Right now, the price of a single Bitcoin on the biggest exchange in the world is $0, from an all-time high of $1,200. Or it would be, if anyone could even access it. Mt. Gox, a Tokyo-based digital currency exchange that started as a Magic: The Gathering card game community, has frozen all transactions. It increasingly looks like anyone who was holding Bitcoin at Mt. Gox is out of luck.
How did it happen? The exchange’s rapid death spiral is a result of the apparent theft of 744,000 Bitcoins (six percent of all available Bitcoins) due to a security breach, a crime that went unnoticed for several years according to a leaked document that has been connected to Mt. Gox. “The reality is that MtGox can go bankrupt at any moment, and certainly deserves to as a company,” the document reads, outlining a plan to switch CEOs, rebrand, and start over from scratch as a more transparent business.
The document reveals the stark statistic that the company now has around $33 million in assets with $170 million in liabilities due to the breach and their failure to catch it earlier. A spokesman for Mt. Gox told Re/code that the company will file for bankruptcy.
Even before public awareness of the theft, however, Mt. Gox was showing signs of instability. It sporadically shut down withdrawals from its exchange, blocking users from removing their Bitcoins from the market and cashing out for nationalized currencies. Two weeks ago, withdrawals were stopped again, prompting suspicion. Then yesterday, Mt. Gox CEO Mark Karpeles suddenly resigned from the Bitcoin Foundation and the company deleted all the tweets on its Twitter account. Prior to the shutdown, Bitcoin prices on Mt. Gox were falling under $150.
According to the Mt. Gox document, the exchange was hoping to limit the risk of shutting down: “To avoid a bank run from customers, the daily amount of Bitcoin and cash withdrawals will be limited.” Because the exchange closed, users don’t even have a chance to withdraw the currency that might be left on the company’s servers. Even if Mt. Gox relaunches and restores some portion of the stolen money, it’s unlikely that anyone would trust the founders again.
The news of the shutdown has hit the Bitcoin community hard, though it hasn’t killed the currency’s value as much as might be expected. Bitcoin is trading at around $500 on other exchanges like BTC-E and Coinbase, which are likely to control larger shares of the Bitcoin market as Mt. Gox falls out of the picture.
Those companies and other Bitcoin business released a joint statement regarding Mt. Gox’s “violation of trust.” It “does not reflect the resilience or value of Bitcoin and the digital currency industry,” the statement reads. “We are confident, however, that strong Bitcoin companies, led by highly competent teams and backed by credible investors, will continue to thrive, and to fulfill the promise that Bitcoin offers as the future of payment in the Internet age.”
Bitcoin has been critiqued as a dressed-up Ponzi scheme—as more users buy in, digital currency exchanges are able to pay off the smaller group that cashes out without holding enough money in reserve. The theft and resulting shutdown shows that putting faith in unregulated financial companies is just as dangerous.
As new financial products, digital currencies are an inherent gamble. There are vulnerabilities in the form of hacker attacks, untrustworthy entrepreneurs, and the possibility of the government regulating them out of existence. But there are those who still believe in them, and as long as there are, Bitcoin and its alternatives will retain some value.
The digital currency Dogecoin, which modeled itself after Bitcoin but riffed off a viral Internet meme for its name, is still worth around $1.