhu Chen Professor of Clinical Finance and Business Economics at University of Southern California

Josh R. Stillwagon Assistant Professor of Economics at Trinity College Bitcoin is not safe in the sense that I would recommend those in or near retirement to put most of their savings into it. Historically, it has been subject to large price declines, at times losing up to half of its value within short periods. There is also potential default risk if a given exchange goes bankrupt as with Mt. Gox. Although it is not at all safe from capital losses, like any speculative asset or perhaps more analogously any fixed supply commodity, it is a viable option as part of a high-risk investment portfolio. In the shorter-term, heightened geopolitical or monetary uncertainty bodes well for Bitcoin. In that sense, Bitcoin has a safe haven component, since it, at times, does well when the markets are in turmoil. We have seen that during the 2012 Cypriot crisis and China's recent struggle to prop up their fixed exchange rate. The medium-term trend will depend on whether the world stays in a low growth environment provoking continued quantitative easing and negative interest rates (which is good for Bitcoin), or whether central banks normalize their balance sheets. This is really the key question, in my view. Whatever one thinks of the longer term monetary environment, and hence longer term Bitcoin returns, it is certainly not free from the risk of sizeable price declines. Further, these declines are often sudden due to limited liquidity. Significant short term price swings will also be associated with Bitcoin specific events like adoptions or bans by particular institutions/countries; although I think digital currencies are here to stay and will continue to proliferate in transaction use. Jonathan Zatlin Associate Professor of History at Boston University Bitcoin is not “safe.” People misidentify these digital tokens for actual money at great risk. Bitcoin is not a currency. It’s a commodity. The electronic coins are not a universally accepted medium of exchange, nor does an institution exist that has the requisite power to guarantee their use, ensure their stability, or protect their value. The lack of oversight makes the payment system vulnerable to manipulation, while the anonymity of the transactions makes it attractive to those engaged in criminal activity, money launderers, and tax evaders. Its connection to illicit activity has severely damaged Bitcoin’s reputation and served to limit its adoption. In fact, the number of merchants willing to use the payment system remains relatively small. If Bitcoin involves a degree of risk as a medium of exchange, it is an even riskier store of value. To the extent that Bitcoin does have value, it is because people treat the digital tokens as an investment. But as even a superficial glance at Bitcoin’s exchange rate against the dollar reveals, the market for the tokens is highly volatile. That reflects the absence of any regulatory agent that might support the virtual currency’s value, but also the relative illiquidity of demand for it. To the extent that there is demand for Bitcoin, it acts like a commodity. Like gold, the tokens are fungible, but not completely and universally so; like gold, trading the tokens involves a hedge against inflation, precisely because the electronic coins aren’t money but rather a bet on the future depreciation of actual money. So Bitcoin’s strengths are the same as its weaknesses -- and that makes it a very risky investment. Bitcoin appeals to those who see the electronic tokens as embodying the future of money -- digital. There is no doubt that the math behind Bitcoin is imaginative and elegant. The algorithms that regulate its transactions also seem far more democratic than the central banks that issue and regulate national currencies. And as a challenge to the dollar’s hegemony, Bitcoin seems to promise a more global distribution of the benefits Americans currently reap as the clearing and storehouse of world. Ultimately, however, the absence of a trustworthy regulatory authority will severely limit the adoption of this virtual currency as money. Once people begin to realize that and treat the digital tokens like the commodity they are, their value will adjust accordingly. Doug Jacobson University Professor of Electrical & Computer Engineering and Director of the ISU Information Assurance Center at Iowa State University I view Bitcoin as a digital house of cards. First created as a way to provide anonymous digital currency using a cute set of mathematical properties it has become an investment strategy for some. There has been a lot of review of the safety/security of the Bitcoin and its mathematical properties. I see two major issues relating to the safety of Bitcoin. The first is that Bitcoin has no real value other than the artificial value set by the people trading in Bitcoin. To me, this is like trading in stock of a company who has no product or service, only stock. People will argue that bitcoin is not like stock, but is a currency and therefore will always have value. This is a false assumption since there is nothing standing behind the value of Bitcoin. We have all seen currency being devalued overnight even if there is a government standing behind it. Also, all it would take is a major country to declare Bitcoin illegal because it supports money laundering or some other reason, to cause the value to drop. The second issue is the safety of any Bitcoins you own. There have been cases when Bitcoins have been lost or stolen and there is no way to get them back. In this way they are like owning cash, if lost, stolen or destroyed you are out the money. So, using bitcoin as an investment strategy is very risky and to me resembles a Ponzi scheme. Ken Dick Research Fellow in the IT Innovation and NUCIA in the College of Information Science and Technology at the University of Nebraska at Omaha The perceived value of any currency is based on what is standing behind it. For example, the dollar has the reputation and the history of the U.S. economy under-pinning the value. It has been a while since we have had a precious metal (gold or silver) as a basis for our currency. That said we still have the history and reputation of the country supporting the dollar. In the European Union, they have a similar foundation for the Euro. BitCoin has no such under-girding. The only value is a perceived value by those who use it. Therefore, it is much more susceptible to random fluctuations and at any time its value could go to zero. The self-limiting nature of Bitcoin generation will also limit future growth, thus leading to the eventual loss of interest in and the devaluation of the Bitcoin. The other issue with this digital currency is the ethical issue of the perceived anonymity provided by the block chaining. This leaves us with non-traceable transactions, thus supporting exchanges that may be illegal in nature. This has been observed through the website Silkroad.com. Maurice Herlihy An Wang Professor of Computer Science at Brown University There is an old children's joke that goes like this. A man climbs over a fence into a field to pick flowers. Suddenly he notices a bull nearby, and a farmer sitting on the fence. "Excuse me sir, is that bull safe?" "Sure, is." (Long pause) "Can't say the same about you, though." Yes, bitcoin is safe, at least for now, but what about us, bitcoin's clients? There are many dangers, some more credible than others. Can a dishonest player reverse a transaction already in the bitcoin ledger? (Probably not, provided that transaction has been there long enough.) Can someone divert money from my bitcoin account? (Yes, if you reveal your secret keys. Some recent malware surreptitiously scans your file system looking for them.) Can a cabal of evildoers take control of the bitcoin ledger? (Not yet. But the bitcoin ledger is increasingly driven by fewer and fewer "miners," and there is cause for alarm if their number becomes too small.) Each of these dangers merits an article of its own, but here I will focus on a more subtle danger. Bitcoin is the best known of a number of systems centered around a "blockchain," a kind of tamper-proof decentralized ledger. Blockchain-based systems are often unclear about “fairness” guarantees. For example, can one client's transactions be systematically delayed or ignored? Or, in a blockchain-based stock trading system, can one client's purchase orders be systematically rescheduled to run after a rival client's purchase of the same stock (so-called "front-running'')? The idea that third parties such as governments cannot favor or impede certain class of transactions, a property known as censorship-resistance, is often touted as one of the key benefits of bitcoin and similar systems. If we turn our attention to the system's participants, however, the situation is unclear, and dangers still lurk. A blockchain-based system provides fairness transparency if it answers these two questions. First, does the system clearly specify its fairness guarantees? (For example, it is legitimate to ignore transactions from known money launderers, but all other transactions are processed first-come-first-served.) Second, can the system provide evidence that clients have been treated fairly? While it may be difficult or impossible to flag a single instance of a fairness violation, blockchain systems should be designed so that systematic and repeated fairness violations can eventually be detected with high confidence. A specification is worthless if violations can't be detected, and a detection mechanism is useless if fairness can't be defined. Here are some simple design principles that contribute to fairness transparency. First, each non-deterministic choice is a temptation to cheat. Whenever possible, replace non-deterministic choices with deterministic rules, and provide a way to prove to the client those rules were followed. Second, track all unavoidable non-deterministic choices in a tamper-proof public log, so clients can detect unusual statistical patterns. Providing fairness transparency for blockchain-based systems is still an open research question, but the first step is to recognize the danger. Baizhu Chen Professor of Clinical Finance and Business Economics at University of Southern California Bitcoin is not safer than conventional money. First of all, due to the nature of Bitcoin, its value is inevitably very volatile. By design, the Bitcoin supply is capped at a fixed amount in the long run. Because of its limited supply, the value of Bitcoin is destined to increase relative to the overall economic activity. This tends to encourage hoarding of bitcoin, which limits market liquidity. The result is that a small number of players, many speculators, can influence the Bitcoin value significant in a short period of time. Second, Bitcoin is not a legal tender. No creditor is required to accept it for the settlement of a debt. Individuals are not forced to hold Bitcoin because it cannot be used as a payment for taxes. If one day Bitcoin becomes unattractive to people as a medium of exchange for whatever reasons, its value will go down the drain. Third, because Bitcoin transaction is irreversible, there is no recourse if an error is made. If one accidentally pays $11111.11 instead of $1111.11, the conventional banking system allows remedy while Bitcoin transaction has none. Fourth, Bitcoin is not immune to hackers. Verification cost will go up as fewer amount of Bitcoin are left for mining. To verify the past transaction encoded in the blockchain will require more and more computing power which will make policing counterfeiting more difficult. Further, Bitcoin exchange and wallet services can be vulnerable. In 2015, Bitstamp lost 19000 bitcoins due to a security breach. Bitcoin Is Safe

None of the experts on our panel believe bitcoin can be categorized as safe. But if you feel otherwise, make sure to let us know why.

Bitcoin Can Be Safe And Risky

Highlights

• “Regulators have, at least historically, been quite accommodating to cryptocurrencies, probably because their regulatory frameworks already handle the notion of multiple currencies -- given that some of these currencies are backed by nothing more than the say-so of central bankers in small countries, it is a no brainer that Bitcoin, with its strong guarantees, fits well into the existing frameworks. And while I believe the quantum computing threat is real, it is also nowhere in the near future and progress towards it will be slow and in measured steps that give us plenty of time to react.”

  - Emin Gun Sirer // Associate Professor, Cornell University

• “Recent research by the academic community (Garay et al. and Pass et al.) has formally proven that Bitcoin’s core Nakamoto blockchain protocol satisfies consistency and liveness, assuming that the attacker controls less than 51% of the hashpower.”

  - Elaine Shi // Professor, University of Maryland

• “Bitcoin is safe, if you use it appropriately as a medium of exchange. Its algorithms have been extensively reviewed and it has a reasonable track record in practice, albeit with some hiccups along the way.”

  - Carl Landwehr // Research Scientist, George Washington University

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• Emin Gun Sirer Associate Professor in the Department of Computer Science at Cornell University
• Elaine Shi Professor of Computer Science at University of Maryland
• Nicolas Christin Associate Research Professor in the School of Computer Science and in Engineering and Public Policy at Carnegie Mellon University
• Carl Landwehr Research Scientist in the Cyber Security Policy and Research Institute at George Washington University
• Mary V. Papazian Managing Director of the Mucci Capital Markets Lab and Visiting Professor of Finance at Merrimack College

Emin Gun Sirer Associate Professor in the Department of Computer Science at Cornell University No. Few things in life are truly safe, and of those, almost none are fun or exciting. Bitcoin itself carries many risks. There's the risk that someone, perhaps an insider, will empty out an exchange and dump large numbers of coins on the market. The risk that a fractious miner will engage in Selfish Mining, an attack that Ittay Eyal and I discovered, which can lead to undue concentration of money and power in the hands of an undeserving pool. The risk that regulators in some jurisdiction will ban Bitcoin and send investors reeling. All the way to the far-fetched risk that an unexpected breakthrough in quantum cryptography will compromise keys overnight. But none of these risks actually matter. We have technical responses to many of these threats now. Malte Moeser, Ittay Eyal and I designed Covenants to stem thefts of coins from cold storage. We provided a patch for selfish mining, and my colleagues Elaine Shi and Rafael Pass pioneered Fruit Chains that can stem selfish mining attacks altogether. Regulators have, at least historically, been quite accommodating to cryptocurrencies, probably because their regulatory frameworks already handle the notion of multiple currencies -- given that some of these currencies are backed by nothing more than the say-so of central bankers in small countries, it is a no brainer that Bitcoin, with its strong guarantees, fits well into the existing frameworks. And while I believe the quantum computing threat is real, it is also nowhere in the near future and progress towards it will be slow and in measured steps that give us plenty of time to react. What I do fear in Bitcoin isn't anything technological -- we have that under control -- but social. Money is, at the end of the day, a social construct. Despite the narrative about how cryptocurrencies are "protected by maths," even Bitcoin is subject to pressures from people. Bitcoin has evolved tremendously since its inception: we now have new features such as multisignature, we have fixed a number of bugs, including some that caused forks in the chain and even the creation of large numbers of coins. And indeed, to reach millions of more users, the system has to evolve: it has to adopt scalability measures and the ecosystem around it has to improve the user experience. I worry, at once, that it may become ungovernable and unable to enact some of the much needed changes, and that it may become captured by commercial interests that tug it in directions that serve a particular class of users and use cases at the expense of others. Humans, as is often the case, are the weakest element. Elaine Shi Professor of Computer Science at University of Maryland Yes, particularly because recent research by the academic community (Garay et al. and Pass et al.) has formally proven that Bitcoin’s core Nakamoto blockchain protocol satisfies consistency and liveness, assuming that the attacker controls less than 51% of the hashpower. No, for possibly many reasons, and we focus on two below: First, the bitcoin community and IC3 faculty (Eyal and Sirer) demonstrate the selfish mining attack, where a minority coalition can reap as much as 2 times their fair rewards under a “right” set of conditions. Recently, a group of Princeton researchers further show that when Bitcoin’s block reward dwindles, and when miners obtain payout primarily from transaction fees, selfish mining style attacks become more powerful. Such selfish mining attacks break fairness and incentive compatibility; consequently, participants will be incentivized not to follow the honest protocol. If more than half of the computing power chose to deviate, Bitcoin’s consistency and liveness guarantees will be completely broken. Second, as solo miners today would take years to reap their first reward, mining pools form to allow people to get paid more frequently. Such mining pools, however, harm the decentralized nature of Bitcoin. The largest mining pool has exceeded 51% of the mining power in the past, and had such a mining pool behaved maliciously, all Bitcoin’s security guarantees would be broken. The solution. Fortunately, there is now a solution to all known and unknown selfish mining attacks, and in the meanwhile remove the need for mining pools. In joint work with Rafael Pass and others in IC3, we design and build a new blockchain protocol called Fruitchain that fundamentally addresses all such attacks, known and unknown, in a mathematically rigorous manner. Fruitchains offers the first game theoretically secure blockchain, providing a coalition-safe, approximate Nash equilibrium. We mathematically guarantee no matter how an attacker behaves, she can at most increase her rewards by an arbitrarily small epsilon fraction, as long as the attacker controls minority hashpower. Thus, Fruitchains disincentivizes miners from deviating from the honest protocol, thus reinforcing an equilibrium state where everyone is incentivized to behave honestly seeing that most other users are. As IC3 faculty Rafael Pass and others mathematically demonstrate, in Nakamoto’s blockchain, the block mining difficulty must be large to ensure security. In Fruitchains, however, the block mining difficulty can be made very small. Solo miners can obtain rewards on the order of days rather than years (and meanwhile we achieve almost comparable transaction throughput and confirmation time as Bitcoin). This removes the need for forming mining pools. Nicolas Christin Associate Research Professor in the School of Computer Science and in Engineering and Public Policy at Carnegie Mellon University Why is Bitcoin safe: There are now a number of reputable exchanges that enable customers to buy Bitcoin safely and legally online. None of the cryptographic primitives behind Bitcoin have, to this day, shown major weaknesses. The system as a whole has shown tremendous resiliency for the past eight years it has been in existence, and works well. Why is Bitcoin not safe: Contrary to what a lot of people think, Bitcoin is not anonymous, but pseudonymous. All transactions are publicly available and traceable. So, if one can associate a given Bitcoin address to Alice's identity (e.g., by obtaining the information from an online exchange where Alice bought her Bitcoin), all of her purchases are traceable. Very rapid fluctuations in value are still the norm, making Bitcoin a very risky investment if used for speculation. Carl Landwehr Research Scientist in the Cyber Security Policy and Research Institute at George Washington University Yes, bitcoin is safe, if you use it appropriately as a medium of exchange. Its algorithms have been extensively reviewed and it has a reasonable track record in practice, albeit with some hiccups along the way. An appropriate use, in my view, is as a short term way to transfer funds internationally. If you purchase bitcoin today, transfer it to someone else tomorrow, and they convert it back to a stable conventional currency after receiving it -- things will probably work out OK, because you are using it as a medium of exchange, not as a store of value (i.e., not as an investment). The value of a bitcoin will probably not change very much in that short period of time. In the longer term, the value of bitcoin has fluctuated quite a bit, so I would not recommend it as an investment, a place to store value for months or years. For the ordinary person in a country like the United States, where there is a stable banking system and many investment alternatives, bitcoin as an investment is a risky proposition. And there are other cryptocurrencies being developed that may supplant it. But using it to send money to relatives in other countries may save substantial banking fees and be relatively quick. Caution: do not assume that your bitcoin transactions are automatically untraceable or anonymous. Unless you take considerable care in using the system, it may be possible for a motivated person to track your transactions. Caveat: Although I've studied bitcoin's mechanisms, I have never engaged in a bitcoin transaction, and please do not construe this statement as financial advice. Mary V. Papazian Managing Director of the Mucci Capital Markets Lab and Visiting Professor of Finance at Merrimack College First, I must disclose that I own a small amount of bitcoins and ethereum. Investing in Bitcoin is like investing in many other types of asset classes. It is risky and unless you can afford to lose all the cash that you would invest and you have no set time frame in needing to get out of the market, I would highly advise against it as of today. Bitcoin is a cryptocurrency also known as a digital asset or a virtual currency. These terms can be used interchangeably. You cannot touch it. You are not holding those cute gold coins with the letter “B” on it. You are not buying a physical asset like gold or silver. A virtual currency allows for peer-to-peer payments over the internet that can be exchanged without a third party -- meaning lower transaction costs and greater efficiency. A bitcoin transaction -- like a cash transaction -- is not reversible and can only be refundable by the receiver of the payment. An owner of bitcoins should also know the inherent risks involved in holding the digital asset as an investment. Market and Volatility risk: There are many cryptocurrencies being traded and the debate is open as to which one will prevail in the end. However, Bitcoin, the first and most popular one launched in 2009 is the most widely used today. Currently, Bitcoin is trading around $1,065 up over $600 from a year ago. The current appreciation of the currency makes it a very speculative trade. Prior to the recent appreciation, the price of bitcoins fell over 60% in 2013 and over 75% in 2014 making it quite a volatile currency. Regulation/Political or Country Risk: Since cryptocurrencies are still in the early stages, there is no proper governance. Bitcoin is an unregulated, decentralized virtual currency. No one controls it. Governments and central banks around the world are still trying to understand what regulations should be in place to protect consumers. At the moment, the United States’ SEC (Securities and Exchange Commission) is trying to decide if they should approve a Bitcoin ETF (Exchange traded fund). This decision has been in the works for three years and next month it is expected that they will provide ruling. If it gets the appropriate approval, bitcoin prices will most likely move higher -- a lot higher. China is currently worrying about their currency restrictions and capital outflows via cryptocurrency exchanges. China constitutes the majority of the global bitcoin trading volume and if China moves to tighten restrictions/regulations on the cryptocurrency exchanges it could cause this market to spiral. Security and Liquidity risk: In 2014, Mt. Gox, the largest bitcoin exchange at the time, suspended trading and closed its website due to hackers stealing over 850,000 bitcoins, an estimated $460 million value. This led to Mt. Gox to eventually go bankrupt. The risk of hackers and malware is still a major concern, as is liquidity risk -- the inability to convert a security to cash without a loss of capital or income. There is always the risk that when you are ready to redeem your bitcoins that there will be no one ready to buy the bitcoins from you. Despite the above-mentioned risks, it is my opinion, that the use of virtual currencies and the underlying technology behind it will have a major impact on our global payment systems in the future.

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