Bitcoin Exchange Closure Shines Light on the Mysterious Currency

Just days after the Winklevoss twins (of Olympic and Facebook (News - Alert) fame) went public with Winkdex, their price index for Bitcoin, today’s headlines are covering the closure of Tokyo Bitcoin exchange Mt. Gox. Some are even calling this the end of the virtual currency, though at this point that seems alarmist.

This is a great chance for the rest of us to finally learn how exactly Bitcoin works, since the elusive stand-in for money seems to be part of an exclusive club fraught with jargon and insider knowledge. If you’ve heard of Bitcoin at all, you probably know that it can only be traded online – well mostly, since some entrepreneurs have been working on ATM’s that will dispense cash from Bitcoin accounts. Overstock and WordPress have also been lending the currently legitimacy among the mobile commerce community by accepting it for online transactions.

But it was created as a bit of a geek lark; an online trading system only those savvy enough  to work the web would be able to use, pretty much limiting it to programmers or those wealthy enough to hire them. Details are sketchy about who started the process – it’s credited to a group known as Satoshi Nakamoto – which only adds to its mystique. The creator(s) limited the number of Bitcoins that can ever be created to 21 million, about nine million of which are still unclaimed.

People typically acquire Bitcoins by mining, though they can also be bought for straight cash from some exchange sites. (By way of example one Bitcoin can be bought right now for, at the lowest, $572 on exchange site btc-e.com) A miner “digs” for new coins by verifying the authenticity of Bitcoin transactions. Each time a transaction is made its bundled with other transactions into “block chains” which are virtually padlocked. Miners run programs to crack the unlock code and if they get it first they are rewarded with twenty-five newly minted Bitcoins. While mining software is freeware the success largely depends on the speed and power of a miner’s computing system, since you’re basically spinning virtual tumblers until the code falls into place.

To bank the value of the coins a miner needs a special encrypted bank account and this is where they system gets part of its dangerous reputation. The most common wallets are highly targeted by thieves and often hacked, and since Bitcoin isn’t backed by a bank there’s nobody to back your loss. One investor with Mt. Gox, the firm that went under today, may have just seen his $320,000 wallet vanish. The lack of regulation also means Bitcoin is popular on the black market and for trading illegal goods, making an average users account even more enticing for criminals.

Mt. Gox has intermittently stopped trades several times over the past year allegedly to deter cyberattacks and try to stabilize after a massive theft in 2011. Today the exchange simply went dark and security at its offices say nobody is in the building. Last week the CEO of Mt. Gox resigned from the board of the Bitcoin Foundation, a standardization and advocacy group. Skeptics say this is the danger of unregulated currency and that this is the beginning of the end for Bitcoin, proponents say it is just standard attrition in a growing market. For today however, Bitcoins appear to be holding their virtual value.