When Bitcoin first launched, there was a great deal of interest in the digital currency.Bitcoin investors were all over the news, talking about the virtual pot of gold they saw in Bitcoin, and encouraging everyone else to get on board.It seems that, perhaps not shockingly, this was bad advice.Bitcoin has seen its value collapse over the last few months, and in this article, Australian professor David Glance explains some of the fundamental flaws of the Bitcoin model.– FD Bitcoin’s continuing price fall unmasks its underlying flaws.Is this its end?By David Glance, University of Western Australia Bitcoin was dubbed the worst investment of 2014.As predicted however, 2015 has seen the continued fall in value of the currency that was supposed to fuel the digital age.In the last 10 days alone, it has lost 26% in value.If 2014 was a bad year for the digital currency, 2015 looks like it will be even worse.Barely days into the year, UK-based Bitcoin exchange Bitstamp was “hacked” and 19,000 Bitcoin stolen.

At the time, this loss was valued at US $5 million.Bitstamp has since come back online, with revamped security from BitGo.It may however, all be a bit too late.bitcoin deutschland bezahlenHacks of Bitcoin exchanges have come to characterise the Bitcoin world.bitcoin lost laptopIt isn’t something that is necessarily inherent in Bitcoin itself, but more of a feature of the types of companies that have sprung up around the troubled technology.bitcoin maker android appAt best, the hack of one-time leading Bitcoin exchange Mt Gox, was a result of sloppy coding and business practices.bitcoin value sterlingAt worst, it was an inside job, defrauding its customers of $487 million.bagi bitcoin

A more ominous problem has cast its shadow on the future of Bitcoin.Bitcoin relies on people to engage in “mining” to validate every exchange of the virtual currency.bitcoin suisse twitterMiners, do some agreed calculations, and if they are fast, or lucky, enough, will succeed in winning some newly produced Bitcoin in exchange for adding the transaction onto the Bitcoin ledger called the Blockchain.bitcoin sha-1The strategy of mining has become Bitcoin’s achilles’ heel.bitcoin free bingoThe design of Bitcoin dictates that the difficulty of mining will increase as more Bitcoins are produced and more miners get involved.bitcoin online kaufen paypalThis has led to mining being dominated by companies that can scale to the point where they can guarantee to earn a certain percentage of Bitcoins created each day.

As Bitcoin’s value has dropped, the economics of the mining operation have changed, to the point that mining ceases to be economically viable.Cloud mining company CEX.io suspended their mining operations this week, declaring that it needed the price of Bitcoin to be at least $320 before it would be able to resume its operations.Unfortunately for them, the price has dropped even further since and the likelihood of it climbing back to $320 seems slim.Another mining company, CoinTerra, is being sued by a data centre provider for $5.4 million for unpaid fees.The cost of power alone to run CoinTerra’s services was $12,000 a day.The underlying protocol of Bitcoin does allow for the relative difficulty of mining to be eased if it becomes to hard for miners to stay in operation.In fact, this happened last month for the first time since 2012.It could theoretically continue to become easier as the Bitcoin price drops.The issue is however, that this wasn’t supposed to happen.Bitcoin’s price was supposed to keep increasing as more Bitcoins came onto the market.

Bitcoins value relies purely on the belief of the people who buy and sell it.There is no central bank or government around to support it in the case of its value crashing to zero.Once that belief is questioned, Bitcoin becomes unsustainable.Even if the price of Bitcoin doesn’t go to zero, the chances the Bitcoin community convincing the wider public, governments, and industry that Bitcoin really represents the future of the world’s digital economy will become extremely unlikely.For the time being, Bitcoin still has enough devotees who believe that the currency will eventually recover and still claim the crown as the future enabler of all digital commerce.However, even they are having their doubts that this grand technological experiment may have run its course.This article was originally published on The Conversation.Read the original article.There can't be many financial instruments that have generated intense debate and scare stories over the past year than digital currencies such as bitcoin.

This month, Bank of England (BoE) weighed into the debate, publishing a major new piece of research.Ever since academics and experts have been poring over the report, especially its warning that cryptocurrencies could pose a threat to financial stability.The BoE pays particular attention to bitcoin.Like other virtual currencies, it allows users to exchange online credits for goods and services and can be created by using a computer to complete difficult tasks, a process known as mining.While it believes bitcoin doesn't currently pose a material risk, mainly due to its limited use, the bank warns that it is possible to conceive the risks that may develop over time as it gains in popularity and if no controls are in place.Read More Bank of England: Bitcoin could transform stock markets CNBC highlights the three key areas that the BoE believes could pose a threat with well-known voices in the industry adding to the argument.Crash contagion The BoE suggests that "marked increases" in price could mean that a price crash might have greater impact.

A chart showing the price of bitcoin since its inception in 2010 makes for some scary reading.Critics have likened it to the Dutch "tulip fever" of 17th century but advocates expect this to iron itself out as liquidity and volume increase over time."Anyone who has been following bitcoin would probably agree with the BoE that a future bitcoin price crash is not only conceivable but probable," Garrick Hileman, an economic historian at the London School of Economics, told CNBC via email.Read MoreWhat is bitcoin?"A more interesting bitcoin price observation, which the Old Lady of Threadneedle Street fails to mention, is that the severity of bitcoin price crashes appears to be lessening."But the BoE concedes that a crash would be fairly limited to the holders of the digital currency, adding that it would only really cause genuine fear if derivatives came into play or "systemically important" financial institutions had an unhedged position.In February this year, Wall Street's Fortress Investment Group reported a $3.7 million in unrealized losses on bitcoin during the previous year.

While this might not be a significant institution like the BoE details, it shows the willingness for some players to take major positions on the cryptocurrency.Zennon Kapron, the managing director of financial consulting and research firm Kapron Asia believes that derivatives based on bitcoin's open source technology could potentially provide more clarity than traditional financial derivatives as each underlying risk in each asset could be more easily broken down to its individual parts.System-wide fraud The U.K.'scentral bank is also concerned that system-wide fraud could appear with one or more miners taking control of payments by gaining a majority holding of the currency.This is known as the "51 percent attack" issue, and is a well-known problem in the bitcoin community, according to Bobby Lee, the CEO of prominent Chinese bitcoin exchange BTC China.Read MoreIs Apple Pay a bitcoin killer?"The consensus is that it would not make economic sense to conduct fraud using a 51 percent attack," Lee told CNBC via email.

Jon Matonis, the executive director of the Bitcoin Foundation, which aims to promote and protect the cryptocurrency, explains that as bitcoin miners are incentivized then they would participate honestly rather than manipulate a system which would only grant "limited" capabilities.He adds that it would be disruptive but not fatal and there would be ways for the bitcoin community to rapidly correct the issue within a short space of time.Read MoreBitcoin key to future of online payments: EBay CEO "It's a lot of money to spend for approx 10 minutes of temporary and potentially limited 'fraud'," he told CNBC.Fractional reserve banking This is already a familiar banking practice -- whereby a lender only holds reserves to satisfy the demands for withdrawals and are less than the amount of total customer deposits.But used in the world of bitcoin, this could put national financial stability at risk if unregulated, according to the Bank of England, due to the possibility of what it describes as "bank runs."