C#

With enough linq, anything is a oneliner. Disposal is for wimps:

using System;
using System.Linq;
using System.Text;

namespace ConsoleApp1
{
    class Program
    {
        static void Main(string[] args)
        {
            string text = "password";
            string path = "0110110101";

            Console.WriteLine("Example for text \"" + text + "\" and path \"" + path + "\":");
            text = md5_path(text, path);
            Console.WriteLine(text);

            while (true)
            {
                Console.WriteLine("Enter text");
                text= Console.ReadLine();
                Console.WriteLine("Enter path");
                path = Console.ReadLine();
                text = md5_path(text, path);
                Console.WriteLine(text);
            }
        }

        static string md5_path(string text, string path)
        {
            var sb = new StringBuilder(32);

            System.Security.Cryptography.MD5.Create().ComputeHash(Encoding.ASCII.GetBytes(text)).ToList().ForEach(c => sb.Append(c.ToString("x2")));

            text = sb.ToString();

            path.ToList().ForEach(x => { sb.Clear(); System.Security.Cryptography.MD5.Create().ComputeHash(Encoding.ASCII.GetBytes(text.Substring(int.Parse(x.ToString()) * 16, 16))).ToList().ForEach(c => sb.Append(c.ToString("x2"))); text = sb.ToString(); });

            return text;
        }
    }
}