Apparent collapse of Mt. Gox exchange threatens Bitcoin economy

Rumors about the possible collapse of leading Bitcoin exchange Mt. Gox are sending shock waves through the community that has embraced the virtual currency.

Amid radio silence from the company, users are attempting to sort through conflicting signals that the company has shut down or that it is being acquired and possible relaunched.

[Updated 9:30 a.m., Feb. 25: Mt. Gox issued a short statement: “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.”]

There was a debate over the authenticity of a document circulating that appears to be an internal Mt. Gox memo detailing how the company may have lost 744,000 Bitcoins in theft over several years.

A joint statement from several Bitcoin companies condemned Mt. Gox’s handling of its situation:

“This tragic violation of the trust of users of Mt. Gox was the result of one company’s actions and does not reflect the resilience or value of bitcoin and the digital currency industry. There are hundreds of trustworthy and responsible companies involved in bitcoin. These companies will continue to build the future of money by making bitcoin more secure and easy to use for consumers and merchants. As with any new industry, there are certain bad actors that need to be weeded out, and that is what we are seeing today.”

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Still, the uncertainty sent the value of Bitcoins tumbling and raised questions about whether the Mt. Gox issue could bring down the entire Bitcoin economy.

Just last week, Japan-based Mt. Gox apologized for a 10-day disruption that has prevented customers from exchanging the virtual currency on its platform and said trading should resume again “soon.”

The problem stemmed from what appears to be a broader issue with the Bitcoin system, which is a distributed set of protocols that are not controlled or maintained by any single entity.

In addition to Mt. Gox, the Bitstamp and BTC-E exchanges were also hit with problems, though the other two have since resumed operations.

Mt. Gox stopped letting customers withdraw Bitcoins on Feb. 7, saying there was some kind of glitch in the Bitcoin system.

The company said it had developed a workaround that it was in the process of implementing. However, a week went by and users noticed that the site seemed to be disabled. The main homepage is blank. The company said the fix would take some time, and that it would resume trading only gradually.

On Monday, a “Crisis Draft Strategy” document was obtained by somebody and posted online, purporting to be from Mt. Gox. The document, which some claim is a fake, raised further alarms because it seemed to indicate the issue at Mt. Gox went beyond some glitches:

“At this point 744,408 BTC are missing due to malleability-related theft which went unnoticed for several years,” reads one slide in the presentation.

The document adds:

“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.”

The document then goes on to lay out the case for trying to save Mt. Gox or just shut it down.

There was a report Monday night that indicated that the company may be in the process of selling itself to a new entity and rebranding itself as Gox.com and preparing a strategy to relaunch under the new name.

The Bitcoins apparently lost by Mt. Gox account for about 6% of all Bitcoins in circulation. If they are lost, it’s unclear who may control them.

The uncertainty surrounding Mt. Gox comes just as a New York firm, SecondMarket, was announcing plans to create a new exchange with some major banks as possible partners.

Just recently, Silicon Valley venture capitalist Marc Andreessen wrote about his belief that Bitcoin was one of the Internet’s most significant developments.

Until last week, the virtual currency seemed to be riding a growing wave of public acceptance.

Now that seems to be in jeopardy.

Ryan Galt, a Bicoin blogger, wrote a post expressing his fear that this could be a fatal blow.

“This is catastrophic, and I am sorry to share this,” he wrote. “I do believe that this is one of the existential threats to bitcoin that many have feared and have personally sold all of my bitcoin holdings through Coinbase.”

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