<center><img src="http://www.infiniteunknown.net/wp-content/uploads/2013/04/bitcoin-plunge.png"></center>

[As I promised](https://steemit.com/bitcoin/@sqlinsix/bitcoin-drops-10-that-s-it), I would post some thoughts about the recent hack.


### We've Come A Long Way

Reiterating my above link, bitcoinaires have come a long way.  We used to have 90+% drops, now bitcoin stabilizes much faster even when an exchange as big as Bitfinex is hacked.  Bitfinex traded huge sums in US Dollar and bitcoin.


### The Flush Is Starting

As a regular reader to [Vinny Lingham's blog](https://vinnylingham.com/), [Vinny pointed out a while back that we'd see a flush](https://vinnylingham.com/the-lake-wobegon-effect-b39decb6691a).  *This will be the best news this year*, though it will be a period where bitcoin is lower in price.  Austrian economists correctly point out that capitalism in the long run destroys bad companies.  Companies that do not have valid business models that last *should* we wiped out; but it will mean that the price will drop because that's what bankruptcies and "flushes" do.  This is like when a stock index falls; it's a healthy part of the growing process - we must separate the wheat from chaff.

This fall in prices will impact some businesses in bitcoin and we'll see how they handle it; an irresponsible institution will go bankrupt while a responsible one won't.  Bitcoin isn't the Federal Reserve - it doesn't bail out failed companies in the name of saving the system.  That creates moral hazard and encourages bad behavior, which is why the mainstream financial system no longer creates wealth for people - there's no incentive to.  And bitcoin has crashed over 90% more than once and look at where it's at - much higher than all of those crashes.

Welcome to the real world.

When Edison's home burned to the ground, he gathered his family to celebrate the site of his home burning.  Let's celebrate the destruction of bad ideas because there will be room for good ideas.


### How Do You Bail Out A Dead Tree?

If you plant an apple tree and three years into its growth, before it produces apples, the tree dies, how do you bail out your loss?  Where is the insurance for losing a source of food like this?  *That's reality* and it always comes with risks.  A system that does not carry as harsh of consequences as described above this will never last because it will encourage market participants to move into industries that are safe, but safety cannot be guaranteed.  The result will be what happened with the Soviet Union:

-  People will enter "safe" professions, that don't *actually* exist in reality.
-  No one will want to do the "hard" professions, which provide us food, healthcare and energy, yet experience failure a lot.
-  We will have no food, no energy and no healthcare because everyone will have easy skills.
-  This is the result of rewarding incompetence and trying to remove risk; risk cannot be removed in hard professions, so what's the incentive to work in those industries?  We must make EVERY profession difficult, or else we will all hate the future.

If you try to make the world 100% safe, the entire world will collapse.  Millions of people starved to death in the Soviet Union because they tried to protect everyone from risk through socialism of losses.

Anytime you hear someone say "risk free" or "safe" *you are being sold*.  Neither exist and neither will ever exist.  If you're in bitcoin because you want to get rich quick, you are going to be poor quick because that's not how bitcoin works.  Many ideas will fail in bitcoin, just like many planted trees die.  This means that there will be seasons where bitcoin performs poorly and it should since *stability does not exist with anything in reality*.   Consider the following exchanges:

-  GDAX
-  Coinbase
-  OKCoin
-  BTC-e

Along with other exchanges, how did these exchanges react?  How are they currently preparing for being hacked?  For a related question for SteemIt users, how did the Steem team react and what measures are they using to protect users?  Considering that a few of the exchanges have customer PII data, what will they do when they are hacked?  Note that I wrote *when*, not if.  As Jim Rickards says in *A New Case For Gold*, only gold cannot be hacked because it is physical.  All digital money is open to hacking.  As linked below this, even the Federal Reserve has been hacked and that's with all the "talent" they hire.  Take it from someone who works in tech: *you will be hacked eventually*, which is why we're always thinking two steps ahead of that fact.

From GDAX to BTC-e, the hack on Bitfinex is a warning sign that exchanges must constantly consider what they're doing to keep customers and their data safe.  The more data you have, the more danger you pose to your customers.  As I like to joke about BTC-e - *they know nothing about the customer and the customer knows nothing about them; I find this oddly comforting in the age of digitally-desired omnipotence.*  BTC-e might walk away the biggest winner, if we discover that regulations were the reason Bitfinex experienced the hack.


### Did Regulations Hurt Bitfinex?

[Andreas makes this assertion and it's something to consider with exchanges](https://twitter.com/aantonop/status/760846832138194946).  In other words, "regulated exchanges" may be high risk.  In addition, if an exchange is complying with laws that require customer PII data and it's hacked, it becomes a risk for consumers to use these exchanges.  Many of these laws are like the red-flag act for cars; they create more dangers than the dangers they're trying to solve.

If we discover that it was the regulations that posed risks to Bitfinex, we may see new exchanges that begin as competitors to existing exchanges and that do not comply to regulations.  Why?  If governments prove to be as incompetent in bitcoin as they are in their own financial system, exchanges may reject these regulations and move to more open systems.  It's that simple: government *must* be competent here - they cannot make the careless mistakes they continue to make in the mainstream financial system.  Never forget that governments and economic leaders didn't see the Long Term Capital mess coming, they failed to see the housing bubble coming, and [they're currently in denial that there is a massive stock bubble right now](https://mishtalk.com/2016/08/02/feds-lockhart-doesnt-rule-out-rate-hikes-bubbles-apple-pie-tuna-casserole/).

>**Note:** The S&P 500 index is currently trading 12 multiples above the CRB index.  There's no way stocks are 12 multiples more valuable than a basket of commodities.  That didn't even happen in the bull market of the 90s.  Lockhart, there's your bubble.

As a reminder: [the Federal Reserve had $100 million stolen from it](http://www.zerohedge.com/news/2016-03-10/incredible-story-how-hackers-stole-100-million-new-york-fed).  These are the same people who want to regulate bitcoin?  They can't even protect their own system!

The solution for government regulations is that the *government regulators must be a part of the system they're regulating and must be the ones who lose when people lose*.  This is basic economic incentive structuring; for an example, if regulators in charge of flights never fly what incentive to they have to protect against crashes?  Likewise, if regulators do not have bitcoins on the exchanges they regulate, what incentives do they have to keep them safe?  In other words, if someone is in charge of regulating an exchange, *they should be required to have significant holdings in that exchange*.  Good incentive structuring will prevent hacks; but if governments can do what the SEC did in the housing bubble and bust (nothing and no consequences), then the entire crypto-currency community will either have to abandon government regulations due to the risks they impose or the entire community will collapse in the long run because no one will feel safe in the system.

The latter point is why I always suggest to people in the crypto-community to own physical gold as insurance in the system.  This whole system may not work out and government regulations may be why it doesn't.  The only regulator that should be allowed is a regulator with something to lose, because that's why you keep your gold bars safe - you are the regulator of what you physically own and you know that's why your gold is safe.


### And the Winners Are ...

Right now, DigixDAO has been a big winner for traders.  Considering that during the panic, it fell to as low as $7.92, it was a steal of a deal at that point.  Its few drawbacks right now are that:

-  People don't realize that DigixDAO is more like a stock.  Digix does have a gold backed currency, Digix Gold Tokens (DGX).  DigixDAO is not the same and like stocks it *pays a dividend-like yield* (in gold).
-  Due to the above misunderstanding, some exchanges don't trade DigixDAO.  For an example, you won't find it on Coinbase or GDAX.
-  [Digix is smart about what they want to accomplish](https://medium.com/@Digix/progress-update-2-8-16-33842a1998f4).  The debate between one chain versus the other misses the point that we're trying to fix an even worse mainstream financial system.

Counterparty also made a strong comeback from its fall.  Like Ethereum, Counterparty is an alternative smart-contract system that is built on *bitcoin's blockchain* and uses the same language as both Ethereum and Ethic.  I am just as guilty as everyone else of not giving it credit during the hard fork mess; Counterparty is a great alternative to people who don't like the directions of other smart contract systems, in addition to it using the reputation of bitcoin.  Unlike both, however, it does not have an inflationary currency.  It bounced back very quickly from its low of $1.94.

Those with a little Tether on trading platforms may have also won big, since they could have swapped USD for bitcoin.  One of the challenges in the past was *which crypto-currency will do well when bitcoin falls* and generally it's the US Dollar or Chinese Renminbi that do well.  Tether now allows traders to easily hold USD on exchanges.  If you feel that you can trust Tether, consider keeping a little of it on exchanges where you want to buy when we see dips.

*Great Buys During the Mess:*

-  DigixDAO
-  Bitcoin
-  Ether
-  Counterparty
-  BitShares
-  ShadowCash
-  Many others

On a related note, my favorite crypto-currency - DASH - didn't fall nearly as hard as the others, with the exception of bitcoin.


### A Reminder About Failure

Solomon warns in Proverbs 1, "And the prosperity of fools will destroy them."  If failure does anything perfectly, it reminds us all that we have not reached and will never reach prosperity.  That's good!  Prosperity is the beginning of the end for everyone and look no further than every "prosperous" empire in human history - they all collapsed after that point.


### Bitcoin Is 7 Years Old

Show me a system that in seven years has grown as fast as bitcoin and accomplished as much.  I full agree with [Erik](https://twitter.com/ErikVoorhees/status/760554072114016257), "Some day we'll sit around as old men in rockers with beers laughing about all of this.... or crying ;)."

Exactly.


**Disclosure:** I own shares of the DigixDAO and I currently have multiple buy orders in for more shares.  I also own numerous crypto-currencies and assets, such as - but not limited to - bitcoin, dash, litecoin, ether, ethic, counterparty, steem, rise, shadowcoin, teslacoin, etc.