Back to the Mattress: Mt Gox and the Future of Bitcoin

A true digital currency is the holy grail of the on-line world. Since the start of the Internet, a long series of folks have been trying to find the on-line equivalent of cash - some kind of digital token that is secure, easy to transfer and, for most of the people who have joined the hunt, anonymous. Bitcoin provides the latest foray into this arena, and the Bitcoin story provides the latest example of the basic truth that payment systems are always dependent on the support of a strong, trustworthy third party.

This truth applied to traditional currencies, like this:

Or these:

Valued when their backing governments existed, when the government support failed so did the currency.

The digital world is no different. When "virtual" banks tried to build a business around Linden Dollars in Second Life, problems quickly developed. Customers of Ginko Financial, an unregulated Second Life investment bank, swarmed the "doors" at the first hint of trouble, causing a run on the bank and its collapse.

The rapid increase of Bitcoin popularity is creating a similar dynamic. At one point the largest trader of Bitcoin, Mt Gox started to encounter pronounced difficulties handling transactions as the result of regulatory issues. Customers started to move business to different exchanges, and on February 7 Mt Gox halted withdrawals.  Four days later, another exchange, BitStamp, also suspended withdrawals, citing difficulties caused by denial of service attacks against its servers that could potentially affect the security of its transactions.

On February 24, Mt Gox shut down completely. Customers might have lost up to $480,000,000. Although, Bitcoin value has been plunging as a result of the shutdown and other disturbances in the Bitcoin infrastructure. So, the actual loss might be significantly less.

As of today (February 26) visitors to its website received this informative and reassuring message:

February 26th 2014
Dear MtGox Customers,
As there is a lot of speculation regarding MtGox and its future, I would like to use this opportunity to reassure everyone that I am still in Japan, and working very hard with the support of different parties to find a solution to our recent issues.
Furthermore I would like to kindly ask that people refrain from asking questions to our staff: they have been instructed not to give any response or information. Please visit this page for further announcements and updates.
Sincerely,
Mark Karpeles

And so it goes.

The lesson, as I pointed out before, is that any currency, even a virtual one, requires a reliable and trustworthy controlling authority. An imaginary person simply does not cut it.