For the last month, Bitcoin has been growing fat on the vine, like an over-watered grape in July. But the fun is now over. The fruit has burst and all of the juices are running out.
A massive sell-off began last night at around 4:00pm, yanking the exchange rate down from a high of US $260 to nearly $100 and reducing the total value of the bitcoins in circulation by more than one billion dollars. Mt. Gox, the largest of the Bitcoin exchanges, announced this morning that it will suspend trading until tomorrow. But the decline has continued on smaller exchanges, which have remained open. As of writing this, the price had already sank to $50 on the BitStamp exchange, setting Bitcoin back to where it was a month ago. If that rate holds, a whopping $2 billion will have evaporated in less than 24 hours.
The timing of the sell-off coincides with a spate of technical failures over at Mt. Gox. Yesterday afternoon, as the exchange rate rocketed up to $260, some traders began to notice a lag time on their orders. As the day went on, it got worse until many were complaining that their trades were taking two hours to go through. Meanwhile, the price began to drop rapidly and by the time orders were being filled, they no longer reflected the exchange rate.
Mt. Gox had a similar problem last week. After customers complained about not having access to their accounts, the company revealed that it had been the target of denial of service attacks. The exchange rate grumbled in response but ultimately continued its vertical surge. This time, however, Mt. Gox is not blaming an outside attack. According to an announcement on its blog:
"First of all we would like to assure you but no we were not last night victim of DDoS but instead victim of our own success."
Mt. Gox claims that it has been signing up 20 000 new accounts every day and had seen the number of trades triple in the 24 hours prior to suspending trading. It said it was this sudden increase in the trade volume that froze the trade engine.
As a result, it decided last night to suspend trading altogether until 12 April and will, it said, use this time to upgrade their system and catch up on the demand. Traders will be able to cancel their orders during this time and when trading resumes there will be no fees for 48 hours.
But this could be the beginning of a revolt against Mt. Gox, as Bitcoin holders take to online forums to vent their anger. They are especially dismayed that Mt. Gox continued to accept trades while fending off attacks by hackers. And many are calling for its customers to leave Mt. Gox and redistribute their money into smaller, competing exchanges.
Right now, Mt. Gox claims to handle 80 percent of all the trades in Bitcoin. Some kind of redistribution would seem fitting for a currency that was created to oppose centralized monetary controls.
Or, the answer may arrive by way of innovation. Bitcoin itself decentralized the concept of money. Perhaps the same could be done for an exchange. Mike Hearn introduced the idea of a peer-to-peer currency exchange at the last Bitcoin conference in London, and the people working on Ripple have come up with something similar.
One thing is clear from this latest debacle. In order to have a stable currency, the currency exchanges themselves must be stable and secure.
Image: Bitcoin Charts