The cryptocurrency bitcoin has long been touted by its evangelists as a liberating alternative to banks and government-backed currencies that excises unnecessary fees and price controls.
But a lack of a central banking system comes with distinct disadvantages, notably a complete lack of consumer protection. Bitcoin adopters unfortunate enough to have housed their bitcoins in Japanese exchange Mt. Gox learned that lesson the hard way on Friday, when the former industry leader announced they would be halting all currency withdrawals.
While there is no indication Mt. Gox intends to make the suspension permanent, there is also no assurance that they will not, with the exchange only saying the will “update” on Feb 10. In the meantime, Mt. Gox customers can only wait and hope.
The Free Market Giveth, the Free Market Taketh Away
Mt. Gox was at one time the clear market leader in bitcoin exchanges, at one point handling almost 75 percent of all bitcoin transfers. But as we noted when we first began exploring bitcoin exchanges Mt. Gox has fallen from its pedestal, and has been dogged by customer complaints and a lack of faith since April 2013.
While customers wishing to trade bitcoins certainly have other options, like Bitstamp and btc-e, the rise and fall of Mt. Gox illustrates that bitcoin trading comes without a safety net. Bitcoin has no backing government and no inherent regulatory system, and this is both its feature and its bug. Compare the Mt. Gox situation to traditional banks. Well, that’s not entirely apt, because a modern American bank could never, ever engage in what Mt. Gox seems to be doing: experiencing an old-fashioned bank run.
Run, Mt. Gox, Run
Bank runs, which were commonplace in the Great Depression, occur when consumers lose faith in a currency and simultaneously try to withdraw their money en masse. Like any panic, bank runs increase exponentially, eventually sinking banks and, if there is no consumer protection, taking the last depositor’s funds with them.
As bitcoin aficionados like to point out, American consumers pay bank fees. But they do so for a little thing called the Federal Deposit Insurance Corporation, which insures all deposits up to $250,000 and so far has prevented a single customer from losing their deposits since 1934.
Bitcoin has nothing like that, of course. And now its unlucky customers are worried they may never be able to exchange out their bitcoins.
A lot of ire has been directed at Mt. Gox CEO Mark Karpeles, who is rumored to be able to save Mt. Gox with his personal fortune alone. And if the stories are true, he could do it — rumors peg Karpeles’ wealth at $8 million USD and his bitcoin hoard at around 345,000 bitcoins, or roughly four percent of bitcoin’s entire global GDP.
A Delicate, Top-Heavy Economy
The Mt. Gox run is bringing public attention to one of the less talked about aspects of bitcoin: the highly disproportionate relationship between its de-facto bankers and elite, and the average bitcoin trader. That is, that the vast majority of bitcoins are controlled by a select few.
Blockchain reports that there are about 1.2 million bitcoin wallets in existence that contain more than 0.001 bitcoin. But assuming that means the average “active” wallet contains $10,000 USD of bitcoins follows about the same logic as when comedian Bo Burnham says that the average person has one fallopian tube. “Average” is, in short, highly misleading.
According to BitcoinRichList, more than 35 percent of all bitcoins are held in just 500 wallets, and 21 percent in just 100. Of course, some of these wallets are exchanges – or, in the case of the absolutely largest wallet, the FBI’s (as a result of their various bitcoin seizures). But others certainly aren’t, like the Winklevoss Twins’, who have publically said they own 1 percent of all bitcoin.
Make no mistake, USD wealth distribution is also highly uneven. But even in the economic disparate US, the “one percent” only own 35 percent of the wealth. In bitcoin, on the other hand, the top one percent hold 98 percent of bitcoin. In fact, just the top .5 percent control a whopping 95 percent of bitcoin.
Whether these wallets are controlled by individuals or groups is hard to pin down. But it does make for a suspicious financial system. What if just one account holder tried to cash out? How about two? Or 100?
Bitcoin is a famously anonymous system, so it’s hard to say what person or institutions own the various wallets, and who all is trying to pull their money out that is sparking the possible Mt. Gox collapse. But the run, coupled with the highly unequal distribution of bitcoin capital and lack of insurance, highlights a market that while highly lucrative for some, is also highly risky, and at this point, very fragile.