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MtGox goes dark, Bitcoin exchange rates get volatile

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On Feb. 24, Bitcoin exchange MtGox went offline and all trading activity ceased. This development follows an announcement on Feb. 7 that the Tokyo-based exchange was halting withdrawals due to increased traffic and a flaw in its protocol which can allow for fraud. Amid the turmoil, MtGox CEO Mark Karpeles has resigned from the Bitcoin Foundation.

MtGox's current issues are the latest in a long line of problems. Created in 2010, just one year after the launch of Bitcoin, MtGox quickly became the largest and most visible exchange. But due to several instances of server mismanagement and government thefts of its assets leading to illiquidity of customer deposits, MtGox steadily became viewed as a source of boom/bust cycles in the Bitcoin exchange rate. Its BTC/USD exchange rate had been significantly higher than other exchanges until recently, as the difficulty and time delay of getting assets out of MtGox effectively put an interest rate onto the exchange rate. The exchange rate collapsed following the Feb. 7 announcement to a fraction of the rate on other exchanges.

A crisis strategy draft from MtGox states that 744,408 BTC are missing as the result of the protocol flaw, which they term “transaction malleability.” Their assets column shows that only 2,000 BTC and $32.43 million are currently on hand, and $5 million of that was stolen from MtGox's accounts by the Department of Homeland Security in August 2013. They also have $55 million in fiat unfunded liabilities.

The CSD outlines a plan to reduce liabilities, take MtGox offline for one month, find a new CEO, and rebrand the company.

The founders of Coinbase, as well as the CEOs of Kraken, Bitstamp, BTC China, Blockchain.info, and Circle, made a joint statement on the matter, expressing the view that “there are certain bad actors that need to be weeded out, and that is what we are seeing today,” and that “strong Bitcoin companies, led by highly competent teams and backed by credible investors, will continue to thrive, and to fulfill the promise that bitcoin offers as the future of payment in the Internet age.” The BTC-e team released a statement to assure its traders that a similar incident would not occur there as well.

Bitcoin exchange rates dropped sharply in reaction to the news. The rate on Bitstamp dropped 30.86 percent, from a local maximum of $578.50 to a low of $400. The rate on Bitfinex dropped 32.09 percent, from a local maximum of $589 to a low of $400. The rate on BTC-e dropped 26.31 percent, from a local maximum of $587.922 to a low of $433.25. All exchange rates have since rebounded to nearly their pre-dip levels.

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