Can bitcoin capitalize on the death of Mt Gox?

By Felix Salmon
February 26, 2014

In November, I said that I was waiting for bitcoin to get boring – and it certainly isn’t boring yet. The death of Mt Gox has created headlines saying things like “Bitcoin future in doubt” and “Mt. Gox Meltdown Spells Doom for Bitcoin”; those, in turn, have sparked their own backlash of people saying that in fact this development is one of the best things that could have happened to the cryptocurrency.

The truth of the matter is that it’s too early to tell. Mt Gox was a unique institution in the bitcoin universe: it was there from the beginning, and people have been moaning about it from the beginning. It was always a badly-run and far too opaque institution; if bitcoin is ever going to really take off — if Ben Horowitz is going to win his socks – then the death of Mt Gox was surely necessary sooner or later. At the same time, however, Mt Gox was for many years the cleanest dirty shirt in the bitcoinverse, and historically accounted for the lion’s share of trading in the currency. That’s one of the reasons why it somehow managed to be sitting on such an enormous lode of bitcoins at the time it went belly-up.

The rumor is that 744,408 bitcoins are “missing due to malleability-related theft which went unnoticed for several years”; that’s hundreds of millions of dollars that have been stolen, and it’s almost impossible to believe that Mt Gox was so incompetent as to not be aware, for years, of a nine-figure hole on its balance sheet. Instead, it quietly sold itself not only as a trading venue but also as a wallet service: store your bitcoins with us, they’re safe here. So long as the number of people using Mt Gox as a wallet was greater than the number of bitcoins that had been stolen, the service could continue. But then, when the run started, Mt Gox collapsed — inevitably — in a matter of days. It’s a Ponzi scheme, essentially — just one that looks like it was driven by theft rather than avarice.

The Mt Gox fiasco is literally an order of magnitude larger than the previous largest bitcoin scam, the theft in July 2011 of 78,739 coins from a wallet service called MyBitcoin. The Mt Gox implosion is on a massively larger scale than even the shutdown of Silk Road, where some 171,955 bitcoins disappeared. As a result, it’s fair to say that the end of Mt Gox is also the end of bitcoin as we have known it to date — a wild-west world of hackers and discussion forums and pseudonyms and Tor accounts and — as one highly-active page puts it — numerous “Heists, Thefts, Hacks, Scams, and Losses.”

Now, we enter the world of Bitcoin 2.0: an arena of well-capitalized companies with VC backing; of sober joint statements using terms like “trustworthy and responsible” and “comprehensive consumer protection.” Of course, all these promises have been made before, not least by Mt Gox itself; the big questions are whether (a) this time is different; and whether (b) this time will be seen to be different by a population that has — quite rationally — had little faith in bitcoin to date.

My tentative answers to those two questions are yes and no, respectively. I actually do believe Coinbase and other next-generation bitcoin companies when they say that they’re much more robust than their predecessors. But I don’t believe that regulators, and the public at large, will believe them. Bitcoin is based on mistrust, which makes it almost impossible for this circle to be squared. There is a small number of cryptogeeks who really love the paradox that they can trust the protocol precisely because they don’t need to trust any given institution. Regulators, it’s fair to say, tend not to be among them. And neither are normal people, who don’t understand the math behind bitcoin, and who have no real ability to secure their coins on their own, and who therefore need to be able to trust whatever institution they’re using to store their bitcoin-denominated wealth.

In order for the end of Mt Gox to be a blessing for bitcoin, we’re going to need to see an influx of new entrants into the asset class — people who never trusted Mt Gox, but who are happy to trust (say) Coinbase. The bitcoin faithful — who include the likes of the Winklevii and Barry Silbert, along with Ben Horowitz — will happily celebrate the end of Mt Gox and try to use it as a way to persuade the general public, and regulators, that the field is growing up and can be trusted. The big question is whether anybody is going to believe them. And so far, I’ve seen no evidence that’s happening. As far as the public is concerned, Mt Gox was bitcoin. Most of us who never bought any bitcoins in the first place feel as though we likely dodged a bullet. And we have no particular desire to enter that war zone now, even if it is marginally safer than it was before.

PHOTOS: Kolin Burges, a self-styled cryptocurrency trader and former software engineer from London, holds a placard to protest against Mt. Gox, in front of the building where the digital marketplace operator was formerly housed in Tokyo February 26, 2014. REUTERS/Toru Hanai 

A mock Bitcoin is displayed on a table in an illustration picture taken in Berlin January 7, 2014. REUTERS/Pawel Kopczynski 

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