This week’s halt, and possible failure, of the Mt. Gox exchange may or may not prove to be the beginning of the conclusion for Bitcoin – but to borrow Winston Churchill’s phrase, that is definitely the end of the beginning.
Mt. Gox had already lost its location as the leading Bitcoin exchange before the murky chain of events that will led the Tokyo-based site in order to shut down. An apparently leaked internal document indicates that the site may have been the victim of a major theft, in which perhaps more than $300 mil worth of Bitcoin “disappeared” from the exchange’s accounts. I put “disappeared” in quotes because, of course , Bitcoin has no physical manifestation.
Bitcoin exists only as the product of a computer algorithm whose origins are unidentified and whose ultimate purpose will be unclear. It has attracted a various collection of users, including individuals who want to keep questionable dealings private, folks who may want to keep part of their prosperity hidden from authorities who have access to conventional financial accounts, and end-of-the-worlders who think civilized society can be on the highway to hell and that for some reason they will be better off owning bitcoins whenever we all arrive there.
Bitcoin fans like to call it a digital currency, or even 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 changes according to its quality and based on 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 more 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 resource. 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 stocks exist, whether in tangible or even intangible form, and there are government authorities available to vouch for their validity, if not their value. Bitcoin, sponsored by no government and outlawed by some, has no such backing. Ask any Mt. Gox user nowadays whether that is a plus, as bitcoin holders have heretofore maintained. (Authorities from Tokyo to New York are actually probing the Mt. Gox failure, and some sort of follow-up action appears likely. )
True money acts 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 of 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 the actual same with any other commodity, like expensive diamonds or Hondas. Diamonds and Hondas are worth money, but they normally are not money.
Bitcoins utterly flunk your local store of value test because their wild price fluctuations do not shop value; depending on blind luck, they will either create or destroy it. Collecting bitcoins is speculating, not really 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 contemporary banking system, which is laden along with regulation to try to prevent everything from financial distress to money laundering to identity theft. But the regulations exist since insolvency, money laundering and identity theft exist, too. As Mt. Gox vividly illustrates, a system without having such safeguards is prone to create problems much more serious than the ones it purports to solve.
The Mt. Gox debacle might or may not permanently undo Bitcoin’s credibility. We won’t know before we know so what happened in those computers in Tokyo.
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The crisis should, however , strip whatever is left from the veneer of safety that Bitcoin’s intended cryptosecurity was supposed to provide. Bitcoin is no more secure than the structure which is built to hold it. Lacking all the backstops that have evolved over time in the traditional financial system, that is not secure in any way. Either we recreate those backstops in the Bitcoin world, in which case we need to wonder why we bothered along with Bitcoin in the first place, or we live dangerously without them.
There will always be people who don’t trust banks and the government to secure their savings. They will used to stuff cash into mattresses. Maybe some will continue to use Bitcoin instead. My own guess is that Bitcoin’s chance of becoming a mainstream form of transaction, like debit cards or PayPal, is virtually zero. This may not be the beginning of Bitcoin’s end, but we have definitely seen the end of the beginning.