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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Comments
11 comments so far

Hey, I just found a bag of Mt Gox bitcoins buried in my back yard, are they worth anything?

Posted by Woltmann | Report as abusive

For anything to become a viable currency it has to meet three basic tests:

1) It has to be liquid.
2) It has to be somewhat stable in terms of day-to-day value.
3) It has to be widely accepted.

Bitcoin meets none of these three tests.

Any with the collapse of Mt. Gox due to theft, its going to be even more difficult now to convince people to accept as currency something that is illiquid (since accounts can be frozen), easy to steal, and not subject to regulation.

Posted by mfw13 | Report as abusive

Thanks Felix-

The situation is clearly fascinating as it’s unfolding and at the time I write this missive, is still in flux as MtGox folks have posted an update I just saw that kinda implies, “I’ll be back [read w/an Ahrnold accent for the full effect]” That’s hard to believe at the moment, unless they can recoup/recover the funds they lost on their watch. We…shall see.

On another note relating to investing in general; if you want what’s secure, buy T-bills and accept a meager if any return vs. inflation. If you want to make some serious cash with your investments, you WILL…embrace risk, lose some cash and hopefully gain way more than cover those losses with a few potential hits like Bitcoin represents, and has done for many others.

Caveat emptor; GiddyUP!

Posted by Twinkbait | Report as abusive

There are a LOT of coins on the market. The Cryptocoin market is about 10 billion dollars today. It’s going to get a LOT bigger, put that in your pipe and smoke it.

Posted by UScitizentoo | Report as abusive

mfw13 is fortunately quite wrong in how btc works. you can’t freeze a btc account (address, really, a PK pair). what mtgox did was freeze custodial accounts – btc or fiat that customers had transfered to mtgox’s ownership for the purpose of trading. the fact that mtgox lost the money really has nothing to do with the rest of the btc world.

btc doesn’t require the use of custodial accounts – it exists pretty much for the purpose of eliminating the need for that kind of trust.

Posted by markhahn | Report as abusive

Funny how Felix Salmon has become a lot less dismissive of Bitcoin in the last few months. It used to be a ponzi scheme, a bubble that would soon burst and leave every investor feeling like fools. It was something to ridicule with his on-air talk show hosts like Warren Olney. Maybe its because his peers on Wall Street who are a thousand times richer than him are promoting it. Maybe he has seen how credit card payments are becoming more expensive with the all the hacking and the push to burden merchants with expensive upgrades to chip/pin cards and terminals when Bitcoin payments are ten times cheaper to the merchant. Maybe he has had a sudden empathy for poor Mexicans who the banks do not want to deal with who pay 5% to Western Union to send money home when they could do it free with Bitcoin. Maybe he seen Bitcoin ATMs and the Bitcoin payment logo a little too may times and has said to himself– “I’d better get on the right side of this issue and I’ll do it gradually so no one will notice.”

Posted by blath | Report as abusive

Funny how Felix Salmon has become a lot less dismissive of Bitcoin in the last few months. It used to be a ponzi scheme, a bubble that would soon burst and leave every investor feeling like fools. It was something to ridicule with his on-air talk show hosts like Warren Olney. Maybe its because his peers on Wall Street who are a thousand times richer than him are promoting it. Maybe he has seen how credit card payments are becoming more expensive with the all the hacking and the push to burden merchants with expensive upgrades to chip/pin cards and terminals when Bitcoin payments are ten times cheaper to the merchant. Maybe he has had a sudden empathy for poor Mexicans who the banks do not want to deal with who pay 5% to Western Union to send money home when they could do it free with Bitcoin. Maybe he seen Bitcoin ATMs and the Bitcoin payment logo a little too may times and has said to himself– “I’d better get on the right side of this issue and I’ll do it gradually so no one will notice.”

Posted by blath | Report as abusive

Check out the cynicism toward BitCoin being expressed on this technology news site:
http://arstechnica.com/business/2014/02/ leaked-just-before-bitcoin-catastrophe-m tgox-dreamed-of-riches/?comments=1

It’s a fad. Don’t let the hype carry you away into the vain believe that it’s all different this time…

Posted by matthewslyman | Report as abusive

…Whether or not MtGox undermines the thesis of BitCoin, it certainly undermines the thesis of “Too Big to Fail!”

Posted by matthewslyman | Report as abusive

@blath, you haven’t thought through your comment carefully. What this (and the other thefts) illustrate is that Bitcoin is just as open to hacks/thefts as credit cards. The difference is that Bitcoin losses fall on the consumer, while credit card losses are carried by the merchants.

Those horribly expensive chip/PIN cards cost what? Fifty cents apiece to mint? Sure, it will require an upgrade of terminals and systems, but that ought to happen on a five year cycle regardless.

Posted by TFF17 | Report as abusive

I’ve come to believe that a cryptocurrency that is designed to include a central bank, in which the size of the “mining” transaction in each new block could be adjusted through broadcast software updates from the central bank, might actually have some viability. Under this system, the central bank would have control over the rate of money supply growth. You could also tweak things so that the mining transaction was required to make deposits to two wallets — one belonging to the mining collective, for distribution to their members who contribute computational power to help process transactions; and one to the wallet of the central bank itself, thus retaining some of the value of seigniorage. You’d probably want to have some kind of system for rotating through central bank wallets, so that you weren’t accumulating too much value in one place. Maybe the bank would broadcast a new wallet ID every week or so, and would empty out the old wallet on a regular basis.

I still think there could be problems with scaling the volume of transactions in a way that doesn’t risk frequent forks in the blockchain.

One way to process more transactions is to make it easier to find a valid block (put looser constraints on a valid hash). Go too far in this direction, and you’ll hit a point where the first valid block can’t spread to the full network fast enough to become entrenched before an alternative valid block is found. The system can cope with this if it doesn’t happen often, and doesn’t tend to result in subsequent blocks getting attached on both sides of the fork before the fork is resolved. Speed is the enemy of stability.

The other way would be to simply include more transactions in each block, but it seems like this could be a serious problem if you tried to scale existing bitcoin volumes up to the kind of volume that exists in dollars today — several orders of magnitude. It’s not clear to me what kind of pressure this would put on mining hardware.

There’s also the fact that if quantum computing ever solves the problem of testing many hashes at once, whoever owns the first computer that can do that will instantly be able to compromise the entire cryptocurrency system. But they would probably pose a non-trivial threat to existing networked banking systems too. :-P

Posted by Auros | Report as abusive
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