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Huge Bitcoin Exchange Goes Belly-up; What Does This Mean for the Currency?

The recent issues with Mt. Gox shed light on the risks associated with the Bitcoin digital currency.
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The largest Bitcoin exchange in the world appears to have gone belly-up after apparently losing hundreds of millions of dollars in Bitcoins after a long-term hacker attack. The fallout has resulted in an increased scrutiny of Bitcoin safety — leading more people to consider pulling their Bitcoins offline — and raises questions about how far this nascent unregulated financial market will go.

According to Wired, an exploit in Mt. Gox's website allowed hackers to siphon off millions of Bitcoins over a two year period. The crumbling of Mt. Gox, which lost around $350 million in Bitcoins, has prompted some Bitcoin investors to start storing their digital currency offline, according to MarketWatch.

Going Back to Paper for Digital Currency

And yes, you can store Bitcoins offline: each Bitcoin has a key, like a serial number, which allows the Bitcoin to be spent. Without the key, there's no Bitcoin. So some users have taken to printing out the key on paper, or storing the data on a device not connected to the Internet, or a 'cold' device. While some customers want security in lieu of this disaster, they are still operating within a completely unregulated market.

No Real Banks Means Little Safety

Printing out Bitcoins or keeping them offline isn't like pulling money out of a bank and storing it under a mattress because Bitcoin 'banks' aren't recognized as banks. A recent article by MarketWatch mentions one company that stores Bitcoins offline in a bank vault for a 2% annual fee. And while it's insured against theft, it's not a real bank. Another company, FlexCoin, claims it is the "world's first Bitcoin bank" but also states "technically we're not a licensed bank. We're a Bitcoin bank." A thumb drive can be lost, a hard drive fried, or a Bitcoin key trashed. Once a Bitcoin is gone, it's gone; there's no Federal Deposit Insurance Corp. covering your loss.

Cashing Out Isn't Easy

Mt. Gox customers got a harsh reality check when they tried to cash out earlier this month. Customers received only a paltry statement that the company would sort everything out, but were faced with no way to get their Bitcoins, which are either in limbo within the company's servers or stolen. Some Mt. Gox customers sold the rights to their Bitcoins to speculators hoping that Mt. Gox would make good on their promise. These Bitcoins went far below market rate at $118 per Bitcoin, compared to the regular exchange rate for Bitcoins at around $570 per Bitcoin at the time, according to CNNMoney.

What This All Means

Mt. Gox serves as a reminder that you're not just buying Bitcoins; you're also involved in the company performing the exchange. There are no watchmen to answer to, and things can go downhill quickly if a breach happens. It's not an isolated incident, either: In 2012, the exchange site Bitcoinica was hacked for over $460,000 worth of Bitcoins, according to The Verge.

Additionally, feds seized over $5 million from Mt. Gox's bank accounts for allegedly not properly registering a money transaction business last year, according to Wired, another indication that an unregulated financial market has little or nothing in the way of consumer protection.

Readers, are any of you invested in the Bitcoin market, perhaps due to its recent mainstream acceptance? What do you think of the latest developments? Share your thoughts in the comment section below.

Contributing Writer

Angela Colley has covered everything from money saving technology to how the Mayans might affect your savings. She’s appeared on publications like MainStreet and MSN Money. You can follow her on Twitter @angelancolley.
Please note that, although prices sometimes fluctuate or expire unexpectedly, all products and deals mentioned in this feature were available at the lowest total price we could find at the time of publication (unless otherwise specified).
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8 comments
de1337er
nimer, Flooz isn't really the same at all. Bitcoin's prinicples are designed to keep it from being a corporation - unlike Flooz. No one owns "Bitcoin".

No, jameskatt. You only lose your Bitcoins if you put them in that exchange. For example, say you have some (real) money on a Japanese stock exchange and -something- happens to that market, then your money is gone because it was there. If you had some money in a US exchange like the NASDAQ, or any other exchange for example, and it didn't crash you'd be fine. Either way, it's up to you to decide where to put your money. The Bitcoins are yours, in your wallet.dat file, until you decide to send them somewhere. Those on Mt. Gox put their Bitcoin there and were holding it there to try to profit off the market rates. There are many other Bitcoin exchange markets alive and kicking just fine.

cy8675309, US currency is also for drug dealers, money-launders, and thieves. I presume you're one or all of the above.
nimer
Same future of Flooz.com
Scroll down to #4 on this list
http://www.cnet.com/1990-11136_1-6278387-1.html
jameskatt
So with Bitcoins, you can only cash out with one specific Bitcoin exchange, like Mt Gox? You can't simply take your Bitcoins and cash it out in any exchange???

That means you are completely subject to the safety of the Bitcoins controlled by your exchange. If hacker takes Bitcoins from the exchange, you lose and have zero recourse.
silex
Cashing Out Isn't Easy
cy8675309
Bitcoin is a currency for drug dealers, money-launders, and thieves.
Corruption
Government getting nervous.
silex
This means nothing. Banks fall. Places fall. People who store in exchanges and pools are the ones who are playing a game of roulette.

You can store in a wallet offline or even technically online. You have to simply protect from hackers. There are many ways, paper method is one, another is make the account on a clean pc, set up all levels of security, have a copy of it as a paper wallet also as a backup, and then simply log in only when secure, only using a time changing auth code or sms cross match. Never share the private key, never photo the paperwallet with both keys. Your btc is stored.

When you put it into anothers control you can loose it. Just like having someone hold your wallet of 500$. There are no banks because there need be no banks. You make a wallet. You are your bank. YOU loose the wallet or share the Key YOU lost your money.

Never ever store in an exhcange or pool. Only store in a actual wallet you have the private key to. Always be safe when accessing it.
digdug
"What Does This Mean for the Currency?"

Not much: http://valme.io/...emember-the-3rd-of-october-2008
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