Setback deals bitcoin a heavy blow

Share with others:


Print Email Read Later

TOKYO -- The sudden disappearance of one of the largest bitcoin exchanges only adds to the mystery and mistrust surrounding the virtual currency, which was just beginning to gain legitimacy beyond the technology enthusiasts and adventurous investors who created it.

Prominent bitcoin supporters said the apparent collapse of the Tokyo-based Mt. Gox exchange was an isolated case of mismanagement that will weed out "bad actors." But the setback raised serious questions about bitcoin's tenuous status and even more tenuous future. At least one supporter said the blow could be fatal to bitcoin's quest for acceptance by the public.

A coalition of virtual currency companies said Mt. Gox went under after secretly racking up catastrophic losses. The exchange had imposed a ban on withdrawals earlier this month.

By Tuesday, its website returned only a blank page.

Mt. Gox's origins are rooted in fantasy instead of finance. The service originally specialized in trading colorful cards featuring mythical wizards and derives its name from a game. The initials stand for, "Magic: The Gathering Online Exchange."

San Francisco-based wallet service Coinbase and Chinese exchange BTC China sought to shore up confidence in the currency by saying the Mt. Gox's situation was isolated and the result of abusing users' trust. They offered no details. "As with any new industry, there are certain bad actors that need to be weeded out, and that is what we are seeing today," the statement said.

Since its creation in 2009, bitcoin has become popular among tech enthusiasts, libertarians and risk-seeking investors because it allows people to make one-to-one transactions, buy goods and services, and exchange money across borders without involving banks, credit card issuers or other third parties. Criminals like bitcoin for the same reasons.

For various technical reasons, it's hard to know just how many people worldwide own bitcoins, but the currency attracted outsize media attention and the fascination of millions as an increasing number of large retailers, such as Overstock.com, began to accept it.

Speculative investors have jumped into the bitcoin fray, too, sending the currency's value fluctuating wildly in recent months. In December, the value of a single bitcoin hit an all-time high of $1,200. In the aftermath of the Mt. Gox collapse Tuesday, one bitcoin stood at around $470.

Mt. Gox "reminds us of the downside of decentralized, unregulated currencies," said professor Campbell Harvey of Duke University's Fuqua School of Business, who specializes in financial markets and global risk management. "There is no Federal Reserve or IMF to come to the rescue. There is no deposit insurance."

But Mt. Gox's disappearance, Mr. Campbell said, "doesn't mean the end of the road" for bitcoin and other virtual currencies. The collapse "might represent the end of the 'wild west,' where anyone can set up shop and deal in crypto-currencies," he said. But "increasingly sophisticated investors" are funding serious ventures that will "raise both quality and confidence."

Documents purportedly leaked from Mt. Gox lay out the scale of the problem. An 11-page "crisis strategy draft" published on the blog of entrepreneur and bitcoin enthusiast Ryan Selkis said that 740,000 bitcoins were missing from Mt. Gox. That represents roughly 6 percent of the estimated 12 million bitcoins that have been created so far, translating into hundreds of millions of dollars' worth of losses, although figures are fuzzy given the currency's extreme volatility.

"At the risk of appearing hyperbolic, this could be the end of bitcoin, at least for most of the public," the draft said.


Join the conversation:

Commenting policy | How to report abuse
To report inappropriate comments, abuse and/or repeat offenders, please send an email to socialmedia@post-gazette.com and include a link to the article and a copy of the comment. Your report will be reviewed in a timely manner. Thank you.
Commenting policy | How to report abuse

Advertisement
Advertisement
Advertisement

You have 2 remaining free articles this month

Try unlimited digital access

If you are an existing subscriber,
link your account for free access. Start here

You’ve reached the limit of free articles this month.

To continue unlimited reading

If you are an existing subscriber,
link your account for free access. Start here