How Bitcoin tanked on a false ‘double spend’ rumor
Bitcoin fell around 15% on Thursday, briefly tumbling below $30,000 before rallying later in the day. This is hardly the first time the price has swung wildly—volatility is Bitcoin’s hallmark—but Thursday’s events are notable because they were partly triggered by false rumors of an existential event: a double-spend.
A “double-spend” incident is unfamiliar to most casual Bitcoin buyers, but preventing one is crucial to the integrity of the currency. If double-spends are possible, then everyone would rightfully lose confidence in Bitcoin and the price would go into free fall.
So what exactly is a double-spend? As the name implies, it means spending the same batch of Bitcoin twice, while tampering with the transaction record, known as blockchain, to get away with it. There is no proof such an incident has ever happened.
In the world of traditional finance, the best analogy to double-spending Bitcoin is someone writing a check to buy something, then withdrawing money from their bank account before the seller can cash it.
Unlike the act of writing check, however, someone receiving Bitcoin funds doesn’t have to trust the person paying them. Instead, Bitcoin users rely on the currency’s software network—thousands of computers scattered around the world—to verify a transaction is legitimate.
What happened on Thursday involved a user who tried to sent a small amount of Bitcoin but failed to attach a sufficient transaction fee. Just like ATMs charge people for withdrawing cash, the so-called miners who operate the Bitcoin network typically demand a similar fee to send Bitcoin. But unlike ATMs, the Bitcoin fee fluctuates depending on how busy the network is.
In the case of the transaction on Thursday, the miners initially ignored it, leading the user to post it again with a higher fee. This time, one of the miners decided to accept the transaction—but, by coincidence, a different miner at the very same time decided to process the original transaction.
The upshot is that, for a very brief time, it looked like the user got to send the same Bitcoin twice. This was an illusion, however, because the Bitcoin network is designed so that it only recognizes one batch of transactions (the batches are known as blocks with a new one being added every ten minutes or so). So even though it briefly appeared that the user had spent his or her Bitcoin twice, one of those transactions was quickly ignored while the other became part of the blockchain—the public, immutable record of all Bitcoin transactions since the currency launched in 2009.
Those very familiar with Bitcoin quickly recognized Thursday’s incident as a non-event (you can read a full technical account here). But that didn’t stop some media outlets writing headlines that suggested a bona fide double-spend had occurred. Meanwhile, some boosters of a poorly-regarded rival cryptocurrency—a knock-off called Bitcoin SV—fanned the rumors.
All of this led to a brief panic like the bank runs of old—when customers who lost confidence in a bank’s solvency would line up to withdraw their savings before the funds were all gone. In the case of Bitcoin, though, Thursday’s effort just underscored how the design of the digital currency is stronger than ever. And while skeptics can point to reasons why Bitcoin’s current price levels are not sustainable, the risk of a double-spend flaw is not one of them.