On Tuesday, the world's most established exchange for bitcoin disappeared from the Internet, sending the price of the virtual currency tumbling and prompting fears that the experiment in electronic cash could soon be strangled by fraud or regulation. Here's an explanation of what bitcoins are, how exchanges work, and why the demise of Tokyo's Mt. Gox exchange means many people may have lost a lot of money.
Q: What's a bitcoin?
A: Bitcoin is an online currency that allows people to make one-to-one transactions, buy goods and services and exchange money across borders without involving banks, credit card issuers or other third parties. As a result, this exotic new form of money has become popular with libertarians as well as tech enthusiasts, speculators — and criminals. Bitcoins are basically lines of computer code that are digitally signed each time they travel from one owner to the next.
Q: Who's behind the currency?
A: It's a mystery. Bitcoin was launched in 2009 by a person or group of people operating under the name Satoshi Nakamoto. Nakamoto dropped off the map as bitcoin began to attract widespread attention.
Q: What's a bitcoin worth?
A: Like any other currency, bitcoins are only worth as much as you and your counterpart want them to be. At its height three months ago, a single bitcoin was valued at $1,200. On Tuesday, it was around $500.
Q: Is the currency widely used?
A: That's debatable. On the one hand, leading bitcoin payment processor BitPay works with more than 20,000 businesses — roughly five times more than it did last year. On the other, the total number of bitcoin transactions has stayed roughly constant at between 60,000 and 70,000 per day over the same period, according to bitcoin wallet site blockchain.info.
Q: Is bitcoin particularly vulnerable to counterfeiting?
A: A network of tech-savvy users called miners keep the system honest by pouring their computing power into a blockchain, a global running tally of every bitcoin transaction. The blockchain prevents rogues from spending the same bitcoin twice, and the miners are rewarded for their efforts by being gifted with the occasional bitcoin. As long as miners keep the blockchain secure, counterfeiting shouldn't be an issue.
Q: If that's the case, what's all this talk about fraud?
A: A lot of the mischief surrounding bitcoin occurs at the places where people store their digital cash or exchange it for traditional currencies, like dollars or euros. If an exchange has sloppy security, or if a person's electronic wallet is compromised, then the money can easily be stolen.
Q: Is that what happened to Mt. Gox?
A: It's not entirely clear what happened to the Tokyo exchange. Several experts have accused the exchange of ignoring warnings about a software glitch which could enable hackers to silently drain the business of its bitcoins. On Monday, bitcoin enthusiast Ryan Selkis posted a document allegedly leaked by a Mt. Gox insider. It appeared to show the exchange secretly trying to grapple with the loss of 740,000 bitcoins over several years — a titanic sum several times the value of its assets.
Q: So does that means it's all over for bitcoin?
A: Some fear that a sudden loss of confidence in online exchanges' ability to protect their stored bitcoins could kill off the currency's appeal.
A coalition of bitcoin businesses sought to portray Mt. Gox as an isolated case of incompetence but the document published by Selkis speaks in apocalyptic terms about what would happen were the scale of its losses to become public — "this could be the end of bitcoin, at least for most of the public." That may be hyperbole. Bitcoin's value stabilized around $500 per bitcoin on Tuesday. At $500, the cybercurrency's value is still 17 times what it was at this time last year.
Q: What about Mt. Gox's customers?
A: If the leaked document is correct, Mt. Gox has lost $370 million worth of bitcoins.