Mt. Gox files for bankruptcy: what to keep in mind when using Bitcoin

On Friday, Mt.Gox announced it would be filing for bankruptcy after losing track of nearly 750,000 customer bitcoins as well as 100,000 of its own bitcoins, totaling a nearly $500 million loss. This is a tough blow. What does this mean for you and Bitcoin as a currency?

Kyodo News/File/AP
Mt. Gox CEO Mark Karpeles, sitting at second right, attends a press conference at the Justice Ministry in Tokyo Friday night, Feb. 28, 2014. The Mt. Gox bitcoin exchange in Tokyo filed for bankruptcy protection, acknowledging that a significant amount of the virtual currency had gone missing. Karpeles appeared before Japanese TV news cameras Friday, bowing deeply for several minutes. He said a weakness in the exchange's systems was behind the massive loss of the virtual currency.

The largest Bitcoin exchange in the world appears to have gone belly-up after apparently losing hundreds of millions of dollars in Bitcoins after a long-term hacker attack. The fallout has resulted in an increased scrutiny of Bitcoin safety — leading more people to consider pulling their Bitcoins offline — and raises questions about how far this nascent unregulated financial market will go.

According to Wired, an exploit in Mt. Gox's website allowed hackers to siphon off millions of Bitcoins over a two year period. The crumbling of Mt. Gox, which lost around $350 million in Bitcoins, has prompted some Bitcoin investors to start storing their digital currency offline, according to MarketWatch.

Going Back to Paper for Digital Currency

And yes, you can store Bitcoins offline: each Bitcoin has a key, like a serial number, which allows the Bitcoin to be spent. Without the key, there's no Bitcoin. So some users have taken to printing out the key on paper, or storing the data on a device not connected to the Internet, or a 'cold' device. While some customers want security in lieu of this disaster, they are still operating within a completely unregulated market.

No Real Banks Means Little Safety

Printing out Bitcoins or keeping them offline isn't like pulling money out of a bank and storing it under a mattress because Bitcoin 'banks' aren't recognized as banks. A recent article by MarketWatch mentions one company that stores Bitcoins offline in a bank vault for a 2% annual fee. And while it's insured against theft, it's not a real bank. Another company, FlexCoin, claims it is the "world's first Bitcoin bank" but also states "technically we're not a licensed bank. We're a Bitcoin bank." A thumb drive can be lost, a hard drive fried, or a Bitcoin key trashed. Once a Bitcoin is gone, it's gone; there's no Federal Deposit Insurance Corp. covering your loss.

Cashing Out Isn't Easy

Mt. Gox customers got a harsh reality check when they tried to cash out earlier this month. Customers received only a paltry statement that the company would sort everything out, but were faced with no way to get their Bitcoins, which are either in limbo within the company's servers or stolen. Some Mt. Gox customers sold the rights to their Bitcoins to speculators hoping that Mt. Gox would make good on their promise. These Bitcoins went far below market rate at $118 per Bitcoin, compared to the regular exchange rate for Bitcoins at around $570 per Bitcoin at the time, according to CNNMoney.

What This All Means

Mt. Gox serves as a reminder that you're not just buying Bitcoins; you're also involved in the company performing the exchange. There are no watchmen to answer to, and things can go downhill quickly if a breach happens. It's not an isolated incident, either: In 2012, the exchange site Bitcoinica was hacked for over $460,000 worth of Bitcoins, according to The Verge.

Additionally, feds seized over $5 million from Mt. Gox's bank accounts for allegedly not properly registering a money transaction business last year, according to Wired, another indication that an unregulated financial market has little or nothing in the way of consumer protection.

Readers, are any of you invested in the Bitcoin market, perhaps due to its recent mainstream acceptance? What do you think of the latest developments? 

Angela Colley is a contributing writer at Deal News where this article first appeared:

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