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The largest Bitcoin exchange faces collapse

The fall of Mt.Gox

The future of Bitcoin has been a constant point of speculation so far in 2014. While traders of the virtual currency have been busily investing, the lack of regulation around Bitcoin has been keenly demonstrated in the swift and catastrophic demise of Mt. Gox.

As recently as February 7th Mt. Gox appeared to be the world’s largest Bitcoin trading forum. Yet recent reports suggest that the company has been in decline for almost a year as the exchange came up against regulators and fought off an endless stream of cyber attacks. It is due to the latest attack that Mt. Gox’s fate is looking increasingly uncertain, having been forced to take its trading offline, to suspend all trading and freeze withdrawals after 6 per cent of all minted Bitcoins, worth an estimated £225m were stolen.

What is Mt. Gox?

Since freezing transactions, Mark Karpeles chief executive at Mt. Gox, sought to calm investors earlier this week by stating he remains at the exchange’s headquarters in Tokyo and is working hard to solve the security problem. However, reports on Wednesday suggested that all has gone dark at Mt. Gox headquarters and a recovery is looking less attainable.

Mt. Gox originally rose to success as a site designed for people to trade cards for the game ‘Magic: The Gathering’, from which the site takes its name; ‘Magic: The Gathering Online Exchange’ which abbreviates to Mt. Gox.

Founded in 2009 by American software hacker Jed McCaleb, Mt. Gox was turned into a Bitcoin exchange and sold to Karpeles in 2011 under whose leadership the company became the face for the virtual currency. Around this time, Karpeles made several statements in defence of Bitcoin and what he expected to happen if his company was forced to shut down:

“…the likely result will be more exchanges popping up all over, with methods much harder to track, and who will be much less likely to agree to help with any investigation… We want (authorities) to understand that the problem is not Bitcoin itself, but what some people do with those.”

A step towards regulation

The issue facing many investors is that Bitcoin’s greatest asset is also its biggest flaw – and it has been no better demonstrated than by the demise of Mt. Gox. As long as the exchange stands little chance of making a full or even partial recovery, as do its customers. It is yet to be known whether Mt. Gox is able to return the funds it is liable for, it is thought that the company’s crisis plan sets out $174m (£104m) in liabilities against $32.75m (£19.57m) in assets.

Unlike the Bank of England, Bitcoin investments are not regulated by any government body and therefore not insured against such losses of public funds. One of the only avenues possible for customers to reclaim their money is by taking Mt. Gox to court with claims of negligence or breach of contract.

Since the shutdown of Mt. Gox, internet economists have been speculating over the oncoming regulation that will protect customer investments in future. Meanwhile, Vietnam became the latest country to rule that its central bank would not recognise Bitcoin as a legal currency, warning citizens of the risks involved when investing – following the lead of China, Thailand, Russia and South Korea who have already banned the use of Bitcoin.

Daniel Nolan, managing director at theEword said: “Investors in Bitcoin are fully aware of several facts: that the currency is not regulated, it exists solely online, it has always been associated with cyber attacks and its value is subject to the level of public interest and faith. Essentially, the aspects of Bitcoin that were so appealing between November and January have already become its greatest failings in the eyes of Bitcoin traders.

“If there is to be a future of Bitcoin, regulation must be brought in to ensure its longevity and sustainability as it is reliant on public trust; the rise and fall of Mt. Gox is the perfect example of that fact.”

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