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
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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.

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