The oldest, Tokyo based Bitcoin currency exchange, Mt.Gox holds 21% of all exchanged Bitcoins by volume. This weekend the bitcoin price headed south drastically, losing about $400 in less than 48 hours to momentarily fall to $540 (as shown in Figure 1).
Mt. Gox suspended withdrawals after it found a technical glitch in the system. It was reported that due to a large number of withdrawals that hindered the technical repair of the system, Mt.Gox had to suspend its operations indefinitely to work on a static system for faster repair. “A bug in the bitcoin software makes it possible for someone to use the bitcoin network to alter transaction details to make it seem like sending bitcoins to a bitcoin wallet did not occur when in fact it did occur,” MtGox said.
Essentially what happened, was that the transaction record (hash) was being manipulated by a technical bug before it entered the public ledger (Transaction Block Chain). Therefore after a Mt.Gox withdrawal, the transaction record (hash) will not match the one in the public ledger, thereby creating suspicion! Users who tried to make subsequent withdrawals received Invalid Bitcoin Address error messages. This technical glitch is however not something new, it was first discovered by a couple of Software Engineers about 3 years ago, but no significant solutions could be discovered then.
Mt.Gox’s technical support team is working along with Bitcoin’s core development team to resolve the problem as soon as possible. Mt. Gox, in a press release, apologized for the disaster and suspension of operations and said, “In our efforts to resolve the issue being encountered by various bitcoin withdrawals, it was determined that the increase in the flow of withdrawal requests has hindered our efforts on a technical level. To understand the issue thoroughly, the system needs to be in a static state.”
How is the Bitcoin community taking it? The Bitcoin community is furious, venting out its anger in various online forums. Some users went a step ahead and questioned if the Bitcoin Exchange, Mt.Gox was a large scale scam, claiming that the exchange is accessing millions of dollars’ worth user’s Bitcoins. The withdrawal suspension by Mt.Gox also added to the volatility of the market. The Bitcoin price had just reached $1000 in January, bottoming to $535 this weekend. This high price volatility is scaring a lot of investors, while some are seeing it as a perfect entry point into the market. A lot of selling in the past few days has stabilized the price in the $650 level, but even that is temporary, given Bitcoin’s history.
In the year 2013, the Mt.Gox user table, containing details of about 60,000 users including usernames, email addresses and password hashes was leaked. This created a heavy panic in the Bitcoin market and contributed heavily to the price volatility which stabilized within no time. The whole of 2013 has seen an erratic pattern in the price, with regular ups and downs.
Mt.Gox says a large volume of withdrawal had triggered the issue. So, why is there a large volume of withdrawal? TeamBitcoin finds a few plausible reasons for heavy withdrawal:
1. Russia bans Bitcoins: Russian Prosecutor General’s office released a statement that clearly prohibits Russians from using the new digital currency. “Bitcoin is a money substitute and cannot be used by citizens and legal entities,” the agency’s press release reads. Russia’s Central Bank therefore issued a ban on Bitcoins, as a preventive measure to avoid money laundering and terrorist funding during the Sochi 2014 Winter Olympic Games.
2. Apple - Bitcoin Rift: Apple, the technology giant that revolutionized phones, music players and laptops, has taken down BlockChain , the last iPhone application used to buy and sell Bitcoins. In protest, Bitcoiners smashed their iPhones and a thread on Reddit promised them Google Nexus 5 smartphones.
3. Concentrated Ownership: According to a study by Business Insider, less than 1000 people own 50 percent of the currency which is “mined” from logarithms. This allows a few people to destabilize the market by their withdrawals. Since, the ownership of Bitcoins is concentrated, the actions of these Bitcoiners would greatly impact the market.
4. Introduction of Regulation: Recently, the State of New York has has planned to create regulations guiding bitcoin firms to hold a bitcoin trading license called the BitLicense. Furthermore, New York’s Superintendent of Financial Services, Benjamin Lawsky said that such regulations would hinder fraudulent activities and would make the use of bitcoins safer for everyone.
5. Charlie Shem’s Arrest: Recently, Charlie Shem, the CEO of the Bitcoin Exchange BitInstant was arrested on allegations of money laundering through Silk Road, the FBI seized online marketplace accepting Bitcoins. BitInstant, has become a major player in the Bitcoin market after it received a $1.5 million investment from the Winklevoss twins.
Barry Silbert, CEO of the New York based SecondMarket Inc., who runs a Bitcoin investment fund tweeted that his trading team would buy and sell Bitcoins with a minimum of 25 BTC, settling transactions on the same day. He further stated that the downfall of Mt.Gox reiterates the clear need for a U.S based, regulated, complaint and trustworthy Bitcoin Exchange.
The original alternative currency, Gold, traded higher as bitcoin prices weakened. Gold futures on Monday rose to the highest levels since November in the wake of Friday's disappointing January employment report. This explains the logical parallels drawn between Gold and Bitcoins.
Furthermore, as Bitcoin heads south, Vertcoin, its competitor virtual currency is heading north. During the weekend, Vertcoin’s price surged 200% from $0.73 to $6.19. Dogecoin also surged as well to all-time high.
Many are asking themselves Is this the end of Bitcoin? Will the heavy price volatility ever stop? Are Bitcoin investors starting to flee to other virtual currencies?
As of 2/11/2014 4:37 EST - Bitstamp exchange has shutoff all withdrawals and an extended DDOS attack on the blockchain using the transaction malleability vulnerability is actively under. Blockchain.info is reporting thousands of unconfirmed transactions piling up.