MtGox bankruptcy: Bitcoin insiders saw problems with the exchange for months

MtGox filed for bankruptcy Friday and said 850,000 bitcoins are missing as a result of a hack. Other exchanges have managed to withstand the same vulnerability, Bitcoin insiders say.

Tokyo-based MtGox filed for bankruptcy Friday and confirmed rumors that the once-dominant Bitcoin exchange had lost track of nearly half a billion dollars' worth of bitcoins.

The MtGox website went dark on Tuesday amid reports that a hack had siphoned 740,000 bitcoins from the exchange over the course of several years. MtGox CEO Mark Karpeles confirmed the loss to Japanese news crews on Friday and increased the number of missing bitcoins to 850,000 – 750,000 of customers' bitcoins and 100,000 of the company’s own bitcoins.

"There was some weakness in the system, and the bitcoins have disappeared,” Mr. Karpeles told reporters at the Tokyo District Court press club. “I apologize for causing trouble."

Hackers reportedly forced the Bitcoin exchange to a crawl by creating thousands of copies of transactions that MtGox had to sift through and independently verify. Other Bitcoin exchanges have reported the same problem, but managed to address it more quickly than MtGox.

“It was a well-known issue that every major exchange in the Bitcoin community knew about and had solutions for. MtGox did not,” Jordan Kelley, CEO of Bitcoin ATM maker Robocoin, told Reuters.

MtGox first announced that it had discovered a problem earlier this month and responded by freezing withdrawals indefinitely, a move that has been criticized by those in the know as too little too late.

Bitcoin Association president Bruce Fenton told the Monitor earlier this month that the issue only affected “exchanges who had not updated to the most current best practices.”

While the MtGox failing is massive – 7 percent of all bitcoins in existence are now missing – it could have been even worse had this happened during the height of MtGox’s reign as the world’s largest Bitcoin exchange.

However, Bitcoin insiders have been distancing themselves from the Tokyo exchange since last spring.

“Most professional users moved away from MtGox months ago, leaving April 2013 or thereabouts,” an anonymous Bitcoin core developer told Reuters. “By June 2013, the final nail was in the coffin for US users.”

In May, the exchange processed 66,770 transactions each day. That figure dropped to a little over 14,000 by September and 9,000 by January.

Some insiders have suggested that the exodus of major Bitcoin holders from MtGox may have artificially inflated the price of bitcoins available on the MtGox exchange, which caught the media’s attention last fall.

MtGox became the definitive index for Bitcoin pricing as the media scrambled to explain the cryptocurrency craze to mainstream consumers.

However, insiders say they had seen the writing on the wall long ago.

“It was obvious there was something really bad going on there for nearly a year. They were processing withdrawals very slowly and generally being very opaque about what was going on,” Switzerland-based Bitcoin developer Mike Hearn told Reuters.

The exchange has also reported that 2.8 billion yen ($27.4 million) is missing from its bank accounts.

MtGox was created by American software hacker Jed McCaleb as a trading card exchange for a game called “Magic: The Gathering.” The name MtGox actually stands for “Magic the Gathering Online Exchange.”

In 2011, Mr. McCaleb converted the website into a Bitcoin exchange and sold it to Karpeles, who catapulted the exchange to the forefront of the Bitcoin industry. Bitcoin advocates maintain that MtGox is not the only Bitcoin game in town and that its demise does not spell the end of Bitcoin.