Collapse of exchange spells threat to bitcoin

The sudden disappearance of one of the largest bitcoin exchanges only adds to the mystery and mistrust surrounding the virtual currency, which was just beginning to gain legitimacy beyond the technology enthusiasts and adventurous investors who created it.
Published: February 25, 2014
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The sudden disappearance of one of the largest bitcoin exchanges only adds to the mystery and mistrust surrounding the virtual currency, which was just beginning to gain legitimacy beyond the technology enthusiasts and adventurous investors who created it.

Prominent bitcoin supporters said the apparent collapse of the Tokyo-based Mt. Gox exchange was an isolated case of mismanagement that will weed out “bad actors.” But the setback raised serious questions about bitcoin’s tenuous status and even more tenuous future. At least one supporter said the blow could be fatal to bitcoin’s quest for acceptance by the public.

A coalition of virtual currency companies said Mt. Gox went under after secretly racking up catastrophic losses. The exchange imposed a ban on withdrawals earlier this month.

The collapse followed the resignation Sunday of CEO Mark Karpeles from the board of the Bitcoin Foundation, a group seeking wider use of the exotic currency.

San Francisco-based wallet service Coinbase and Chinese exchange BTC China sought to shore up confidence in the currency by saying the Mt. Gox’s situation was isolated and the result of abusing users’ trust. They offered no details.

Since its creation in 2009, bitcoin has become popular among tech enthusiasts, libertarians and risk-seeking investors because it allows people to make one-to-one transactions, buy goods and services and exchange money across borders without involving banks, credit card issuers or other third parties. Criminals like bitcoin for the same reasons.

It’s hard to know just how many people worldwide own bitcoins, but the currency attracted outsize media attention as an increasing number of retailers such as Overstock.com began to accept it.

Speculative investors have jumped into the bitcoin fray, too, sending the currency’s value fluctuating wildly in recent months. In December, the value of one bitcoin hit an all-time high of $1,200. After Tuesday’s Mt. Gox collapse, one bitcoin stood at about $470.



Q&A

Bitcoin:

At a glance

Q: What is bitcoin?

A: Bitcoin is an online currency that allows people to make transactions across borders without involving banks, credit card issuers or other third parties. Bitcoins are basically lines of computer code that are digitally signed each time they change hands.

Q: Who’s behind it?

A: It’s a mystery. Bitcoin was launched in 2009 by a person or group called Satoshi Nakamoto. Nakamoto dropped off the map as bitcoin began to attract attention.

Q: Is bitcoin vulnerable to counterfeiting?

A: A network of tech-savvy users called miners keep the system honest by pouring their computing power into a blockchain, a global running tally of every bitcoin transaction. The blockchain prevents rogues from spending the same bitcoin twice.

Q: What’s all this talk about fraud?

A: If an exchange has sloppy security, or if a person’s electronic wallet is compromised, the money can be stolen.

Q: Is that what happened to Mt. Gox?

A: It’s not clear. Several experts have accused Mt. Gox of ignoring warnings about a glitch that could let hackers drain its bitcoins. The glitch was fixed, but not before Mt. Gox banned bitcoin withdrawals, feeding speculation that it was out of money.

Associated Press

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