Thursday, February 27, 2014

the Mt. Gox shutdown

The reason that Bitcoin plunged on Mt. Gox was similar to a bank run -- there simply weren't enough Bitcoins in circulation to allow everyone to cash out at the same time. Bank runs usually occur when a bank invests too much of its clients' money elsewhere, leaving so little cash on hand that it can't survive a mass withdrawal.

Mt. Gox's possible insolvency, on the other hand, was rumored to be caused by a hack that resulted in the loss of 744,000 Bitcoins ($409.2 million). This isn't the first time it happened, either -- Mt. Gox was possibly hacked in 2011 for 400,000 Bitcoins (now worth $220 million). Mt. Gox customers have also reported troubles since early February, when CoinDesk reported that 68% of its customers had been waiting for months to withdraw their funds.

Therefore, even though exchanges like Mt. Gox might not be making risky bets with their clients' cash, their doors can be pried open by legions of hackers on the Internet instead. In the case of a bank failure or data breach, a depositor is insured by the FDIC for $250,000. In Bitcoin accounts, no such insurance policy exists.

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