Mt. Goxalypse Now! Bitcoin's Credibility Faces a Make-or-Break Moment
For the past few years, Dave Carlson has stored 1,100 Bitcoins in an online account with Mt. Gox, the Tokyo-based exchange that once led the world in trading the digital currency. By the end of 2013, with the Bitcoin price booming, the value of Carlson’s holdings had surpassed $1 million. Their value now: zero, most likely. “I’m disappointed in myself for not getting off the exchange when I saw the problems,” says Carlson, a Seattle-based entrepreneur who says he feared withdrawing his holdings would further destabilize the company. “This is Bitcoin, after all. It’s the Wild West.”
Mt. Gox ceased operations on Feb. 24, taking roughly $400 million of its customers’ digital currency down with it. The collapse has cast a shadow over Bitcoin, whose proponents have channeled a revolutionary fervor into startups built around mining and facilitating transactions with the currency. The question now is whether the Mt. Goxalypse marks an end to Bitcoin or a new phase of its evolution toward stability and widespread acceptance. “I think some people will lose faith,” says Naval Ravikant, a Silicon Valley investor active in the Bitcoin community. “There will probably be a lot of people who stampeded in who now stampede out.” Within hours of Mt. Gox going offline, the Bitcoin price dropped to about $430, from more than $1,000 late last year. It recovered somewhat by the following evening.
When it made its debut in 2009, Mt. Gox wasn’t a venue for financial innovation. It was founded by Internet entrepreneur Jed McCaleb as a marketplace for the illustrated trading cards used to play Magic: The Gathering. (Mt. Gox is an acronym for Magic: The Gathering Online Exchange.) McCaleb remade the site as a Bitcoin exchange soon after but, wary of the impending regulatory challenges, sold it to Mark Karpeles, a Frenchman living in Tokyo. The transaction was completed online.
By early 2013, Mt. Gox’s servers handled 70 percent of all Bitcoin buying and selling, and its challenges grew, too. Last year the U.S. government seized two Mt. Gox bank accounts with more than $5 million in combined assets and charged the company with transmitting funds without a proper license. Companies working with Mt. Gox sued for breach of contract; customers complained in online forums that they couldn’t make withdrawals. Karpeles, once a regular participant on forums under the handle MagicalTux, began to post less and less. He couldn’t be reached for this article.
“Mt. Gox was fundamentally crippled by its own business approach,” says Will O’Brien, chief executive officer of BitGo, which develops security software for Bitcoin transactions. “It never really took a mature, serious approach to delivering on its promise to its customers.” Josh Weinstein, founder of online video platform YouAreTV, says he tried for three months to withdraw funds, stymied by a series of cryptic e-mails from customer service reps. Weinstein wouldn’t say how much he lost.
On Mt. Gox’s final day, blogger Ryan Selkis obtained and published a document that purported to outline the company’s internal crisis strategy. The real problem, the document suggested, was security: Some 744,000 Bitcoins had been stolen from the exchange. Soon after Selkis posted, Mt. Gox pulled down its website and Twitter account.
Definitive answers about exactly what happened likely won’t emerge until the inevitable lawsuits. “It’s either total incompetence or negligence or outright criminal behavior,” says Jeremy Allaire, founder of Circle Internet Financial, a Bitcoin services startup.
Some Bitcoin believers say Mt. Gox’s demise will ultimately help their cause. They’re hailing it as the end of amateur hour for the currency, as many did after the fall of Silk Road, a Bitcoin-based black market notorious for drug trafficking. (Silk Road’s collapse in October only briefly tanked the currency’s value.) “It purges the final vestige of the first generation of infrastructure companies,” says Jerry Brito, director of the technology policy program at the Mercatus Center at George Mason University and a longtime Bitcoin supporter. “Who’s left? It’s the serious people, who are doing this right.” Several prominent Bitcoin companies issued a joint statement saying “there are certain bad actors that need to be weeded out” and vowing to shore up the currency’s credibility by requiring better behavior from companies that handle Bitcoins for customers.
Shortly before the Mt. Gox collapse on Feb. 24, SecondMarket founder Barry Silbert, whose online exchange specializes in trading alternative investments such as equity stakes in private companies, announced the formation of a U.S.-based Bitcoin exchange that will admit only regulated financial institutions. The exchange, a spinoff of SecondMarket, has an initial investment of $20 million in U.S. dollars and Bitcoins. (He wouldn’t say how much of each.) Silbert says he’s in talks with interested financial institutions and a handful of reputable Bitcoin companies, and the downfall of Mt. Gox hasn’t threatened those discussions. “It just highlights the need for a well-run, well-capitalized exchange here in the U.S.,” he says.
Bitcoin’s most significant vulnerability isn’t its underlying technology. The success of any currency requires belief in its value, and the Mt. Gox debacle is a big setback for Bitcoin as it struggles to achieve greater stability. Chris Larsen, CEO of digital currency startup Ripple Labs, is less bullish on the fallout from the Mt. Gox PR nightmare. As the boards of many banks begin to assess whether to accept or work in some way with math-based currencies such as Bitcoin, he says, “You can kind of guess how those conversations will now go.”