Regular readers know that I have been skeptical of Bitcoin through the whole speculative frenzy surrounding the electronic currency. Unfortunately I’ve also been fairly consistently wrong when it comes to the short-term outlook. Even the closing of Silk Road, the drug marketplace that was Bitcoin’s most-significant non-speculative use, hasn’t ended the mania.
Now Mt. Gox, for several years the biggest Bitcoin exchange, has shut down. One widely circulated report claims a loss of 704,408 bitcoins (about $400 million, depending on when you’re doing the counting) from thefts at the exchange. This has set off a round of stories asking if Bitcoin’s future is in doubt.
I’ll risk another prediction: This won’t be the end of Bitcoin yet. That end will come, but only after a long round of efforts to keep the leaky boat afloat.
Bitcoin’s future is in fact in doubt, but the failure of Mt. Gox is not the reason. Other Bitcoin exchanges, like Bitstamp, have already been catching up to Mt. Gox’s volume because Mt. Gox was clearly not a safe place to keep your money. Over the last few months, the site was repeatedly shut down by technical problems, several times shut off withdrawals, and had money seized by U.S. regulators. It had long ago suspended withdrawals in U.S. dollars.
In other words, a shutdown of Mt. Gox falls into the category of “So, what else is new?” If you believe that there is a need for an anonymous, decentralized electronic transaction system and are willing to live with the known risks of Bitcoin (like the fact that Bitcoins can be irretrievably lost to hacking or even computer crashes), this doesn’t change much. On the contrary, if you are a caveat-emptor libertarian you might even experience some smug satisfaction in evidence that Bitcoin investing makes for a dangerous hobby. If you like the idea of a privatized currency system, you can easily chalk this up to growing pains.
If on the other hand you think (as, yes, I do) that Bitcoin has little utility for actual transactions and loses the advantages — security, reliability, traceability — of real electronic payment systems like credit cards, then the Mt. Gox fiasco hasn’t changed your mind on Bitcoin either. We already knew that $1 million could be stolen, lost, or seized by the government. Why not $100 million or $400 million?
This is the point in almost any conversation when we would be talking about whether the government should step in and regulate. Some hardcore anti-government types might be willing to accept the loss of a few tens of millions of dollars here and there to avoid the evils of government interference, but a lot of other people (ie. most potential users) will find it unnerving that their holdings can suddenly disappear. And indeed the conversation has turned to regulation, with politicans and state regulators lining up to point out the need for rules. Even some of the true believers are getting in on the act. ”Regulation is a must at this point,” one investor tells Quartz‘s Heather Timmons.
Well, wait a second: The whole point of Bitcoin was that there’s no need for a central authority to regulate things, right? Truth is, the more rules get imposed on Bitcoin, the less of a purpose it has. There is no easy solution here. No, scratch that. There is no solution at all. Layer the apparatus of government to Bitcoin and what you’ve got is fiat currency without the convenience. On top of which, Bitcoin by its nature — decentralized, supra-national — cripples efforts at regulation.
That’s becoming easier and easier to see. There’s been plenty of talk of what governments should do about Bitcoin; we just went through a round of U.S. Senate hearings on the subject. And still, that did nothing to prevent the biggest Bitcoin exchange from going bust.What’s happening with Mt. Gox doesn’t demonstrate new problems with Bitcoin; those were already evident. What it demonstrates is that no one is in a position to step in and solve them.