Back in December, I discussed the pros and cons of Bitcoin, the new P2P (peer to peer) virtual currency. From the outset, this idea and its reality, its theory and its practice, has been replete with controversy. Paul Krugman, a 2008 Nobel Laureate in Economics, wrote in an Op-Ed piece in The New York Times called Bitcoin Is Evil. He said that “to be successful, money must be both a medium of exchange and a reasonably stable store of value. And it remains completely unclear why Bitcoin should be a stable store of value.” Krugman says this because of the fluctuations in value that Bitcoin has exhibited recently, as on December 6 and 7 of last year, the value of one Bitcoin fell from $1200 to $600 in the course of 48 hours. And, since computer programs can easily adjust the price of goods along with the value of Bitcoins, the currency doesn’t have to maintain a stable store of value.
Yet there is another group of economists and business investors whose ideological passion lies in strengthening a system of exchange that is independent of any government or bank. As a spokesman for such views, I quoted Charles Eisenstein, author of Sacred Economics, in my previous article: “Today’s national and supranational currencies have become a blight…created through interest-bearing debt, controlled by financial elites, tracked by the surveillance state, and necessitating endless growth, money as we know it is a primary agent of inequality, injustice, and ecocide.” He believes in Bitcoin.
In both of these opposing ideologies, something may be missed: the basic newness of the idea, and how a new idea during its first years has a tendency to bump and grind along. The Bitcoin idea has had its share of dings, scrapes and bruises. The most recent one, occurring this week, could be considered a major fracture. Time will tell, but here is what happened.
Even though the concept of Bitcoin rejects the control of banks and government, the flow and fiscal movement of Bitcoin had to be dealt with somehow, so digital currency exchanges evolved to allow trading Bitcoins for U.S dollars and several other currencies. There are many exchanges, but the largest and best-known Bitcoin exchange is Mt. Gox, which seems to have met its demise on Feb 24 after having lost, according to Bloomberg, hundreds of millions of dollars of its customer’s Bitcoins. The New York Times reported that a document circulating widely in the Bitcoin world states that Mt. Gox had lost 744,000 Bitcoins in a theft that had gone unnoticed for years. That would be about six percent of the 12.4 million Bitcoins in circulation.
To many, this was not a profound shock, as Mt. Gox had complications for some time - last year it had its accounts seized by government regulators and experienced increasing trouble allowing its customers to get at their money. On Sunday the company’s chief executive resigned from the board of the Bitcoin Foundation, the primary advocacy group for Bitcoin. Then they took down their website and their Twitter feed.
What does all this mean, in terms of Bitcoin’s viability? Again, there are two diverse sides. One believes that Mt. Gox was an accident waiting to happen, given what is seen now as lax security measures. Those who see it this way also see this as a Mt. Gox problem, and not a Bitcoin problem. Indeed, the other more secure trading Bitcoin exchanges — Coinbase, Kraken, Bitstamp, BTC China, Blockchain and Circle — have already released a statement, distancing themselves from Mt. Gox. Part of this statement reads, "This tragic violation of the trust of users of Mt. Gox was the result of one company's actions and does not reflect the resilience or value of Bitcoin and the digital currency industry.”
Ultimately, what this demise does is remind investors that Bitcoin is in its infancy, and seems still a capricious proposition. It also shows, right now, the darker side of unregulated currencies, and again defining the Wild West nature of anything unregulated by any governmental agency. So, what happens now?
Will the general public view this experience to be just another reason to distrust Bitcoin? Will investors, who have become more skeptical and non-ideological as days pass, see the demise of Mt. Gox as a good thing, paving the way for greater security, transparency, and consumer protection in future transactions? Tune in tomorrow!