$473 Million Lost In Online Currency Scandal

John Lister's picture

One of the largest businesses that allowed people buy the online currency Bitcoin is filing for bankruptcy protection. The collapse means customers have almost certainly lost nearly half a billion US dollars in "real money."

Mt Gox is a Tokyo-based business founded in 2009 as a trading card exchange (Source: wikipedia.org). It has recently filed for bankruptcy protection because it has debt worth $63.6 million, but assets worth only just half over that.

Customers had a total of around 750,000 Bitcoins stored in the Mt Gox equivalent of a bank account, which translates to around $473 million in US dollars. They are highly unlikely to be able to access those funds now. (Source: wsj.com)

Bitcoin Has No Notes Or Coins - Just Virtual Currency

Bitcoin is the best-known of a string of virtual currencies online the Internet. The currency however is unrecognized by most governments, and does not correlate to coins or notes. The currency simply exists in digital form.

Each Bitcoin user has a unique reference number, as does every Bitcoin. In simple terms, whenever two users make a transaction, the numbers become publicly available to all other users, meaning there's never any doubt about who owns a particular coin.

Supporters of Bitcoin like the fact that there's no transaction charges and little if any way for governments and finance authorities to control the currency. Many believe that, because there's a fixed limit on Bitcoins, it's less susceptible to inflation than "real" currencies where governments can just print more money.

A Brief Overview: How Bitcoins Are Used

There are only three ways to get hold of a Bitcoin.

One is to accept it as a payment from another user. The second way is by "mining", which requires users to run a special computer program to try to solve a complex mathematic problem; success means creating a new Bitcoin. It's this program that means only a certain number of Bitcoins can ever exist.

The third way to get a hold of a Bitcoin is to exchange a traditional currency (such as a US dollar) through a business known as an exchange. This works in much the same way as a business that exchanges foreign currencies as an airport.

The main difference is that somebody who uses such an exchange can choose between storing the Bitcoin files on their computer (similar to taking a foreign currency home in cash) or keeping them stored with the exchange (similar to keeping a bank account.) It's people who did the latter who will be hit by the Mt Gox collapse.

Critics Suggest Virtual Currency Is Unsound

Critics of Bitcoin are already pointing to the Mt Gox situation as evidence that virtual currencies can't be trusted. They say that in effect Mt Gox had all the power and risks of a traditional bank, but without the regulation or supervision by governments.

While it's certainly a knock for Bitcoin, some supporters say it could be a good thing in the long run. They argue that Mt Gox was poorly run and that its collapse will encourage users to switch to more reliable and trustworthy exchanges. (Source: businessweek.com)

What's Your Opinion?

Would you ever use a virtual currency like Bitcoin? Do you agree with the argument that Bitcoin is no less real than a bank account or PayPal? Has the Mt Gox collapse changed your attitude toward virtual currency? Lastly, do you feel it's time for governments to attempt to regulate or even ban such currencies?

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DavidFB's picture

If what you describe is the case - that investors in Mt Gox are hooped, then thats a flaw in the system that can be corrected. Clearly, the database needs to be diversified so there's no one point of failure, much a like a torrent or the Internet itself. Then, if one node fails, investors have not lost.

I'm no expert on crypto-currency but my understanding was this is how it's already being done. So it would seem theres an administrative issue here, another level of cooperation and distribution needed.

There also may be the issue of putting too many eggs in one basket, esp. in something as volatile as these currencies.