home | Tea Party Economist | Bitcoins Crash . . . Again.

Bitcoins Crash . . . Again.

Gary North - February 13, 2014
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For the naive souls who bought bitcoins from Mt. Gox at $1200 in December, they have lost 60% of their money.

Look at the dollar price for bitcoins on Mt. Gox. Then compare with other exchanges.

For now, Mt. Gox investors cannot spend their bitcoins.

As you are aware, the MtGox team has been working hard to address an issue with the way that bitcoin withdrawals are processed. By "bitcoin withdrawal" we are referring to transactions from a MtGox bitcoin wallet to an external bitcoin address. Bitcoin transactions to any MtGox bitcoin address, and currency withdrawals (Yen, Euro, etc) are not affected by this issue.

The problem we have identified is not limited to MtGox, and affects all transactions where Bitcoins are being sent to a third party. We believe that the changes required for addressing this issue will be positive over the long term for the whole community. As a result we took the necessary action of suspending bitcoin withdrawals until this technical issue has been resolved.


The phrase "suspending bitcoin withdrawals" surely caught my attention. How about you?

Brenda Lee said it best, way back when.

Yet the Mt. Gox site says this.

Mt. Gox is safe! That's because it uses exclamation points!! Safe!!! Secure!!!!

Investors will get their dollars back -- far fewer dollars. When? One of these days, Real Soon Now. Of course, that will leave a bank record. You know. A "paper trail." But weren't bitcoins supposed to be untraceable? Sorry about that.

Yes, glitches happen. But Mt. Gox is now blaming the entire bitcoin architecture/code. "It's not our fault!" Others say, "Yes it is. We're OK."

Then there is techie-babble. Mt. Gox explains.

Bitcoin transactions are subject to a design issue that has been largely ignored, while known to at least a part of the Bitcoin core developers and mentioned on the BitcoinTalk forums. This defect, known as "transaction malleability" makes it possible for a third party to alter the hash of any freshly issued transaction without invalidating the signature, hence resulting in a similar transaction under a different hash. Of course only one of the two transactions can be validated. However, if the party who altered the transaction is fast enough, for example with a direct connection to different mining pools, or has even a small amount of mining power, it can easily cause the transaction hash alteration to be committed to the blockchain.

The bitcoin api "sendtoaddress" broadly used to send bitcoins to a given bitcoin address will return a transaction hash as a way to track the transaction's insertion in the blockchain. Most wallet and exchange services will keep a record of this said hash in order to be able to respond to users should they inquire about their transaction. It is likely that these services will assume the transaction was not sent if it doesn't appear in the blockchain with the original hash and have currently no means to recognize the alternative transactions as theirs in an efficient way.

This means that an individual could request bitcoins from an exchange or wallet service, alter the resulting transaction's hash before inclusion in the blockchain, then contact the issuing service while claiming the transaction did not proceed. If the alteration fails, the user can simply send the bitcoins back and try again until successful.

We believe this can be addressed by using a different hash for transaction tracking purposes. While the network will continue to use the current hash for the purpose of inclusion in each block's Merkle Tree, the new hash's purpose will be to track a given transaction and can be computed and indexed by hashing the exact signed string via SHA256 (in the same way transactions are currently hashed).

This new transaction hash will allow signing parties to keep track of any transaction they have signed and can easily be computed, even for past transactions.

Got that? It's all so simple. The thingamabob is not interfacing with the doo-dad, causing a reaction in the gazornonplex.

Another site clarifies the issue.

Oh there is a "problem" in the Bitcoin protocol, known since at least 2011 (see the link I gave). But for normal applications, not involving unconfirmed transactions, it shouldn't cause any severe problems because wallets can handle it locally.

Basically, third parties can change the transaction IDs of transactions. This means what wallet software must be written to accommodate that and still recognize them when that happens.

What the press release talks about is adding a second kind of transaction ID, which is robust against changes, which would be helpful for tech support purposes. Though it doesn't resolve all of the issues that being able to modify transactions presents.


Aunt Iris, who got into this because her nephew, age 19, told her this was all scientifically validated, understands none of this. Neither does her nephew. What she can understand is this. What she paid $1,000 (or $1200) for is now worth $481.


Money has the same purchasing power at point A and point B. That is why it is money. If you wire money from Bank A to Bank B, the same amount of money arrives in Bank B that left Bank A. This is not true of bitcoins. You cannot transfer bitcoons at Mt. Gox to another exchange. That is why bitcoins are not money. They are not currency. They are crap-shoot investments based on the greater fool theory. They are a plaything of techies who do not understand monetary theory, and amateurs who understand neither monetary theory nor technology. All of them have faith in this experiment.

This is the world's replacement currency. The dollar is doomed. The euro is doomed. The techies say so. It must be true.

Money is not volatile. Bitcoins are incredibly volatile.

As a way to transfer money, fine. But bitcoins are not money. Until they become money, they are a way not to transfer money, as investors using MtGox have discovered.

Digits can be traced: going in and coming out. Never forget this.

Going in is easy. Coming out is more difficult, as Mt. Gox clients have learned.

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