This week’s halt, and possible fall, of the Mt. Gox exchange might or may not prove to be the beginning of the final for Bitcoin – but in order to borrow Winston Churchill’s phrase, it is certainly the end of the beginning.
Mt. Gox had already lost its location as the leading Bitcoin exchange prior to the murky chain of events that will led the Tokyo-based site to shut down. An apparently leaked inner document indicates that the site might have been the victim of a major fraud, in which perhaps more than $300 million worth of Bitcoin “disappeared” from the exchange’s accounts. I put “disappeared” in quotes because, of course , Bitcoin has no physical manifestation.
Bitcoin is available only as the product of a personal computer algorithm whose origins are not known and whose ultimate purpose can be unclear. It has attracted a different collection of users, including individuals who want to keep questionable dealings private, those who may want to keep part of their wealth hidden from authorities who have access to conventional financial accounts, and end-of-the-worlders who think civilized society is usually on the highway to hell and that for some reason they will be better off owning bitcoins when we all arrive there.
Bitcoin aficionados like to call it a digital currency, or cryptocurrency because of its encrypted nature. However it is clear now, amid the wild fluctuations in Bitcoin’s price, that it can be not a true currency at all. It is definitely a commodity whose price fluctuates according to its quality and according to supply and demand.
As of this 7 days, there are two grades of Bitcoin. One of the Mt. Gox variety, which nobody can access while the web site is down and which may no longer truly exist at all, was worth only about one-sixth of every other bitcoin yesterday.
Some people are always willing to provide value, albeit not very much value, to take a chance on a possibly worthless asset. This is why shares of companies that are obviously about to go bust can trade for a price greater than absolutely no. But at least we know the gives exist, whether in tangible or even intangible form, and there are governing bodies available to vouch for their validity, otherwise their value. Bitcoin, sponsored simply by no government and outlawed by some, has no such backing. Request any Mt. Gox user these days whether that is a plus, as bitcoin holders have heretofore maintained. (Authorities from Tokyo to New York are already probing the Mt. Gox collapse, and some sort of follow-up action appears likely. )
True money serves two functions: as a store associated with value and as a medium associated with exchange. Bitcoin thus far gets only fair marks as a medium associated with exchange, since there are only a limited variety of places where you can freely spend it. You can swap your (non-Mt. Gox) bitcoins for real money, but you can do the same with any other commodity, like gemstones or Hondas. Diamonds and Hondas are worth money, but they normally are not money.
Bitcoins utterly flunk the store of value test because their particular wild price fluctuations do not shop value; depending on blind luck, these people either create or destroy this. Collecting bitcoins is speculating, not saving. There is a big difference.
Bitcoin really does address certain real-world issues, such as the sometimes exorbitant cost of exchanging currencies and the cumbersome nature of the modern banking system, which is laden along with regulation to try to prevent everything from bankruptcy to money laundering to identification theft. But the regulations exist because insolvency, money laundering and identification theft exist, too. As Mt. Gox vividly illustrates, a system with out such safeguards is prone to make problems much more serious than the ones it purports to solve.
The Mt. Gox debacle might or might not permanently undo Bitcoin’s credibility. We won’t know before we know what happened in those computers in Tokyo. The crisis should, however , strip whatever is left from the veneer of safety that Bitcoin’s expected cryptosecurity was supposed to provide. Bitcoin is no more secure than the structure that is built to hold it. Lacking all of the backstops that have evolved over time in the traditional financial system, that is not secure at all. Either we recreate those backstops in the Bitcoin world, in which case we need to wonder why we bothered with Bitcoin in the first place, or we live dangerously without them.