Failing Bitcoin Exchange MtGox Spreads Misinformation Creating Price Scare

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MtGox, a Japan-based Bitcoin exchange that was once the darling of the Bitcoin world, has effectively driven the final nail in its own coffin.

The exchange has been plagued with liquidity and security issues over the last year. These include denial of service attacks in April 2013 and halted USD withdrawals in June 2013. Each event caused a price panic.

Because it was hard to withdraw USD, the price of Bitcoin on MtGox was always artificially higher than other exchanges. This high price made it alluring to traders and investors, but was ultimately a symptom of unsustainability.

Then this past week MtGox suddenly halted Bitcoin withdrawals without explanation. This made the exchange basically worthless and the spread between MtGox and Bitstamp, another popular exchange, collapsed.

Bitcoin Exchange Mt Gox DDoS Response

MtGox finally broke its silence today with a lengthy statement on its website. But instead of taking responsibility for its own failings, MtGox blamed the latest issues on a bug in the Bitcoin protocol.

As you are aware, the MtGox team has been working hard to address an issue with the way that Bitcoin withdrawals are processed. By “Bitcoin withdrawal” we are referring to transactions from a MtGox Bitcoin wallet to an external Bitcoin address. Bitcoin transactions to any MtGox Bitcoin address, and currency withdrawals (Yen, Euro, etc) are not affected by this issue.

The problem we have identified is not limited to MtGox, and affects all transactions where Bitcoins are being sent to a third party. We believe that the changes required for addressing this issue will be positive over the long term for the whole community. As a result we took the necessary action of suspending Bitcoin withdrawals until this technical issue has been resolved.

The price of Bitcoin fell dramatically. In fact it hit $100 on BTC-e, an exchange based in Bulgaria, before recovering to $640. [Editor's note: To be clear, the $100 price was a single sell order likely due to an error by the seller. The price rebounded instantly after this order, but still at a lower level than previously trading for the past week. Here is a screenshot of the trade http://i.imgur.com/XDcjlts.png]

As of this writing, the price on Bitstamp is down over 7% from yesterday and 20% from a week ago.

What Gox Said and why it is misleading

MtGox blamed its troubles on something called transaction malleability, which is defined on the Bitcoin wiki.

While transactions are signed, the signature does not currently cover all the data in a transaction that is hashed to create the transaction hash. Thus while uncommon it is possible for a node on the network to change a transaction you send in such a way that the hash is invalidated. Note that this just changes the hash, the output of the transaction remains the same and the Bitcoins will go to their intended recipient. However this does mean that, for instance, it is not safe to accept a chain of unconfirmed transactions under any circumstance because the latter transactions will depend on the hashes of the previous transactions, and those hashes can be changed until they are confirmed in a block. (and potentially even after a confirmation if the block chain is reorganized) In addition clients must always actively scan for transactions to them; assuming a txout exists because the client created it previously is unsafe.

To a relatively new Bitcoiner this sounds like a fatal flaw. But in reality this is an issue that has been known since 2011 and is easily handled at the Bitcoin wallet level.

Core developer Greg Maxwell explained in an interview with CryptoCoins News.

“The Gox press release seems a little ‘spun’ to me,” said Maxwell. “They portray characteristics of the Bitcoin system well known since at least 2011 (which even have their own wiki page) as something new.”

He continued, “These characteristics are annoying but don’t inhibit basic operation. They are slowly being fixed – but fixing them completely will likely take years as they require changing all wallet software. Correctly-written wallet software can cope with the consequences, and I cannot understand why they would gate their withdraws on external changes.”

Maxwell said that MtGox is using transaction malleability as a scapegoat. “The challenge for me in offering something here is that this isn’t news to me – for years – and it’s never been a particularly large concern. This wouldn’t make the top ten list of dangers in the Bitcoin technology.”

And finally, “MtGox is at fault for not implementing in a way that copes with behaviors in the Bitcoin protocol which have been known since at least 2011.”

It appears therefore that MtGox did not build these protections into its own codebase, and the exchange itself has a fatal flaw, not the Bitcoin protocol.

Bitcoin guru Andreas Antonopoulos recently shared a similar view in an interview with CoinDesk. “Mt. Gox has built an exchange based on a hodgepodge of technologies that are really not suitable for running an exchange. And it’s being run by people who don’t really have experience building and operating scalable systems.”

Burning the Bitcoin Community

The Bitcoin community immediately expressed outrage at MtGox’s statement. Some said this was just typical practice for the failing exchange, while others suggested MtGox was breaking financial or consumer laws by releasing information that would send the price crashing.

“So Gox decided to take the Bitcoin ship down with them blaming their shortcomings on well known and documented protocol limitations. Shame!” expressed one person.

Another said simply, “Gox has done the greatest service & disservice to Bitcoin.”

If there is one rule of thumb about Bitcoin, it is to engage and support the community. Companies that don’t follow this rule will be alienated and criticized publicly until they are gone.

MtGox v Bitstamp Bitcoin Price Spread Feb 2014

The spread between MtGox and Bitstamp had now inverted.

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9 Responses to Failing Bitcoin Exchange MtGox Spreads Misinformation Creating Price Scare

  1. Ted Lilley says:

    Quoting the $100 price on btc-e is strongly misleading, if not irresponsible.

    The $100 price was an individual large sell order, probably made in error since it was made at a price 6x lower than the current market at the time. An expensive error on the sellers part no doubt, but entirely not indicative of the behavior of the market as a whole. As soon as the order was fulfilled the market bounced straight back to where it had been trading prior, so the $100 dollar price was an extreme outlier and a windfall for whomever was able to snatch up those bitcoin.

  2. On Bitcoin says:

    Ted, thanks for pointing that out. We added a note.

  3. Michael says:

    It’s not only hard to withdraw USD. I have big difficulty to withdraw EUR. I am one of the easiest verified customers of MtGox.

  4. […] This was quickly refuted by Bitcoin core developers and community members alike as spreading misinformation. However, the announcement did have a negative effect on the global price of Bitcoin and sent the […]

  5. […] This was quickly refuted by Bitcoin core developers and community members alike as spreading misinformation. However, the announcement did have a negative effect on the global price of Bitcoin and sent the […]

  6. […] withdrawals blaming transaction malleability and causing a price scare. They were widely accused of spreading misinformation and not taking […]

  7. […] withdrawals blaming transaction malleability and causing a price scare. They were widely accused of spreading misinformation and not taking […]

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