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The MtGox Bitcoin Scandal Explained -- Fusion

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The MtGox Bitcoin Scandal Explained

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By FIDEL MARTINEZ @fidmart85

Posted 02/25/2014 12:13 pm

If youve followed the news today, chances are youve come across multiple
reports that theres trouble in Bitcoin land.
MtGox, a Bitcoin exchange, has mysteriously disappeared, putting at risk
millions and millions of dollars and in some cases, the livelihood of many.
This certainly sounds ominous, but what does it really mean? How does this
affect the Bitcoin economy? The answers to these and other questions can
be found below.
What is Bitcoin?
If this the first time youve asked yourself that question, then chances are that
everything else below will be over your head. But, if you insist on reading
along, heres a quick explainer.

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Its also worth noting that there are currently just over 12.4 million bitcoins in
circulation, with a market capitalization of just over $6 billion. As of this
writing, the average price of a bitcoin according to Coindeskan index for the
cryptocurrencyof $517 (earlier this morning, the price had dipped below the
$500 threshold but it appears to be bouncing back some).
What is/was MtGox?
MtGox isor was, depending on what actually happen (more on that later)
a bitcoin exchange where individuals can buy and/or sell bitcoins. It is the
oldest exchange and, up until yesterday, it was the largest and most popular.
What Happened?
MtGox is now completely offline. This development came after the exchange
had halted all withdrawals because of technical issues on Feb. 7. The
company cited a transaction malleability as the reason behind the
transactional freeze, or, to be more specific:
A bug in the bitcoin software [that] makes it possible for someone to use the
Bitcoin network to alter transaction details to make it seem like a sending of
bitcoins to a bitcoin wallet did not occur when in fact it did occur. Since
transaction appears as if it has not proceeded correctly, the bitcoins may be
resent. MtGox is working with the Bitcoin core development team and others
to mitigate the situation.
This answer, however, was not enough for MtGox users, many of whom had
been waiting weeks to have withdrawals completed.
On Sunday, after much criticism, MtGox CEO Mark Karpeles stepped down
from the board of the Bitcoin Foundation, a nonprofit group that advocated
the use of Bitcoin and its technology.
The following day, MtGox vanished into thin air.
Wait, why?
This is where we get into speculative territory. The truth is no one knows what
happens. The prevalent theory right now is built on an alleged leaked internal
document from MtGox itself. The document, entitled Crisis Strategy Draft
and made available by Bitcoin blogger and evangelist Ryan Selkis, reveals
that MtGox had been the victim of a multi-year hack that syphoned off more
than 744,000 bitcoins from its coffers, including bitcoins that were supposedly
in cold storage, funds that were kept in an offline computer so as to be
protected from hacks.
The reality is that MtGox can go bankrupt at any moment, and certainly
deserves to as a company, the document, which is embedded below, reads.
However, with Bitcoin/crypto just recently gaining acceptance in the public
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eye, the likely damage in public perception to this class of technology could
put it back 5-10 years, and cause government to react swiftly and harshly. At
the risk of appearing hyperbolic, this could be the end of Bitcoin, at least for
most of the public.
The leaked memo also detailed a strategy to address the situation. One of
the points is to shut down MtGox for a month and rebrand itself as Gox.
Those 744,000 bitcoins, by the way, make up roughly 6 percent of all bitcoins
currently in circulation. At the current going rate, that equals to roughly $368
million. The actual damage could also be worse, depending on whether
people who have their bitcoins in the exchange will be able to retrieve them
or not.
MtGox Situation: Crisis Strategy Draft by twobitidiot

SHOW ME MORE LIKE MTGOX SITUATION: CRISIS STRATEGY DRAFT

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How legitimate is the document?
Its really hard to say, but there are a lot of things that make it seem
legitimate. For starters, Ryan Selkis is well known and trusted in the Bitcoin
community. Secondly, the supposed years-long hack isnt too far fetched.
MtGox was known just as much for being vulnerable as it was for being the
most popular. Also, the claim that the exchange was planning a rebranding
and name change has some legs given that Karpeles bought the domain
Gox.com recently.
Are there any other theories?
Yes, of course. If you sift through the comments over at r/Bitcoin, the Reddit
subsection devoted to the cryptocurrency, there are many who believe that
this was an inside job, that it was a heist and Karpeles (or his associates)
have taken the money and ran. At this moment, however, there hasnt been
any evidence to back that claim up.
In truth, anything beyond the fact MtGox is offline is mere speculation. The
exchange hasnt helped their cause either. They released a statement earlier
todayseen below that doesnt really shed any light into what might have
happened:
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Dear MtGox Customers,

In the event of recent news reports and the potential repercussions on
MtGoxs 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
What does this mean for Bitcoin?
If youve read coverage of this in the media, youll likely think that this is a
serious blow to the Bitcoin economy. It is. 744,000 Bitcoins is a lot of
cryptocurrency. But it seems unlikely that this will be the final nail on Bitcoins
coffin. Many thought that the shutting down of Silk Road, the online and
secretive Amazon for drugs, would be a devastating blow to Bitcoin. The
cryptocurrency bounced back.
A joint statement was also issued by Blockhain.info, Coinbase, Kraken,
Bitstamp, BTC China, and Cirlcesix leaders of the Bitcoin industry
denouncing MtGox for their action.
This tragic violation of the trust of users of MtGox was the result of ones
company actions and does not reflect the resilience or value of bitcoin and
the digital currency industry, the statement declared.
As with any new industry, there are certain bad actors that need to be
weeded out, and this is what we are seeing today.
Other Bitcoin luminaries also publicly spoke up. Erik Vorhees, who in 2013
sold his Bitcion-based gambling site SatoshiDice for over 126,000 bitcoins
took to Reddit to plead that Bitcoiners not lose faith in the cryptocurrency.
For all you who lost money, my heart goes out to you. Some people lost a
little, some lost a fortune, Vorhees said.
The proper lesson, he added, if I may suggest, is this: We are building a
new financial order, and those of us building it, investing in it, and growing it,
will pay the price of bringing it to the world. This is the harsh truth. We are
building the channels, the bridges, and the towers of tomorrows finance, and
we put ourselves at risk in doing so.
Many are also trying to find the silver lining in this debacle.
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