Bitcoin Heist or Glitch? Which Scenario Can’t They Bear to Admit?

By CASASCIUS (CASASCIUS) [CC-BY-3.0 (http://creativecommons.org/licenses/by/3.0)], via Wikimedia Commons

The news is out. Mt. Gox, the Tokyo-based leading bitcoin exchange, finally admits its bitcoin losses. Mt. Gox files for bankruptcy after mysteriously going offline for some time, leaving the following ambiguous message on their website:

Dear MtGox Customers,

In the event 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.

Best regards,

MtGox Team

Competitors rushed to…condemn Mt. Gox. Well, so much for the effort to protect the reputation of the virtual currency system. In a joint statement, Coinbase, Kraken, and Bitstamp.net criticized the act as a “tragic violation of trust.” Many expected them to at least refrain from saying anything on what happened, for the sake of the virtual currency’s integrity or public perception. A blow on a major bitcoin exchange is doubtlessly a big blow to the future of bitcoin. Apparently, capitalist competition still hounds bitcoin’s supposedly nontraditional approach to global currency.

So what does any of these have to do with the common person who wants to be money-savvy? Well, it may not be an immediate concern but ordinary folks have to learn something from this debacle involving a system touted to be the currency of the future.

Why did it take time for Mt. Gox to reveal what really happened? Everybody has to understand to realize if it’s really worth changing the current currency system with something that involves computer algorithms and electronic devices.

These points need to be discussed:

Missing Currency – The Main Problem

Mt. Gox had to shut down to prevent further damage. They reportedly detected unusual activity that led to the purported bitcoin heist. The official word from Mt. Gox CEO Mark Karpeles is that hacking was responsible for the loss.

Based on official numbers, 850,000 bitcoins have gone missing. At present bitcoin-to-dollar value, this means nearly half a billion dollars lost or $473 million. This amount represents about 7% of all bitcoins minted. Duke University’s Fuqua School of Business professor Campbell Harvey says that if it is indeed a case of theft, what happened to Mt. Gox could be considered the biggest bank heist by non-authority. Saddam Hussein’s order for the withdrawal of $1 billion from Iraq’s central bank is still unmatched in overall loot value.

Hacking or Glitch — Either of Which Is a Major Problem

Bitcoins were lost – there’s no need for any other argument to emphasize that there is a problem. If hacking was the cause, it means that Mt. Gox’s security is infirm. If the losses were due to technical glitches or bugs that have been negligibly addressed, Mt. Gox is indeed liable. What’s worse, however, is the possibility that the bitcoin losses have been happening untracked, that the loss recently reported is the accumulation of months or years of unresolved glitches. This could be the reason why Mt. Gox couldn’t immediately admit the problem, why they eventually chose the less damaging culprit–hacking.

By Isokivi (Own work) [CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons

Is Ditching Regulation Really Good?

Bitcoin proponents use the lack of regulation as one of the good things about bitcoins. Is it really the case? Should government authorities be allowed to regulate bitcoins now? Fortunately, for bitcoin advocates and believers, the answer is really simple. It’s this simple question: Did regulation prevent bank heists and banking scams involving real money? Regulation couldn’t have prevented the theft, especially considering that government regulators don’t even understand the system that much.

Besides, regulation will only subject digital currency to the same problems associated with traditional currency. Who wants digital currency to be dominated by the Chinese or to become an offshore industry? Who wants to see digital currency falling to the banes of legislation?

So Much for Transparency — We’ll Never Know What Really Happened

The sad part in all of this is that nobody will really know what happened at Mt. Gox. As the people in this former largest bitcoin exchange try the best they can to avoid or minimize their liability, other advocates of the bitcoin system are likely to step up to conceal problems that may diminish bitcoin’s credibility any further. Sadly, it’s not really possible to expect transparency when large amounts of money are involved.

Not a Hopeless Case

There’s still hope for bitcoin to really take off as a good alternative currency, though. The fall of one major exchange does not represent the fall of the system. If a syndicate successfully emptied the coffers of one bank, does that mean the downfall of the entire financial system? Of course, the answer is “no” and bitcoin still has all the time to prove its worth.

Obviously, it’s important to learn the lesson of the Mt. Gox debacle. If you are someone who is out to try something new, be sure that that something new is reliable. There have been a number issues lodged against Mt. Gox before. For example, there’s a bug that tricks the system into repeating a transaction as it deems it to be a failure. This was pointed out by Boston University research fellow Ethan Heilman. The bug has accordingly been fixed in other exchanges but maybe not in Mt. Gox.

It is hence important to observe the following as you consider adopting a new system like moving to a new bank or handling your investments in a different approach:

• Be very familiar with the system. Enroll in a crash course or have someone mentor you about it if it’s necessary.

• Be regularly updated with what is happening with your money and the system that handles it.

• Always keep track of your numbers. There’s nothing wrong with automation but it is always advisable to see everything for yourself.

By CASASCIUS (CASASCIUS) [CC-BY-3.0 (http://creativecommons.org/licenses/by/3.0)], via Wikimedia Commons

It will be a waste to put an end to the system bitcoins have already been able to create. What’s important now is to improve the system to make sure that the same problems won’t happen again. It’s very important to know what to do and what not to do with your money. Thinking of adopting the bitcoin system is not necessarily a bad move. Maybe you just have to wait a little more for the bitcoin system to mature further so you can reasonably entrust your traditional money’s value in it.