Bitstamp halts transactions: Bitcoin woes continue

Slovenia-based Bitstamp halted withdrawals Tuesday due to a denial-of-service attack. The Bitstamp debacle is only the most recent problem in an ongoing saga of issues for the online currency. Is this a rocky start or the beginning of the end?

First it was Silk Road. Then there were the money laundering arrests. Late last week, Mt. Gox halted transactions. Not to mention the simultaneous peak-and-valley value fluctuations that more resemble the Himalayas than rolling hills.   

Bitcoin has faced rampant issues in the past few months, and the most recent news doesn’t bode well for the online currency. On Tuesday, one of the largest-volume Bitcoin exchanges, Slovenia-based Bitstamp, announced it was halting withdrawals due to a denial-of-service (DoS) attack creating false transactions.

“Currently [BitStamp] has suspended processing Bitcoin withdrawals due to inconsistent results reported by our bitcoin wallet, caused by a denial-of-service attack using transaction malleability to temporarily disrupt balance checking,” says the exchange in a blog post. “As such, Bitcoin withdrawal and deposit processing will be suspended temporarily until a software fix is issued.”

However, the service says no funds were lost or at risk, and money from failed withdrawals on Feb. 10 and 11 would be deposited back into users' accounts.

A DoS attack gets at one of the contentious issues in the Bitcoin world: transaction malleability. Late last week, Tokyo-based Mt. Gox, another one of the largest Bitcoin exchanges, shut down trading due to technical glitches, that some believed were caused by the same attack. In a blog post, Mt. Gox says that a flaw in Bitcoin software causes people to be able to falsely claim a transaction hadn’t gone through and receive a second payment. However, the Bitcoin Foundation says that it is up to individual exchanges to find a way to ensure the transaction is legitimate.

“In simplest of terms, [transaction malleability] is a small window where transaction ID’s can be ‘renamed’ before being confirmed in the blockchain,” says Gavin Andresen, chief scientist at the Bitcoin Foundation, in a blog post Monday, referring to the moment when transactions can be falsely replicated. “This is something that cannot be corrected overnight. Therefore, any company dealing with Bitcoin transactions and have coded their own wallet software should responsibly prepare for this possibility and include in their software a way to validate transaction ID’s. Otherwise, it can result in Bitcoin loss and headache for everyone involved.”

Is loss and headache the only repercussion? Or is does it spell the beginning of the end for the online currency? Bitcoin advocates say it is just another bump in the road.

“The death of Bitcoin has been prematurely announced so many times already that the obvious conclusion is that Bitcoin is far more resilient than its critics would like to think,” says Andreas Antonopoulous, chief security officer of Blockchain.info, another large Bitcoin exchange, to CoinDesk. “I am confident that in a few days, those who predicted the death of Bitcoin will once again be proven wrong.”

The numbers, however, tell a less optimistic story. According to CoinDesk Bitcoin Price Index, on Wednesday Bitcoin was valued at $663, down from a high of $1,203 in December.