A technical glitch in the core Bitcoin software forced developers to call for a temporary halt to Bitcoin transactions, sparking a sharp sell-off. The currency's value briefly fell 23 percent to $37 before regaining much of its value later in the evening.

The core of the Bitcoin network is a shared transaction register known as the blockchain. Approximately every 10 minutes, a new block is created containing a record of all Bitcoin transactions that occurred since the previous block. Nodes in the network, known as miners, race to "discover" this next block by solving a cryptographic puzzle. The winner of this race announces the new block to the other nodes. The other nodes verify that it complies with all the rules of the Bitcoin protocol and then accepts it as the next official entry in the block chain, starting the race anew.

It's essential for all miners to enforce exactly the same rules about what counts as a valid block. If a client announces a block that half the network accepts and the other half rejects, the result could be a fork in the network. Different nodes could disagree about which transactions have occurred, potentially producing chaos.

That's what happened on Monday evening. A block was produced that the latest version of the Bitcoin software, version 0.8, recognized as valid but that nodes still running version 0.7 or earlier rejected.

Rollback

"After some emergency discussion on #bitcoin-dev, it seems best to try to get the majority mining power back on the 'old' chain, that is, the one which 0.7 accepts," wrote Bitcoin developer Pieter Wuille in an e-mail. "That is the only chain every client out there will accept. If you're a miner, please revert to 0.7 until we at least understand exactly what causes this."

He asked merchants to stop accepting transactions until the problems had been sorted out. Mt. Gox, the leading Bitcoin exchange, announced that it was suspending Bitcoin transactions shortly afterwards.

The fix is technically straightforward, and (with the exception of coins "mined" in the last couple of hours) users' Bitcoins are not in any danger of being lost. Still, the incident shook the confidence of the markets. From a high of more than $48 earlier Monday, the value of Bitcoins plummeted to less than $37 around 10 PM Central time on Monday evening, a 23 percent decline. The price has since recovered; one Bitcoin is now worth about $46.

This latest glitch is different from the problem that caused Bitcoin prices to briefly fall to zero on Mt. Gox in June of 2011. In that case, the sell-off was caused by the compromise of the exchange itself. The integrity of the underlying Bitcoin network was not affected, but the incident still contributed to a decline in public confidence in the currency. From a high of $32 earlier in the month, Bitcoins would decline to a value of $2 before the end of 2011.

This time, the glitch occurred in the core Bitcoin software itself. Accordingly, the incident will be an important test of the cryptocurrency's decentralized governance structure. No single person or institution can order Bitcoin miners to abandon the 0.8 branch of the blockchain in favor of the 0.7 branch. Rather, the "winning" branch is effectively chosen by a majority vote of the network's computing power. Bitcoin's technical developers must convince a majority of the network's miners to voluntarily downgrade their software. Fortunately, Bitcoin still enjoys a relatively tight-knit community, and its leaders say they are confident they can get the cooperation they need.

Disclosure: I own some Bitcoins.