Collapse: Mt. Gox and the Future of Bitcoin

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Despite an increasingly prominent profile in the media sphere, Bitcoin remains something of a mystery to the general public. While folks may have heard of the virtual currency, it’s generally in connection with its explosive growth or its associations with various scandals (including the seizure of $28 million in Bitcoins during the FBI’s takedown of the Silk Road marketplace).

Yet even as security concerns and scandals accumulated, the embattled crypto-currency seemed poised to continue its uneven but seemingly-unstoppable growth in the closing weeks of 2013, when a single Bitcoin held a value of more than $1,000 (an estimated 8,000% increase in value compared to January of the same year). A little controversy was good for the coffers, it seemed.

The Implosion of Mt. Gox

But 2014 may prove to be a different matter. Bitcoin hit the news early in 2014 when Charlie Shem, CEO of BitInstant (a major Bitcoin exchange) and one of the founding members of the Bitcoin Foundation Board, was arrested for money laundering. The currency took another blow when tech titan Apple removed its final Bitcoin app, BlockChain, from its store a few weeks later.

And in February, Japan’s Mt. Gox exchange—the single largest Bitcoin exchange in the world—wascompletely cleaned out by hackers. The thieves took 750,000 Bitcoins, or nearly half a billion dollars at February 2014 exchange rates, along with 100,000 Bitcoins owned by Mt. Gox. In total, that’s a disheartening seven percent of all Bitcoins in the world, and the largest bank robbery since Saddam Hussein’s son Uday seized nearly a billion dollars from the Iraqi Central Bank in 2003.

In the wake of the collapse of Mt. Gox, enraged investors and concerned lawmakers alike demanded answers. With their wealth essentially transferred elsewhere, investors were quick to file a class-action lawsuit against both Mt. Gox and its French CEO, Mark Karpeles. In the U.S., a few state governments (including New York and California) were already making efforts to regulate Bitcoin (not only to protect investors, but to provide economic incentives for their states), but the failure of Mt. Gox prompted calls for regulation at the Federal level.

Yet neither investors nor legislators are likely to get what they seek. Because Mt. Gox was unregulated, the burden of tracking down the stolen booty falls squarely on the shoulders of the investors themselves.

Due to the structure of Bitcoin, every transaction is theoretically traceable, but the process can be time-consuming and expensive, leaving individual investors in the uncomfortable position of having to spend even more money to track down their pilfered funds. And while lawmakers have repeatedly called for regulation, the head of the Federal Reserve, Janet Yellen, has repeatedly asserted that the government has no authority, or ability, to regulate the crypto-currency:

The Future of Bitcoin

So what does the fall of its largest exchange mean for Bitcoin? As with other problems it has faced, Bitcoin seems to be shaken, but not yet moribund. Defenders are quick to stress that the problems plaguing Mt. Gox were related to that organization’s lackadaisical mismanagement and not due to issues with Bitcoin itself.

The currency rebounded in value swiftly after Mt. Gox debacle, but given that Mt. Gox entered bankruptcy protection over $100 million in debt, it’s clear that improved safety and regulation are in order.

Not content to wait around for legislative assistance, many Bitcoin users are taking some novel approaches to securing their investments. Some, in an ironic twist, are taking their virtual currency into the physical world by printing out the private keys associated with their Bitcoin accounts and storing them like paper currency.

Some even use services that securely store their keys in a physical location, similar to safety deposit boxes. Others are employing advanced biometric technology to protect their Bitcoin wallets and other personal data. While promising, these methods shackle Bitcoin with a limitation associated with more traditional currencies—namely, how do you keep someone from stealing, destroying, or misplacing your physical wealth?

Was Mt. Gox the death knell for Bitcoin, or simply another costly growing pain for it, and cryptocurrency as a whole? In the absence of regulation and reliable remedies for investors who’ve fallen victim to the virtual currency’s vulnerabilities, the answer is unclear at best.

The potential for profit and ongoing financial and technical innovation make it likely Bitcoin (and others like it) will likely continue to grow—but a healthy and profitable future for virtual currency depends upon finding solutions to the very real security and regulatory challenges it presents.

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MT.GOX image is in the public domain.
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