The shuttering of Mt.Gox this week shook the Bitcoin industry to its foundation.
After failing to address a flaw with Bitcoin transactions, the Tokyo-based exchange lost 744,408 Bitcoins (worth approximately $350 million) to theft, according to an unverified document believed to have originated from Mt.Gox. The amount represents 6 percent of the total Bitcoins currently in circulation.
“The reality is that MtGox can go bankrupt at any moment, and certainly deserves to as a company. However, with bitcoin/crypto just recently gaining acceptance in the public eye, the likely damage in public perception to this class of technology could put it back 5~10 years, and cause governments to react swiftly and harshly,” the document stated, noting that this could be the end of the digital currency.
On Wednesday, the exchange, which was once the world’s largest Bitcoin exchange, announced that it would be closing its doors temporarily.
“In light of recent news reports and the potential repercussions on MtGox’s operations and the market, a decision was taken to close all transactions for the time being in order to protect the site and our buyers,” read a posting on the Mt.Gox website. “We will be closely monitoring the situation and will react accordingly.”
The situation with Mt.Gox has sent sell prices and transaction volumes for Bitcoin trading into a tailspin. With Bitcoin currently selling below half of its 2013 high, many investors are questioning whether the cryptocurrency can survive as a viable global currency post-Mt.Gox.
Internal failings
Mt.Gox found itself involved in a modern form of receipt fraud. Because the blockchain, or permanent database of Bitcoin transactions, is updated every 10 minutes, hackers can falsify transaction records to show that they made a withdrawal but didn’t receive the Bitcoin to a Bitcoin “wallet.”
In early February, Mt.Gox seized the withdrawal of Bitcoins and conversion to U.S. dollars in regards to this “transaction malleability.” Bitstamp also announced that it would stop accepting withdrawal requests due to the glitch.
“I think that this event highlights the issue of security and accountability within the Bitcoin industry and secondary market,” Erin Fonte, a payments lawyer with Texas-based Cox Smith, told MintPress News. “If the shutdown of Mt. Gox is ultimately traced back to hacks and security issues, a discussion around Bitcoin as both an investment currency and transaction currency must focus not just on the security elements of the crypto-currency itself, but the security of all the parties handling the currency on behalf of third parties, including trading sites like Mt. Gox.
“As I always tell my banking and payments clients, security is only as strong as its weakest link and weakest point in the system as a whole.”
This situation, meanwhile, is further complicated by a lack of transparency on the part of Mt.Gox. Last week, the company announced that it had moved offices due to “security problems.” On Sunday, Mt.Gox CEO Mark Karpeles resigned from the board of the Bitcoin Foundation. On Monday, the exchange deleted all of its tweets from all of its accounts.
Since the U.S. government seized $5 million from Mt.Gox for lying on fiduciary documents, the exchange has been slow in processing transactions. Even though the “transaction malleability” has been a known issue since 2011, the idea that the exchanges have not taken the glitch seriously represents an amateurish quality to Bitcoin trading that many Bitcoin advocates hope the industry will shed as a result of this incident.
Meanwhile, many consider “cashing out” to be practically impossible.
“If anything, the fall of Mt. Gox signifies the end of the ‘Phase One’ of Bitcoin, where weaker players and services die off due to inefficiencies, negligence, laziness and lack of technical innovation,” Eric Adamowsky, co-founder of CreditCardInsider.com, told MintPress News. “New individuals and companies developing in the Bitcoin space have certainly taken note and will create products and services that will survive only if they are accountable, innovative, and create trust among users in the Bitcoin sphere.”
Adamowsky pointed to the fall of Mt.Gox as a potential step toward the next “phase” of Bitcoin, which could host a “more mature landscape of service providers and layers.”
“Now that many of the initial issues are known, core developers and service providers are making joint efforts to ensure that they do not repeat themselves,” he said.
Shaken faith in Bitcoins
Despite Adamowky’s optimism, the situation with Mt.Gox and the other affected exchanges give rise to a very real question: How can a currency based on trust continue once the trust has been shaken?
As Bitcoin is an unregulated currency, there is no security framework in place to insure it in case of lost or theft. While exchanges could have invested in insurance policies to protect deposits, none did.
Considering tech-savvy people came across a virtual goldmine, grew rich while it was in its infancy but eventually found themselves lacking the business or management skills to run the industry after it developed, it shouldn’t be a surprise that many are hesitant to reinvest money into Bitcoins.
In a joint statement, the founders of Coinbase and the CEOs of Kraken, Bitstamp.net, BTC China, Blockchain.info and Circle sought to alleviate investors’ fears.
“This tragic violation of the trust of users of Mt.Gox was the result of one company’s actions and does not reflect the resilience or value of bitcoin and the digital currency industry. There are hundreds of trustworthy and responsible companies involved in bitcoin. These companies will continue to build the future of money by making bitcoin more secure and easy to use for consumers and merchants. As with any new industry, there are certain bad actors that need to be weeded out, and that is what we are seeing today,” the CEOs wrote.
However, this is not the first notable instance of Bitcoin theft. In 2011, Mt.Gox was allegedly hacked for 400,000 bitcoins (worth $9 million then, but worth $220 million today), which caused the value of the Bitcoin to crash to zero. MyBiticon lost 154,406 Bitcoins in a 2011 attack and Bitcoinica lost 43,554 Bitcoins in 2012. Considering the frequency of Bitcoin theft, which result in losses that can not be recouped, investing in Bitcoins has started to look a lot more like gambling than investing.
Roller coasters and Bitcoins
New exchanges like the proposed SecondMarket, which would open the virtual currency to major banks for the first time, indicate that although Bitcoin might not die with Mt.Gox, it will never be the same again. For Bitcoin adherents, the essential nature of the Bitcoin as a decentralized virtual currency free of the weight of nationalism will keep the cryptocurrency in demand.
“The demise of Mt. Gox is a dramatic setback for Bitcoin’s expansion into the realm of legitimate currency, but this is by no means the end of Bitcoin,” Cassie Christopher, a professor at Texas Tech University School of Law, told MintPress News. “There have been many highs and lows for this digital currency over the past few months.
“But is this the end of Bitcoin? Absolutely not. Users are still interested in an anti-government currency (even if that means uninsured deposits). Investors are still going to try to buy low and sell high. Criminals will still use Bitcoin for its anonymity and ability to cheaply move lots of money around the globe. Yes, there have been highs and lows for Bitcoin, and there will continue to be. Roller coasters are fun.”