The price of Bitcoin plunged as withdrawal issues plagued the ecosystem's oldest exchange. Image: Bitconity
The price of Bitcoin plunged over $200 over the last few days as Mt. Gox, the world’s first Bitcoin exchange (and at one point the largest by volume) responded to user protests by indefinitely suspending Bitcoin withdrawals on Friday, citing technical issues. By some accounts, Mt. Gox is effectively “dead.” (Digital currency news site Coindesk, which initially claimed the exchange was dead, has since updated their headline to say that it’s “dying.”)
It’s a bittersweet moment. For years, Mt. Gox proudly served as the primary destination to buy and sell bitcoins, helping the underground movement blossom. “I liked you, Mt. Gox. You supported Bitcoin long before it was cool,” wrote one user in a farewell post. “For a long time, you weren't just the biggest bitcoin exchange—you were the only bitcoin exchange.”
But it also provided a frustratingly centralized point of failure for what is supposedly a decentralized currency. When Mt. Gox struggled—and it would often as Bitcoin grew in popularity, whether through DDoS attacks or spikes in trading volume—the entire ecosystem suffered, often resulting in catastrophic prices crashes. “Their time has finally come and passed,” a prominent insider told me nonchalantly.
For much of the community, word of the historic exchange’s apparent demise wasn’t much of a surprise; the writing had always been on the wall. The exchange has long been plagued by performance issues, and last year added legal worries and regulatory problems to its growing list of potentially fatal flaws.
Yet despite obvious uncertainty, the Tokyo-based exchange has remained a major player in Bitcoin trading, still commanding 21 percent of all trading volume, if only because users lacked better options. As I suggested two months ago, it’s still a pain to buy and sell bitcoins and the latest issues surrounding Mt. Gox are yet another reason why regulations would actually benefit the community by providing bitcoiners with a degree of much-needed security.
And with regulators closing in—early US exchange Tradehill shuttered its doors last year due to licensing issues—the only prominent exchanges exist in relatively exotic locales like Eastern Europe or mainland China, which come with their own set of risks.
BTC China, at one point the largest exchange around, must deal with the unpredictable whims of the PRC. Party officials popped the last Bitcoin bubble when they clamped down on exchange deposits late last year. Elsewhere, little is known about the owners of BTC-e, a popular exchange with 23 percent market share that might be based in Cyprus or Bulgaria, which is worrying considering the kind of money at stake. If the anonymous owners one day disappeared, there’s not much anyone could do. (It’s certainly happened before.)
While Mt. Gox is operationally unreliable, it’s at least been financially credible. Indeed, most critics believe the exchange’s claim that the underlying issue is simply technological, rather than financial (or ethical).
The platform has an unusual history. It was originally created by Jed McCaleb, the legendary coder behind e-Donkey and Ripple, to trade Magic cards—Mt. Gox stands for Magic: The Gathering Online Exchange—and only later transitioned to bitcoins. The exchange was acquired by current owner Mark Karpeles in 2011, who continued to develop on the existing source code. It’s no wonder, then, that Mt. Gox has been persistently plagued by performance problems. Given that the platform was never meant to serve as an international currency exchange in the first place, major scalability issues exist.
And some—including insiders like Mike Hearn, a Bitcoin open source developer considered to be the movement’s Ray Kurzweil—argue that Karpeles, who is also a board member of the Bitcoin Foundation, lacks either the technical expertise or the personal motivation to address glaring systemic design flaws, preferring instead to employ temporary band-aids.
“It seems very likely to me that for some reason Mark K is not able to work on his codebase anymore, and isn't able to resolve bugs in a timely manner, leaving his support staff to try and clean up the mess by making horrible hacks like ‘throw away and retry later,’” Hearn, who also happens to be a Google engineer, recently wrote in the Bitcoin Foundation forums. “The question in my mind then becomes—where is Mark and what is he doing?”
Reuters talked to Mark Karpeles back in April 2013. Video: Bit Coin/Youtube
Other prominent bitcoiners like Andreas Antonopoulos, author of the forthcoming Bitcoin For Dummies book and the new chief security officer for popular wallet provider Blockchain.info, take a similarly critical stance.
“Mt. Gox has built an exchange based on a hodgepodge of technologies that are really not suitable for running an exchange,” he told Coindesk. “And it’s being run by people who don’t really have experience building and operating scalable systems.”
Of course, such issues have been widely known, but users appeared to put up with the hiccups as long as Mt. Gox continued to show them the money. This, however, is no longer the case.
One glaring indication of a fundamental problem was the so-called Mt. Gox price premium. Observers may have noticed that the price of BTC was consistently higher on the troubled exchange, regularly over 10 percent more than the competition. With efficient markets, every exchange should produce the same price since such differences provide an obvious arbitrage opportunity, known as the law of one price. If traders can easily buy on one exchange and sell on another, prices should quickly converge.
The price discrepancy on Mt. Gox reflected the difficulty users had withdrawing from their accounts, which could often take months according to numerous reports, if it happened at all, and which was further complicated after exchange operators suspended US withdrawals following the seizure of funds by the Department of Homeland Security.
Given the complications of fiat withdrawals, users were forced to buy bitcoins so they could cash out in crypto-form. The Mt. Gox price premium then became a mathematical measurement of market uncertainty, an ongoing barometer of user fear that they might never get their money back.
In the last month, even this desperate workaround became increasingly flaky. According to The Gox Report, over 40,000 BTC worth of withdrawals are unprocessed since January, at the time worth over $30 million. A recent Coindesk poll revealed that 70 percent of respondents have yet to receive funds, with the median time of each unfulfilled request ranging between one to three months. To exacerbate growing despair, the company has been slow to respond, a common complaint throughout its existence.
Short of viable options and in need of answers, one enterprising user, known only as CoinSearcher, decided to hop on a plane from Australia and fly 16 hours to Japan after “repeated and failed attempts to withdraw my BTC from MtGox” to protest at the company’s offices on February 5. After failed attempts to return CoinSearcher’s personal stash during the three day protest, Gonzague Gay-Bouchery, head of business development and Karpeles’s right hand man, would eventually suspend all bitcoin withdrawals on February 7 until “the issue is resolved,” according to an announcement posted on the site.
Gay-Bouchery again emphasized that the underlying problem was technical in nature and there were no issues with liquidity.
Insiders that I spoke to had few qualms with this explanation. Bitcoin evangelist Roger Ver, who resides in Tokyo and had a chance to examine Mt. Gox’s books last July, told me that he believes “people will get their money back eventually,” but added that “it's not likely to be soon.”
Though Mt. Gox doesn’t have an estimate on when withdrawals will resume, the company promised to work “hard through the weekend and will provide an update on Monday.”
But for some, this latest development was already the final nail in the coffin.
“I think just witnessed MtGox die today,” the protester wrote. “I didn’t get my bitcoin, but glad I came and tried.”