The Bitcoin Blunder

Bad news for Bitcoin users and proponents this week. From an article in the New York Times:

A document circulating widely in the Bitcoin world said the company had lost 744,000 Bitcoins in a theft that had gone unnoticed for years. That would be about 6 percent of the 12.4 million Bitcoins in circulation.

While Mt. Gox did not respond to numerous requests for comments, and the companies issuing the statement scrambled to determine the exact situation at Mt. Gox, which is based in Japan, the news helped push the price of a single Bitcoin below $500 for the first time since November, when it began a spike that took it above $1,200.

I think that this breach confirms most of the problems of those who oppose Bitcoins as a fundamental currency: namely, that those who control the supply of Bitcoins are not adequately equipped to protect the national currency, and that Bitcoin is not a stable store of value.

The first point should now be obvious. Those who thought that the suppliers of Bitcoins could adequately protect them through encoding have been proven wrong, and it should be clear that currency should be left in the hands of a very powerful central power. The Federal Reserve would be an excellent choice, I should think.

But on to my other point. That Bitcoins are not an adequate store of value was obvious from the beginning, and still is. Indeed, the price of a Bitcoin in USD had already been dropping dramatically since the beginning of January — this itself should have been proof positive that the currency is not stable. But for those who held out hope for Bitcoins value, the effect the recent theft has had on the  value of the Bitcoin should be a wakeup call. It is not surprising that the theft pushed the value down even further, but the magnitude of the drop, as shown in the graph I linked too, is striking. In other words, even in the absence of bad news Bitcoin cannot hold its value, and bad news has particularly harsh implications. if Bitcoins were the national currency this would have disastrous implications.

Still, I can’t help but imagine that some will still want to fight for Bitcoin, saying that once Bitcoin is a more widely accepted form of currency it will be a more dependable store of value. But this is not true. The fact is, there is nothing that gives Bitcoin intrinsic value — it is fiat money in its purest form. The USD, which is also technically fiat money, actually does have an intrinsic value: it is legal tender for the payment of all debts, public and private. That is, people have to accept it as a form of repayment for debt. So, even though the USD is no longer tied to gold, it has an intrinsic value that Bitcoin just doesn’t have, which probably grants the USD stability that Bitcoin just doesn’t have.

So, the recent fiasco has confirmed what Bitcoin opponents knew all along: it just can’t work as a form of national currency.