Here’s the reasons for the current bitcoin crash. It’s a stupid story, but it doesn’t really affect bitcoin in the the long-term, except for the matter of public perception.
1. Yet AGAIN, the exchange Mt. Gox has fallen apart. It’s about a yearly occurrence now that Mt. Box explodes somehow and takes the bitcoin price with it. I’ve actually seen a lot of bitcoin fans cheering this on because they desperately want Mt. Gox to die for good so that they stop screwing everything up.
Basically, Mt. Gox has fallen victim to the transaction malleability “flaw”. Imagine this scenario: You go to the bank and ask to withdraw $100. The bank gives you $100 as well as a receipt. You then go home and make a photocopy of the receipt. You then go back to the bank and complain that you never received your $100, even though you have a receipt (the photocopy) that says that you should have gotten it. The bank agrees and gives you another $100. Repeat this process until you’ve stolen millions.
This is pretty much exactly what happened to Mt. Gox. Gox blamed the Bitcoin Protocol for this mess, saying that people shouldn’t be capable of photocopying receipts. The Bitcoin developers responded with “You’re insane! The receipts are only supposed to be for convenience, not a factual record! You’re supposed to check your own systems to see if you’ve already given them the money or not.” Of course, the damage was already done.
2. Encouraged by the massive success of stealing from Mt. Gox, scammers started sending huge amounts of photocopied receipts at all the major exchanges, hoping that one of them had the same implementation flaw. None of them did, but the massive amount of false transactions being sent their way ended up causing a pseudo-Denial of Service attack, where the exchanges were having trouble picking out the legitimate withdraws from all the fake ones. One of the exchanges, Bitstamp, temporarily shut down all withdraws (they’re back up now) while they reworked their systems so that they’d be better at automatically rejecting false transactions.
3. Silk Road 2 (the drug dealing site) had all its bitcoins “stolen”. The people in charge are blaming it on the transaction malleability issue. As many people have pointed out, this is completely ridiculous. No one could possibly send out so many “refunds” that their account balance goes to zero without noticing that something’s up. What (almost certainly) actually happened was that the drug dealers in charge of Silk Road decided to run off with the money and blame it on the same issue Mt. Gox was having, correctly assuming that most people wouldn’t realize how ridiculous of a claim that was, and the few people who would couldn’t do anything about it.
Thus, bitcoin has crashed yet again. And then it’ll go back up. And then it’ll crash again. And then back up. Then crash again…
I’m sorry you invested in bitcoin.