The Mt. Gox bitcoin debacle: Bankruptcy filed, customer bitcoin lost

The Mt. Gox bitcoin debacle: Bankruptcy filed, customer bitcoin lost

Summary: UPDATE: Mt. Gox has closed the bitcoin exchange and filed for bankruptcy in Japan.

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The Mt. Gox debacle has become a confusing, frustrating mess for users who have no idea whether their investments are safe.

Just days after resigning from Bitcoin advocacy group The Bitcoin Foundation and wiping its Twitter feed clean, bitcoin exchange platform Mt. Gox suspended trading. What suspended trading? It is believed to be the leak of an alleged Mt. Gox document by well-known bitcoin blogger Two-Bit idiot.

The leak -- which has not been verified -- is called the "Crisis Strategy Draft." The document, which the blogger says has been verified by sources close to Mt. Gox, reads:

"For several weeks MtGox customers have been affected by bitcoin withdrawal issues that compounded on themselves. Publicly, MtGox declared that 'transaction malleability' caused the system to be subject to theft, and that something needed to be done by the core devs to fix it.

Gox’s own workaround solution was criticized, and eventually a fix was provided by Blockchain.info. The truth, it turns out, is that the damage had already been done. At this point 744,408 BTC are missing due to malleability-related theft which went unnoticed for several years.

The cold storage has been wiped out due to a leak in the hot wallet. The reality is that MtGox can go bankrupt at any moment, and certainly deserves to as a company."

At today's trading rate, 750,000 BTC equates to roughly $375 million in missing funds, thought to be the result of a hacking spree that went unnoticed for several years. 

After posting this document, the blogger then linked to the original file, hosted on Scribed as below:

There are some interesting sections of note within the document, namely, the mention of rebranding to Gox.com:

Screen Shot 2014-02-25 at 15.17.48

Originally, identical statements issued by a number of other bitcoin exchanges -- Coinbase, Blockchain, Circle and Kraken -- spoke of the company's insolvency, before later revisions on some of the statements removed any mention of the insolvency and the "tragic violation of the trust of users of Mt Gox."

Today, as many bitcoin holders discovered, checking the source the of Mt. Gox website resulted in the following code:

screen-shot-2014-02-25-at-13-28-15-v2

If you attempt to access Gox.com, which appears to have been registered by the Mt. Gox chief executive recently, then a domain forward sends you back to mtgox.com. The domain was previously owned by domain investor Andy Booth, who confirmed the deal to transfer the domain to Karpeles while speaking to Domain Investing :

"Basically I got gox.com like any other LLL -- didn’t directly target Mt Gox. My brother met domain broker Joe Politzer in Singapore who got excited about gox.com and then I said he could try to sell it if he wanted. He called Karpeles and Gox to find out if they wanted it and immediately they expressed pretty strong interest. I’ve asked Mark if it’s ok to publish details (no response as yet)."

Joe Politzer of DN.BIZ, Booth's brother, also said:

"I reached out to Mt Gox and the deal took a few weeks to come together but we made a deal for the domain that included both a fair amount of cash and some bitcoins. Mark was a very nice guy and very patient in my opinion especially considering all that seems to be going on in his world from what we see in the media. I never really asked him about all of that; I just stayed focused on the deal as that was really the point."

Screen Shot 2014-02-25 at 13.27.41

According to computer security researcher Nicholas Weaver, who purchased historical WHOIS data on gox.com, the leaked document creator would have had to have known when the reported acquisition of the website from Mt. Gox's parent company occurred:

Following this, a new Twitter account registered as Gox.com appeared on the microblogging website, sporting a different logo. In addition, a Facebook page appeared -- while some believe this to be a real account, it is almost certainly a trolling account. However, the group -- as does multiple Reddit threads -- show the depth of anger and frustration felt by many Mt. Gox users who may have lost their investments.

Screen Shot 2014-02-25 at 14.31.59

In fact, the term "Goxxed" is now being used as a way to describe the loss of bitcoin across the web.

While the company has been keeping very, very quiet over the past few days, CEO Mark Karpeles did respond to Reuters over email, saying:

"We should have an official announcement ready soon-ish. We are currently at a turning point for the business. I can't tell much more for now as this also involves other parties."

Blockchain, a bitcoin mining data provider, later released its thoughts on the Mt. Gox debacle. In a statement, the firm said:

"Blockchain has always recommended that users store their bitcoins in such a way as to maintain control and ownership of their keys. Custodial accounts, like those used by Mt. Gox, where other people hold the keys to your bitcoins are risky.

Last night, we were shocked to find out about Mt. Gox’s insolvency, as they appear to have committed a grievous breach of trust against their customers.

The Blockchain staff will continue to collaborate with other industry leaders to establish better controls to ensure that events like this are not repeated. We are hopeful that together we can create a more trustworthy industry for the benefit of all existing and future Bitcoin holders."

We are yet to see whether Mt. Gox's problems will impact on the future of bitcoin as a viable currency permanently -- or whether investors will choose to take advantage of slumping prices in the hope of making a profit if, and when, the currency stablizes.

Update at 11.38 a.m. ET: Mt. Gox posted a statement on the home page of its website, saying :

Dear MtGox Customers,

In the event of recent news reports and the potential repercussions on MtGox's operations and the market, a decision was taken to close all transactions for the time being in order to protect the site and our users. We will be closely monitoring the situation and will react accordingly.

Best regards,

MtGox Team

Update at 7.05 a.m. GMT: Authorities in Japan and the U.S. have begun investigating the sudden closure of the Bitcoin exchange. 

Update at 2.43 p.m. GMT:

A new update appeared on the Mt. Gox website:

Dear MtGox Customers,

As there is a lot of speculation regarding MtGox and its future, I would like to use this opportunity to reassure everyone that I am still in Japan, and working very hard with the support of different parties to find a solution to our recent issues.

Furthermore I would like to kindly ask that people refrain from asking questions to our staff: they have been instructed not to give any response or information. Please visit this page for further announcements and updates.

Sincerely,

Mark Karpeles

A leaked internal chat obtained by Fox suggests that the crisis documents are "more or less" genuine.

"As the name suggests it’s a draft, and it’s a bunch of proposals to deal with the issue at hand, not things that are actually planned and/or done," the Mt. Gox chief said.

Karpeles also said that the bitcoins held at the exchange were not lost, "just temporarily unavailable."

Update Friday 28. 11.12 a.m. GMT: Mt. Gox has filed for bankruptcy protection in Japan, admitting to the loss of its customer's bitcoin.

Karpeles said at a press conference that bitcoins have been lost "due to weaknesses in the system," and "we are really sorry for causing trouble to all the people concerned."

The firm's lawyer said 750,000 customer-owned bitcoin have gone, as well as Mt. Gox's store of roughly 100,000 coins, worth almost $500 million in total. 

Developing... more soon. Check back as we will be updating this story as updates occur.

Topic: Tech Industry

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47 comments
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  • Just one MORE P.T. Barnum moment.

    Now seriously folks...putting your money into something that has no real credibility has to be one of the dumbest things anyone could do. Even "Penny Stocks" have more credibility than this crap.

    Would anyone "buy" a paper one hundred dollar bill...and then expect it to be "worth" more down the road? Say $200.00...or $500.00...or $1,000.00? Just because some speculators, who you will never see or communicate with, "say" it is now worth more? I sure as heck would not.

    And something without ANY financial backing by any financial institution or country. Simply..."give us your currency, and then buy our Bitcoins, because we say it is safe and secure here online".

    Right...like no one is going to figure out how to hack into the system and steal your money.

    What's that? Bitcoins have already been stolen by hackers? More than once? What a shock.

    "Stupid is as stupid does" kids.
    IT_Fella
    • How do we know that one hundred dollar bill is even worth $100?

      There were millions of dollars worth of Confederacy money that was rendered worthless after the war. It's all about trust. You get enough people to believe in a system of currency and it works. Lose that trust and it's worthless. The same thing can happen to that hundred dollar bill someday.
      Michael Kelly
      • Wrong Analogy

        Bitcoin wasn't currency. It was akin to precious metals. Real currency can't have wide ranging fluctuations in value, because if it seems ascendant, the buyer won't want to use it and if it's devaluing, the seller won't want to take it. Right now, we see more people taking it: I figure those folks think it cannot lose value. However, clearly the buyers do, or the buyers made a mistake and had to liquidate an investment to cover expenses. (Of course, I overlook the purported advantages of anonymity which may encourage a party to overlook its future value.)

        Any way, the idea that both parties in a transaction share the same sense of value for the instruments of exchange is key, as you say. The mechanism with Confederate dollars wasn't lack of trust, it was that in those days the paper money was exchangeable for gold owned by the government. After defeat, those assets were seized by the US government and they chose to tell the Confederates to take a hike with their dollar bills. If no one, pre-Breton Woods, would give you gold for your paper, it was just paper.

        But, today, that $100 bill buys $100 worth of goods or services. It's a tautology. Tomorrow it will acquire a different amount, could be more, could be less, but it will still a $100 worth in terms of the dollar's value in that time.

        Unlike coins, there is no advantage to taking a hundred dollar bill and locking it in a vault so as to speculate on its future value, as its value is not tied to the intrinsic cost of its materials.

        Bitcoin has a value based on its intrinsic worth which then increases or decreases based on demand.

        I have to say, I haven't seen a clear write-up on "malleability." From the description in the press, it sounds like a party may change the terms of the transaction after it happened. That seems a pretty wack-a-doodle loophole. I've been affiliated with professional services and we have had occasion when payment was made with a stopped check. How crazy it would be if the client got to change the check after payment. We already have enough trouble with self-discounters: folks who sign the contract, but pay less, or who add scope holding the balance of the contracted payment hostage.

        Any way, I reserve judgement until I see a clear description of what malleability means.
        DannyO_0x98
        • Malleability in simple terms

          You can't change what the transaction does, but you can create a nearly identical copy with a few bits changed, which changes the checksum value.

          If I send you 1 BTC, store that checksum, and you rebroadcast a slightly modified version of that transaction, and THAT copy goes into the ledger (the blockchain), then if you tell me "the transaction you sent with checksum X didn't get to me" and I only look at the checksum, then I might get tricked into resending the BTC.

          But you *did* get it, just not work the exact same checksum. BUT, it is STILL possible for me to verify that the original transaction DID go through, what I have to look at is the "inputs" that I used to send BTC to you and make sure they were spent to your address, because every input (every BTC you've received previously) can be identified uniquely and can only be spent once (the remainder is sent back to you as change).
          Natanael_L
        • What intrinsic worth?

          A bitcoin is a string of bits that is worth *only* what people are willing to give for it in exchange. It is a mere unit of account with no intrinsic value; just like a dollar, except that it's not backed by any government or other institution (yet), which means that nobody is trying to insure its future value (the theory being that no such backing is necessary).
          John L. Ries
      • The funny thing is...

        a Confederate dollar has "held" its value a lot better than the U.S. Dollar. This in spite of the world's most powerful military (until recently) enforcing its use...
        nwtim
        • When 61¢ on the dollar holding value?

          Even as a collectors item, a great condition $100 confederate bill might get you $61.
          Bruizer
          • When 61¢ on the dollar holding value?

            I think you might also find that due to inflation in the last 100 years the American dollar has lost about 98% of its value so that a 2014 dollar would buy about 2c worth in 1914 terms.
            Will McClenaghan
        • So if a foreign merchant refuses a dollar...

          ...the US Army is going swoop down on him and make him accept it? US residents and institutions have to accept dollars as payment, but the worst thing that might happen to those that don't is a lawsuit.
          John L. Ries
    • IT_Fella .. never ceases to amaze me, how there's always at least one

      prize Putz who spouts off about something like this - without ever finding facts via research, thinking things through on a big scale - let alone having an open mind towards the bigger picture.

      To quote you, "Now seriously folks...putting your money into something that has no real credibility has to be one of the dumbest things anyone could do."

      You mean like all the folks over the last century and more who invested traditional $, pounds and other *traditional currencies* in the Stock Exchange? You know? That massive, old established, legalized, global casino, that happened to collapse global economies based upon *traditional currencies* and consequently bring the world to its knees in The Great Depression.. Black Monday '87, and not to forget the other huge, historical elephant in the room, the Mother of All world-wide, financial crashes.. the GFC of 2008.

      How did i do? How's your traditional currency illusion working out now, "security wise", compared to Bitcoins?

      The thing of it is, Bitcoin at least has a value, above and beyond the ability to simply use it as a traditional currency. On top of that, Mt. Gox, for all intents and purposes, is a 'minor blip' compared to Goldman Sachs, Lehman Bros, Llloyds TSB, Northern Rock, to name but a very few amongst a myriad of now dead, multi-national financial houses.

      How are your super stable, trusty, dollar/GB pounds/Euro based & backed economies stacking up now? Still not enough for you? Then go tell Germany, Spain, Greece (and well.. pretty much most of Europe) about just "how well" glorious traditional currencies will work out for ya.

      Quote 2, "Right...like no one is going to figure out how to hack into the system and steal your money."

      Straw man argument. Enough to be laughable... and easy enough to debunk. For starters, most the huge financial juggernauts (pre-GFC) were probably less secure, or no more secure, than Mt. Gox likely was. The problem wasn't an external threat - it was an internal, dubious board / management.. You know? Like those wonderful Boards of Directors (aka filthy, low down, sewer rats) that brought the world economy to near death?

      The whole illusion of stability in traditional, currency backed, Stock Exchanges has been destroyed for all-time after 2008's GFC calamity... and yet.. here we have you, the most deluded, selective memory subject i think i've ever witnessed, blowing hot air about one failure - due to dubious management at Mt.Gox .. not due to a failure of Bitcoin itself.

      But you know what? just keep on spreading FUD. All i know, is you know next to zip about Bitcoin, and clearly love to bandwagon the FUD, sensationalist media on anything that suits your narrow-minded, ignorant view on the world.

      So it's like this: Bitcoin is likely here to stay, for a very long time.. despite all the ulterior-based, FUD and rumors being circulated by media saying otherwise. But don't let that stand in your way.

      Run along now.. i think your bandwagon's on the move again.
      thx-1138_
      • If anyone knows a Putz when seen...

        ...it surely is you Ace.

        And how much do you have in Bitcoins? Lost any recently? You really trust this alleged currency? Good luck kid.
        It'sNotMe
        • lost?

          if you leave your gold bar in the park, you will lose it, if you lend it to another person, they may steal it.

          If you give your bitcoin wallet address to someone, they can move all the coins from it to somewhere else, if you store your address in an unencrypted text file it can be stolen.

          But it is quite simple to not ever lose your bitcoins. Just don't do silly stuff with them.

          Now, if your argument is they will lose value then that is yet to be seen, but comparing bitcoins to dollars is completely missing the point of them. Bitcoins are a replacement for all the other currencies (a currency being a system to facilitate complex barters), the price compared to dollars is irrelevant to those who understand the idea, the relationship between bitcoins and goods/services is all that matters.
          Mytheroo
      • You know child,

        I could really give a rat's a$$ what you think about me, a$$h0le.
        IT_Fella
        • IT_Fella ... that's a laugh

          A guy throwing insults any ADHD, 10 year old would be proud of, calling out someone who doesn't happen to buy into your flawed, deluded world view, calling out someone trying to have a mature (albeit heated) debate, as being a "child".

          Nicely done.. real mature... way to invert and project.

          Bravo, bravo.. good form.. good form.
          thx-1138_
      • Congratulations

        You have proudly proclaimed your total ignorance on what a stock market is.
        baggins_z
    • US Dollar bill

      Reading at the top of US paper currency, it clearly states that the paper is a Federal Reserve Note. This is not backed by any government nor is it based on anything of intrinsic value such as gold.
      Reading about the Federal Reserve and world currency in general is quite eye-opening and scarry.
      Morti
      • Dollars are backed

        The Federal Reserve works very hard to make sure that the value of the dollar is stable. Dollars are not currently redeemable in precious metals or other commodities, but the US government (among others) has bought and sold precious metals in the past to stabilize the currency and will likely do so again.

        The theory of Bitcoin is that the market will stabilize it all by itself without anybody's effort. So far, the theory hasn't born out very well, but it's only been five years.
        John L. Ries
  • Survival strategy...

    My suspicion is that most of these other Bitcoin trading companies that are harshly criticizing Mt Gox for lax security and poor business practices are probably guilty of many of the same sins. The reaction to the Mt Gox debacle reminds me of nothing so much as the reaction to the BP Oil spill, where all the major Oil companies reacted by slamming BP and insisting that "everyone knew" that BP was lax with security all along, and nothing like this would have happened to any of them. In that case it was an attempt to thwart the imposition of further industry wide safety regulations. In this case, I suspect, it's a desperate attempt to prevent a run on Bitcoin reserves by frightened investors. Keep in mind that, unlike your Saving's account, your Bitcoin stash is not FDIC insured. If there's a run on Bitcoin that causes the exchanges to collapse, you're SOL and will probably never see any of that money again. The very techno-anarchist impulses that promoted Bitcoin, also ensured that no government entity would insure Bitcoin reserves.
    dsf3g
    • There are one insurer

      https://www.elliptic.co/vault

      The other option is to store it yourself.
      Natanael_L
    • exchanges are optional

      bitcoin doesn't require exchanges.

      If all the exchanges were destroyed tomorrow it wouldn't affect any bitcoin wallets that were not stored there.

      Are you suggesting if Fort Knox fell into another dimension all your gold fillings would disappear?
      Mytheroo