On Monday at around 11PM Mt. Gox, the largest exchange for trading the virtual currency Bitcoin, started disappearing piece by piece. First the homepage disappeared. Next the support page was pulled, followed by the press releases and then the API. "The requested page was not found on this server," customers were told when they tried to access their deposits. Users started to panic as they realized they might never get their bitcoins back.
It had been a rough month for Gox. The company froze customer accounts, citing a technical vulnerability. Now, three weeks later, a leaked internal document revealed that the exchange is more than $100 million dollars in the hole owing to a theft that stole 743,000 bitcoins over the course of years.
Gox is more than $100 million dollars in the hole
"A decision was taken to close all transactions for the time being in order to protect the site and our users," Gox said in a non-statement. CEO Mark Karpeles has hinted to Reuters that an acquisition announcement could be "coming soon." But the company is reportedly being investigated by law enforcement in New York and Tokyo, where it’s based, and things don’t look good. There is no Federal Deposit Insurance Corporation backing Gox’s customers’ deposits. In the event that Bitcoin’s most popular exchange is insolvent, as reports claim, an untold number of customers will have their savings wiped out. Karpeles’ recent statement to an analyst — "Well, technically speaking it's not 'lost' just yet, just temporarily unavailable" — was less than reassuring.
According to the leaked document, titled "Crisis Strategy Draft" and obtained by a Bitcoin blogger, allowing Mt. Gox to fail would be so damaging to Bitcoin at large that anyone holding the currency would be better off bailing them out. All the exchange would need is 200,000 bitcoins from investors and the core community. "This isn’t about saving Mt. Gox anymore," the document says. "At the risk of appearing hyperbolic, this could be the end of Bitcoin, at least for most of the public."
The total number of bitcoins tied up in Mt. Gox is unknown, but it looks like millions. The theft ultimately stole nearly 6 percent of the bitcoins in the world, a nearly impossible loss to make up without an unprecedented effort. Customers have stepped forward lamenting their losses. Already there is pressure on the rest of the Bitcoin community to make the Mt. Gox users whole, as when the community around the niche virtual currency Dogecoin raised money for the victims of a large hack. So is it true? Is Mt. Gox too big to fail?
There is a large community of Bitcoin users who want the currency to succeed long term for idealistic and financial reasons, so a bailout isn’t out of the question. A true Mt. Gox crash could potentially undo some of the progress Bitcoin has made toward mainstream adoption. Already the story of Gox’s shutdown is prompting scaremongering headlines.
"This isn’t about saving Mt. Gox anymore. At the risk of appearing hyperbolic, this could be the end of Bitcoin."
Unfortunately for Gox and its customers, there isn’t much support for a bailout. That’s not surprising given that the ostensible founding premise of Bitcoin was freedom from the inbreeding that caused the global financial crisis and then called upon taxpayers to allay the damage. The prevailing sentiment is that Mt. Gox was an amateur effort with too much power that needed to be eliminated in order to make room for savvier and more responsible players. Mt. Gox had gotten in trouble with one of its US partners, CoinLab, which ended up suing the company for $75 million; later the US government froze $5 million of Mt. Gox’s funds due to suspicion of violating anti-money-laundering regulations. And despite its large stake in Bitcoin, the site struggled with basic technical functions for years after launch. In the summer of 2013 Mt. Gox suspended withdrawals in dollars for murky reasons even as it was supposedly raking in around $60,000 in revenue a day.
Now that what’s left of Mt. Gox’s credibility has been shredded, the company is unlikely to rebound even with a bailout from investors or other members of the Bitcoin community. That leaves the question of what comes next. A host of funded exchanges are ready to take its place. But for an exchange to regain users’ trust after the fall of Gox, it will need new transparency standards and safeguards, some of which have already been proposed.
Others see currency exchanges as a gap technology that the Bitcoin economy is poised to move beyond. Once people are being paid in Bitcoin and spending money in Bitcoin, there won’t be as much need to buy it for cash, which is the primary function of an exchange. "These large exchanges that are international and global are more important in the early stages of Bitcoin when we need price discovery," says Jon Matonis, director of the Bitcoin Foundation. "You don’t need them in the long run because in a true Bitcoin economy you’ll have a closed-loop system."
There are precedents for Bitcoin bailouts
There are precedents for Bitcoin bailouts, as when the Polish exchange Bitomat accidentally erased all its customers’ bitcoins. Mt. Gox bought the company and reimbursed its customers. But a bailout of Mt. Gox would be contrary to Bitcoin’s libertarian ethos and it doesn’t seem necessary. The price has already rebounded. A number of well-funded, reputable Bitcoin companies are standing by ready to sell the idea to the vast majority of potential users who have never used the currency or heard of Mt. Gox. And anyone who wants a bailout is likely to be shamed by the sense of self-determinism that kickstarted Bitcoin in the first place.
"It's not like this came out of left field," says Erik Voorhees, CEO of Coinapault, who had more than 550 bitcoins in Mt. Gox when it collapsed, worth more than $250,000 as of this writing. "People have known that Mt. Gox sucked for years. I knew that. I knew that I was being foolish keeping money there, and ultimately got burned for it."