Does this $350m disaster spell the end for bitcoin?

MtGox was the world’s first and largest bitcoin exchange. At one stage it handled some 70% of global bitcoin trades.

But a couple of days ago the site was taken down. Its Twitter feed was deleted. Trading was halted (not for the first time). Withdrawals were frozen. And a rumour began circulating that some 744,408 bitcoins – over $350m worth – had been stolen.

It’s a publicity disaster for bitcoin and a nightmare for anyone who had their money in the exchange. Bitcoin’s value has plunged on the news.

Does this spell the end?

The story behind the world’s biggest bitcoin exchange

If you used MtGox to buy and sell bitcoins, you would have two sub-accounts – one for US dollars (or another national currency), and another for bitcoins. You bought bitcoins with your deposited national currency and, if you sold them, the proceeds would be deposited in your national currency sub-account.

Jed McCaleb – who Wired described rather disparagingly as ‘an unemployed computer hacker’ – founded MtGox in 2009. At first, it was an exchange for the trading cards game, ‘Magic: The Gathering’. Hence the weird name ­– MtGox is an acronym of ‘Magic The Gathering Online eXchange’.

In July 2010, McCaleb saw a post about bitcoin on the website Slashdot. It was the first to draw attention to bitcoin to an audience beyond the handful of computer programmers developing the code. McCaleb thought it looked like a good idea, and quickly turned MtGox into an exchange for bitcoins.

The site had huge first-mover advantage. It became the portal for buying and selling bitcoins. But McCaleb lost interest and in March 2011 sold MtGox to the Japanese company Tibanne, run by Mark Karpeles.

But, despite bitcoin’s stratospheric rise, with MtGox riding on its coattails, the exchange has always been dogged with problems.

In June 2011, its database was compromised: 60,000 usernames, emails and passwords leaked. A few days later, some 600 account holders at MyBitcoin had their balances stolen. Not long after, someone hacked into MtGox and issued sell orders for hundreds of thousands of fake bitcoins, briefly driving the price down from $17.50 to $0.01.

In May 2013, around $5m was seized by US authorities on the grounds that MtGox was operating a money-transmitter without being properly registered. It also faced a $75m lawsuit from Coinlab over breach of contract.

In June 2013, it suspended US dollar withdrawals. Withdrawals were reinstated in July, but the internet is rife with people complaining that they were unable to get their money out.

In short, MtGox can hardly have ever been described as reliable.

This year, before the shutdown, withdrawals were halted, then restarted, then halted again. At one stage, the MtGox-quoted bitcoin price was about a quarter of that on other exchanges, so weak was trust in the exchange. People were flying to Japan to demonstrate outside the company’s offices. An extremely wealthy tech-millionaire told me on Monday night that Karpeles had been on the phone to him last week asking for financial help.

At the weekend Karpeles resigned from the Bitcoin Foundation. Yesterday all you got when you visited the MtGox site was a blank screen. Today there’s a message which reads:

Dear MtGox Customers,

In light of recent news reports and the potential repercussions on MtGox’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,
MtGox Team

Other exchanges have been quick to distance themselves. One said that the “tragic violation of the trust of users of MtGox was the result of one company’s actions and does not reflect the resilience or value of bitcoin and the digital currency industry”.

But a lot of people will lose a lot of money from this. They’ll be angry and there’ll be repercussions.

Many will demand the authorities take some kind of action. But what they can do, I’m not sure – apart from ban it. The whole point of bitcoin is that it has no governance. It is open source and decentralised.

The BBC’s Robert Peston has called this “bitcoin’s life-or-death moment”. James Titcomb in the Telegraph says “bitcoin is under threat”.

But I’m not sure that this is the end of bitcoin. It’s just the end of one bitcoin company that was at best out of its depth, and at worst, a scam.

Why bitcoin technology won’t just vanish

As you may know, I have begun work on a new book on bitcoin. (My timing is impeccable).

For all the extremists who have associated themselves with this digital cash, there is no doubting the technology. It is the easiest and most practical way to make digital payment, large or small, particularly over long distances. It bypasses the costs of the banking and credit card system.

I often get small jobs from clients overseas. Sometimes 20% or more of a £250 job gets swallowed in forex and money-transfer costs. If somebody sends me a bitcoin, it’s just so much easier. The efficiencies in terms of cost and time-management are irresistible, particularly for micro-payments.

And that’s why I don’t think this is the end. The technology is too good. It might be that bitcoin must fail so that others succeed. But, on the other hand, there is now a great deal of vested interest in bitcoin. Large investment has come in from venture capital funds and elsewhere. The currency is already very evolved.

Ultimately, this is rude capitalism at work. MtGox was badly run. If the rumours are true, how can anybody run a company and not notice $350m-worth of its core product go missing? My sympathies are with those who have lost money, very much so. But these kinds of losses will force better practice on all participants in the future.

If bitcoin is to succeed, it will need better institutional practice. Failure is how you achieve that.

If you’re thinking of taking a punt – just be very, very cautious

As for buying into the sector: as this episode makes very clear, crypto-currencies are the Wild West. If you want to play the game, fine. But the same rules as with any highly speculative venture apply – only risk money you can afford to use; do your own due diligence; and store your bitcoins somewhere safe. Many keep theirs off-line, unless they’re planning to spend them.

In recent months we have seen: the downfall of the revamped second Silk Road; the ban of bitcoin in Russia; the arrest of high-profile member of the Bitcoin Foundation for money-laundering; and now the problems at MtGox.

Yet the bitcoin price remains around $500. That’s indicative of some strength. My guess is that we’re reaching a bad news peak and this may be some kind of low. There’s certainly blood in the streets. Perhaps now is a good time to speculate. Others might feel is better to wait for some kind of clear upward trend.

If you want to buy bitcoins, you deposit money with an exchange such as Bitstamp, Bitpay, Coinbase or Bittylicious, and then buy bitcoins with it. You can download a wallet from Blockchain.

But it all rather makes you long for the relative calm of gold.

Interested in bitcoin? Back my new book

Finally, I’ve begun work on another book, which tells the amazing story of bitcoin and the crypto-currencies. I am crowd-funding it with Unbound and I’m pleased to say it is already funded. But you can still support the project and get your name in the book. If you ‘d like to, I’d be very grateful – just click here.

• Life After The State by Dominic Frisby is available at Amazon. An audiobook version is available here.

• Follow @dominicfrisby on Twitter.

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  • Wotan

    I have pointed out before that Bitcoin is no currency and never will be or can be. It is merely a speculative object in the sense of any share quoted on the stock exchange. It serves no useful purpose and is probably operated and manipulated by crooks. Speculators, obviously, are welcome to purchase it. Anybody who buys it as an investment should immediately see a psychiatrist.

    • Ion01

      I disagree. It already is a currency: you can work for it and buy things with it right now. I can send money around the world in minutes for no charge. Every time the value goes down the “bubble has burst” articles are wheeled out (eg when it went from 30 bucks to 2 bucks in 2011, before going on to over $1000).

      And whenever someone says “bitcoin” there is a Pavlovian response of “tulip bulbs”. Last time I checked, tulip bulbs were not a disruptive technology that were about to transform the economy. It seems to me that fiat currency is coming to resemble a Ponzi scheme (essentially worthless bits of paper, not backed by anything of value, issued by governments with massive, unsustainable debts).

      Following the success of Bitcoin, every man and their dog have released an e-coin. 99% of them are simply clones of the Bitcoin code with a lick of paint and a new logo. They offer nothing new and therefore no reason to hold them long term.

      The ONLY coin that SIGNIFICANTLY advances the technology from Bitcoin is QuarkCoin. It is much more secure and has much faster transaction speeds. It does not suffer from the problems MtGox had.

      This quick video will explain:

      Currently, the coin is seriously under-valued because the community’s marketing skills have not been very good – they are a serious community focussed on building a resilient, reliable infrastructure.

      Full disclosure: I am buying Bitcoin and QuarkCoin on the dips.

      • Inquisitor

        Hadn’t heard of Quarkcoin, thanks for the mention.

        Personally, I am treating BTC as belonging in the same category as gold and silver. They all have tremendous upwards potential, and it is worthwhile owning them within a portion of your portfolio. Other people may prefer other assets like bonds or property etc. Their prerogative.

  • Chester

    Bitcoin is subject to the same psychological mania as any other “asset”. If enough people want to believe in something, and find a way of trading it for the currency of the day, it becomes the next big thing. Remember tulip bulbs?

    Bitcoin is not “money”, and never will be unless the state adopts, controls and regulates it’s use and issue. Until then, like gold, it is a speculative asset which fluctuates in price, is not legal tender, and is arguably not a reliable store of value either

    It has indeed been useful to highlight the rediculous cost of operating through banks worldwide, and long overdue focus needs to be put on transacting fiat currencies efficiently and cheaply through existing regulated channels. That would at least be a positive outcome

    • Ion01

      What actually is money? I recommend this fascinating book: Debt – The First 5,000 Years

      Did you know, for example, that debt preceded money? Or that when the Roman Empire collapsed, for hundreds of years the English carried on accounting for loans and debts in Roman coins, despite there being no Roman coins any more?

      • Inquisitor

        You don’t need that book to tell you that the govt is unnecessary for creating currency. I think there’s also gaps in his recollection of the emergence of currency, and he does not necessarily approach it with an economist’s lens. That said, it is completely logically possible for debt to precede money since debt is simply an IOU.

  • Ellen12

    Thank you for the concise background to MtGox. The rise and volitility of Bitcoin is part of the debt muddle the world is in, as it is with gold, and the mishandling of central banks of the currencies we rely on. And I expect there have been deliberate take downs of both recently. However MtGox does underline the need for a currency to be backed by something, ideally the work and wealth of a nation (or people) who support it. Without getting too bogged down in the psychology, I believe there are increasing numbers of people trying to conduct their lives with the minimal need for banks and central banks. While bitcoin may not be the answer, it could be the forerunner to disempowering central banks that collude against savers and investors. Crowdfunding is another, and possibly better, example where investors are increasingly needing to bypass our corrupt banking system. Bitcoin may change, even change fundamentally, but it fulfills a need to move away from the power that is being abused in the hands of a few bankers and I think this concept will not go away.

    • Inquisitor

      The problem with crowdfunding and P2P lending is that the government is eager to stick its bloody nose in it, as is the case with e.g. Funding Circle. They’re excellent investment vehicles, delivering decent returns for relatively little risk.

  • freethinking

    There is nothing much wrong with Bitcoin. I went very deeply into it before buying a few. I use an offline wallet stored on a laptop that NEVER goes online, therefore can’t be hacked. It’s by Bitcoin Armory and is extremely easy to use. Secondly , I had a good look at MtGOX and couldn’t believe the mess they made of peoples transactions and the length of time it took, sometimes weeks ! I have bought and sold using LocalBitcoins and it couldn’t be simpler or faster. It can be used all over the world .Only a couple of minutes most of the time. As this method of payment gets more widely accepted the fact that the total coinage is finite will see the price soar. Don’t listen to the putdowners, they would distrust the wheel if was newly invented.

  • haircut

    Bitcon- Whaddyaexpectfurchrissake!!!!!!!

  • Clive

    @ freethinking

    “As this method of payment gets more widely accepted the fact that the total coinage is finite will see the price soar”

    Surely, that’s part of the problem. There’s never been an asset where the price “soars” and it’s a one-way thing. Stuff that soars invariably crashes. Sure, it’s fun when one starts with (say) £50, buys the asset and cashes it in later and is able to buy (say) a house. Not so much fun when you’ve got the price of a house in that asset, only to find when you need the money, you cash it in and it buys only £50 worth of stuff and your house is a distant dream.

  • seneschal

    There is no way that central bankers, nor governments – probably backed by the security services – are going to let bitcoin supersede the major currencies: particularly the all-powerful US Dollar.

    • Inquisitor

      Good luck to them, I say. They’ll need it.

  • MichaelL

    Book on bitcoin, lol.

    Is it a direct translation from the Danish “Kejserens nye Klæder”?