Two sides of the same coin: does Mt. Gox reflect a broken Bitcoin industry?

Now that Mt. Gox, once the largest cryptocurrency exchange, has collapsed, skeptics have seen fit to throw punches at the Bitcoin currency — but is it really two sides of the same coin?

Japanese-based company Mt. Gox allowed users to convert Bitcoin to dollars, and dollars to Bitcoins. Withdrawals were first halted on 7 February when the company cited a security flaw found in the cryptocurrency. The company then went offline entirely soon after. Come 28 February, the company reported bankruptcy after which an investigation by Japanese authorities ensued.

A reported US$460-million is lost — apparently stolen by hackers — with a further US$27.4-million missing from Mt. Gox’s bank accounts. About 850 000 Bitcoins that belonged to investors and the company’s own shares are gone. That’s about 6% of the total Bitcoins currently in circulation, though a mere hiccup in the greater scheme of things.

This graph by CoinDesk shows value of Bitcoin to USD in the last few months. The orange being Mt. Gox performance and the grey CoinDesk BPI.Your average Bitcoin skeptic goes: “Hah, told you so! Investing in Bitcoin is for drug dealers, murderers and uber geeks.” Famous investor Warren Buffet even thought fit to go on the record saying that “Bitcoin is not a durable means of exchange” and “not a store of value”.

So does the recent Mt. Gox reflect a broken system that we should all stay away from? No, it just shows a broken company Bitcoin enthusiasts should stay away from.

Some investors took a beating in the process, yes, but it’s part of a process where the so-called first wave of Bitcoin entrepreneurs are being filtered while a legitimate crop of investors remain.

As pointed out in this Wired article, precautionary measures could have been taken to prevent such security breaches. Other popular exchanges have suffered similar bugs or hacks in the past but managed to keep their assets secure.

It’s dodgy companies like Mt. Gox that should be on trial, not the currency itself.

Getting rid of the bad apples

If we look at the bigger picture, attention paid to the bad apples in the Bitcoin community such as Mt. Gox CEO Mark Karpelles, who is described in the Wired article by colleagues as distracted, demoralising and an egoist, should be welcomed.

Last year, when the FBI bust the notorious Silk Road big shot, who went by the pseudonym Dread Pirate Roberts, the price of Bitcoin dropped by a massive 20%. Dread Pirate Roberts apparently held about 1.5% of all Bitcoins in circulation that time though the currency soon recovered and reached to a record high of US$1000 in the few weeks that followed. Similar results are taking place since the collapse of Mt. Gox.

For a new industry, these kinds of problems present an opportunity for lessons to be learnt and improvements to be made.

Former British Treasury official Anthony Hope recently pointed out the silver lining in this fiasco to Reuters: “It’s good for us as a business, not so good for us as consumers,” he said. “Over the longer term it will be good for Bitcoin because over time the entire ecosystem will be made more robust.”

Preventing the bad apples from getting in

Furthermore, Benjamin Lawsky, superintendent of New York’s Department of Financial Services, also told Reuters that Mt. Gox’s collapse was part of a “shaking out”.

“It’s on the one hand a setback, on the other hand it will cause further improvements in this industry and some more regulatory involvement,” he says. Lawsky wants to attract healthy Bitcoin operators to the state, and has floated the idea of launching a “BitLicense” to regulate operators, and to align any new rules with existing financial regulation.

The currency is popular because of the fact that there is no central bank or government regulation involved and instead relies on thousands of computers around the world. Any effort to regulate the currency itself would be fruitless, but promoting stricter checks and balances to filter out the illegitimate financial institutions — those handling fiat currencies as well as cryptocurrency — could be welcomed.

Japan will be the first government to outline its methods of handling Bitcoin. How the government will go about doing this is unclear but is shows there’s a definite amount of urgency.

Big shots like Buffet may have their doubts about the cryptocurrency’s future but other prominent investors more familiar with such modern trends, such as Marc Andreessen of tech investment firm Andreessen Horowitz (who has investments in tech companies including Bitcoin startups), says that “every important new technology has birthing pains”, and this one’s no different.

The road to the moon is a bumpy one.

Image via Anata on Flickr