Wednesday, February 26, 2014

Virtual currency concerns as MtGox shuts shop

This week saw a tumultuous upset in the currency market, though it was a story mostly consigned to the business columns of financial broadsheets. The story was that Bitcoin, a virtual currency, may soon be consigned to the virtual scrapheap [Telegraph].

MtGox shuts down

One of the biggest Bitcoin Exchanges, MtGox, had gone offline and was informing its customers that “in light of recent news reports and the potential repercussions on MtGox's operations and the market, a decision was taken to close all transactions for the time being in order to protect the site and our users.”

The exchange had already been hit by technical issues and recently halted all customer withdrawals of the digital currency after it spotted what it called "unusual activity".

But while six other major Bitcoin exchanges issued a joint statement distancing themselves from MtGox, the move to shut down such a large enterprise is a setback for backers of Bitcoin, who have been pushing for greater adoption of the currency.

The Bitcoin has had a shaky history, least of all to do with the security issues that are intrinsically tied into a virtual currency. Only days before MtGox shut shop the Financial Times was questioning whether the currency was “brilliant or bonkers”

The virtual currency went up 5,580% in price last year, which rather puts 30% equity market returns in their place, the FT’s New York correspondent Stephen Foley observed.

Such increases have raised eyebrows and prompted some individuals to make potentially unwise financial decisions. A growing number of people have been asking “what is Bitcoin?” and “should I buy some?”- but at Foley suggests, not necessarily in that order.

Given the unease concerning security, potential DDoS attacks on servers, reports of Bitcoin theft and huge fluctuations in Bitcoin’s value, one might have thought most rational people would have steered clear. Granted, it is not easy for governments to trace, thus the virtual currency has been linked to tax evasion, money laundering, and various transactions connected to illegal activity from drugs to arms dealing. As such governments are looking carefully at how they might control Bitcoin.


Bitcoin was created in 2008 by a mysterious computer scientist with the pseudonym Satoshi Nakamoto, who conceived it as an alternative to government-controlled currencies and a means to transfer money quickly, cheaply and anonymously outside the slow, expensive and highly regulated international banking system.

Bitcoins are no more unusual in theory than Air Miles, Nectar points, or credits in online games, except that they can be transferred easily between people and used to pay anyone who wants to accept them, giving them greater currency than loyalty schemes.

The supposed maximum ceiling is 21 million Bitcoins, a built-in scarcity, a little like the gold standard, which is one of the main reasons the price has been driven up, as speculators anticipate greater use of a fixed pool of currency.

However after MtGox went offline the price dropped as concerns rose as to the future of the currency [BBC]. Others who trade in the currency tried to mitigate the damage. The closure of the site did not "reflect the resilience or value of Bitcoin", said a statement from representatives of several other Bitcoin exchanges, including Coinbase and BTC China.

"This tragic violation of the trust of users of MtGox was the result of one company's actions.

"As with any new industry, there are certain bad actors that need to be weeded out, and that is what we are seeing today.” [Business Week]


The Bitcoin might not quite be dead, but its value has slumped in the last month by almost half. Indeed it may well be a life or death moment for this virtual coin [BBC].

The latest reports have perhaps hit home and warned off investors about what some are calling the most dangerous currency in the world [Telegraph].

But Bitcoin isn’t the only virtual currency. An interesting graphic posted by the FT on its Google+ page illustrates several other currencies such as Catcoin, Dogecoin, Litecoin, Peercoin and Nxt.

Whether these virtual cryptocurrencies are any more or less secure, the MtGox shut down has affected them all [IBTimes].

According to the website CoinMarketCap, which monitors the market capitalisation of all cryptocurrencies, the various digital currencies have shown drops of anywhere between 10% and 40% for the digital currencies listed.

As regards the Bitcoin itself it has seen its value rise from $14 for a single Bitcoin to around $850 throughout 2013. But such large inflation has prompted many analysts to suggest short-term speculation is creating a Bitcoin bubble.

And where there are bubbles, there are often crashes. The danger is that even a crash in a virtual currency could cause fluctuations in real financial markets, depending how much money is tied up in the virtual currency.


Governments are perhaps rightly cautious about these new virtual currencies, not only because of the legal concerns, but also for knock-on effects on the real economy should these cryptocurrencies fail [Guardian].

But it is not just economists and governments that are raising concerns. Many comments on social networks show that the general public are still quite sceptical about such currencies.

As one man wrote on the FT’s Google+ page, “I am not an economist, but I was much happier when money was based on some physical and tangible commodity like gold. If we decide money is whatever we accept as money then  we may as well go back to barter or collecting sea shells.”

tvnewswatch, London, UK

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