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The soaring value of crypto-currency Bitcoin stuttered slightly last night - after a main exchange for the currency was flooded with network traffic and Bitcoin wallet site Instawallet was suspended.

Mt Gox, the most popular Bitcoin exchange, blamed an ongoing distributed denial-of-service (DDoS) attack for trading lags and other connectivity problems over recent days. It stated:

Mt.Gox has been suffering from its worst trading lag ever, 502 errors, and at one point some users were not able to log in their account. The culprit is a major DDoS attack against Mt.Gox. Since yesterday, we are continuing to experience a DDoS attack like we have never seen. While we are being protected by companies like Prolexic, the sheer volume of this DDoS left us scrambling to fine-tune the system every few hours to make sure that things don’t go beyond a few 502 error pages and trading lag.

The statement, issued on Thursday, goes on to speculate that the packet-flinging attacks by unknown parties may have been designed to destabilise the fledgling currency that relies on cryptography for transactions.

The attackers may have been attempting to trigger panic selling that they could then profit from by buying the currency at a low point timed to coincide with the temporary suspension of a series of attacks, it suggests.

Japan-based Mt Gox goes on to explain that it is facing an unprecedented increase in new accounts, 57,000 in March alone compared to around 100,000 in the whole of 2012, so that it is now handling 420,000 trades per month and $121m in monthly trade volume.

Bitcoin prices peaked at $147 per BTC early this week before falling back to below $120 per BTC around the time of the attacks. The exchange rate was around $134 per BTC on Thursday. Last year the value of a Bitcoin increased steadily from around $5 to reach about $13 at the start of this year. Since then - after just three months - the value has increased almost exponentially to reach the unprecedented height of $147 per BTC.

It hasn't all been plain sailing. An arcane software problem last month resulted in the price of the digital currency falling 23 per cent to $37 before quickly regaining lost ground, as explained in some depth in a blog post by Paul Ducklin of Sophos here.

As previously reported, a good portion of the recent increase is likely due to the banking crisis in Cyprus. Interest rates are low across Europe, while exchange rates are volatile, factors that make gold, silver and (for the tech savvy) Bitcoins seem like a safe haven. The Dow Jones industrial average has recovered to pre-crash heights but the same can't be said of stock markets in Europe.

The increased value of Bitcoins has made the currency an increasingly attractive target for cybercrooks, among other unwelcome problems, as well as more positive development such as plans to establish the first Bitcoin ATM in Cyprus.

After temporarily suspending its services this week following a security breach, Bitcoin wallet service Instawallet has announced an indefinite suspension of service while it develops a more secure architecture.

Our database was fraudulently accessed, due to the very nature of Instawallet it is impossible to reopen the service as-is.

In the next few days we are going to open the claim process for Instawallet balance holders to claim the funds they had stored before the service interruption.

Last week payments start-up Dwolla was also hit by a DDoS attack which also affected third-party developers. Dwolla accepts Bitcoins but it's unclear whether or not the attack on the service is tied to the latter run of hacker attacks against Mt. Gox and Instawallet.

Individual Bitcoins exist as a digitally signed solution to a complex mathematical algorithm. New Bitcoins are "mined" by working out solutions to unsolved algorithms. There are an estimated 11 million Bitcoins in circulation, worth around $1.4bn at current prices, out of a total 21 million Bitcoins that can ever be created, according to limits hard-wired into the system (PDF).

Regulators are looking to apply money-laundering rules to virtual currencies such as Bitcoin but success on this front is far from assured and may be resisted by some, and not just by libertarians and cypherpunks who've found common cause in backing a digital currency outside the control of governments.

Bitcoins are increasingly going mainstream through development. Expense management firm Expensify, for example, has added Bitcoin as a reimbursement option.

Bitcoin is progressing to the point where the currency offers the cheapest means to carry out foreign currency exchange. However, the use of Bitcoins to anonymously pay for hard drugs and other illicit items on the Silk Road trading marketplace is something that will be undoubtedly used by politicians and other critics to bash the currency. ®

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