To say that Bitcoin is the troubled child of the currency family is an understatement. In another precocious turn of events, Mt Gox, the exchange site most commonly associated with Bitcoin, took down its web site leaving a blank page and a hidden message suggesting that the company had been acquired.
Trouble has been brewing for Mt Gox ever since it stopped allowing customers to withdraw their Bitcoin from the site because of a security flaw it had uncovered. Mt Gox assured customers it was working on a solution to the flaw but today it was revealed that Mt Gox realised it was facing bankruptcy and was taking steps to plan some sort of recovery strategy.
A document purporting to reveal a recovery strategy for Mt Gox, has detailed that 744,408 Bitcoin (roughly US $350 m) has gone missing, stolen over a period of the past 2 years. The somewhat ludicrous strategy document suggests that the situation is redeemable and that Mt Gox should wait a period, sack the CEO Mark Karpeles and relaunch as Gox using donations from people who believe that Mt Gox is, to use the terminology of the conventional market “too big to fail”.
Given that the liabilities of Mt Gox are nearly US $400 m balanced by assets of only US $33 m, this would test the resolve of any Bitcoin believer.
In an attempt to reassure the market, the CEO’s of six other Bitcoin exchanges published an open letter blaming Mt Gox’s collapse on its incompetence rather than any inherent failing of the cryptocurrency. If Mark Karpeles was looking for any of these companies to come to his rescue, it would seem that is a forlorn hope.
Is this the end of Bitcoin? In a word, no.
Bitcoin grew out of the sheer enthusiasm of amateurs. Mt Gox itself was originally a site for exchanging children’s trading cards, and as such, it is surprising that they made it this far. Badly run companies go out of business all of the time, irrespective of their particular trade and this is not to say that others who came in later are not capable of running professional businesses.
At the same time, regulation is starting to creep in with at least two states in the US, New York and California considering issuing licenses to cryptocurrency businesses.
If anything, the potential collapse of Mt Gox may spur governments to tackle the issue and start to take it seriously. In some respects, it is hard to understand why governments have not interceded earlier because treating cryptocurrencies in the same way as regular currencies would appear relatively straightforward. In fact, strong regulation might actually be the driver for more conventional financial businesses to jump into the cryptocurrency market and kickstart the use of this type of currency for Internet-based commerce.
For the people who have lost money through the collapse of Mt Gox, there is likely to be little recourse. Japan’s Financial Services Agency has declared that Bitcoin is not a currency and consequently doesn’t come under their regulatory oversight. Nobody should be in any doubt now that trading Bitcoin is a high-risk venture, however, it would seem that keeping control of your own Bitcoin in a secure digital wallet that is backed up would be a far better option than trusting online exchanges.
To Bitcoin enthusiasts, Mt Gox is a mere bump in the road. Their belief will continue to drive interest in cryptocurrencies. This interest is reflected by the mainstream media with Google Trends showing a sustained rise of mentions of the term cryptocurrency in the news.
How the Mt Gox story plays out will be fascinating to watch in the same way as following a soap drama becomes addictive, despite knowing the eventual and catastrophic outcome.