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: