I haven’t been following the Bitcoin situation too closely — although if I’d had extra money lying around over the last year or two, I might have dabbled — but it’s hard to figure out what really happened from the media reports. At Samizdata, Bruce Hoult explains the details:
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.
