Tag Archives: mt. gox

Bitcoin. Yea or Nay?

Is the shutdown of Mt. Gox, one of the major Bitcoin Exchanges, signifying the doom day of Bitcoin?

No. Although $400 million worth of bitcoins, which accounts for 6% of all existing bitcoins, have lost as a result of the heist on the exchange, bitcoin is far from being a failed attempt. As an up and coming cyber currency, bitcoin is going through the roughness during its infancy of being a “cyber product” and being a “currency” at the same time.

Like every other cyber product, flaws and bugs are inevitable. Therefore Mt. Gox’s incident is not completely unforeseeable. Sooner or later, another bug will be exposed, some people will be hurt, some agency will lose its reputation, and some superhero will come to save the world. The release-bug-fix-release loop of software development has defined the imperfectness nature of bitcoin from day 0.

Bitcoin as a currency, although rebellious in nature and virtual in existence, is still exposed to the risk of being stolen. In fact, the $200 million heist is not the biggest heist on currencies. Beside no firearms involved and nearly untraceable, I don’t see the Mt. Gox meltdown any different from other bank robberies.

So, does Bitcoin have no problem at all?

Absolutely not. When it comes to security and trustworthiness, Bitcoin is much inferior to the dollar bills. In terms of security, in good days, bitcoin is safe because it’s untraceable. When things go south, bitcoin is also dangerous because it’s untraceable. The double-edged sword that is information privacy makes bitcoin a good choice for trading without the big brother’s watch, and a worst option ever for people who want to secure their money.

In terms of trustworthiness, since bitcoin is decentralized by design, there’s no institution backing it up. Columnist Megan McArdle explained this very clear in her article:

“… as yet, no currency exchange (for bitcoin) like the ones we use for regular currency — backed by large institutions that can be sued if things go wrong. … for folks in the regular old economy, that’s a problem. It’s hard to get enthusiastic about saving in a system where hundreds of thousands of dollars can disappear overnight, leaving you with no recourse.”

Now, what’s bitcoin’s future?

I’ll argue that bitcoin will continue to exist, but not as a full-fledged currency.       On one hand, a currency must be durable, divisible, transportable and uncounterfeitable. Although Bitcoin satisfies the latter three, it fails to be durable in terms of retaining the same value over time that is the most important characteristic of money. On the other hand, even if someday bitcoin managed to stabilize its price-to-dollar and became a reliable currency, it’ll receive enormous pressure from the government. The better it does at evading governments’ surveillance, the harder governments try to shut it down. At the end of the day, the government has control over the financial tools and it’s an irremovable part in the ecosystem. Bitcoin can’t achieve its goal of “decentralization” without fundamentally alter the economy system and take the government out of the equations. Meanwhile, in order to be strong enough to fight with the government, it has to be accepted by the vast majority, and that’s only achievable after the removal of the government. Simply put, Bitcoin can’t beat the government without first beating the government. This paradox has decided the doomed failure between Bitcoin and governments.

The Fall of Mt. Gox and the Future of Bitcoin

Yesterday, the most prominent online bitcoin exchange Mt. Gox completely shut down. According to the New York Times, approximately 750,000 bitcoins were lost as a result of the shutdown – a notional value of around $430 million at today’s current market price and nearly 12% of all outstanding bitcoins. As the news came out yesterday, the bitcoin community and financial press was buzzing with rumors and predictions about “the end of bitcoin.” While this may be bitcoins “Lehman Brothers moment” as Mark T. Williams, a finance professor at Boston college told the Wall Street Journal, this is not the end of the cryptocurrency. Bitcoin still has many challenges to cement its legitimacy into the future but it also has several strengths that will likely allow it to rebound and become a successful electronic currency.

In light of the Mt. Gox collapse, the most important thing worth noting is that this problem stemmed from one company’s incompetency and ultimate failure – it was not a failure in the underlying bitcoin protocol. Mt. Gox, while the most popular and highest volume bitcoin exchange, had a reputation for incompetency and problems. Trading was halted several days before the site was taken offline and users had experienced similar issues in the past. Bitcoin as an electronic currency protocol, however, has proven to be incredibly resilient and effective throughout this whole ordeal and throughout its ascent. Saying that bitcoin is doomed because of Mt. Gox’s failure, it like saying paper currency was doomed after the fall of Lehman Brothers – a failed institution does not make a failed system.

Bitcoin, however, does face several key challenges to regain its tarnished legitimacy. The Wall Street Journal quotes a research note out today from Citigroup that outlines bitcoins three biggest challenges:

  1. Bitcoin traders and potential investors lose confidence in the security and safety of Bitcoin transactions and holdings.
  2. Other digital currencies start eating into Bitcoin’s market share, taking away some of the first-mover advantage.
  3. Competition emerges from conventional financial institutions using generic bitcoin technology, without the decentralization and within the conventional regulatory framework.

The essential problem is that Bitcoin’s value is entirely reputation based. Like fiat paper currency, there is no intrinsic value. Unlike fiat paper currency, however, there is no implicit government backing, the value is derived from faith in the decentralized peer-to-peer network that accounts for individual bitcoins. A major negative event such as the failure of Mt. Gox creates the type of negative perception that can ruin bitcoin.

The reason while I do not believe Mt. Gox’s fall will not ruin bitcoin is that the community supporting the cryptocurrency have proven resilient and adaptable. Many are hackers, programmers, and other tech savvy individuals. While many lost a great deal of money in Mt. Gox, they also seem determined to push forward. As entrepreneur and bitcoin enthusiast Erik Voorhees described in a Reddit post yesterday morning, many believe that bitcoin is about more than making money – it is about creating a system that is outside the government’s realm of supervision where libertarians can flourish. If the community embraces this idealism, it will have the strength to innovate through the challenges and create a more stable and accessible system for all.