Mt. Gox Collapses. Is the Bitcoin Dream Dead?

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.

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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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 25, 2014, at 5:22 PM, RxPro wrote:

    Mt Gox could have returned money in some way to their users but they decided to steal it, its as simple as that.

    Learn this lesson: if you are using an online wallet or exchange, ONLY keep as many coins in there as you are willing to lose completely. Use them to make your transactions and then transfer any extra coins to your own private wallet.

  • Report this Comment On February 26, 2014, at 1:05 AM, dgmennie wrote:

    A real eye-opener is the CNBC TV show "American Greed" narrated by Stacy Keatch. If rather ordinary but presumably intelligent folks are regularly swindled out of hundreds of millions of dollars with traditional *TGTBT investment pitches and real-estate deals, it is really no surprise that Bitcoin has become the latest scheme to run off with their funds.

    I cannot say I was ever convinced that Bitcoin had any potential advantage over owning dollars. While some financial ideas are of the 'glass half full or half empty' variety, Bitcoin rather begged the question the question 'glass? what glass?'

    Now folks, do we all know better? Unlikely.

    * too good to be true

  • Report this Comment On February 26, 2014, at 10:25 AM, vpix360 wrote:

    It was bound to happen sooner or later as it was no more than a role-playing fantasy. Something that the Japanese are very good at creating for games, anime and gaming consoles.

    BitCoin. Quatloos. Samolians. It's Monopoly money. It's not for real. It never was.

    And like all delusions, reality sooner or later sets in and you simply wake up.

    Albert Einstein had it right. The only thing more infinite is pure, human stupidity.

  • Report this Comment On February 26, 2014, at 10:59 AM, Mathman6577 wrote:

    I don't feel sorry for the stupid people loosing their money.

  • Report this Comment On February 26, 2014, at 12:29 PM, dgmennie wrote:

    To: vpix360

    I think the item you are attempting to quote goes something like this:

    "The most common element in the universe is Hydrogen. The second most common is stupidity."

  • Report this Comment On February 26, 2014, at 1:56 PM, gshawbsf wrote:

    Bitcoin prices dropped significantly after the Mt. Gox news was announced. Since then the price is up well over $100 and it is above the pre-Mt. Gox announcement prices. This article should have been posted a couple of days ago or not at all. It is no longer timely - the bitcoin market has already settled down.

  • Report this Comment On February 26, 2014, at 1:59 PM, gshawbsf wrote:

    I don't know if bitcoin is a bubble or not, but it has shown itself to be resilient. As long as it doesn't implode (which admittedly is a possibility at some point, not now), as it becomes more widely accepted the price will continue to go up based on supply and demand. If you invest at all, I don't see the downside to putting a few hundred or a few thousand into bitcoin. Just be willing to lose it all if worse comes to worse and be ready to sell when you don't want to be involved in the risk anymore.

  • Report this Comment On February 26, 2014, at 2:06 PM, hohocake wrote:

    While I'm not really a fan of bitcoin, I'm more not a fan of people who think currency is inherently more valuable when backed by a government. A US dollar is worth "the full faith and credit" of the us government. Times are good now so that is worth a lot... But in Venezuela inflation has been over 50% lately, which even with this security and faith breech makes bitcoins a safer currency. I don't even like bitcoins and I can see that. I wouldn't invest in them any more than I'd invest in Venezuela's currency, but I suspect a global and near universal currency is on the future horizon, be it bitcoins or something else, and to do that it must not originate from any one country.

  • Report this Comment On February 26, 2014, at 2:39 PM, SkepikI wrote:

    Some people think money is only gold. Some people think money is paper that says "This note is legal tender for all debts public and private" Some people think money is something you can eat and digest like corn or potatoes.

    A very few people, just enough to make the scam pay, think money is something that strangers tell you is money. Tulips. Real Estate. Cows.

    BUT if it looks like a bubble, rises like a bubble, is ephemeral like a bubble, it can POP like a bubble.

    Good luck to you bitcoin people, you will need it.

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John Maxfield

John is The Motley Fool's senior banking specialist. If you're interested in banking and/or finance, you should follow him on Twitter.

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