How a bullied geek forged an empire out of digital currency, and became a suspect in a half-billion-dollar heist ... During his reign, bitcoin, the leading form of virtual currency, rose in value from approximately a quarter to more than $1,200. The Wall Street Journal estimated that at one point Mt. Gox was processing 80 percent of all bitcoin transactions in the world. At its peak, the company traded more than $4 million a month. ... in February 2014, it was discovered that a half-billion dollars worth of bitcoins simply vanished from Karpeles' exchange, leaving customers around the world unable to withdraw their funds. It's the largest online heist in history. (Estimates vary on the exact amount. Many have reported $450 million; Karpeles says it could be as high as $650 million.) Some — including even those who worked closely with Karpeles — suspected it was an inside job. ... Mt. Gox was originally a site McCaleb had made for people to exchange Magic cards (thus the name — Magic: the Gathering Online Exchange, or Mt. Gox for short). But by July 2010, he'd devoted it to bitcoin instead, setting it up as the currency's first online brokerage ... According to Karpeles, the problem stemmed from what's called a "transaction malleability," a software flaw that allowed people on the outside to manipulate the bitcoin transactions and steal money from the exchange. At first, he tells me, he had no idea how much bitcoin was missing, but the deeper he dug, the worse it became
Financial markets accommodate both prudent insurers and reckless gamblers. They provide investors with an opportunity to diversify their portfolios, and allow gamblers to bet on future movements in interest rates. The coexistence of the two can allow speculators to make profits by stabilising prices—buying when markets are fearful, and selling when they are greedy. But when the gambling motive overwhelms the insurance motive, speculation becomes destabilising and then risk, far from being minimised by careful management, becomes concentrated in the hands of those who understand least what they are doing. And when regulators perceive insurance when they should see wagering, their actions magnify a crisis rather than minimise it. Such destabilising speculation, mischaracterised by regulatory authorities as prudent risk assessment, is what caused the global financial crisis of 2008. ... The coexistence of insurance and gambling goes back to the earliest days of markets in risk, and the interaction of the two has been central to financial history. But it was four developments in the second half of the 17th century that combined to frame the way we think about risk, and the institutions we have for dealing with it, through to the present day.