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Mt. Gox Bankruptcy: What Bitcoin Owners Need to Know

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.

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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 

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.

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