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10 questions on the Mt. Gox implosion

Tim Hornyak and Jeremy Kirk | March 6, 2014
How do half a billion dollars vanish into thin air? That seems to be what happened at popular Bitcoin exchange Mt. Gox, which made a a bankruptcy protection filing in Japan last week.

 What triggered Mt. Gox's collapse?

Mt. Gox long had problems processing international wire transfers for people who wanted to cash out their bitcoins. On Feb. 7, it halted bitcoin withdrawals while investigating a security flaw called transaction malleability. Bitcoin software experts said Mt. Gox's highly customized code may have exacerbated that issue. Other bitcoin exchanges also temporarily suspended trading. With no explanation, Mt. Gox's website went blank on Feb. 25. It filed for bankruptcy three days later, with Karpeles accepting blame with a bow, a Japanese custom acknowledging failure.

Does this mean other exchanges are vulnerable to the malleability flaw too?

Transaction malleability, which allows for transaction IDs to be renamed, has been known in the Bitcoin community since 2011. Yet other exchanges have also been affected. On Feb. 11, for instance, Bitstamp suspended withdrawals blaming a transaction malleability attack, but said it had fixed the problem four days later. The Bitcoin Foundation, an industry trade group, said last month that it is working with core developers to solve the issue.

Can the missing bitcoins be traced?

Bitcoin transactions are recorded in a public ledger called the "blockchain," which shows movements from one bitcoin address to another. There is no identifying information attached to a bitcoin address showing who is transferring the coins, but it is possible through crowd-sourced data to see what particular addresses a company has previously used to transfer bitcoins. But due to a lack of custom software tools to analyze the blockchain, tracing a chain of transactions can be like following a set of muddy footprints in the rain.

Will depositors get their money or bitcoins back?

At least one class-action suit has been filed in the U.S., with another planned in the U.K. Mt. Gox has said "we need to investigate a huge amount of transaction reports in order to establish the truth." Due to bitcoin's complexity, an investigation could take a long time, and international lawsuits are unlikely to proceed quickly. Mt. Gox claims it has US$63.6 million in liabilities. The leaked document describing its supposed future business plans suggests the company may have just slightly over half that figure in assets.

What does this mean for the future of Bitcoin?

Mt. Gox's viability has long been questioned by users. But the bitcoin community, stung by past thefts and frauds, is largely looking forward, saying it will have little impact on the long-term prospects for the virtual currency. The price of bitcoin has been relatively stable amid the Mt. Gox collapse and is now around $660. The total market capitalization of all bitcoin is roughly $8.3 billion.

 

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