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Bitcoin drops another 20% as Mt Gox highlights bug

The virtual currency bitcoin suffered further price volatility on Monday as major exchange Mt Gox blamed its ongoing technical issues on a critical flaw in the cryptocurrency which it said affected all exchanges.

Bitcoin withdrawals at the Japan-based exchange were halted over the weekend as its technical team investigated a problem with the way bitcoin withdrawals are processed. In a new statement on Monday Mt Gox said it would resume bitcoin withdrawals to outside wallets once the issue had been properly addressed in a manner that would best serve its customers.

The digital currency — which is known for its wild price fluctuations — fell to around $680 on Friday morning, having traded around $850 for most of the week, according to CoinDesk, which tracks the price of bitcoin. On Monday after the statement from Mt Gox the currency fell to around $538, with investors deciding to offload further, but staged a small turnaround shortly afterwards.

(Track the price of bitcoin here)

Mt Gox is the third-biggest bitcoin exchange in the world, representing around 14 percent of total bitcoin trade in the last week, according to Bitcoinity.org. It said customers would still not be able to transfer bitcoins from a Mt Gox wallet to an external bitcoin address on Monday.

However, it added that a bitcoin transaction to any Mt Gox bitcoin address, and currency withdrawals (yen, euro, etc) would not be affected by this issue.

(Read More: Bitcoin plummets 20% after major exchange halts withdrawals)

"The problem we have identified is not limited to Mt Gox, and affects all transactions where bitcoins are being sent to a third party," it said in a statement on Monday morning.

"We believe that the changes required for addressing this issue will be positive over the long term for the whole community. As a result we took the necessary action of suspending bitcoin withdrawals until this technical issue has been resolved."

Tomohiro Ohsumi | Bloomberg | Getty Images

Detailing the issue further, it said that it had detected unusual activity on its bitcoin wallets. A bug in the bitcoin software made it possible for people to use the bitcoin network to alter transaction details. That could give the false impression that bitcoins had not been sent to a bitcoin wallet, when in fact they had.

"Since the transaction appears as if it has not proceeded correctly, the bitcoins may be resent. Mt Gox is working with the bitcoin core development team and others to mitigate this issue," it said.

(Read More: Russian authorities say bitcoin illegal)

Mt Gox has been described as the "original" bitcoin exchange by fans of the digital currency that see it as facilitating its fledgling growth in the early days of the technology. Mt Gox once claimed that it handled around 80 percent of all global dollar trades for the currency. However, the exchange hasn't been without its own set of public relation disasters.

It recently experienced lengthy delays when exchanging bitcoin into U.S. dollars and has previously experienced high-profile DDoS (distributed denial-of-service attacks) hacking attacks which slow down its user experience. Meanwhile, the U.S. Department of Homeland Security seized its bank account in May 2013, saying it had never properly registered as a money services company.

Garrick Hileman, an economic historian at the London School of Economics told CNBC that this error with bitcoin's protocol - called "transaction malleability" - isn't a new problem and believes that Mt Gox may be using it as a delaying tactic because of an internal technology complication, a regulatory issue, or even a solvency problem.

"A lot of people have really had it with Gox", he told CNBC via telephone.

He said that he would be surprised if Mt Gox engineers had found something significantly new regarding the issue of "transaction malleability", but added that something like "double spending", where transactions are accidentally completed twice, would be a huge issue.

By CNBC.com's Matt Clinch; Follow him on Twitter @mattclinch81

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