Bitcoin: have hackers doomed virtual currency?

A SPATE of cyber attacks has forced two major Bitcoin currency exchanges to stop all withdrawals of the virtual currency.

Slovenian firm Bitstamp confirmed that it had experienced "denial of service" attacks - where hackers try to disable a website by bombarding it with information requests, and stopped all transactions as a result.

Tokyo firm MtGox, one of the first firms to trade Bitcoins, has also suspended operations, and Bulgaria's BTC-e issued a statement on Twitter warning that some of its transactions might be delayed.

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The attacks further heighten fears surrounding Bitcoin's security and "will further damage the prospects of the virtual currency winning mainstream acceptance," the FT says.

The Bitcoin Foundation, a group of developers that looks after the cryptographic code on which the currency relies, said in a blog post that the problem had been caused by a "bug."

The group attempted to allay fears that their Bitcoin wallets would be affected: "We are creating workarounds and fixes right now," it said. "This is a denial-of-service attack; whoever is doing this is not stealing coins, but is succeeding in preventing some transactions from confirming. It's important to note that DoS attacks do not affect people's Bitcoin wallets or funds," the blog said.

In spite of the group's assurances, news of the attacks caused the value of Bitcoin to drop sharply, the BBC reported. According to currency exchanges the value of Bitcoins has fallen from £490 a month ago to around £350 today.

So is this the end of the line for the revolutionary virtual currency?

The attacks couldn't have come at a worse time, the FT says, as regulators around the world look to step up their scrutiny of Bitcoin: "Even those critical of Bitcoin's potential to replace fiat currencies have acknowledged its technical virtuosity, but the latest incident shows the fragility of the infrastructure surrounding it," the paper said.

Matthew Rhoades, director of the cyberspace & security programme at the Truman Project and Center for National Policy agreed: "With a fluctuating price driven by speculators and an uncertain legal regime, Bitcoin's viability as a consumer currency is still up in the air."

But Garrick Hileman, from the London School of Economics, who researches alternative currencies, told the BBC that it is too soon to write the new currency off.

"It's a reason to be concerned, but it's a little early to say that there's something fundamentally flawed with Bitcoin software. Previous problems have been corrected," he said. "It reflects the immaturity of the software. Bitcoin is still a technology in the process of being developed."