Nope nope nope nope nope. Photographer: Kiyoshi Ota/Bloomberg

If Bitcoin Didn't Work Out for You, There's Always Goxcoin

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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I try not to be the sort of financial blogger who writes about Bitcoin all day, but Goxcoin may be beyond my powers to resist. The story so far is that there's a Japanese Bitcoin exchange called Mt. Gox that somehow lost about 750,000 bitcoins, worth ... worth 750,000 bitcoins, right? The value of one bitcoin is one bitcoin, within some margin of error. But you can translate it into regular money -- sorry, into "fiat," is the preferred noun, I think -- in which case 750,000 bitcoins are worth around $500 million, just to put a number on it.

So Mt. Gox poofed, and I guess there's some prospect that someone will go find those 750,000 bitcoins, under someone's bed or whatever, so there might be a non-zero recovery for Mt. Gox's creditors. So you can think of those creditors -- most of whom are just people who had bitcoins deposited with Mt. Gox -- as having bankruptcy claims against Mt. Gox's estate. And if the estate ever recovers anything, those claims will be worth something. And if not, not.

But there is a problem. I mean, the whole thing is a problem, there are no non-problematic parts of it, but within that larger problem there lives this problem:

As far as the Japanese legal system is concerned, bitcoins might as well be pencils, and Mt.Gox might as well be a pencil factory. If nobody insures pencils, and there is no claim process to recover pencils, the pencil value is reckoned into a dollar amount, which is then discounted and paid out as the recovery of missing or stolen funds, over a number of years.

For people with fiat in the system, that's not a great outcome. For people with bitcoins in the system this is a terrible outcome. Your should-be-deflationary bitcoin value has become anchored to a fiat price that reflects insolvency.

See, the problem is that your bankruptcy claim is converted to dollars -- yen, probably? but go with it -- now, but the bitcoins are hunted down over time, with some probability that that time is "never." And if your claim now is for, say, 10 bitcoins worth $6,000 or whatever, then by the time those bitcoins are recovered, they'll be worth $60,000, because Bitcoin is deflationary, and its price can only go up. But the Japanese bankruptcy system was built to handle pencil bankruptcies and is ill equipped to deal with Bitcoin, so it will only give you back your $6,000 claim, reduced to fiat in the bankruptcy process. So you're getting ripped off, because the Japanese bankruptcy system does not understand that the price of Bitcoin will always go up.

The problem is with the Japanese bankruptcy system.

That is the problem. The problem is the Japanese bankruptcy system.


But there is a solution! Bitcoin's more interesting proponents think of Bitcoin not so much as a currency but as an underlying architecture for new ways to provide financial services, and as a prime example of the idea of "smart contracts," computerized contracts that execute themselves via software rather than relying on trust and cooperation and courts. So the Bitcoin idea can be extended to derivatives contracts, or equity ownership, or bankruptcy claims.

Such as bankruptcy claims on Mt. Gox. In digital-currency form. In Goxcoin form:

Using a technology called Mastercoin, the Goxcoin people would mint a brand new digital currency, a strange hyper-speculative bitcoin derivative, that would itself be backed by claims to bitcoins held in Mt. Gox's accounts. So one Goxcoin would represent one bitcoin, temporarily vanished in the Mt. Gox bankruptcy. Recovery date and value are to-be-determined.

The psychology here is obvious: Mt. Gox investors have been burned by a virtual currency. So it's natural that they wouldn't trust the Japanese legal system and would prefer to keep their bankruptcy claims in another virtual currency. That is just common sense. Because when Mt. Gox gets all of its bitcoins back, and those bitcoins have soared in value, you'd feel like a chump if you'd trusted the Japanese legal system instead of some guys with a Web page.

Kevin Roose is a financial blogger who has historically had more patience for Bitcoin than I have, and here you can readhis patience running out. I recommend it!

As Bitcoin stumbles, the community growing up around it has only become more fervent. Their beliefs are barely falsifiable. ... Ask any of these Bitcoin believers about any of the recent incidents, and they will defend the currency with religious fervor. It's good when black-market drug peddlers and money launderers are taken out of the system, they say, because it makes room for more legitimate Bitcoin operations. Charlie Shrem was a naïf who got ahead of himself. Mt. Gox was taken down by "transaction malleability." The problem is with the immature Bitcoin architecture, not with Bitcoin itself.

But it's okay. The best way to fix the immature architecture of virtual currencies is with new virtual currencies. Goxcoins will solve Bitcoin's problems. This time it's got to work.

(Matt Levine writes about Wall Street and the financial world for Bloomberg View.)

  1. Here is an amusing discussion of negative interest rates for Bitcoin.

  2. By the way I don't endorse this view of how the Japanese bankruptcy system works; I am not a Japanese bankruptcy lawyer. Broadly speaking, the issue of when a bankruptcy claim is reduced to dollars (yen), and what happens if the underlying property appreciates in value after the claim is reduced to money, is an interesting one in any bankruptcy system. But it's only interesting here if Mt. Gox investors actually end up getting back more than 100 percent of their lost money, measured in dollars/yen at the time of insolvency. If Mt. Gox recovers 10 percent of its bitcoins, and those bitcoins have doubled in value, then your recovery is 20 percent of your dollar-denominated claim, Goxcoin or no Goxcoin. If Mt. Gox recovers zero of its bitcoins, this whole thing is moot.

  3. This post is like 95 percent sarcastic so it's worth saying earnestly that the smart contracts stuff is genuinely interesting, though the jury seems to be out on whether Bitcoin itself is all that smart.

  4. And if it's possible for the people running that new virtual currency to be some of the same people who helped run Mt. Gox, so much the better:

    Another wrinkle: one of the backers of Goxcoin is Michael Keferl, a managing director at Mandalah, the marketing consulting company that was advising Gox at the time of its meltdown. That has caused some bitcoin observers to be skeptical of the whole Goxcoin initiative. "I think the confusion about his company, Mandala, and Mt. Gox is really unfortunate because Michael is a great guy in a bad situation," Levine says.

    Levine is Adam Levine, "who is the host of a popular bitcoin audio show, 'Let's Talk Bitcoin,' " and no relation to me.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Matthew S Levine at

To contact the editor on this story:
Toby Harshaw at