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.
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.