Bitcoin, the cryptocurrency that made a huge splash in the media recently, is finding its market crushed under its own weight after a widely publicized hack at an extremely large exchange site MtGox.

A malicious hacker compromised the account of a bitcoin billionaire with the intent of crashing the currency through a massive sale (and succeeded) in order to then purchase the bitcoins back at the lower value to sell them again (which failed.) Sunday, June 18^th the exchange rate dropped over a cliff and has been slow to recover. The aftershocks are still affecting the community as ripples pass through the market and speculators attempt to move their coins (or just get out.)

Numerous bitcoin exchanges have suffered under the sudden run on the currency and the trading of hacked coins. As a result many of the exchanges have either suspended the ability to trade coins or trading has become so slow as to reach near illiquidity. MtGox, the largest and most influtential is entirely offline (rolling back the hacked exchange.) Virwox has halted BTC trading; BitcoinMarket.com and Tradehill trading of BTC has ground to a crawl—although it’s not disabled, the value of the coins have changed little and they’re very slow to respond to exchange requests; bitmarket.eu hasn’t set any policies, but it’s a European market so it’s hard for Americans to use. Finally, Bitomat seems unaffected, but it’s in Polish so it’s difficult to tell.

Also, many of the websites that use bitcoins as the coin of the realm have also taken a staggering hit with the lockdown of MtGox as many of them use that exchange’s API to facilitate their trades. As a result, many of them are unable to process orders or currently display wildly incorrect exchange rates, prices, and values.

Growing from a proof-of-concept into a full blown currency will still be a slow process for Bitcoin and it’s strange progeny; but the underling principles of the cryptocurrency should build for a strong, distributed, and quasi-anonymous exchange culture but first it needs to hit a critical mass to stabilize itself. The existence of Bitcoin Billionaires who hoard surprising amounts of the commodity and no mechanism that regulates fluctuations (or mitigates them against a more stable value source) means that crashes and balloons are extremely likely and high volatility will lead to clotting.

Bitcoin may either fade away for a few more years (or vanish entirely) due to these incidents and its freeze-over but it could also lead to a better understanding of makes it, and its community tick. Malware has even appeared in the wild that targets digital Bitcoin purses, lending some thoughts of legitimacy to the currency as hackers can make money after stealing it.

As of this week, the EFF decided to stop taking bitcoins as an alternative donation currency, citing not the instability of the market but the potential legal troubles the cryptocurency may face in the future. This act came with a some mixed reactions but as one of the early and prominent adaptors of the new currency, the loss of the EFF at this juncture does not look good.

The recovery of Bitcoin will depend largely on what happens after the thaw and how the economic community rebuilds the currency and its culture to weather threats such as sudden-sell-off and hoarding. A thriving currency will depend on a large number of actors showing confidence its continued livelihood by keeping it flowing.