If the free market is one thing, it’s unfeeling. The coldly efficient forces of the market made that clear on April 16 when Mt. Gox, at one time the unquestioned leader of bitcoin exchanges, lost its last ditch attempt to recover and now will almost certainly be liquidated. As bitcoin continues to represent one of the world’s most ideologically pure experiments in modern unregulated commerce, we’re starting to see how quickly companies that deal with the volatile asset can be dispatched. The big question now is, can it happen again? And if it does, how severe will the fallout be?
Mt. Gox Death Toll
When Mt. Gox went under, the exchange originally claimed it lost approximately 850,000 bitcoins, or approximately 7 percent of the bitcoins currently in existence. Of course, not all of them went outright missing. Mt Gox “discovered” 200,000 coins shortly after its crash. Not to mention that it’s likely many of the bitcoins Mt. Gox had go missing are now in the wallets of intrepid hackers. So they’re still out there, somewhere.
Who certainly got the shaft were those unfortunate enough to still be holding their electronic coin in Mt. Gox. And now, with Mt. Gox entering liquidation. The reported 127,000 creditors (AKA customers) who lost BTC in the meltdown are without recourse.
That’s the free market for you. The opaque free market, to be specific.
Digital Money Under a Digital Mattress
The more technically literate of the BTC evangelists often deride those who lost BTC in the Gox crash as being green neophytes, naïve investors who should have known better than to hold their digital wealth in an untrustworthy exchange. Keep your BTC in your own wallet, write the keys on a piece of paper. Hold your own, that is. Trust nobody.
If this sounds like the digital age’s version of “bury your cash in a coffee can,” that’s because it is. It belies both a deep skepticism of the solvency of financial institutions, and a libertarian-flavored individualism. It also severely limits the liquidity of an asset.
For instance, how will people lend money in a BTC without exchanges or banks? Will the free market create one? If it does, how can we trust it anymore than people trusted Mt. Gox? Who will bail it out if it fails?
Regulation vs. The Wild CyberWest
There’s really two paths. One, BTC can continue down the road to mainstream acceptance. That is, classification as a commodity as the IRS, China, and even the Winklevoss Twins have pegged it. Bitcoin trading will be regulated like any commodity, be it gold or oil or wheat or whatever. The market’s forces will become more transparent. Contracts on trading BTC will be treated with the same sanctity as are any other tradable asset.
But that’s one terribly free market. That leaves a second option. Exchanges and banks can operate the same as Mt. Gox. Unfettered by regulation, but doomed to Gox-like fallouts without warning.
It will be interesting to see how the free market sorts this one out, and especially if it will, in absence of financial regulators, create another quasi-vigilante response like the Gox debacle did. Most likely it will. It’s just a matter of seeing how many people get trashed in the next, inevitable house cleaning the free market excels at performing.
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