This kind of week’s halt, and possible collapse, of the Mt. Gox exchange may or might not exactly prove to be the beginning of the final for Bitcoin – but for borrow Winston Churchill’s phrase, it is certainly the end of the start. BitcoInvest.cc
Mt. Gox had already lost its place as the leading Bitcoin exchange ahead of the murky chain of events that led the Tokyo-based site to close down. An apparently released internal document indicates that the site might have been the victim of a major theft, in which perhaps more than $300 mil worth of Bitcoin “disappeared” from the exchange’s data files. I put “disappeared” in quotes because, of course, Bitcoin is without physical symptoms.
Bitcoin exists only as the product of any computer algorithm whose origins are unknown and whose ultimate purpose is unclear. That has attracted a diverse collection of users, including those who want to keep questionable dealings private, people who may want to keep part with their wealth hidden from government bodies who have access to conventional financial accounts, and end-of-the-worlders who think civil society is on the highway to hell and this for some reason they will be better off owning bitcoins when we all arrive there.
Bitcoin enthusiasts want to call it a digital currency, or cryptocurrency because of their encrypted nature. But it is clear now, amongst the wild fluctuations in Bitcoin’s price, that it is not really a true foreign currency at all. It is absolutely a commodity whose price fluctuates according to it is quality and according to supply and demand.
About this week, there are two grades of Bitcoin. One of many Mt. Gox variety, which nobody can gain access to while the site is down and which can no longer truly exist by any means, 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 kind of is why shares of companies that are certainly about to go chest area can trade for a cost greater than zero. Yet at least we know the shares exist, whether in tangible or intangible form, in addition to government government bodies available to vouch for their validity, if not their value. Bitcoin, financed by no government and outlawed by some, has no such backing. Inquire any Mt. Gox end user today whether that is a plus, as bitcoin holders have heretofore managed. (Authorities from Tokyo to New York are already probing the Mt. Gox collapse, plus some sort of follow-up action seems likely. )
True money will serve two functions: as a store of value and as a medium of exchange. Bitcoin thus considerably gets only fair markings as a medium of exchange, since there are only a limited amount of places that you can freely spend it. You can swap your (non-Mt. Gox) bitcoins for real money, but you can do the like any other commodity, like diamonds or Hondas. Diamond jewelry and Hondas are well worth money, nevertheless they aren’t money.
Bitcoins utterly flunk the store valuable test because their wild price variances do not store value; depending on blind fortune, they either create or destroy it. Collecting bitcoins is speculating, not keeping. There is a major big difference.
Bitcoin does address certain real-world issues, including the sometimes exorbitant cost of swapping currencies and the complicated nature of the modern banking system, which is laden with regulation to try to prevent everything from insolvency to money laundering to identity robbery. But the regulations are present because insolvency, money washing and identity theft are present, too. As Mt. Gox vividly illustrates, a system without such safeguards is prone to create problems much more serious than the ones it purports to fix.
The Mt. Gox debacle might or might not permanently undo Bitcoin’s credibility. We won’t know before we really know what occurred in those computers in Tokyo. The crisis should, however, strip whatever is left from the veneer of safety that Bitcoin’s supposed cryptosecurity was expected to provide. Bitcoin is no more secure than the structure that is built to hold it. Lacking all the backstops that contain evolved after some time in the traditional financial system, which is not secure at all. Either we recreate those backstops in the Bitcoin world, where we have to speculate why we bothered with Bitcoin to start with, or we live dangerously without them.