The news of the day is probably the denial-of-service attack carried out on major Bitcoin exchanges. Bitstamp, a Slovenian exchange, and BTC-e, a Bulgarian one, have both announced they experienced the same kinds of problems that earlier hit Mt. Gox.
A denial-of-service attack (DDoS) is basically an attempt to disrupt the functioning of a website by requesting enormous amounts of information from it. In layman's terms, the attackers cause the website to "overheat" under the amount of data it has to process. This, in turn, results in the site being unavailable to its usual visitors or customers.
What's important to know is that no funds are supposedly endangered by the attacks. The full statement
from Bitstamp is as follows:
Bitstamp's exchange software is extremely cautious concerning Bitcoin transactions. Currently it has suspended processing Bitcoin withdrawals due to inconsistent results reported by our [B]itcoind wallet, caused by a denial-of-service attack using transaction malleability to temporarily disrupt balance checking. As such, Bitcoin withdrawal and deposit processing will be suspended temporarily until a software fix is issued.
No funds have been lost and no funds are at risk.
This is a denial-of-service attack made possible by some misunderstandings in Bitcoin wallet implementations. These misunderstandings have simple solutions that are being implemented as we speak, and we're confident everything will be back to normal shortly.
Withdrawals which failed on the 10th and 11th of February will be canceled and the amounts added back to the customer account balances.
We will communicate any further developments regarding this issue.
BTC-e announced withdrawal delays via its Twitter account
: "Due DDOS on Bitcoin network there is a delay possible with crediting of transactions [made] between 10-11 February. Be patient please"
This does not do much in the way of reassuring Bitcoin users. Adding to the problems of Mt. Gox, this creates a situation in which the three biggest exchanges aren't functioning properly. It might be wise to wait for the situation to clarify before allocating any capital to Bitcoin exchanges.
Now back to Mt. Gox.
Bitcoin was relatively stable yesterday on Mt. Gox, losing 0.6% at the end of the day. 16,337.05 Bitcoins were traded, less than half of what we had seen the day before. Overall, the picture yesterday was of a move declining in strength, and my firm had even said it was tempting to bet on a reversal. We did not do that, since we perceived the situation as particularly risky, given Mt. Gox's current problems.
The action today seems to deny any possible reversal (this was written just before 8:30 a.m. EST) since the volume is already almost as high as it was yesterday. The move itself has been down, 9.1% down compared with yesterday's close. This paints a picture of possible further declines, perhaps below $500.
My firm thinks that the current situation in Mt. Gox is still worth looking at, since any severe deterioration here might translate into decisive moves on other exchanges.
Bitcoin is currently dancing around the $540 level (close to the December 18 close, solid red line on the chart). There are no strong indications that the price is coming back above $600 just now. The outlook is all the more bearish, as the actual price level is below $540. A move away from this level to the downside could possibly bring Bitcoin as low as $450 (no sure bet, though).
Any serious moves on Mt. Gox would be likely accompanied by similar, although weaker, moves on other exchanges. This makes the short-term outlook bearish throughout major exchanges.
Summing up, in my firm's opinion, no short-term positions should be kept at this moment.
We're waiting for the situation on Bitcoin exchanges to normalize.
For the full version of this essay and more, visit Sunshine Profits' website.
Mike is a quantitative analyst focused on economic reality, not theoretical models. His investment thinking is grounded in empirical evidence and common sense. A holder of two master's degrees in quantitative methods and finance, he researches economic uncertainty, portfolio management, and investor behavior. At SunshineProfits.com he develops innovative investment tools, and is the author of the Bitcoin Trading Alert service.
No positions in stocks mentioned.