Bitcoin price plunge sparks hunt for reasons why

Bitcoin plunged more than 10% Thursday (Jan 21), sparking a hunt for reasons the notoriously volatile asset was selling off. One that captured attention questioned the very viability of the token itself -- though it turned out not to be cause for concern.

A report in a trade blog suggested that there had been what’s known as a double-spend, where the same token is used by the same person in two transactions. It’s like if someone bought a car, paid the seller, drove off with their brand new wheels and then later yanked back all the money. In the case of the blockchain -- or the software that underlies Bitcoin and other cryptocurrencies -- the transaction in question would be excluded from the final tally on the digital ledger.

But, “in this case, it doesn’t look like a merchant was defrauded,” said Nic Carter, co-founder of Coin Metrics, a data firm. “This doesn’t look sinister to me. My best guess is this is experimentation or a software bug.”

Bitcoin was created with the intention of being a digital currency that doesn’t require any centralized authority to back it or to oversee transactions. Instead of bank software handling electronic transfers, Bitcoin is transacted on a blockchain -- basically a spreadsheet that logs when coins move and to where. Transactions are entered on the blockchain after an unaffiliated third party verifies the deal, often in exchange for partial coins.

The blockchain is supposed to be immutable, helping to prevent fraud and making transactions irreversible. A double-spend would effectively mean the blockchain had been manipulated, obviating Bitcoin’s heralded security claim. Merchants often wait for a payment to be verified as many as six times. In the case of the reported double-spend, the transfer was apparently verified only once, entered on the ledger, and then revoked.

It’s rare to consider a payment final after only one confirmation, said Carter. What likely happened is that two blocks -- the crypto term for a verification -- had the same transaction from the same address but that one entire block was ultimately excluded.

Still, online discussions over potential blockchain implications intensified, with Google searches for “Bitcoin double-spend” spiking.

Bitcoin fell as much as 11% on Thursday to trade around US$30,986 ($41,001.70). Other cryptocurrencies also sold off, with the Bloomberg Galaxy Crypto Index losing as much as 10%.

“The Bitcoin blockchain is operating exactly as designed, and has been operating exactly as designed for 12 years,” said Andreas Antonopoulos, an expert in Bitcoin and open blockchain technologies. “What we saw today was a one block reorganization. These occur on average every two weeks, and are a normal part of the consensus algorithm.”