Bitcoins and Bank Robberies
The Bitcoin world is in turmoil. Its formerly highest profile exchange, Mt. Gox, has shut down overnight, surrounded by allegations of theft. According to the Globe and Mail (and numerous other sources) about 740,000 BTC may have been stolen, worth roughly $350 million at current prices.
This is not the first theft of Bitcoins, and it won’t be the last. But, as defenders of the cryptocurrency point out, theft occurs in every currency! US dollars are stolen every day: and just because there are bank robberies from time to time doesn’t mean the US dollar isn’t a useful currency with a long and viable future ahead of it, right?
What I have never seen is an evidence based analysis of the robbery rate in dollars and Bitcoins. My work below is a first attempt, and I appreciate any concrete suggestions and data for making it more rigorous.
My first caveat is that measuring theft is tricky: a US dollar stolen in 2011 is worth about the same today…perhaps $0.95 due to the effects of inflation. Meanwhile a thousand BTC stolen when it was worth $10 in 2011 is very different from the same number of BTC stolen when it was worth $1000 in late 2013! The extreme volatility of the BTC/USD conversion means that I think we need to calculate all BTC thefts denominated in Bitcoins, and not convert them into the dollar equivalent. Next, due to the relatively recent history of Bitcoin, I am using a time frame of 2011 to end of February 2014, or 3.17 years.
According to the list of Bitcoin thefts online, and counting only thefts of 1,000 BTC and more, from 2011 up until the Mt. Gox news, there were roughly 792,000 BTC stolen. Add the 740,000 stolen from Mt. Gox, and the total is about 1.53 million BTC stolen in 3.17 years, or just over 480,000 BTC stolen per year.
The total number of Bitcoins is growing over time, and was about 6 million at the start of 2011 and is about 12.2 million today. Properly speaking, each robbery should be measured as a percentage of the total BTC is circulation as of the date of the theft, but that is hard to calculate and may be irrelevant, as the thieves can keep the stolen coins and only use them later. But assuming the ~12 million number for today, and that the annual losses due to thefts stays around 480K BTC per year, that suggests that about 4% of all BTC in circulation is stolen every year.
There are about US$1.2 trillion of Federal Reserve notes in circulation today. The FBI hasn’t been publishing the data in more recent years, but they provided a great annual summary of all bank robberies (including armoured cars!) from 2008-2011. The number was declining, but ranged from about $60 million in 2008 to the $40 million area in the other three years. Using a $50 million midpoint, that implies that 0.0042% of all US dollars in circulation was stolen from a bank annually.
As a first order approximation, I therefore conclude that the annual losses due to theft in the Bitcoin currency world have been roughly 1,000x greater than the equivalent losses in the US dollar currency ecosystem over the same time period.