By Emma Haslett Tuesday, 25 February 2014

'This could be the end of Bitcoin' as MtGox goes offline

Bitcoin's biggest bank crashed spectacularly last night. It's the equivalent of RBS, Barclays and HSBC all going down at once, only in this case no one will bail it out...

The wild lurching of Bitcoin's value over the past few months should have been enough to tell any potential investor that buying the cryptocurrency isn't for the faint-hearted. But alas, that's unlikely to come as much comfort to those who may have lost 744,000 coins held by MtGox, the online currency exchange which suddenly went offline overnight.

To be fair, investors had expected something like this: withdrawals from the site have been suspended over the past few weeks because of 'transaction malleability' problems (gloriously euphemistic, isn't it?). MtGox had promised a fix would be forthcoming - but users had begun to suspect something was badly wrong last week when chief executive Mark Karpelès stepped down from the board of the Bitcoin Foundation, essentially a trade organisation for Bitcoin-ists.

Their worries were confirmed last night when a leaked internal document (which may or may not be authentic) revealed that the site has been victim of something called a 'slow hack' which has taken place over 'years'.

As the document itself, titled 'Crisis Strategy Draft', put it:

'At this point 744,408 BTC are missing due to malleability-related theft which went unnoticed for several years.

'The cold storage has been wiped out due to a leak in the hot wallet. The reality is that MtGox can go bankrupt at any moment, and certainly deserves to as a company. However, with Bitcoin/crypto just recently gaining acceptance in the public eye, the likely damage in public perception to this class of technology could put it back 5~10 years, and cause governments to react swiftly and harshly. At the risk of appearing hyperbolic, this could be the end of Bitcoin, at least for most of the public.'

With friends like that, who needs enemies?

To give you an idea of the scale of this, there are only about 12.44 million Bitcoins in existence, worth roughly $6.9bn (although their value rises and falls massively). Based on those figures, MtGox has managed to lose about 6% of all Bitcoins. Imagine the uproar if George Osborne did that with GBP....

But despite MtGox's fears, Bitcoin aficionado and Coinapult co-founder Erik Voorhees, who had 550 coins in 'cold storage' on MtGox, took to Reddit to declare that he 'should have known better'.

'I take responsibility for leaving those funds with an entity that had proven incompetence repeatedly. I chose to ignore even my own warnings, for nothing more than the sake of convenience.'

But he added the real lesson is that the currency is still in its very early stages.

‘The proper lesson, if I may suggest, is this: We are building a new financial order, and those of us building it, investing in it, and growing it, will pay the price of bringing it to the world. This is the harsh truth. We are building the channels, the bridges, and the towers of tomorrow's finance, and we put ourselves at risk in doing so.’

MT is gratified to see he stuck with today’s ‘melodramatic’ theme…

THREE LESSONS FROM MTGOX’S CRASH:

  1. Spread your risk: investors have been warned repeatedly that Bitcoin exchanges are not regulated, so those in the know will have spread their coins across several exchanges
  2. Keep your finger on the pulse: MtGox has, as Voohees points out, ‘proven incompetence repeatedly’. Savvy investors got out way before it suspended withdrawals
  3. Have an eye for detail: keeping a closer eye on the coins stored in ‘cold storage’ would have meant MtGox spotted its vanishing currency earlier and avoided its current fate

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