Bitcoin plunges after marketplace indefinitely halts withdrawals

Says 'bug in bitcoin software' could allow transaction details to be altered

The price of the digital currency bitcoin slid to its lowest level in nearly two months on Monday after bitcoin digital marketplace Mt. Gox said a halt on withdrawals it announced on Friday would continue indefinitely after it detected "unusual activity."

The bitcoin price varied dramatically from one exchange to another, with Tokyo-based Mt. Gox, the best known operator of a bitcoin digital marketplace, recording one of the biggest drops for the day.

On the Mt. Gox platform the currency plunged to as low as $500 early on Monday, down more than 27% from Friday's final price of $692, according to the Mt. Gox website. It last traded at $595.74, off nearly 14% from Friday.

"This technical issue is of a much larger intensity than we've seen in the past," said Sebastien Galy, currency strategist at Societe Generale in New York. "The market may be realizing that there are issues which are specific to these forms of currencies."

The bitcoin in recent months started to gain wider acceptance, with Overstock.com and the Sacramento Kings basketball team both saying they would begin to accept the currency.

More recently, the digital currency has drawn increased scrutiny. New York state's top bank regulator in late January revealed plans to regulate businesses handling transactions in bitcoin this year.

TRANSACTIONS COULD BE ALTERED

The bitcoin price started falling fast on Friday when Mt. Gox said it was temporarily halting withdrawals due to unexplained technical issues.

In an updated statement on Monday, Mt. Gox said withdrawals were on hold indefinitely after it "has detected unusual activity on its bitcoin wallets and performed investigations during the past weeks. This confirmed the presence of transactions which need to be examined more closely."

Mt. Gox said a "bug in the bitcoin software" could allow transaction details to be altered.

In effect, someone on the network could alter transaction details to make it appear a transfer of bitcoins from one digital wallet to another had not occurred when in fact it had. This might cause the transfer to be repeated.

A bitcoin wallet is an application that stores bitcoins for the currency's users.

Mt. Gox said the issue was not limited to the exchange and "affects all transactions where bitcoins are being sent to a third party." It said the withdrawal suspension would be in effect until the issue has been resolved.

CoinDesk, which launched the CoinDesk Bitcoin Price Index in September, removed Mt. Gox from its index Monday, citing its "persistent failure to meet the index's standards for inclusion."

"These recent withdrawal restrictions are just the latest in a series of issues which have made Mt. Gox's inclusion in the BPI problematic," CoinDesk said.

On CoinDesk's bitcoin index, the bitcoin price was lower but not by nearly as much as on the Mt. Gox platform. The CoinDesk index showed bitcoin at $667.79 on late Monday afternoon, down about 5% from Friday's close of $703.57. Its low for the day was around $540 versus $500 on Mt. Gox.

On both platforms, the price was still around the lowest since late December. The price had topped $1,000 as recently as late January.

"With the volatility in the currency being as much as it is, it's going to take some time before we get enough of a comfort level from investors and merchants to enable it to be used ubiquitously," said Darrin Peller, managing director at Barclays in New York.

The arrest of a prominent bitcoin advocate just over two weeks ago threw a spotlight on the currency. Charlie Shrem, 24, operator of the Bitinstant bitcoin exchange company, was charged by U.S. prosecutors with conspiring to commit money laundering by helping to funnel cash to illicit online drugs bazaar Silk Road. The following day Shrem resigned as vice chairman of the Bitcoin Foundation, an advocacy group.