This week’s halt, and possible break, of the Mt. Gox exchange may or may not prove to be the beginning of the conclusion 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 place 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 theft, 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 present only as the product of a computer algorithm whose origins are unidentified and whose ultimate purpose is unclear. It has attracted a varied collection of users, including individuals who wish to keep questionable dealings private, folks who may want to keep part of their prosperity hidden from authorities who have entry 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 fanatics like to call it a digital currency, or even cryptocurrency because of its encrypted nature. However it is clear now, amid the crazy fluctuations in Bitcoin’s price, that it can be not a true currency at all. It is really a commodity whose price changes according to its quality and according to supply and demand.
As of this week, there are two grades of Bitcoin. One of the Mt. Gox variety, which usually nobody can access while the 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 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, otherwise their value. Bitcoin, sponsored by no government and outlawed simply by some, has no such backing.
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Ask any Mt. Gox user nowadays 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 of exchange. Bitcoin thus far gets only fair marks as a medium associated with exchange, since there are only a limited amount 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 tend to be not money.
Bitcoins utterly flunk the store of value test because their wild price fluctuations do not shop value; depending on blind luck, these people either create or destroy it. Collecting bitcoins is speculating, not really saving. There is a big difference.
Bitcoin 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 with regulation to try to prevent everything from insolvency to money laundering to identification theft. But the regulations exist due to the fact insolvency, money laundering and identity theft exist, too. As Mt. Gox vividly illustrates, a system with no such safeguards is prone to generate 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 all won’t know before we know what happened in those computers in Tokyo. The crisis should, however , remove whatever is left from the veneer of safety that Bitcoin’s supposed cryptosecurity was supposed to provide. Bitcoin is no more secure than the structure which is built to hold it. Lacking all of 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 with Bitcoin in the first place, or we live dangerously without them.
There will continually be people who don’t trust banks and the government to secure their savings. They 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 definitely virtually zero. This may not be the beginning of Bitcoin’s end, but we have definitely observed the end of the beginning.