Bitcoin Is in Trouble. But Its Owners Don’t Want a Bailout.

The largest bitcoin exchange, Mt. Gox, has gone offline, costing some investors fortunes. But some bitcoin owners say this is exactly how the system should work.

A Tokyo man looks at Mt. Gox before it went down, February 25, 2014.
National Journal
Matt Berman
Feb. 25, 2014, 5:12 a.m.

Nev­er put your fin­an­cial faith in an ex­change named after fantasy play­ing cards. 

This is what a slew of bit­coin own­ers are learn­ing as they wake up Tues­day morn­ing after Mt. Gox (short for Ma­gic: The Gath­er­ing On­line Ex­change), once the largest bit­coin ex­change in the world, dis­ap­peared from the In­ter­net. The site, which is now just a blank page, went off­line late Monday night, fol­low­ing the re­mov­al of its Twit­ter ac­count and the Tokyo-based com­pany’s chief ex­ec­ut­ive’s resig­na­tion from the board of the Bit­coin Found­a­tion on Sunday. That came after Mt. Gox hal­ted all cus­tom­er with­draw­als earli­er this month, cit­ing a sup­posed bug in bit­coin’s pro­gram­ming that al­lowed some users to ma­nip­u­late trans­ac­tions.

Al­though the in­form­a­tion has not been veri­fied and sup­posedly ori­gin­ates from a leaked doc­u­ment, bit­coin users be­lieve that Mt. Gox lost 744,408 bit­coins to theft, or about 6 per­cent of all bit­coins in cir­cu­la­tion. Based on cur­rent ex­change rates, that’s more than $350 mil­lion. With the ex­change gone, people are los­ing vast sums of money.

There’s un­der­stand­able pan­ic with­in the bit­coin com­munity. But even though some own­ers are quick to say that Mt. Gox is “too big to fail,” very few are ser­i­ously hop­ing for a bail­out. In fact, they say, that would de­feat the whole pur­pose of the di­git­al cur­rency.

“We are wit­ness­ing the fail­ure of a com­pany the gov­ern­ment would deem ‘too big to fail,’ ” a Red­dit user, Potato­Badger, pos­ted late Monday night. The red­dit­or has a point, kind of: While it’s on an in­fin­itely small scale com­pared to something like Cit­ig­roup’s role in the glob­al eco­nomy, Mt. Gox is sys­tem­ic­ally im­port­ant to bit­coin as a whole, and its fail­ure is bring­ing down the cur­rency’s value rap­idly Tues­day morn­ing. Mt. Gox would nev­er be labeled as sys­tem­ic­ally im­port­ant to the lar­ger U.S. eco­nomy by the gov­ern­ment, but it still has some mark­ings of be­ing too big to fail with­in the re­l­at­ively small bit­coin sys­tem. But, Potato­Badger writes: 

Any­one who wasn’t a cus­tom­er of Mt. Gox still has their full amount of bit­coins. Nobody is be­ing robbed to bail out an in­com­pet­ent com­pany. The only losers here are Mt. Gox and those who vol­un­tar­ily chose to do busi­ness with them.

This is a free mar­ket speed bump. It sucks right now, but be­cause the crappy com­pan­ies (Gox) can go bank­rupt while the good com­pan­ies (Bit­stamp, Coin­base, etc.) suc­ceed, the en­tire Bit­coin eco­sys­tem will grow stronger with time.

The post, which is cur­rently on the front of Red­dit’s bit­coin subred­dit, has at­trac­ted a slew of de­bate. “Bail­outs kick the can down the road,” an­oth­er red­dit­or writes on the thread. Bad com­pan­ies “need to fail.” For some, al­low­ing Gox’s fail­ure gets at the sort of liber­tari­an ideo­logy that is at the heart of much of the (so far) un­reg­u­lated bit­coin move­ment.

An­oth­er thread pos­ted Tues­day morn­ing is kicked off by the state­ment that “If Mt. Gox had been JP Mor­gan Chase, it would have been ‘Too Big to Fail.’ The fact Mt. Gox can’t be res­cued by a print­ing press is proof that if you own BTC, you own real money.”

This sen­ti­ment isn’t just com­ing from blow­hards or Red­dit trolls without any ac­tu­al in­vest­ment in bit­coin or Mt. Gox. Some people who are are los­ing massive amounts of money in bit­coins feel like something prop­er is hap­pen­ing here.

Erik Voorhees, an en­tre­pren­eur who holds mil­lions of dol­lars in bit­coins, pos­ted a long let­ter early Tues­day morn­ing on what Gox’s fail­ure means for the cur­rency. Voorhees, who says he had more than 550 bit­coins in Gox, says the les­son here “is not that bit­coin is broken.” Bit­coin, he writes, “is fine.” Of course, Voorhees has a lot in­ves­ted in bit­coin be­ing fine, and in pro­mot­ing the idea that it’s fine. But he doesn’t think bit­coin users should now turn away from liber­tari­an prin­ciples and to­ward reg­u­la­tion. “Let us not re­treat from our rising plat­form only to cower back un­der­neath the de­ranged mach­in­a­tions of Le­viath­an,” he writes.

{{ BIZOBJ (video: 4760) }}

So, what is there to learn from Mt. Gox’s col­lapse? Here’s the crux of Voorhees’s gran­di­ose let­ter:

We are build­ing a new fin­an­cial or­der, and those of us build­ing it, in­vest­ing in it, and grow­ing it, will pay the price of bring­ing it to the world. This is the harsh truth. We are build­ing the chan­nels, the bridges, and the towers of to­mor­row’s fin­ance, and we put ourselves at risk in do­ing so.

For all these risks, dev­ast­a­tion will be­fall us re­peatedly. Some of us will be dis­cour­aged. Some will be ri­diculed and in­sul­ted. Some will be tricked, or swindled. Some of us will be crushed or caged. We will be set upon by all man­ner of ant­ag­on­ists, re­peatedly, for a long time.

So why do we do it? Why do we build these towers that fall down upon us? Why do we toil and strain and risk our pre­cious time, which is the only real wealth we pos­sess?

Be­cause the world needs what we’re build­ing. It needs it des­per­ately. If that mat­ters to you, as it does to me, then hold to that thought. You will see through the smoke, and your wounds will heal.

The fail­ure of Mt. Gox, Voorhees and oth­ers be­lieve, doesn’t need to be the fail­ure of bit­coin, or the fail­ure of bit­coin’s cent­ral premise of free­dom from gov­ern­ment over­sight. Mt. Gox doesn’t need to be bailed out, be­cause its fail­ure, these bit­coin users hold, shows that the sys­tem is work­ing. The ex­change’s col­lapse doesn’t need to be a “mor­tal wound” for bit­coin, es­pe­cially as Gox has been widely de­rided by bit­coin users for months. For some, the fail­ure is a ral­ly­ing cry.

Or, as one red­dit­or per­fectly puts it: “Peak des­pair. Buy now.”

Up­date (11:19 a.m.): Mt. Gox is no longer just blank. The site now fea­tures this not-very-il­lu­min­at­ing mes­sage:

Dear Mt­Gox Cus­tom­ers,

In the event of re­cent news re­ports and the po­ten­tial re­per­cus­sions on Mt­Gox’s op­er­a­tions and the mar­ket, a de­cision was taken to close all trans­ac­tions for the time be­ing in or­der to pro­tect the site and our users. We will be closely mon­it­or­ing the situ­ation and will re­act ac­cord­ingly.

Best re­gards,

Mt­Gox Team

What We're Following See More »
Sanders Wants a Recount in Kentucky
37 minutes ago

Bernie Sanders "signed a letter Tuesday morning requesting a full and complete check and recanvass of the election results in Kentucky ... where he trails Hillary Clinton by less than one-half of 1 percent of the vote. The Sanders campaign said it has asked the Kentucky secretary of state to have election officials review electronic voting machines and absentee ballots from last week's primary in each of the state's 120 counties.

How Much Did the IRS Overpay in Earned Income Tax Credit Benefits?
4 hours ago

An estimated $15.6 billion, "according to a Treasury Inspector General for Tax Administration report."

McAuliffe Under Investigation for Fundraising
4 hours ago

Virginia Gov. Terry McAuliffe (D) “is the subject of an ongoing investigation by the FBI and … the Justice Department” for potentially improper contributions to his 2013 campaign, including while he was a Clinton Global Initiative board member. ... Among the McAuliffe donations that drew the interest of the investigators was $120,000 from” former Chinese legislator Wang Wenliang. “U.S. election law prohibits foreign nationals from donating to … elections. … But Wang holds U.S. permanent resident status.”

Trump Takes Aim at Bill Clinton
4 hours ago

"Donald Trump is reviving some of the ugliest political chapters of the 1990s with escalating personal attacks on Bill Clinton's character, part of a concerted effort to smother Hillary Clinton 's campaign message with the weight of decades of controversy. Trump's latest shot came Monday when he released an incendiary Instagram video that includes the voices of two women who accused the former president of sexual assault, underscoring the presumptive Republican nominee's willingness to go far beyond political norms in his critique of his likely Democratic rival. ...In one recent interview, Trump said another topic of potential concern is the suicide of former White House aide Vincent Foster, which remains the focus of intense and far-fetched conspiracy theories on the Internet."

Head of Security for TSA Has Been Reassigned
4 hours ago

"The head of security for the Transportation Security Administration, Kelly Hoggan, has been removed from his position after a hearing about the agency's management, the House Oversight Committee says." Deputy assistant administrator Darby LaJoye will take over for Hoggan on a temporary basis.