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Bitcoin trader Kolin Burges, right, of London and American Aaron (only his first name was given) hold protest signs as they conduct a sit-in in front of the office tower housing Mt. Gox in Tokyo Tuesday, Feb. 25, 2014. The website of major Bitcoin exchange Mt. Gox is offline Tuesday amid reports it suffered a debilitating theft, a new setback for efforts to gain legitimacy for the virtual currency. The URL of Tokyo-based Mt. Gox was returning a blank page. The disappearance of the site follows the resignation Sunday of Mt. Gox CEO Mark Karpeles from the board of the Bitcoin Foundation, a group seeking legitimacy for the currency. Burgess said he had picketed the building since Feb. 14 after flying in from London, hoping to get back $320,000 he has tied up with Mt Gox.Kaori Hitomi/The Associated Press

The collapse of a major bitcoin exchange and the apparent disappearance of several hundred million dollars worth of digital coinage have exposed the virtual currency's security flaws, damaged its credibility and shaken its supporters to the core.

Tokyo-based Mt. Gox, which helped turn the currency into a tradeable commodity and until recently was the world's largest bitcoin exchange, has gone dark after halting all trading late Monday. Depositors have not been able to withdraw funds, and many fear they will never see their money again, amid unconfirmed reports that nearly 750,000 bitcoins have been siphoned from client accounts by cyber-thieves. At current prices, that would represent a loss of more than $360-million (U.S.).

"This isn't good news for bitcoin," said Lisa Kramer, an associate professor of finance at the University of Toronto. "One thing that proponents have been maintaining is the security of the technology, and current rumours have it that that security has been broken. Without that, I don't know what else that currency has to stand on."

Bitcoin may survive the toxic fallout from what its staunch advocates dismiss as an outlier, arguing that Mt. Gox had been teetering on the edge for months. But the latest reports of virtual money vanishing into thin air – or more likely into the accounts of sophisticated thieves, who quickly converted it into real cash – are troubling. Coupled with fresh consumer warnings from U.S. and other regulators about the dangers posed by the unregulated currency, the current controversies are likely to burst bitcoin's bubble.

The supposedly secure and tightly controlled crypto-currency shot up from a value of 3 cents (U.S.) at its launch in 2010 to more than $1,000 late last year, with huge, volatile swings in between. It was changing hands at a still frothy $500 or so on Tuesday.

The bitcoin system is fraught with security risk, said Mark Williams, a finance lecturer at Boston University and a financial risk specialist.

Backers have publicly claimed they built an "anti-fragile network," despite relying on open-source code, said Mr. Williams, a vocal critic of the bitcoin phenomenon. "To say the infrastructure is anti-fragile is a gross overstatement. I call it as fragile as egg shells."

Other players in bitcoin's expanding universe were quick to paint the Mt. Gox fiasco as an isolated case and vowed to safeguard customers' assets.

"This tragic violation of the trust of users of Mt. Gox was the result of one company's actions and does not reflect the resilience or value of bitcoin and the digital currency industry," said a joint statement by a group of bitcoin exchanges and service providers including Coinbase, BTC China, BitStamp. "As with any new industry, there are certain bad actors that need to be weeded out, and that is what we are seeing."

Coinbase, a startup based in San Francisco, enables users to make purchases and conduct other transactions with bitcoin. BTC China recently replaced Mt. Gox as the world's biggest bitcoin exchange. BitStamp is a smaller exchange based in Slovenia.

Mt. Gox chief executive Mark Karpeles resigned from the Bitcoin Foundation's board on Sunday, but has shed little light on the nature of the exchange's woes. However, a widely circulated document labelled as an internal crisis review at Mt. Gox described the theft by unidentifed hackers of nearly 744,408 bitcoins from customer accounts that "went unnoticed for several years."

Advocates insist bitcoin will weather its growing pains.

Yet even with the bubble seemingly ready to burst, bitcoin is likely to remain in existence, albeit on a smaller scale. "It probably won't disappear ever. But it won't be as big as the hype was," said Peter Leeds, a Toronto-based analyst who specializes in speculative issues and has long argued that bitcoin is a poor investment. "You can still go to Holland and buy tulips."

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