37 Comments

Summary:

The world of Bitcoin is being rocked by a cascade of events related to the final collapse of Mt. Gox, which a leaked crisis document says could be “the end” of the currency in the public realm for years.

Mushroom cloud
photo: Shutterstock / Sergej Khakimullin

The Bitcoin community is on edge as a leaked document (below) shows that the Mt. Gox exchange, a longtime pillar of the virtual currency, is missing hundreds of millions of dollars worth of customer money and is heading for bankruptcy.

Meanwhile, the leaders of high profile Bitcoin companies, including Coinbase and Circle, issued a public letter promising to re-establish the trust “squandered” by Mt. Gox even as the value of bitcoin continues to fall. As the Winkdex shows, it’s off more than 17 percent in the last 24 hours (Update: the price has stabilized around $490 as of Tuesday morning and was back above $500 by noon):

screenshot of bitcion price

These are just some of the facts that came to light during a fast-moving series of events on Monday that also saw Mt. Gox’s website and Twitter account go blank, and that come on the heels of the CEO of Mt. Gox leaving the Board of the Bitcoin Foundation.

Taken together, the events represent an existential crisis for Bitcoin at a time when the virtual currency is starting to get mainstream consumer adoption, and governments are granting it cautious approval. As the leaked document, which is a crisis management guide for Mt. Gox, noted:

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.

The provenance of the document, titled “Crisis Strategy Draft” (embedded below) and leaked by a Bitcoin blogger, is unclear but a source has confirmed to Gigaom that it is authentic. It says that Mt. Gox has lost 744,408 bitcoins due to theft, and includes this table that says the company is in the red for tens of millions of dollars in fiat currencies (such as dollars or yen) as well as millions of bitcoins:

Screen Shot 2014-02-25 at 12.09.27 AM

The document also contains slides that propose ways to reassure the public, such as the orderly resignation of CEO Mark Karpeles and his replacement by a team of technocrats. It also states that the “damage has already been done” as a result of “transaction malleability” — a weakness that permits bad actors to tamper with transaction records (Mt. Gox had been alerted about the vulnerability but failed to fix it, leaving its ledgers a muddle).

As with so many things Bitcion, it’s hard to tell what’s really going on here: Who stole the Mt. Gox money? And are they, as has happened in past crashes, exploiting the current crisis? Conversely, are figures like Circle’s Jeremy Allaire or the Winklevoss twins, who own millions of bitcoins, stepping in to halt the currency’s current slide — much like a central bank would do?

I’ll report more soon but, for now, it’s enough to repeat my recent argument (“Is this any way to run Bitcoin?”) calling for proper governance from the Bitcoin Foundation and other self-styled leaders of the virtual currency. They better hurry before this thing gets even worse.

Update: Fortune reports that Second Market is launching a New  York-based bitcoin exchange; the company’s CEO, Barry Silbert, holds significant amounts of bitcoin. Meanwhile, the Mt. Gox site is finally back up, but now only consists of a brief statement, saying “a decision was taken to close all transactions for the time being in order to protect the site and its users.”

Late Tuesday morning, New York state’s head financial regulator, Benjamin Lawsky, issued a statement about the Mt. Gox mess, saying they “underscore that smart, tailored regulation could play an important role in protecting consumers and the security of the money that they entrust to virtual currency firms.”

MtGox Situation: Crisis Strategy Draft by twobitidiot  (One page is redacted, but has since been leaked too; see it here )

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  1. Donald McIntyre Monday, February 24, 2014

    If other leaders of the Bitcoin world are taking over MtGox to help organize the possible liquidation of the company that is not really acting like a central bank, but like private individuals trying to contain a crisis that could certainly be worse than warranted because of market psychosis.

    In this case rather than a central bank they are acting like JP Morgan in the 1907 NY financial crisis. This is different because they would be pledging private money and not public/tax payers money and they would not be incurring in money printing like a central bank does probably putting at risk the integrity of the currency and for sure diluting the value saved by the rest of the public.

    In the US it is unnoticed the effect of the Fed by printing massive amounts of money because of the huge adoption of the dollar not only within the large US economy, but also the rest of the world.

    But it is much more felt in less developed economies like Argentina where small amounts of new money issuance are nearly immediately rejected by the economy creating high inflation and currency devaluation.

    In the case of Bitcoin private “community” intervention with private money to support the platform seems more adequate than having public money or money issuance. This s because the distribution of risk, costs, and potential earnings are assigned by the “market” to the corresponding people who run the risks. In traditional central banking systems the risk is run by a few bankers, they earn the upside returns, but the potential losses are distributed to the population creating a clear “moral hazard”.

    Moral hazard promotes higher risk taking and returns to the few who are subsequently protected, this inexorably leads to bigger crisis overtime.

    1. Liquidate what? There are no assets to liquidate – you might want to re-read the slides.

    2. “In the US it is unnoticed the effect of the Fed by printing massive amounts of money ”

      Unnoticed, in the same way you can slowly boil a frog to death. Eventually the frog is dead, and eventually our currency is “worthless”. USD has lost 96% of its value since 1913.

      1. Donald McIntyre Dave Saturday, April 12, 2014

        Absolutely agree, I meant in the short term.

    3. You seem to be confusing a currency with a bank and a market.

      Bitcoin is a currency that sort of floats free in cyberspace, unattached to anything.

      The dollar is a currency that’s backed by “the full faith and credit of the United States.” If they don’t make good on the currency, you get the county (good luck collecting…)

      JP Morgan was a banker leading a bank that famously intervened to stop a market drop – it had nothing to do with currency.

    4. the only psychosis is yours for believing electronic monopoly money is not a pyramid scheme. NEWS FLASH ITS A SCAM.

  2. Cirle’s Jeremy Allaire

  3. Done like dinner. Get a fork.

  4. People should read Extraordinary Popular Delusions and the Madness of Crowds

    1. Your comment seems like a critique against Bitcoin as a concept and has nothing to do with what actually happened, a huge amount of Bitcoins were stolen from an exchange that apparently was very badly run, but trusted by many (including me) and held about 6% of all Bitcoins in circulation.

      This is a huge blow to the Bitcoin economy and the trust of companies dealing with Bitcoins, but definitely not a failure of Bitcoin as concept or technology. In fact, Bitcoin has steadily been gaining ground and winning supporters as people start to understand it.

      We are likely to see some turmoil and slowed down adoption for a while, but nothing in this sad situation lends any credibility to your implied statement that Bitcoins rise is due to “madness of crowds”.

      My heart goes out to all those poor people who trusted Mt Gox with their Bitcoins and lost a lot of money.

      1. Well remember what your mother told you about pointing your finger at someone…that means 4 fingers are pointing back at you. The Bitcoin community knew about transaction malleability for years but did nothing about it…did nothing to fix it…left it to the exchanges. When you do that you put yourself at risk. End of story.

        The community responsible for the blockchain could have come up with a solution instead of a workaround to be implemented by the exchanges. For those of us that work in IT know the dangers of workarounds…they provide a quick temporary solution, but in the end do not work. Bitcoin FAIL, MtGox FAIL!!!

        1. Transaction malleability is not a problem at all “alone” and there are actually legitimate reasons to have it in place. It is only Mt Gox(a company started to trade magic the gathering online cards) personal wallet software that allowed this “feature” to become a problem.

          No other exchange has lost a single Bitcoin because of this and no decent programmer would design a exchange/wallet like Mt Gox must have to get themselves in this mess. If you believe otherwise you are just misinformed.

        2. Transaction malleability is a scapegoat for something else, transaction malleability cannot help you to steal funds, https://en.bitcoin.it/wiki/Transaction_Malleability

      2. Stop pumping an obvious scam. Bubbles can go a long time the longer they go the more people they hurt. This is a scam plain and simple, the sooner the bubble bursts the better.

        1. Why is this scam so obvious? As a person who owns and mines Bitcoins I have yet to see where the “scam” side of it comes into place? Please enlighten me.

  5. Péter Szilágyi Tuesday, February 25, 2014

    Never used bitcoin because the sole reason: it’s internet money. Which is worth exactly… nothing.

    1. Me and a lot of people disagree with you. The core value of any crypto currency lies in its utility as a quick, easy, fee-less, international and reliable way to make payments peer-to-peer without the need to trust any middle-man. The more the crypto currency is adopted and its technology and infrastructure can be trusted, the higher value it has.

      The value of all virtual goods, like bitcoins, URL’s, information, patents, copyright, trademarks etc is based on what it can bring you in the physical world.

      What Bitcoin can do for international trade, storage of wealth and micro payments is way beyond any other current technology and gives it a potential real value way beyond its current valuation.

      1. You and a lot of people are arrogant fools.

        1. Linards Bērziņš Af Tuesday, February 25, 2014

          same as you

        2. You yourself are an arrogant fool for prejudging something you know nothing about. We don’t need your support for bitcoin to succeed it has the network effect behind it.

      2. You say the value of Bitcoin is the ability to facilitate exchanges “without the need to trust a middleman.” Looks like there’s a need to trust the exchanges like Mt Gox. And the trust was misplaced.

        1. Yes bitcoin is a DECENTRALIZED system and the only points of failure come at places like Mt Gox. Many of you may be wondering why bitcoins price hasn’t been hurt more by this and its quite simple. ANYONE who has been paying attention has known about problems at Mt Gox for some time now and to still have funds there is either lazy or ignorant.

  6. @Péter Szilágyi
    It is just like you paper-made bills… they worth nothing!

  7. GOLD PEOPLE GOLD IS WHERE ITS AT. SILVER AND GOLD

  8. >> this could be the end of Bitcoin

    Get out! The rest of us have no patience for your foolishness. For the rest of us, there’s still Camp BX.

    1. Not the end. Not by a longshot.

  9. Noob question – is there any way to track/identify stolen BC, or is that exactly the point?

    1. There is but the “leaked” article from Mt Gox points to bad security procedures that may have resulted in theft over “YEARS” and that is hard to track in ANY currency.

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