Now that the Mt. Gox Bitcoin exchange has gone dark, rumors are that the digital currency's future looks dark - but that's not the case.
While all activity on Mt. Gox has ceased as of Monday evening, Bitcoin prices on other Bitcoin exchanges only experienced a brief dip.
On Bitstamp, for example, Bitcoin prices fell from about $580 to $400 as news of the Mt. Gox shutdown spread. But within a few hours, Bitcoin prices were back over $500, even going as high as $540.
That's well below the highs of over $1,000 seen in December, but far from the total collapse of the digital currency that one might have expected from Mt. Gox going dark.
After all, Japan-based Mt. Gox was the first, and for most of its existence, the largest Bitcoin exchange.
Now, after a three-week suspension of Bitcoin withdrawals that had many customers up in arms, the company has suspended all activity, including trading.
For several hours, the main website was blank. Eventually that was replaced with this message:
Dear Mt. Gox Customers,
In the event of recent news reports and the potential repercussions on Mt. Gox'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 users. We will be closely monitoring the situation and will react accordingly.
Best regards,
Mt. Gox Team
Many believe Mt. Gox to be insolvent, and all customer money lost - both in bitcoin and fiat currency. The Mt. Gox chief executive officer, Mark Karpeles, told Reuters in an e-mail that there would be an "official announcement soon," but offered no details on whether the site would ever return.
Most in the Bitcoin community assumed that Mt. Gox was in serious trouble from the moment it suspended bitcoin withdrawals Feb. 7. Many customers engaged in panic selling on the Bitcoin exchange in an effort to convert them to dollars they could try to extract via the international banking system. Bitcoin prices on Mt. Gox dropped as low as $91.50 at one point.
Whether Mt. Gox returns or not - and that appears very unlikely - the black eye that this episode has delivered to the digital currency won't knock it out.
Let's take a closer look at how Mt. Gox got into such a dire condition and what this episode tells us about the future of Bitcoin.
Despite being the oldest Bitcoin exchange, Mt. Gox never put the kind of safeguards in place that could have prevented the sort of crisis it has experienced over the past several weeks.
It evolved from a game-card trading site into a Bitcoin exchange almost by accident. As a result, Mt. Gox had a long history of difficulties, particularly with getting money in and out of customer accounts.
The most recent problem has its roots in an old Bitcoin flaw that allows technically gifted fraudsters to make a minor change to the code of an individual transaction, thus making it appear to the Bitcoin network as a different transaction.
In practice, this meant that a Bitcoin criminal could make a legitimate withdrawal of Bitcoins from a Mt. Gox account, alter the code, then claim to Mt. Gox that the requested Bitcoins were never transferred.
Mt. Gox customer service, aiming to avoid any possible backlash from honest customers who may have had legitimate problems, had a policy of re-sending bitcoins in such cases. They never tried to address the flaw or monitor possible fraud.
And now they've paid the price.
Both Reuters and The New York Times cited what is thought to be an internal Mt. Gox document indicating that the Bitcoin exchange had lost 744,000 bitcoins to the fraud scheme. The document also noted that Mt. Gox had $174 million in liabilities versus $32.75 million in assets.
That's very bad news for any customers who still had money in Mt. Gox accounts. The company had no insurance to protect against this kind of theft.
And a spokesman for Japan's Financial Services Agency said that because it did not consider Bitcoin a currency, it "is not subject to our regulatory oversight."
Japanese Finance Ministry officials also said they were not responsible for regulating Bitcoin and could do nothing for Mt. Gox customers who had lost money.
What all this proves is not that Bitcoin is bad in and of itself, but that like any other financial instrument, it needs at least some oversight as well as institutions designed to manage money reliably on a large scale.
The demise of Mt. Gox, rather than destroying Bitcoin, will serve as a catalyst to speed up the changes that will legitimize it.
Mt. Gox and its never-ending problems were doing more harm than good. Once that Bitcoin exchange fades into history, the way will be clear for the next generation of better-prepared Bitcoin businesses.
Not long after the Mt. Gox site went dark, leaders of several other Bitcoin exchanges posted a reassuring statement on The Coinbase Blog.
"In order to re-establish the trust squandered by the failings of Mt. Gox, responsible bitcoin exchanges are working together and are committed to the future of bitcoin and the security of all customer funds," reads the statement, signed by the CEOs of Coinbase, Kraken, Bitstamp, BTC China, Blockchain.info, and Circle. "We are confident... that strong Bitcoin companies, led by highly competent teams and backed by credible investors, will continue to thrive, and to fulfill the promise that bitcoin offers as the future of payment in the Internet age."
What do you make of the Mt. Gox situation? What do you see in Bitcoin's future? Voice your opinion on Twitter @moneymorning or Facebook.
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