Feb 24 Update: Coinbase, Blockchain.info & other execs issue statement:

■  Refer to Mt. Gox ‘insolvency’.  ■  Web site vanishes.
■  Mysterious loss of more than 700,000 Bitcoins.

I have never been a fan of Mt. Gox, the big Bitcoin exchange based in Japan. From early in their history, I have complained that they lack the standards, oversight and methodology to hold their position as de facto linchpin in an emerging field.

Glitch —vs— Catastrophe

I used to run a large email service. We earned all the top Editors’ Choice awards and were featured in every tech publication.

Like any service provider we had occasional glitches that prevented a fraction of users from accessing mail in a timely fashion. Occasionally, a denial-of-service attack or an upstream peering dispute would degrade service to all users. But, there was one time that all users were locked out of our servers. It happened at the worst possible time — during a summer holiday. Imagine the gooey stuff hitting the fan as our clients started their holiday without email.

Even though we posted service updates to our web site, our phones were under siege from the very beginning. After all, email is the primary communication medium for many individuals.

We developed expertise in preserving good will. Most importantly, we informed users about the problem, updated them frequently, and learned from our mistakes. But, we sometimes deflected blame. When problems were related to an upstream provider or a situation ‘beyond our control’, we learned that with selective disclosure, we could avoid the full brunt of user frustration. It was a bit was disingenuous, because, in most cases, the problems could have been avoided with a more robust fail-over implementation.

Calamity Hits Mt. Gox

By now, anyone who dabbles in Bitcoin is aware that the exchange purported to be the biggest, baddest gun in the west is blocking all withdrawals. That’s right. You can put money in, but you can’t take it out. The excuse: “We have identified suspicious transactions.”

Of course, with millions of dollars of client assets in the balance, even an unregulated organization cannot rest on that explanation for long. And so, Mt. Gox has clarified their radical move, claiming that there is a bug in core code maintained by the Bitcoin Foundation. They refer to this bug as “transaction malleability”.

Mt. Gox implementation protocol: Serious risk to customers

Not only does Mt. Gox blame the Bitcoin Foundation for transaction malleability, they conclude that “Bitcoin is a very new technology in its early stages.” Yeah, sure! That’s another way of saying that some companies lack the resources to keep up with a reference design or to practice due diligence in testing proprietary implementations. Read between the lines, wild ducks: The problem is not with Bitcoin prime, it is with Mt. Gox’s convoluted attempt to create sidecar code in an effort to achieve scale and proprietary advantages.

Mt. Gox tossed the reference code and developed their own wallet process. Then, they failed to keep up with published changes to the reference standard—many related to security, distributed reporting and scaleability! If Mt. Gox thinks that they have an edge on these issues, they should reconsider their complaint about the early nature of the art. Instead, they ought to join established working groups and improve the process from within. In that way, they can avoid forking far from the tracks and throwing customers under the bus.

It’s no surprise that the Bitcoin foundation turned the table on Mt. Gox, blaming them for the problem. Likewise, here is the response from Coinbase, the San Francisco based exchange (also pasted below). As for me, I will bite my tongue and withhold further commentary. Suffice it to say that I agree with the Coinbase position and that

I have never felt that Mt. Gox was deserving of trust or of being the heavyweight in the room.

Was a spectacular failure inevitable?

Glitches are an inevitable result of new technologies—especially when the technology relates to a dramatic shift or emergence of a new mechanism, like cryptocurrency. But fiascos of this magnitude are typically avoided in a shakedown that occurs early on. In this vignette, I the ‘glitch’ is the uncanny survival of Mt.Gox as a credible entity through the first months of 2014.

What does it mean for Bitcoin?

In the days after the Mt. Gox fiasco, the Bitcoin exchange rate retreated 48% to $480. Clearly, many stakeholders were shaken and there a sufficient number of them have sparked a panic, heading for the exit door.

So what does this mean for Bitcoin? Is the fat lady rehearsing the closing aria? I have never considered Bitcoin be an equity play—Ultimately, it is a currency and not an investment. In fact, it is a near perfect exchange medium and adoption is growing like a weed. As such, those with a BTC in their wallet will almost certainly see an increase in value. That’s the inevitable fallout when you factor the intersection of increased adoption and fixed supply cap.

For individuals sitting patiently on the sidelines, waiting for a good moment to fund a their transaction kitty, this current event makes for a spectacular buying opportunity. There is every reason to believe that Bitcoin will be a respectable world currency, despite objections over its lack of intrinsic value. And with permanent market cap of 21 million units, the a value under $500/coin will one day seem to be an incredible bargain.

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Coinbase Response to Mt. Gox problems…
Bitcoin’s Transaction Malleability Issue  (Feb 10, 2014)

Earlier today, Mt.Gox released a press release highlighting the “Transaction Malleability” issue with the Bitcoin protocol.  Gavin Andresen, Lead Developer of the Bitcoin protocol later released a statement confirming that this is not a problem with the Bitcoin protocol, but is a challenge for creators of bitcoin wallet software (like Coinbase).

The malleability issue would allow an attacker to change the identifier of a transaction (but not the sender or recipient of bitcoin, amounts, or other information).  If not accounted for carefully, this could lead some wallets to duplicate transactions.

After conducting a review of our wallet software, we could not find any instances of such an attack being used. We also looked into the technical details of the transaction malleability issue and just this morning added additional security measures to our software to further prevent such an attack. From our current analysis, there weren’t any users affected by this issue, but we’ll continue to monitor transactions to make sure.  If you have any questions about a transaction on your account you can contact support.

Bitcoin is a truly exciting space to be in. Every day, more and more consumers and merchants are experiencing the value of bitcoin – simple, instant transactions – exactly what payments should be in the age of the Internet. With nearly 1M consumer wallets and over 23,000 merchants on our platform, Coinbase will continue to stay vigilant and do everything we can to make Bitcoin as easy as possible for customers.