In an earlier post here on Samizdata, Bruce Hoult posted some very informative comments about MtGox and Bitcoin that we thought it warranted a higher profile, so…
So much misinformation!
What has happened is that people who bought Bitcoins on MtGox thought they owned them. They did not, according to the Bitcoin system. MtGox did. MtGox kept their own records of who ‘owned’ what. And MtGox were incompetent.
Which should have been apparent from the start: MtGox learns Bitcoin
The proper way to use Bitcoin is to keep your wallet of Bitcoins on your own computer. And back it up. Several times. Print it on paper if you want — it will likely fit on one side of A4 in not very small print. Keep it secret. Keep it safe. It is a bearer certificates. If you lose your wallet or forget the password then those Bitcoins are gone out of circulation forever.
That is not what happened with MtGox. They gave Bitcoins that people thought they owned (but did not) to other unauthorised people. It is theft. Just like a bank robbery. Those Bitcoins still exist, just in other hands.
This has absolutely no effect on people who keep their Bitcoins on their own computer (or phone). There are the same number in circulation as before. Bitcoins still can’t be counterfeited or inflated.
If you want/need to use a place similar to MtGox to turn normal money into Bitcoins then DO NOT LEAVE THEM IN YOUR ONLINE WALLET THERE. Make yourself an identity and wallet on your own computer and make a payment from your account on the Bitcoin exchange to your own identity. Then you are perfectly safe.
Well, you are if you do your backups diligently.
Or, if you want to turn normal cash into Bitcoins, find someone who has Bitcoins and wants cash, agree a price, have them do a transfer of Bitcoins from their wallet to yours (using the actual Bitcoin system, not an exchange), and hand them the cash.
The recent problems are not with the Bitcoin system, they are with finding trustworthy and competent ‘bank’ or ‘escrow’ services who will not lose or steal what they hold in trust for you.
To amplify on the previous.
Assume you want to use Bitcoins to buy a used TV, and both you and the seller have Bitcoin software and wallets on your own computers: You make a transfer from your Bitcoin wallet to theirs, using the Bitcoin software. You wait about 10 minutes for the next block of world-wide transactions to be created (mined). If you are paranoid, you wait for another block to be created, pointing to the one with your transaction.
At this point the transaction is recorded on thousand of computers all over the world. They all agree that Bitcoins have been transferred from you to the seller. The transaction is irrevocable.
Now you ask the seller to send you the TV. There is a risk that they will not send you the TV, even though they have the money.
This is exactly the same situation as any on-line auction site, or newspaper classifieds or whatever.
The solutions are the same. You can not get your money back, but you can damage their reputation in whatever venue you used to arrange the deal. Or you can meet them in person and do both sides of the swap in person. Or you can use a trusted third party as escrow — you give them the money, and the seller gives them the goods, and when they have both they pass them on.
The problem is to find a competent and trustworthy escrow service.