Bitcoin currency exchange BitFloor is in big trouble after a security blunder resulted in the theft of $250,000. The heist at the BitFloor "exchange" came after operators did the online equivalent of leaving the keys in the door.

Bitcoin is a virtual currency that isn't controlled by a government and therefore isn't subject to any seizure of funds. With no government backing, Bitcoin has value only so long as enough people agree to use it.

Unlike most currencies, Bitcoin exists only online, with no physical currency (like coins or bills).

Each Bitcoin exists solely as a unique identification code, while every Bitcoin user has a personal, secret code for use in transactions. Because both codes are necessary in every transaction, it's not possible to "spend" the same BitCoin twice or to use somebody else's Bitcoins without permission.

Bitcoins can be used for online transactions between individuals, and there are also exchanges, such as BitFloor. This system allows people to exchange government-backed money, such as US dollars, for Bitcoins, or vice versa.

Bitcoin Exchanges Equivalent to Banks

Organizations such as BitFloor are something between a savings bank and a currency exchange. The rate of exchange between any other currency and a Bitcoin varies, depending on supply and demand. As with other currency exchanges, customers may get back more or less than they originally put in.

BitFloor had its own personal code to protect all the Bitcoins it was holding on behalf of customers. In effect, this code was the key to its safe.

Unfortunately, the founder of BitFloor made a computer back-up that included the details of this code, and then mistakenly stored this back-up on an unencrypted section of a hard drive.

When hackers got access to this drive, they found the BitFloor code and used it to transfer all of BitFloor's 24,000 Bitcoins to an anonymous account.

Those coins are estimated to be worth about US $250,000. (Source: bbc.co.uk)

BitFloor Suffering Insufficient Funds

BitFloor retains its records of all accounts and transactions, along with all the money stored electronically as US dollars. However, BitFloor no longer has enough money to pay out all account balances if customers try to withdraw their funds.

To avoid the online equivalent of a run on the bank, BitFloor has temporarily suspended all transactions, and says it is exploring external investment to replace the missing Bitcoins.

In the worst case scenario, BitFloor would completely close down and distribute its remaining funds among its account holders. (Source: pcworld.com)