Smeagol Bitcoin

The other shoe may have dropped for embattled Mt. Gox, the world’s third-largest bitcoin exchange by volume. Last night Mt. Gox published a message on its website alerting users that it will be temporarily suspending bitcoin withdrawals. (Full text of this message is embedded below.) While the company states that the step is aimed at allowing it to improve its underlying technology, there’s more than enough reason to question that.

For the last six months, the Japanese company has suffered from lengthy and unpredictable delays in the withdrawal of fiat currencies like dollars or yen. Many users have reported waiting four to six weeks to receive their money after requesting a withdrawal. Mt. Gox has had a history of trading difficulties and regularly has failed in communicating effectively with its users. Many hoped that earlier technical problems would be fixed by the shift in August to running Mt. Gox on Akamai, but that proved overly optimistic. Even prior to Mt. Gox’s letter, Richard Falkvinge, founder of Sweeden’s Pirate Party, claimed that Mt. Gox has accumulated more than $38 million worth of unfulfilled bitcoin withdrawals.

These technical issues were only compounded by the company’s run in with the US Department of Homeland Security and the seizure of $5 million in funds from several US bank accounts, following accusations of operating as an unlicensed money transmission service. The company was also sued for $75 million by scorned partner CoinLab.

Given this back story, many bitcoin users have accused Mt. Gox on forums and messageboards of lacking the funds to properly manage the liquidity of the exchange. This is a hefty charge that amounts to calling Mt. Gox a Ponzi scheme, an overused and oft-misunderstood characterization that may in fact fit here, depending on what ultimately proves true. Whether the current situation is the consequence of the USDHS seizures or some more nefarious behavior was unclear, but many users stopped trusting the service and its owner Mark Karpeles months ago. (The service was originally founded by Jed McCaleb in 2009 and sold to Karpeles in 2010.)

The Mt Gox message states that the exchange’s technical team has been hampered in its effort to improve the platform’s performance by the high withdrawal volumes, hence the decision to temporarily suspend withdrawals. The letter promises an update on the situation on Monday (February 10) and further that withdrawals will be reinstated once the technical issues are resolved.

In a patronizing passage, the letter also states, “The trading platform will perform as usual for the needs of our customers.” Without bitcoin withdrawals, and with fiat withdrawal moving at a glacial pace, Mt. Gox is effectively reduced to a paper-trading platform. That is, users can still trade bitcoin on its platform and watch their fiat and BTC account balances fluctuate digitally, but can’t access that wealth or use it outside the platform.

Several users have confirmed that pending bitcoin withdrawal requests, as in those issued prior to the announcement, have been returned to their accounts. Those trying to make new withdrawals are receiving an “Invalid Bitcoin Address” error message.

The bitcoin community had plenty of warning that an event like this could be coming, but unsurprisingly the price of bitcoin has suffered as a result. The CoinDesk Bitcoin Price Index, which represents a global price average, closed yesterday at $783.62. In early trading today, the Index plummeted as low as $660, but has rebounded to approximately $734 as of the time of this writing. The price at Mt. Gox, which has averaged nearly $100 over the Index for the last half year, closed yesterday at $831, and has since fallen as low as $652 before bouncing back to $720.

Mt. Gox represented more than 70 percent of global trading volume as recently as April 2013, but has since fallen to just 19 percent (of course the total pie has increased over that time). The current trading volume leaders are Slovenia-based Bitstamp (30 percent) and Bulgaria-based BTC-e (25 percent), followed, in fourth place, by China’s BTC China (14 percent).

At just 6.3 percent 13.4 percent respectively, the total price declines of the Index and Mt. Gox respectively suggest that the bitcoin market was in fact prepared for this instability and may have priced it into recent trading activity. Ongoing conversations at bitcoin message boards show a mix of “I told you so” and “benefit of the doubt” reactions from observers. While such declines would signal pandemonium on Wall Street, a 10 percent fluctuation is business as usual for bitcoin exchanges. That said, bitcoin remains well off its six-month-high of $1,242 reached in late November.

The long-term implications of the Mt. Gox withdrawal suspension remain uncertain. While the exchange’s volume is far from its all-time peak, it still sees substantial trading activity and presumably has a meaningful amount of user wealth held hostage at the moment.

If it turns out that Mt. Gox’s technical issues are just that, and further that they are curable, then the price of bitcoin will likely rebound, although community trust in the platform may not. If it turns out that funds are missing or that the exchange’s operators have been untruthful as to the cause of this withdrawal suspension, then we could see more blood in the streets.

Read the full Mt. Gox letter below.

Dear MtGox Customers,

In our efforts to resolve the issue being encountered by various bitcoin withdrawals, it was determined that the increase in the flow of withdrawal requests has hindered our efforts on a technical level. To understand the issue thoroughly, the system needs to be in a static state.

In order for our team to resolve the withdrawal issue it is necessary for a temporarily pause on all withdrawal requests to obtain a clear technical view of the current processes.

We apologize for the sudden short notice. All bitcoin withdrawal requests will be on pause, and the withdrawals in the system will be returned to your MtGox wallet and can be reinitiated once the issue is resolved. The trading platform will perform as usual for the needs of our customers. 



Our team will resolve this problem as soon as possible and will provide an update on Monday, February 10, 2014 (JST).



We deeply apologize for the inconvenience caused, and thank you for your kind support and considerations. 


Sincerely,

The MtGox Team