Bitcoin News: Answers to Questions About the Mt. Gox Situation

Email
    Text size

Problems at the Mt. Gox exchange have dominated Bitcoin news this past week, creating concern and confusion within the Bitcoin community and leaving everyone else wondering what in the world is going on.

Here's what's happened.

Japan-based Mt. Gox, the first and for a long time the largest Bitcoin exchange, suddenly announced Feb. 7 that it was halting all customer withdrawals of bitcoin from their accounts.

A few days later the exchange blamed a glitch in the Bitcoin software itself that allowed dishonest users to make multiple withdrawals. That angered many in the Bitcoin community, who charge that the glitch had been known for a long time and that Mt. Gox should have had a system in place to deal with the issue.

The story then took another twist, and the Bitcoin news got much worse...

Other Bitcoin exchanges, such as BitStamp and BTC-e, were also vulnerable to the glitch, which became apparent after a widespread attack on the digital currency in the days following the Mt. Gox announcement.

Slovenia-based BitStamp, now the largest Bitcoin exchange, and Bulgaria-based BTC-e, both halted withdrawals late Tuesday.

The disruptions caused Bitcoin prices to tumble from about $700 to about $600 on most Bitcoin exchanges.

But on Mt. Gox, where Bitcoin had been trading for more than $900 in the days before the halt in withdrawals, prices kept dropping. They hit a low of $220 on Sunday, a steep drop from their all-time high in early December of $1,242.

Some order returned to the world's Bitcoin exchanges when BitStamp and BTC-e both resumed allowing withdrawals of bitcoin on Friday. Bitcoin prices on those exchanges have stabilized in the low $600s.

But Mt. Gox remains in a state of crisis. The exchange said on Monday (yesterday) that it was working on a solution with bitcoin wallet site Blockchain.info, and that customer withdrawals of bitcoin would resume "soon."

But given the issues Mt. Gox has had moving fiat currencies to and from customer accounts, as well as its waning popularity, many believe the exchange's problems run much deeper.

And the entire sequence of events has given skeptics more reason to question whether the digital currency can endure.

And yet there are numerous signs that Bitcoin will survive this episode just as it has several previous crises...

Making Sense of the Latest Wave of Bitcoin News

Make no mistake - the problems at Mt. Gox are very serious.

The main reason the Bitcoin prices are so much lower there right now is that many customers think Mt. Gox no longer has enough money - fiat or Bitcoin - to remain solvent for long. So they're willing to sell their otherwise trapped bitcoins at any price to get them into a fiat currency that can be transferred out of Mt. Gox.

Mt. Gox has said that when it does again permit withdrawals, it will do so at a "moderated pace" enforced by daily and monthly limits.

That hasn't done much to curb the fear of many users that they will never get their bitcoins out of Mt. Gox. That's not yet clear, but if Mt. Gox goes belly up without returning the bitcoins in user accounts, those customers will have no recourse. So the fire sale there continues.

It's obvious at this point that Mt. Gox will never regain its position as the premier Bitcoin exchange and will almost certainly fade into obscurity after this latest debacle.

But Bitcoin itself is not going the way of Mt. Gox.

What's remarkable about this recent string of damaging Bitcoin news is how little impact it seems to have had on the growing interest in Bitcoin from startups and investors.

Even the underlying issue that started this mess - which was not unique to Mt. Gox - is not considered serious enough to derail it.

"I'm confident they will get it resolved," Nicolas Cary, chief executive of Blockchain.info, told the Associated Press. "Bitcoin is very resilient... and it can handle this."

In recent days Bitcoin prices have stabilized on other exchanges, showing that most of the community of users and investors has kept the faith despite their concerns.

But many of those outside of the Bitcoin circle must still be wondering why it's proven so durable, even in the wake of the kind of negative Bitcoin news we've heard for much of the past two weeks.

The answer lies not in what Bitcoin is today, but what it could become in the future - a new, better, and more secure form of payment, a leap akin to other digital leaps forward such as e-mail and the World Wide Web.

Chris Larsen, chief executive of Ripple Labs Inc., another digital currency, told The Wall Street Journal that Bitcoin's growing pains reminded him very much of the early days of the Internet, which had its share of skeptics at the time.

"It all just seemed like the craziest stuff - who would ever use this? - and now it's absolutely in the fabric of every enterprise on earth," he said.

What do you think of #Bitcoin? Why has is proven so durable in the face of so many problems? Join the conversation on Twitter @moneymorning or Facebook.

Still trying to figure out what Bitcoin is all about? That's OK, a lot of people are. Bitcoin has been in the news for less than a year, yet has become a huge sensation. Here's an overview of Bitcoin and why this exciting new digital currency matters...

Related Links: