Mt. Gox Collapses. Is the Bitcoin Dream Dead?

The world's largest Bitcoin exchange collapsed on Monday. Does Mt. Gox's failure portend the end of the virtual currency revolution?

Feb 25, 2014 at 10:26AM

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The world's largest Bitcoin exchange is no more. Following heightened speculation concerning its health over the weekend (click here to read about the recent bank run on Bitcoin), Mt. Gox took down its website on Monday evening and, by all appearances, has ceased to exist.

While the Tokyo-based company has been notably silent on the matter, an industry-backed blog was the first to report Mt. Gox's insolvency last night. According to The Coinbase Blog:

The purpose of this document is to summarize a joint statement to the Bitcoin community regarding Mt. Gox.

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. Mtgox has confirmed its issues in private discussions with other members of the bitcoin community

We are confident, however, 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.

In order to reestablish 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. As part of the effort to reassure customers, the following services will be coordinating efforts over the coming days to publicly reassure customers and the general public that all funds continue to be held in a safe and secure manner: Coinbase, Kraken, BitStamp, Circle, and BTC China.

Mt. Gox's apparent insolvency follows on the heels of multiple red flags. The popular Bitcoin exchange stopped allowing customers to withdraw funds in U.S. dollars last June. It then expanded the ban to all currencies earlier this month.

Last week, the company "relocated" its offices to a nonexistent address -- or, rather, a "virtual office" -- after protesters began lining up outside its headquarters to demand the return of their money. And over this past weekend, Mt. Gox's chief executive officer resigned his board seat from the Bitcoin Foundation, an industry group established to promote, standardize, and protect the virtual currency.

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At this point, it's hard to pinpoint the precise cause of Mt. Gox's demise. The Economist attributes it to a flaw in the programming code that's responsible for the "giant shared transaction ledger, recording who owns each individual unit of the currency at any one time." Known as "transaction malleability," the vulnerability made it possible for hackers to trick the software and effectively rob from Bitcoin exchanges.

It's also hard to deny, however, that more mischievous intentions may have been at work. Just last month, the head of another leading Bitcoin exchange was arrested and charged with money laundering in connection with his Bitcoin company. And according to the statement from The Coinbase Blog quoted above, "As with any new industry, there are certain bad actors that need to be weeded out, and that is what we are seeing today."

Either way, the recent experience with virtual currency reveals one indelible truth: While currency and monetary transactions can manifest themselves in any number of unique ways, there are a handful of enduring characteristics that always lurk in the background of financial markets, one of which is the critical nature of confidence -- without which markets cease to operate, and currencies lose all value.

That's what we're seeing now.

Is this the end of Bitcoin? It's too early to say for sure. At the same time, it would amount to nothing short of a miracle if the executives at the remaining Bitcoin exchanges are able to assuage the now-rampant fear that pervades the market and threatens the very existence of the virtual currency.

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