Mt. Gox clarified its position on US dollar withdrawals Friday, after worrying customer feedback over its USD withdrawal freeze. But it faced yet more problems early this week as it reported system downtime to frustrated traders. As it struggles to reassure bitcoin users, what will the long-term implications be for the exchange, and for the bitcoin market overall?

In a post to its Google+ account, Mt. Gox acknowledged “mixed reactions” from customers after it announced on Thursday that it would temporarily freeze withdrawals in US dollars.

“Our bank can no longer handle the volume of withdrawals,” the exchange said, adding that it had struggled in the last two months. It is working with the bank to find an alternative method to get money to its customers, it said. For the time being, it is manually processing US dollar withdrawals itself. “This will take more time, but we are dedicated to doing as many per day as possible,” it added.

But this is the latest in a series of confidence-shaking events at Mt. Gox. Last month, the US Department of Homeland Security pulled the plug on Mt. Gox’s account with the Dwolla online payment network, complaining that Mt. Gox was a money transmission business (MTB), and as such was violating regulations by operating without a license. It also suffered several denial of service attacks.

Now, the market appears to be losing confidence in Mt. Gox. BitPay announced last week that it had temporarily stopped using the exchange for determining the exchange rate for its invoices. Instead, it will be using a blended mix from multiple exchanges.

As users work out how to withdraw their dollars from an exchange which now appears to be processing transactions by hand, the obvious question is: what is the future for Mt. Gox?

Some are not surprised at its latest travails. “In my experience, Mt. Gox always had delays with withdrawals,” points out Meni Rosenfeld, a leading light in the Israeli bitcoin community, and the founder of Bitcoil, an Israeli bitcoin exchange. “I just took it for granted that withdrawing from them isn’t reliable if needed in a timely manner, so I don’t really see that much difference between the current situation and the previous one,” he said.

Bitcoil has suffered its own problems, however; it ceased operations on March 6 and is hoping to resume trading at some point, but opposition from banks is his biggest problem, he says.

In tracking Mt. Gox’s fortunes, it is important to understand where the company came from. It started as an exchange for playing cards used in the Magic: the Gathering trading card game. The company had to endure massive scaling challenges, as it began trading bitcoins, and volumes increased.

The engine clearly needs some upgrading. Adding to the company’s woes, the firm was forced to announce this week that it had experienced downtime preventing customers from accessing the site. Rather than a DDoS attack, this time it attributed the problem to a system error.

“We were alerted to an error in the file system that had triggered a kernel panic, resulting in a server freeze,” it reported. “At that point we had to restart the server manually and proceeded with a fsck (filesystem check) which took some time.”

The company has announced that it will be upgrading its trading engine, and is migrating its server from a hosting provider to its own data center. The new trading system is described as “smokin’ fast”. Let’s hope so.

In the meantime, pundits predict that other exchanges will pick up the slack, gathering valuable market share while Mt. Gox pushes back from the ropes. “Big winners for this announcement will probably be Bitstamp and other exchanges like that, that have better banking infrastructures,” said Charles Hoskinson, cryptocurrency expert and the founder of the Bitcoin Education Project. “We will probably see a larger market share for MTBs like LocalBitcoins as well.”

The charts show significant volatility in the past week. US dollar trading volume on Mt. Gox took a dive on June 19, before recovering slightly and then tanking again. Bitstamp volumes tracked these movements, although in a far less volatile manner. At one point on Saturday, it almost looked as though Bitstamp bitcoin trading volumes would exceed Mt. Gox volumes.

In the longer term, Mt. Gox is losing traction. “Over time, Mt. Gox’s monopoly has decreased. Year by year, the percentage of trading volume held by Mt. Gox has gone down. And so people are starting to move to other exchanges,” said Hoskinson.

Volume is certainly down. Earlier this year, Mt. Gox processed around 80% of transactions. This has fallen to 54%.

Perhaps the biggest worry for the bitcoin market in the short term is liquidity. Trading volume and liquidity go hand-in-hand, and with confidence eroding in Mt. Gox, market liquidity could suffer. “In the short-term, it isn’t great,” said Jesse Heaslip, cofounder of exchange hosting service Bex.io. “But long-term, it will be good for the ecosystem to not have one major fail point.”

Mt. Gox is one step along a longer road, argues Jeff Garzik, now employed full-time by BitPay in his role as one of the core development team for Bitcoin. “While absolutely, Mt. Gox has been the market leader for quite a while, there are several competitors coming up,” he said, adding that there are more exchanges operating currently than we’ve seen in a while. “From a long-time bitcoin user’s perspective, things just keep getting better.”

The big opportunity for the next up-and-coming exchange will be getting state-level regulator approval across the entire US, Garzik predicts. Companies are already shooting for this goal (although they’re going to have problems in California and New York, among other places). The first one past the finish line stands to make millions of dollars, he predicts, especially because its systems will likely have been built from the ground up with bitcoin trading in mind.

In the meantime, Mt. Gox is not only attempting to recover from its recent problems, but is also preparing to list Litecoin, as early as next month.

“We’re looking at July right now, that depends on a few things,” it said. “Mainly, we want to do things correctly from the beginning.”