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Mt. Gox Bankruptcy: What Bitcoin Owners Need to Know

By - Source: Tom's Guide US | B 30 comments
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This week, thousands of people lost 850,000 bitcoins — worth approximately 473 million US dollars — when Bitcoin exchange company Mt. Gox first shut down and then declared bankruptcy.

Who is to blame for the collapse, and is the lost cryptocurrency recoverable? What should Bitcoin users do now? Here's what you need to know.

MORE: 7 Cyberthreats of 2014

What is bitcoin?

Bitcoin is a decentralized, digital-only currency. It has no central monetary authority. Instead, a peer-to-peer computer network maintains transactions and "creates" bitcoins through a process called mining.

Users can acquire bitcoins by mining them, which can take a long time and a lot of computer resources, or by purchasing them from other users, either through private transactions or through exchange services such as Mt. Gox.

What is Mt. Gox?

Created in 2009 as a trading-card exchange site,  the Tokyo-based company's name was originally an acronym for "Magic: The Gathering Online Exchange."

In 2010, the company became a place where people could buy and sell bitcoins. For the most part, the Bitcoin exchange rate has risen sharply over the past year, drawing currency speculators.

At one point Mt. Gox was the world's biggest Bitcoin exchange. But now all the money invested in the site has been either lost or stolen.

What went wrong at Mt. Gox?

A couple of things went wrong. The first problem is inherent to Bitcoin itself; it's an issue called "transaction malleability."

It works like this: Bitcoin transactions are secured by a digital signature that protects information, such as the amount being traded, the identity of the person sending the bitcoins and the identity of the person receiving them.

The Bitcoin software also generates a unique transaction ID name, based partly on this secure information, and partly on some unsecured information. Because of this, it's possible to tweak a transaction's ID name by changing the unsecured information.

Changing the name doesn't change the actual transaction — but it does create bookkeeping problems for sites like Mt. Gox that track transactions, and also creates opportunities for computer-savvy thieves.

This flaw in Bitcoin's transaction process has been known since 2011. Because Mt. Gox could have implemented bookkeeping software to validate transaction ID numbers, the exchange is far from blameless in this issue.

It seems that one or more thieves were able to edit the ID names of Mt. Gox transactions, then claim that an expected transaction hadn't gone through, In fact, it had, but under an altered name. Mt. Gox would automatically attempt to resend the transaction, paying out double what it should have.

It's still unclear how long this kind of theft has been going on. But on Feb. 7, the company halted all Bitcoin withdrawals. On Feb. 25, the site closed down without a word to its its users, and on Feb. 28, the company filed for bankruptcy.

It also appears that Mt. Gox was trading in more bitcoins than it actually held. The Guardian reports that Mt. Gox CEO Mark Karpeles was trying to return the exchange to solvency when it shut down.

Update: In a post on its website Mt. Gox wrote that the company had almost $64 million in liaiblities, which is twice its actual assets of $37 million. At the same time, it was reported that the alleged thieves skimmed an approximate $460 million in bitcoins from Mt. Gox over several years. 

What is Mt. Gox doing for people who had money in the site?

Over the weekend (Mar. 2) Mt. Gox opened a call center that people can get information about their account. However, the staff at the center appear to be a call center contractor, not actual Mt. Gox employees, and they can only take messages for lawyers. 

A YouTube user called Tom Reiner recorded a phone call made with the Mt. Gox Call Center, where the representative said that the Tokyo District Court would need to investigate before deciding whether and how much members could be reimbursed for their lost credit.

Is there any chance of Bitcoin investors getting their money back?

There's no way to tell. Because Bitcoin is an independent currency outside the regulation of any government or institution, there's no organized oversight for failure of this kind. It's hard enough for international law enforcement to figure out how to investigate Bitcoin crime in the first place. 

"The Federal Reserve simply does not have the authority to supervise or regulate Bitcoin in any way," U.S. Fed Chairwoman Janet Yellen told the Senate Banking Committee this week. She also added that investigations of Bitcoin-related crime fell under the jurisdiction of the Justice Department and the Treasury Department's Financial Crimes Enforcement Network.

All that's to say that Bitcoin owners shouldn't expect a government bailout.

However, some within the Bitcoin community have been talking about organizing a grassroots bailout of their own. 

"I think this is the best thing for Bitcoin as we are in the transition stage from 'innovative tech' to 'regulated and trusted mainstream innovative tech,'" wrote a user going by the name btc237ftw on the the bitcoin forum bitcointalk.org. 

Most of the responses were highly negative. Some argued that Mt. Gox's failure to address the "transaction malleability" issue meant it deserved to go under. Others said that a bailout would run counter to the anarchic philosophy from which Bitcoin was created in the first place.

"Bailouts are a mentality for the legacy centralized financial system where specific entities are needed so the whole system doesn't collapse. Bitcoin was created for the explicit purpose of not needing such a process," wrote forum user BittBurger.

However, a user named alyssa85 pointed out that Karpeles himself bailed out another Bitcoin exchange called Bitomat in 2011, which was then the third-largest in the world, and incorporated Bitomat into Mt. Gox.

Is there a way to safely store bitcoins?

It's best not to let funds sit in a Bitcoin exchange site, because you're trusting someone else with a lot of legal leeway and mostly minimal oversight to take care of your money.

Instead, you can store bitcoins by saving their cryptographic keys on your own device, such as an external hard drive, or in software called a digital wallet.

It's helpful to think of bitcoins as cash: unless your bitcoins are in your digital wallet, whether or not you get them back is largely up to the kindness of strangers. Bitcoin benefits from its cash-like state in other ways, but not when it comes to online exchanges.

Email jscharr@techmedianetwork.com or follow her @JillScharr and Google+.  Follow us @TomsGuide, on Facebook and on Google+.


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Top Comments
  • 22 Hide
    jupiter optimus maximus , March 1, 2014 10:04 AM
    Hopefully we can see the prices of AMD GPUs fall to reasonable prices very soon.
Other Comments
  • 1 Hide
    the1kingbob , March 1, 2014 8:57 AM
    Just to clarify, I was under the impression that you couldn't transfer out USD from MtGox. You had to transfer out something else and then convert it, so there is absolutely no chance the US government is going to do anything; also the company is/was based in Japan. I believe it is generally accepted that coins will not be refunded, just won't happen. The question I think most people have is, if you were owed CASH will you get it? My officemate was owed 7K two weeks before they froze the coin transfer system. He was just waiting for them to process the money and deposit in his account. He has a money lien against the company, not coins. That is what people want to know and is the reason the coin dropped in price on mtgox. People would rather be owed money than coins.
  • 1 Hide
    InvalidError , March 1, 2014 9:16 AM
    Since many governments want to ban Bitcoin or otherwise disapprove it, the easiest way would be to simply not recognize it as a currency and ignore Bitcoin theft and fraud due to Bitcoin having no legal value so no value is lost - why would governments spend tons of public money to protect a currency they would have a hard time collecting taxes on and was partly designed to make tracking transactions to their real owners anyway?With no legal protections, people trade in crypto-currencies entirely at their own risk. How many more Silk Roads and Mt.Gox will it take before most people lose interest/faith in it?
  • 6 Hide
    LordConrad , March 1, 2014 9:22 AM
    Quote:
    It's best not to let funds sit in a Bitcoin exchange site, because you're trusting someone else with a lot of legal leeway and mostly minimal oversight to take care of your money.
    This fact should have been obvious to everyone. The only time I sent Bitcoins to Mt. Gox was when I sold them for cash, and I only transferred the coins I was going to sell.
  • 3 Hide
    ezeuba , March 1, 2014 9:37 AM
    Has anyone ever given thought to the possibilty that this whole scenario could have been an orchestrated scam by the owners of Mt . Gox? I mean why would a company with such a huge undertaking (850,000 bitcoins) not make an effort to close a gaping hole it has been aware of since 2011? If it smells fishy, and looks fishy - it is fishy...
  • 0 Hide
    xspkbstr , March 1, 2014 9:47 AM
    If it sounds too good to be true then it usually is...I "earn" digital money by just crunching numbers on my computer and I can buy things with it. Sweet...NOT. Just one big complex con-artist scheme. Poor suckers.
  • 0 Hide
    kawininjazx , March 1, 2014 9:52 AM
    People are going crazy for bitcoins all of a sudden, but I notice most of them live with their parents so they can pay the electric bill.
  • -2 Hide
    coolitic , March 1, 2014 10:03 AM
    Before investing tons of money make sure it can't be stolen obv.
  • 22 Hide
    jupiter optimus maximus , March 1, 2014 10:04 AM
    Hopefully we can see the prices of AMD GPUs fall to reasonable prices very soon.
  • 5 Hide
    bustapr , March 1, 2014 10:47 AM
    people are definitely going crazy about bitcoin, but the craze is just a bit late imo. It gained the extremely high value seemingly overnight and I believe that was the peak. people who had lots of bitcoin before that became filthy rich(or almost), but people who came in after that point started losing money. Im not at all excited about investing time and money into such a volatile business. and Im definitely not interested in investing into a business that gets hacked every other day and you cant really do anything about it when all your money disappears. I hate to wish people to lose their money, but I really want this to end. Bitcoin brings more problems than its worth. noones decided on how to tax the stuff and the "untrackable" part of it makes it a legal haven for criminals. it just needs to end...
  • -2 Hide
    RCguitarist , March 1, 2014 12:57 PM
    Quote:
    it just needs to end...
    Yep. It's a dumb fad that will go away in the next year or two. It's a completely unneeded thing. It serves no purpose and nobody would ever use them at all if it weren't for the whole farming thing which people see as free money. As they say, a fool and his money are soon parted.
  • 4 Hide
    ferooxidan , March 1, 2014 1:21 PM
    Good news! Tho I'm really sorry for the victim, but this is good news. Soon people will lose interest in Bitcoin and soon R9 290X will be the best bang for bucks card again. Soon...
  • 0 Hide
    FloKid , March 1, 2014 2:12 PM
    Quote:
    Quote:
    it just needs to end...
    Yep. It's a dumb fad that will go away in the next year or two. It's a completely unneeded thing. It serves no purpose and nobody would ever use them at all if it weren't for the whole farming thing which people see as free money. As they say, a fool and his money are soon parted.
    I would like to see you when all of your money is gone hippo.
  • 9 Hide
    jimmysmitty , March 1, 2014 3:03 PM
    Quote:
    Hopefully we can see the prices of AMD GPUs fall to reasonable prices very soon.


    Bitcoins are no longer viable with GPUs. In fact that happened almost a year ago when the difficulty ramped up like crazy and still is since they have ASICs that can put out 200GH/s while the best GPU can only do 1200MH/s.

    Litecoins are the reason AMD GPUs are inflated since they were designed around memory speeds more than anything and will never become as non-viable with GPUs.

    This does suck for those who had money in Mt. Gox but I never used them after they kept getting hacked and DDoSed all the time.
  • -3 Hide
    redgarl , March 1, 2014 3:36 PM
    FUCK YEAH! Video cards for GAMERS! Done with this BS MINING CRAP rising the price of AMD video cards!
  • 0 Hide
    bison88 , March 1, 2014 3:40 PM
    Quote:
    Quote:
    Hopefully we can see the prices of AMD GPUs fall to reasonable prices very soon.
    Bitcoins are no longer viable with GPUs. In fact that happened almost a year ago when the difficulty ramped up like crazy and still is since they have ASICs that can put out 200GH/s while the best GPU can only do 1200MH/s.Litecoins are the reason AMD GPUs are inflated since they were designed around memory speeds more than anything and will never become as non-viable with GPUs.This does suck for those who had money in Mt. Gox but I never used them after they kept getting hacked and DDoSed all the time.
    Yeah the way the other mining coins are built, there wont be any reason to abandon GPU's for quite some time. I would expect the same problems that have plagued Bit Coin to affect others though. It's still gambling at this point and the value can rise and drop huge margins in the scope of just a day. Let alone you better hide your coins offline on a flash drive or what not. Many vulnerabilities are now using infected machines as miners and to rob them of their coins.Huge risk people are taking.
  • 2 Hide
    wdmfiber , March 1, 2014 4:34 PM
    Quote:
    Good news! Tho I'm really sorry for the victim, but this is good news. Soon people will lose interest in Bitcoin and soon R9 290X will be the best bang for bucks card again. Soon...
    Soon... ya, hopefully the 290x can be put to rest in the ewaste pile, along with most current GPUs. Have you seen the mining hashrates for the low wattage Maxwell cards? The rates are impressive, to say the least (NVidia must have be pissed over all the lost sales).Really looking forward to the next generation 20nm GPU's out of TSCM. The successors to the Radeon 7970/280x or GTX 680/770(whatever your preference). And for gaming of course, not mining. We'll all be drooling, looks like double the performance per watt.
  • 1 Hide
    southernshark , March 1, 2014 5:38 PM
    What should Bitcoin owners know???Sell your coins while you still can stupid. If you are still holding them at this point, all I can say is WTF???
  • 0 Hide
    jredinger , March 1, 2014 5:43 PM
    Correct me if I'm wrong but I took a long hard look at this 'security hole', and I'm pretty sure the 'unsecured information' this article is talking about is the security key itself. A security key can't digitally sign itself. If you can manage to secure the same information with two different keys (no easy feat), which ever one gets confirmed in the network first wins, and the other one is dropped. Either way, the transaction still takes place and is completely secure. The security breach was on Mt. Gox's end, because they didn't have fail-safe's in place to compensate for this 'flaw' - which is actually a rational security decision - IE > it's better to tie the transaction ID to the digital signature, than not - not doing so would create a huge potential security hole. This isn't some simple bug that needs to be patched that's been known since 2011. It's not a bug that's easy to abuse, and the bitcoin community IS working on the problem. But Mt. Gox didn't have to lose a dime if they only had the proper security measures in place, and that's why some members of the community have said that they deserved to go down. For perspective, Mt. Gox's security would have to have been worse than a bank accepting five one dollar bills as $100, because the customer claimed they were $20's after the teller had already processed the transaction.People try and scam banks all the time. Not being prepared to catch someone in such an obvious and common scam is just plain negligent and stupid.
  • 4 Hide
    24oz , March 1, 2014 7:37 PM
    This sounds like a big scam.
  • 4 Hide
    teknic111 , March 1, 2014 11:21 PM
    Here is what bitcoin owners need to know... DO NOT LEAVE YOUR BITCOINS OR FIAT ON ANY EXCHANGE!
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