The short answer to why Bitcoin prices dropped today (Monday) is that Mt. Gox briefly had everyone thinking that a serious new flaw had been discovered in the software that controls the digital currency - but that's not the whole truth.
The trouble started Friday. Mt. Gox, the first Bitcoin exchange in the world and until last year the largest, first sent Bitcoin prices falling early Friday when it halted the transfer of Bitcoins out of the exchange to personal wallets so that it could study a problem it was having with those withdrawals.
The news sent Bitcoin prices falling from $830 to $652 in 10 hours. Mt. Gox promised to provide more details by this morning
Instead of explaining an internal software issue, however, Mt. Gox stunned the Bitcoin community today by blaming its transfer issues on a bug in the Bitcoin code itself. This bug, Mt. Gox said, could allow a hacker to alter the details of a transaction to make it appear it had not occurred, with the implication that fraudulent transactions would then be possible.
"Since the transaction appears as if it has not proceeded correctly, the bitcoins may be re-sent," the Mt. Gox statement said. "The problem we have identified isn't limited to Mt. Gox, and affects all transactions where Bitcoins are being sent to a third party."
Such an issue would threaten the reliability of Bitcoin as a payment mechanism and its validity as a currency - hence the panic selling. Bitcoin prices fell as low as $535 Monday before recovering to just over $600. Other Bitcoin exchanges saw similar brief plunges.
But here's what's wrong with the Mt. Gox story...
Bitcoin experts - including developers involved in the maintenance of that software - said that the flaw Mt. Gox had blamed for its problems has been known since May of 2011 and is not a great cause for concern.
Greg Maxwell, one of the "core developers" of Bitcoin that Mt. Gox said it was working with to solve the problem, posted a response to the Cryptocoins News site:
"The Gox press release seems a little 'spun' to me. They portray characteristics of the Bitcoin system well known since at least 2011 (which even have their own wiki page) as something new."
Maxwell described the flaw as "annoying" but one that most Bitcoin wallets already can deal with sufficiently to avoid any fraud.
"It's never been a particularly large concern," Maxwell said. "This wouldn't make the top ten list of dangers in the Bitcoin technology."
The Mt. Gox statement drew swift rebukes on the Bitcoin Reddit page and from leaders in the Bitcoin community.
Liad Shababo, founder of the ecommerce site Shoply.com, blasted Mt. Gox on Twitter: "They spin it like it's a fault in the protocol rather than a fault in their understanding. Dirty of them."
What the Mt. Gox Debacle Means for Bitcoin Prices in the Long Term
So while the flaw that Mt. Gox described is real, it is relatively insignificant and is being fixed by the Bitcoin development team. But the bigger point is that since this bug has been known for such a long time, there are workarounds for it - workarounds Mt. Gox has inexplicably ignored.
This incident should not have shaved some 35% off Bitcoin prices on the Mt. Gox exchange and about 25% off Bitcoin prices on most of the other exchanges.
That's why the Bitcoin community is so angry with Mt. Gox right now. The exchange should not suddenly be having problems transferring Bitcoins out of its system due to an old and well-known bug.
Unfortunately, few mainstream news stories have noted this distinction.
"I think we need a press release on behalf of the 'community' explaining to mainstream media that the Bitcoin protocol is not broken and it's in fact a problem with Mt. Gox custom wallet software exclusively used on their own [crappy] service," wrote a user named bitpotluck on Reddit.
But one thing you can say for Bitcoin is that is has proven remarkably resilient.
Anyone who has followed the Bitcoin story over the past year knows it has had more than its share of existential crises, from a nagging association with Silk Road, the now-closed website where people could buy illegal drugs with Bitcoin, to restrictions over the use of the digital currency in China.
Heck, just in the past week, in addition to the crisis at Mt. Gox, Apple Inc. (Nasdaq: AAPL) pulled its lone Bitcoin wallet app from the iTunes App Store without explanation, and Russia declared the use of Bitcoin illegal.
And yet by midday Monday, Bitcoin prices were back over $650 on most Bitcoin exchanges (Mt. Gox excluded).
Interest from merchants and private investors and individuals continues to quietly, steadily increase, despite all the turmoil that seems to surround Bitcoin.
The problems at Mt. Gox may well be the undoing of Mt. Gox, but it will take more than that to stop Bitcoin.
"Bitcoin is extremely resilient," the chief executive officer of Blockchain told CoinDesk last week after Apple pulled his company's wallet app. "The largest migration of human and financial capital is underway into Bitcoin projects and we're just getting started."
Are you convinced that #Bitcoin is here to stay? Why or why not? Share your thoughts with us on Twitter @moneymorning or Facebook.
These are truly the ground-floor days for Bitcoin. And when the Winklevoss Bitcoin ETF launches later this year, investing in Bitcoin will be as simple and straightforward as buying shares of stock. Here's why a Bitcoin ETF would be a Game-Changer...
Related Links:
- Cryptocoins News:
Mt. Gox Blames Bitcoin - Core Developer Greg Maxwell Responds
- CoinDesk:
Venture Capitalists and Bitcoin Companies React to Apple's Blockchain Ban
About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.