The End Of Bitcoin's Beginning
This week's halt, and possible collapse, of the Mt. Gox exchange may or might not end up being the start of the end for Bitcoin - but to borrow Winston Churchill's phrase, it is unquestionably the end of the beginning.
Mt. Gox had already lost its place since the leading Bitcoin exchange before the murky chain of events that led the Tokyo-based site to shut down. A seemingly leaked internal document suggests that the site could have been the victim of an important theft, in which perhaps significantly more than $300 million worth of Bitcoin "disappeared" from the exchange's accounts. I put "disappeared" in quotes because, needless to say, Bitcoin doesn't have physical manifestation.
Bitcoin exists only as the item of a pc algorithm whose origins are unknown and whose ultimate purpose is unclear. It's attracted a varied assortment of users, including individuals who would like to keep questionable dealings private, individuals who may choose to keep part of these wealth hidden from authorities who've use of conventional financial accounts, and end-of-the-worlders who think civilized society is on the highway to hell and that for some reason they will be better off owning bitcoins whenever we all arrive there.
Bitcoin enthusiasts want to call it an electronic digital currency, or cryptocurrency ticker because of its encrypted nature. But it's clear now, amid the wild fluctuations in Bitcoin's price, that it is not really a true currency at all. It is often a commodity whose price fluctuates based on its quality and according to supply and demand.
As of this week, you will find two grades of Bitcoin. One of the Mt. Gox variety, which nobody can access while the site is down and that might no further truly exist at all, was worth just about one-sixth of each other bitcoin yesterday.
Some people are usually willing to provide value, albeit not very much value, to take a chance on a possibly worthless asset. For this reason shares of companies which can be obviously planning to go bust can trade for a price higher than zero. But at the very least we know the shares exist, whether in tangible or intangible form, and you will find government authorities offered to vouch for their validity, if not their value. Bitcoin, sponsored by no government and outlawed by some, doesn't have such backing. Ask any Mt. Gox user today whether that's an advantage, as bitcoin holders have heretofore maintained. (Authorities from Tokyo to New York happen to be probing the Mt. Gox collapse, and some kind of follow-up action seems likely.)
True money serves two functions: as a shop of value and as a medium of exchange. Bitcoin to date gets only fair marks as a medium of exchange, since there are only a limited amount of places where you can freely spend it. You are able to swap your (non-Mt. Gox) bitcoins for sure money, but you certainly can do the exact same with every other commodity, like diamonds or Hondas. Diamonds and Hondas are worth money, however they aren't money.
The Mt. Gox debacle might or mightn't permanently undo Bitcoin's credibility. We won't know before we know what happened in those computers in Tokyo. The crisis should, however, strip whatever is left from the veneer of safety that Bitcoin's supposed cryptosecurity was supposed to provide. Bitcoin price widget for website is not any better compared to structure that's built to put on it. Lacking most of the backstops that have evolved over time in the original financial system, that's not secure at all. Either we recreate those backstops in the Bitcoin world, in which case we've to wonder why we bothered with Bitcoin in the first place, or we live dangerously without them.
Bitcoins utterly flunk the store of value test because their wild price fluctuations do not store value; according to blind luck, they either create or destroy it. Collecting bitcoins is speculating, not saving. There is a huge difference.
Bitcoin does address certain real-world issues, such as the sometimes exorbitant cost of exchanging currencies and the cumbersome nature of the modern banking system, that will be laden with regulation to try to prevent sets from insolvency to money laundering to identity theft. But the regulations exist because insolvency, money laundering and identity theft exist, too. As Mt. Gox vividly illustrates, something without such safeguards is vulnerable to create problems much much more serious compared to ones it purports to solve.
There will always be individuals who don't trust banks and the government to secure their savings. They used to stuff cash into mattresses. Maybe some will continue to make use of Bitcoin instead. My own, personal guess is that Bitcoin's chance of becoming a main-stream form of payment, like debit cards or PayPal, is virtually zero. This may possibly not be the start of Bitcoin's end, but we've definitely seen the end of the beginning.