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Sudden shutdown of Mt. Gox a lesson for Canadian Bitcoin enthusiasts: experts

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This April 3, 2013 photo shows bitcoin tokens in Sandy, Utah. THE CANADIAN PRESS/AP, Rick Bowmer

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This April 3, 2013 photo shows bitcoin tokens in Sandy, Utah. THE CANADIAN PRESS/AP, Rick Bowmer

TORONTO - The head of the Bitcoin Alliance of Canada says the collapse of a major currency exchange in Japan, following months of secret catastrophic losses, serves as a warning to those who buy and trade in the popular digital currency.

Anthony Di Iorio, the executive director at the non-profit organization, advises that the lesson to be learned is that large amounts of Bitcoins should not be left on any exchange or service due to possible security risks.

"The great thing about Bitcoin is that you can be your own bank and nobody has access to your funds," he said Tuesday.

"But if you are putting them in an exchange, and you're buying and selling, you have to have them stored there at least for a small amount of time."

The risk with leaving money languishing with a third-party is that if the site shuts down, the investment can be gone with it.

That appears to be what happened at the Tokyo-based Mt. Gox where it's estimated as many as 740,000 Bitcoins are missing, roughly translating to hundreds of millions of dollars’ worth of losses.

The company posted a message Tuesday that it has suspended all of its transactions — a move that followed the resignation Sunday of the exchange's CEO Mark Karpeles from the board of the Bitcoin Foundation, a group seeking worldwide legitimacy for the currency.

Mt. Gox's website was returning a blank page Tuesday after it had imposed a ban on withdrawals earlier this month.

Prominent members of the Bitcoin community — including San Francisco-based wallet service Coinbase and Chinese exchange BTC China — sought to shore up confidence in the currency by saying Mt. Gox's collapse was an isolated case of mismanagement and not indicative of the success, or endurance, of the virtual currency.

Di Iorio said the collapse will serve as an important lesson to consumers about how their Bitcoins are secured.

"People are really going to be looking at their security and they are going to probably using this as warning that their security is up to snuff," he said.

"I think the biggest thing is that this is not a problem with Bitcoin itself. It's a problem with a private company."

But others view the troubles with Mt. Gox as the beginning of the end for the popular digital currency.

Lisa Kramer, an associate finance professor in Toronto, said the shut down is not a surprise because Mt. Gox has been dealing with serious security issues for several months, including users recently being banned from making withdrawals.

"Bitcoin has been operating in limbo for some time. The writing has been on the wall," said Lisa Kramer, with the Rotman School of Management at the University of Toronto.

"A lot of economists had been predicting that Bitcoin's days are numbered."

Kramer said people use Bitcoin due to convenience and ease, and Mt. Gox shows that these reasons may no longer apply.

"A center point of any currency's existence is that users have faith in its stability as a medium of exchange. When you need your currency, it needs to be there for you. Mt. Gox has been having trouble obtaining their Bitcoins for some time now and now it looks like they won't get their Bitcoins at all," she said.

"This will decrease trust in Bitcoins."

On Bitcoin exchanges, the currency's value fell to about US$470 from US$550 on Tuesday, a figure already down more than 50 per cent on the price of $1,200 per Bitcoin reached on Mt. Gox three months ago.

Bitcoin was started in 2009 as an unregulated currency, free of control from governments and central banks. There are an estimated 21 million Bitcoins in circulation, but statistics on their usage are unreliable.

Some countries, including Russia, have effectively banned the currency. It is not recognized as legal tender by the Bank of Canada and, in other jurisdictions, authorities are weighing whether to try to tame the marketplace through licenses or other mechanisms.

To access Bitcoin, users set up and manage a digital wallet and can process transactions using their smartphones. The digital currency is seen as more convenient than other forms of payments because they can be sent directly and instantly from one person to another and do not include processing and other fees usually charged by banks or third parties.

Its proponents argue that the currency's design is difficult to counterfeit and manipulate.

Its popularity has grown in Canada, with nearly 150 Canadian businesses currently accepting Bitcoin as a form of payment, according to the Canadian Bitcoin Business Directory.

Canada was also the first country in the world to introduce Bitcoin ATMs last year, including in Vancouver, Ottawa and Toronto.

But critics have argued that Bitcoin's flexibility has come at a price, making the currency extremely volatile.

The currency has also been associated with the black market, specifically its use in the now-defunct online drug marketplace Silk Road. Last month, the vice chairman of the Bitcoin Foundation was arrested in New York on charges of money laundering.

— With files from The Associated Press

Follow @LindaNguyenTO on Twitter

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