Mt. Gox, the big bitcoin exchange, has disappeared overnight. Rumors are swirling that it’s insolvent, that a rescue plan is coming from the bitcoin community, and in the confusion questions are being raised about the reliability of bitcoin itself. This may be a story about a private company, but the crisis will have ramifications for the company, the customers doing business with it, and bitcoin itself.
Until last summer, Mt. Gox was the biggest trading platform for bitcoin. The firm started operations as a bitcoin exchange in July of 2010, but it began in 2009 as an online exchange for trading cards for Magic: The Gathering (thus, Mt. Gox is an acronym of Magic: The Gathering Online Exchange). In 2011, Jed McCaleb, who started the site, sold it to the Mark Karpeles and his company Tibanne. By 2013, it was handling 70% of all bitcoin trading.
But it has been dogged by hacks, glitches and shutdowns throughout its brief life. The exchange suspended withdrawals for two weeks in June and July of 2013, at which time rumors of its solvency were widespread. At the same time, other trading platforms, like bitstamp, and BTC-e, have been growing and stealing trading volume.
Where Mt. Gox goes, if anywhere, isn’t clear right now, but as the story unfolds, here are five themes to keep in mind.
Even though Mt. Gox wasn’t the largest exchange anymore, it was still a big player in the bitcoin market, and its collapse will present an interesting test case. Is this a systemic crisis, like the fall of Lehman Brothers, or will the damage be limited, like MF Global? If Mt. Gox disappears, and its customers lose everything, how far will the damage fan out?
Even as Mt. Gox was falling apart over the past month, trading volume on its site surged as the price dropped. So far from being scared off, it seems these bold traders were actually courting the risk. One presumes they will be prepared for the outcome, whatever it is. If so, the odds of this being an existential crisis are lower.
Bitcoin is a famously, even notoriously, unregulated market. Even if some kind of coordinated rescue is needed, it won’t come from any government. The only response will come from the Bitcoin community. There are hints that a plan is being devised to save Mt. Gox, rescue the investors, and rejigger the site. But there are plenty of people who see the fall of Mt. Gox as a good thing, even a necessary thing. The exchange’s past problems were a sign it wasn’t mature enough or developed enough to keep pace with the growth of digital currencies. Call it digital Darwinism, if you like.
Ultimately, this is what a free market looks like. No regulations, no guarantees. Libertarian-type true believers in the free market should love this.
Bitcoin prices have been dropping all year. They briefly hit $1,200 in December (on Mt. Gox, of all places), and were in the $800 range before Mt. Gox’s latest spate of problems a few weeks ago. As of this writing they around $500. That’s a precipitous drop, to be sure, but it’s not all that unusual for bitcoin. It was under $20 at the beginning of 2013, spiked to $600 in the spring, fell to under $200 in the summer, and then spiked again in December.
You might call this a digital stress test. If Bitcoin is going to emerge as a dependable currency, it’s going to have to prove it can cope with the kinds of meltdowns that affect real-world currencies. We don’t know all the details yet of why Mt. Gox disappeared, so we can’t say where this is going to go. But true believers in Bitcoin should welcome this moment.
$418.76
Bitcoin traded as low as $418.76 on Tuesday, as per CoinDesk's price index. Most recently, it was at $513.05, down 6%.
One of the biggest themes in Bitcoin is that of regulation, and Mt. Gox’s story will present fodder for both sides. On the one hand, customers of the exchange are most likely going to lose their money. Maybe they recover something in bankruptcy, or some coordinated bailout, assuming Mt. Gox doesn’t just disappear. The question is, if a regulatory framework had been in place previously guiding Mt. Gox’s operations, would this have happened? There’s a case to be made for regulating bitcoin to protect investors.
Benjamin Lawsky, the superintendent of the New York Deparment of Financial Services, who’s been mulling a regulatory framework for bitcoin, had this to say on Twitter:
Probs at @MtGox underscore fact that thoughtful regulation could play impt role in protecting consumers with funds at virtual currency firms
On the other hand, if Mt. Gox does indeed go under and disappear, and the Bitcoin platform absorbs it, then that is a big argument in favor of bitcoin and its decentralized system.
Benjamin Lawsky, superintendent of the New York State Department of FInancial Services
In terms of the public trust, Mt. Gox’s problems have been legion for so long that this isn’t likely to have any effect on the faith of the Bitcoin community. On the other hand, the vast majority of people still don’t even know what Bitcoin is, so this news isn’t likely to have any impression on them. The damage to Bitcoin will come from the slice of the public that has heard of bitcoin, was maybe even bit-curious, and is scared away by this story. The damage from this episode will be directly in correlation with the size of that crowd.
Lastly, this whole episode illustrates one thing investors and potential investor should keep in mind: Bitcoin is still wildly volatile, and the markets around it still inchoate. This is not a market for conservative investors.
