How Will Mt. Gox Bankruptcy Affect the Future of Bitcoin?

Bitcoin is in the spotlight once more, and this time there's bad news everywhere about the state of the cryptocurrency. From coin heists to exchange shutdowns, a lot happened in February for Bitcoin, so let's break down what took place, how this has affected the currency and what challenges (and opportunities) it faces in the weeks to come.

A major exchange halts withdrawals

At the heart of the Bitcoin economy are the many independently owned and operated exchanges that allow individuals to trade their Bitcoins into other currencies. Each exchange decides what it will accept in return for Bitcoins, ranging from dollars and euros to even other cryptocurrencies like Litecoin. One of the largest and longest-running exchanges on the market, Mt. Gox, halted withdrawals on Feb. 7, blocking users from withdrawing Bitcoins.

The halt continued for several weeks, causing Bitcoin's value to plummet from $820 to a low of $400. Mt. Gox halted because it discovered the way it was allowing withdrawals of Bitcoins was flawed, allowing users to manipulate it in order to withdraw more Bitcoins then they are supposed to. This process, known as transaction malleability, ultimately allowed hackers to steal 850,000 bitcoins worth more than $500 million before Mt. Gox corrected the issue. Other exchanges such as BitStamp found the same issue but were able to quickly fix the flaw without any substantial losses.

This loss however left Mt. Gox insolvent. On Feb. 28 it declared bankruptcy in Japan with about $34 million in assets and liabilities totaling more than $64 million. This bankruptcy shook the core of the Bitcoin community as Mt. Gox was one of the first exchanges to appear back in 2010 and was, at one point, responsible for 70% of all Bitcoin trades. 

Other Bitcoin heists steal millions

Since Bitcoins are anonymous currency and are not tied to an identity, the exchanges and other Bitcoin-based websites have become prime targets to hackers. Since the Mt. Gox fiasco two other major websites reported losses in the millions due to Bitcoin heists. A smaller independent exchange called Flexcoin also closed after hackers stole about $620,000 worth of Bitcoins.

But Bitcoin thefts take place in more places than the exchanges. Silkroad 2, a website hidden in the anonymous Tor network, lost more than $2 million in Bitcoins after hackers emptied the website's coffers. While this may have taken place within a community far from the mainstream, legal side of Bitcoin, any major theft can have major repercussions on the entire cryptocurrency economy.  

The impact on Bitcoin

The obvious way Bitcoin has been affected can be seen in market prices. Right now Bitcoin is down 18% from about a month ago when the trouble started. The recent jump in value actually came partially because of the Mt. Gox bankruptcy announcement, as it ended nearly a month of speculation about the future of the exchange and allowed the Bitcoin community to finally move on, even if it meant many losing everything they had held in the Japanese exchange.

This then leads to a second major impact: the wake-up call. The challenges Bitcoin faced in the last month represent what happens when you have such a valuable currency in such a chaotic environment. Bitcoins remain an unregulated currency with high risks and few consequences for those who choose to do evil. Exchanges are all equally capable of falling to bugs, hackers, or greed.

In turn, many are beginning to consider the possibility of regulation or protections for those in the Bitcoin community. The first act of protection came with a joint letter from six of the largest Bitcoin exchanges after the Mt. Gox fiasco in an attempt to reassure Bitcoin buyers.

In a post-Gox Japan, regulators are beginning to consider regulations that would treat Bitcoins as a commodity, like gold. New York State's top banking regulator, Benjamin Lawsky, also has his eyes set on introducing new regulations for the currency. These discussions are a blessing and a curse. While some believe the only way Bitcoin will survive is with greater protections and oversight, others see the value in it serving as a currency free of regulation and symbol of libertarian economics. 

As for protection, one such firm has emerged that offers customers a way to securely store and insure their Bitcoin assets. Elliptic offers policies underwritten by Lloyd's of London against the theft of Bitcoins stored with the company's storage services. The policies, ranging from a few thousand dollars to over $1.6 million, offer peace of mind for those interested in more than just a sense of security for their wallets. Still insuring wallets has not yet become a norm, though this may change as hackers continue to design malware specifically made to steal Bitcoins

The Foolish bottom line

Bitcoin continues to face hurdles as it attempts to become the currency of note for the digital age. The heists and losses it has seen at the hands of hackers will continue to affect the currency's value in the months to come.

Still, Bitcoin is empowered by the immense hype it continues to receive. "What is Bitcoin" was one of the most popular search terms in all of 2013. Newsweek's 2014 relaunch featured a front-cover expose on the (now questioned) identity of Bitcoin creator Satoshi Nakamoto. Bitcoin has spawned a slew of similar cryptocurrencies that have been used to plant trees in Madagascar and help Jamaica make it to the Winter Olympics. 

Even Bitcoin early adopter Overstock (NASDAQ: OSTK  ) remains optimistic in the wake of these challenges after seeing $1 million in revenue generated by Bitcoin, beating expectations. While Bitcoin remains very chaotic in value, firms that have embraced the currency are seeing the benefits. Humbled by recent strife, Bitcoin still stands as a growing currency with many battles ahead to be fought and won.

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