Tokyo-based Mt. Gox posted an update on its website on Tuesday, saying a "decision was taken to close all transactions for the time being."
Mt. Gox had imposed a withdrawal ban earlier this month after detecting what it called "unusual activity" and then on Tuesday, its website went dark. The new message posted later in the day said: "We will be closely monitoring the situation and will react accordingly."
On Sunday, Mt. Gox CEO Mark Karpeles resigned from the board of the Bitcoin Foundation, a group seeking legitimacy for the currency, which has been tainted by extreme volatility, dodgy exchanges and its association with criminal activities.
Prominent members of the bitcoin community — including San Francisco-based wallet service Coinbase and Chinese exchange BTC China — sought to distance themselves from the Mt. Gox collapse. They called it an isolated case of mismanagement and said other exchanges have better security and management systems.
"As with any new industry, there are certain bad actors that need to be weeded out, and that is what we are seeing today," the statement said.
740,000 bitcoins missing
Documents purportedly leaked from the company lay out the scale of the problem. An 11-page "Crisis Strategy Draft" published on the blog of entrepreneur and bitcoin enthusiast Ryan Selkis says that 740,000 bitcoins are missing from Mt. Gox, which roughly translates to hundreds of millions of dollars' worth of losses, although figures are fuzzy given bitcoin's extreme volatility.
Mt. Gox previously suffered a crippling security theft in 2011, and several experts have warned the exchange about a software glitch which could enable hackers to silently drain the business of its bitcoins.
If the draft strategy document is correct, Mt. Gox has lost some $370 million worth of bitcoins and has liabilities of $55 million against only $33 million in assets, meaning it is unlikely to recover
"At the risk of appearing hyperbolic, this could be the end of bitcoin, at least for most of the public," the draft said.
In a post to his blog, Selkis said that the document was provided to him by a "reliable source" and that several people close to the company had confirmed the figures. Reached by phone, he declined further comment.
The scandal may cost bitcoin enthusiasts dear.
At the Tokyo office tower housing Mt. Gox, bitcoin trader Kolin Burgess said he had picketed the building since Feb. 14 after flying in from London, hoping to get back $320,000 he has tied up in bitcoins with Mt. Gox.
"I may have lost all of my money," said Burgess, next to placards asking if Mt. Gox is bankrupt. "It hasn't shaken my trust in bitcoin, but it has shaken my trust in bitcoin exchanges."
Bitcoin exchange value falls
Mt. Gox CEO Karpeles did not immediately return several messages seeking comment. A security officer at the office tower said no one from Mt. Gox was in the building. Tibbane, an internet company that Karpeles is CEO of, still has its name listed on the building's directory.
"I have no idea" where they are, said Burgess, the trader. "I'm both annoyed and worried."
On bitcoin exchanges, the currency's value has fallen to about $470 from $550 in the past few hours, a figure already down more than 50 per cent on the price of $1,200 per bitcoin reached on Mt. Gox three months ago. However, in the $500 range, it is still trades at 17 times what it traded for last year.
The disappearance of Mt. Gox could hurt bitcoin, which was started in 2009 as a currency free from government controls. Bitcoin's boosters say the currency's design make it impossible to counterfeit and difficult to manipulate, and the virtual money has won an eclectic mix of die-hard fans, including libertarians, tech enthusiasts and adventurous investors.
But the currency has struggled to shake off its associations with criminality, particularly its role in powering the now-defunct online drug marketplace Silk Road. Only last month another member of the Bitcoin Foundation, vice-chairman Charlie Shrem, was arrested at New York's Kennedy Airport on charges of money laundering.
Not everyone believes the Mt. Gox shutdown will seriously hurt bitcoin.
Anthony Di Iorio, who runs Bitcoin Decentral Toronto, a group for those interested in bitcoin, said people will be concerned in the short-term, but will return to the virtual currency.
“The fundamentals of bitcoin are very strong. I believe that other exchanges are coming up that are much more robust and more secure than what Mt. Gox has been,” he told CBC News.
Di Iorio said Mt. Gox appeared to have a security breach on its site, which went undetected. He advised bitcoin enthusiasts to exchange only small amounts of the currency at one time, as bitcoin is most secure when it is in your own digital wallet.
"The great thing about Bitcoin is that you can be your own bank and nobody has access to your funds," he said. "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 your money languishing with a third-party is that if the site shuts down, your investment is gone with it.
Authorities have been taking an increasingly hard look at bitcoin and related virtual currencies including Litecoin, Namecoin, Ripple, and countless others. Some countries, including Russia, have effectively banned the currency. In other jurisdictions, authorities are weighing whether to try to tame the marketplace through licences or other mechanisms.
Alabama's securities regulator Joseph Borg said he planned to caution consumers and investors against trading on bitcoin exchanges after receiving dozens of complaints from around the United States over bitcoin exchanges.
He expressed concern that "Main Street" investors were taking chances on the digital currency.
Even if Mt. Gox doesn't drag bitcoin down with it, there's fear that the exchange's demise will push officials to take an even more skeptical stance.
"I think this is disastrous from a [regulatory] standpoint," Selkis, the enthusiast, said in a message posted to Twitter. "The hammer will now come down hard."