In a sign of just how frenzied trading in Bitcoin has become, the biggest exchange for the virtual currency shut down Thursday to “allow the market to cool down following the drop in price.”
Tokyo-based Mt. Gox said it will remain closed until Friday in response to overwhelming demand for orders and a huge selloff on Wednesday that saw the price of the currency fall from $266 (U.S.) per Bitcoin to $105 within a few hours before closing around $175. The digital coins fell again Thursday to $124 before the halt. Bitcoins had been trading at only $13 in January.
“The rather astonishing amount of new account opened in the last few days added to the existing one plus the number of trades made a huge impact on the overall system that started to lag,” Mt. Gox said in a statement Thursday. “As expected in such situation people started to panic, started to sell Bitcoin in mass (Panic Sale) resulting in an increase of trade that ultimately froze the trade engine!”
Bitcoin is the world’s first online currency and it has become a sensation in recent weeks in part because of the financial instability in Cyprus.
It was created in 2009 by an engineer known as Satoshi Nakomoto, who has never been identified and is reportedly no longer involved with the project. Digital coins are created, or “minted,” through a series of complicated computer programs and the total amount of coins to be made has been capped at 21 million (about 11 million are in circulation now).
The coins can be used to pay for a growing number of goods and services, although much of the commerce has been done on a website called Silk Road, which is known mainly for selling drugs and weapons. Bitcoins can also be traded on various online exchanges, which are not immune to wild price swings and allegations of hacking.
Mt. Gox, a unit of a Japanese high-tech company called Tibanne Co. Ltd., is the largest Bitcoin exchange, accounting for more than 70 per cent of all trading. When the exchange launched in 2010, Bitcoins changed hands at about 5 cents each. They jumped to $30 by the spring of 2011 when a cyberattack on Mt. Gox caused the market to crash, driving the price back down to pennies. The exchange recovered but Bitcoins rarely traded above $40 until last month’s financial crisis in Cyprus.
As the price climbed, and trading activity soared, Mt. Gox once again faced a hacking attack. “Attackers wait until the price of Bitcoins reaches a certain value, sell, destabilize the exchange, wait for everybody to panic-sell their Bitcoins, wait for the price to drop to a certain amount, then stop the attack and start buying as much as they can,” the company said in an April 4 statement explaining the disruption. “Repeat this two or three times like we saw over the past few days and they profit.”
The problems at Mt. Gox demonstrate the need for more exchanges, said Jered Kenner, who runs Tradehill, a California-based Bitcoin exchange that has not ceased trading. “It’s unfortunate that [trading] is so centralized at Mt. Gox,” he said. Mr. Kenner added that the price swings and the recent trading volumes indicate that Bitcoin is being taken seriously by professional investors. “It has shown that Bitcoin has really grown up as well. It has gone beyond an experiment for sure,” he said.
On Thursday, The New York Times reported that Cameron and Tyler Winklevoss, the twins made famous by their battle with Facebook founder Mark Zuckerberg, have begun amassing a pile of Bitcoins and hold about 1 per cent of the total number of coins in circulation.
“People say it’s a Ponzi scheme, it’s a bubble,” Cameron Winklevoss told the newspaper. “People really don’t want to take it seriously. At some point that narrative will shift to ‘virtual currencies are here to stay.’ We’re in the early days.”