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Are Mt. Gox and the Bitcoin and indication of the future?

By Stephen Friedland
On March 6, 2014

In 2009, a revolutionary form of electronic fiat currency, or cryptocurrency, called the "bitcoin" was created by a web developing firm called Satoshi Nakamotom. Since then, it has become an internet fixture, allowing people to conduct trade between themselves without the regulation of national treasuries or revenue services. The currency is what allowed illegal drug, weapon and firework hubs on the Deep Web like Silk Road to prosper. But not all is well in the infantile, unpredictable bitcoin world: Mt. Gox, a former bitcoin exchange based in Japan with upwards of a million customers, filed for bankruptcy last Friday after 850,000 bitcoins were missing from client and company accounts. Considering the bitcoin is valued at $660 USD, that's a lot of money, in the ballpark of $474 million. And all from a company initially established four years ago as a market for Magic: The Gathering trading cards.
Mt. Gox is blaming the thefts on a type of security weakness called "transaction malleability," which allows transaction IDs to be renamed. So say my ID for one exchange is "StephenFriedland" and I request X amount of bitcoins from Mt. Gox. Then Mt. Gox sends the bitcoins over to my "eWallet," or personal bitcoin storage account, and I subsequently use my extensive knowledge of computers to change my transaction ID to "CarlosDanger." After that, I approach Mt. Gox complaining that I didn't have the X bitcoins I requested, and the system doesn't recognize my handle and interprets it as a different transaction, so it unwittingly sends more bitcoins over. If that happens repeatedly over the course of multiple years (as The Wall Street Journal subsidiary Market Watch suggests has been occurring problem since 2011), then the virtual money adds up.
This is just one of the possibilities, though. Mt. Gox presented themselves as anything but a competent company with respectable managerial skills, losing $8.75 million in bitcoins as far back as 2011 - only a year after its inception - in a mass stolen password hack. Yet incidents like these did not deter the firm from upping its protection; a company insider told PC World that the code was "a mess like spaghetti" and that some bugs went either undetected or untouched. In short, they were asking to get perpetually hacked.
Nevertheless, it would be unfair to completely blame Mt. Gox for its demise despite all the aforementioned indiscretions. There is a bigger problem that rests with a volatile, unregulated financial market. Transparency is a complete necessity for the institution of the bitcoin to not be maliciously manipulated and the internet has not been able to provide it with such a thing thus far.
In a way, though, there is transparency, but a transparency that does little to reveal the identities of the bad guys and in fact serves to bolster their thieving odysseys: every bitcoin transaction from address to address is recorded publicly in a registered forum called the Blockchain. While difficult to follow a long set of transactions, it is entirely possible to wade through someone's addressing history. Additionally, if the potential hack victim uses an insecure browser, i.e. one that doesn't obfuscate your internet traffic, the hacker can see transactions you personally have made (not under the guise of your transaction handle) and use that accordingly. To combat this, one should use a type of browser that hides your IP address like Tor (The Onion Router) when making bitcoin exchanges or doing anything else. Another means of prospective anonymity is to use multiple eWallets to not save the entirety of your bitcoins in one account, but this is not foolproof.
A severe problem with the bitcoin is the prolonged efforts one must make to recover bitcoins if they are lost and/or stolen; this is happening to those affiliated with Mt. Gox at the moment. The BBC article "Mt. Gox gives bankruptcy details" features a picture of a frustrated customer who travelled to Japan holding a sign that says, "Mt. Gox, where is our money?" outside the company's headquarters. Is Mt. Gox going to just pull out its internet safe and withdraw all the coins from its special online-to-reality converter and drop them into your hands? This is going to take long, meticulous transaction analysis to recover all 850,000 bitcoins. And long, meticulous work is what will be needed to reform and better regulate a fledgling financial industry so things like this don't occur as often as they can and are.

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