No moves left for Mt. Gox Bitcoin Exchange

Unable or unwilling to make payments, Mt. Gox seems to have run out of options and shut down operations tuesday.  The whereabouts of Mark Karples the ceo is unknown. Once the largest bitcoin exchange in the world, Mt. Gox was at the center of a bitcoin universe brimming with opportunity. As a leader in the bitcoin community Mt. Gox was set to help shepherd the historic rise of digital money. Instead, it's failure will become a case study in blow ups. Unfortunately, the explosive growth in bitcoin seems to have out-stripped Gox's abilities and left them in over their heads. Prior to getting into the bitcoin exchange business Mt. Gox originally was a Magic: "The Gathering" playing cards trading platform. Well, at least it wasn't a fantasy football or bowling league. Had management been more honest with itself and it's customers, there may have been an opportunity to bring in the expertise needed to avoid the current fiasco. Although other bitcoin exchanges and businesses have tried to distance themselves from the fallout, it's hard to see how that's possible. Will these dark days for bitcoin spell the end for digital currency? As Mt. Gox erupts and sinks into the sea a new island of bitcoin exchange maybe about to rise up. Second market has announced it's intention to have a U.S. based bitcoin exchange up and running by the summer of 2014. 

Bitcoins or IOUs from Mt. Gox ?

Trading bitcoins has just gotten easier now that Mt. Gox and some of the other exchanges have (temporarily) halted withdrawals. You can now sell bitcoins without the drudgery of receiving payments. How's that for thinking outside the box? Unfortunately, no similar moratorium exists when buying bitcoins. Mt. Gox says to blame it on the glitch. A vulnerability in the bitcoin protocol dubbed "malleability." 

Well known to core developers since 2011 this chink in bitcoin's armor was considered more of a nuisance up until now. Come to find out hackers have been busy exploiting the up to 10 minutes it takes for a bitcoin transaction to confirm on the blockchain. Inside this 10 minute window (which by the way is an eternity to miscreant hackers types) these unsolicited beta testers are able to insert phoney transactions. By exploiting the "malleability" thingie they can fool third party transactors into believing their cockamamie assertion that the original bitcoins were never received and thus get themselves a double dipper, wit cheese. 

It's still unclear as to how many bitcoins have been stolen in this manner. Being unable to settle and pay clients on time is no trivial matter for a currency exchange. There now exists a palpable loss of trust - particularly with the Mt. Gox exchange which calls into question the future viability of the repeat offender.

Considering bitcoin wallets?

While the bitcoin protocol is secure, wallets on the otherhand are under constant seige from hackers. Choosing a bitcoin wallet and understanding the security guidelines will go a long way toward ensuring your bitcoins remain safe. The underpinning premise to securing bitcoin wallets is that security resides with the holder of the wallet and corresponding key. If you decide to hold your bitcoins at home or somewhere else, then you are responsible for securing the keys and media e.g. computer, hard drives, USB flash drives, paper wallets etc. That includes securing the printing of paper wallets from hacker attacks on your printer. Likewise, if you decide to choose an online wallet for it's ease of use and hosted security, remember that at present there does not exist such a thing as FDIC insurance for bitcoin accounts. With that in mind, if you decide to go with an online wallet, then determining the best of breed becomes paramount. With no federal deposit insurance and very little in the way of regulations, replacing bitcoins that become lost or are stolen is ultimately at the discretion of the company or possibly a court. In researching the subject I have heard computer security experts say they wouldn't feel comfortable storing bitcoins on their own machines. This leads me to believe that for the vast majority of users, an easy to use and secure online wallet will make the most sense and become the model for mass adoption. Coinbase, a San Francisco based world leader in online bitcoin wallets has over 720,000 active users. It uses a combination of hot & cold storage security protocols to maintain approximately 90% of customer funds offline with keys held in vaults which are spread around the world. The international digital wallet provider recently raised $25 million (dollars) from Andreessen Horowitz in a series B funding and that's a very big deal, the biggest ever in fact for a bitcoin company. Coinbase is also integrated with the US banking system which may lower overall privacy but adds legitimacy and trust to the service. It would appear bitcoin technical talent and smart money is increasingly coalescing around a coinbase nucleus.


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Bitcoin's Big If

These days it's hard going a full day without hearing news of the bitcoin exchange rate. The virtual currency is getting real world attention. It's even causing business's to start considering how to integrate bitcoin payments. Customers are displaying an increasing interest in the trending private world of cryptocurrency transactions. But some could be placing too much emphasis on the "crypto" aspect a la silk road, losing sight of the main reason for it's development in the first place. It was in response to the financial crisis that Satoshi Nakamoto (the pseudonym used by the creator or creators - no one really knows) loosed the bitcoin block chain algorithm. Bitcoin was released as an alternative currency, an inflation resistant form of electronic money free from centralized control and manipulation. You might be thinking - how can a currency which is up over 500% in value this year alone be considered inflation resistant? Good question, the theory goes something like this,... since only 21 million bitcoins will ever be mined with only 12 million having already been - that bitcoin is currently undergoing the market process of price discovery. As it's popularity and price keeps increasing, miners and others are more inclined to hold or even hoard the virtual money in expectation of even higher prices down the road. Couple that with the technical aspects of mining, such as ever increasing levels of difficulty, rising cost per mined coin all leading to a feedback loop for price appreciation. Also, it is commonly understood that the 21 million coin limit is miniscule in relation to combined world currency value and money supply with estimates approaching one hundred trillion USD. Here's the big if. If Bitcoin were to gain even a modest share of the currency markets then the value of a single coin could easily achieve price in excess of tens of thousands of dollars. Over time believers in bitcoin expect it to slowly mature and enter a state of exceptional stability. Once all the coins have been mined some 30-40 years in the future, the virtual dollar would then become a durable and predictable form of inflation resistant digital currency. On the other hand, there is the real possibility bitcoins achieve considerable success with overwhelming public support only to - in the end - suffer a fate similar to another famous peer to peer file sharing network which was ultimately downloaded into the trash bin of history - napster. 

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