This week’s halt, and possible collapse, of the Mt. Gox exchange may or may not prove to be the beginning of the end for Bitcoin – but to borrow Winston Churchill’s phrase, it is certainly the end of the beginning.
Mt. Gox had already lost its place as the leading Bitcoin exchange before the murky chain of events that led the Tokyo-based site to shut down. An apparently leaked internal document indicates that the site may have been the victim of a major theft, in which perhaps bitcoin mixer more than $300 million worth of Bitcoin “disappeared” from the exchange’s accounts. I put “disappeared” in quotes because, of course, Bitcoin has no physical manifestation.
Bitcoin exists only as the product of a computer algorithm whose origins are unknown and whose ultimate purpose is unclear. It has attracted a varied collection of users, including individuals who want to keep questionable dealings private, people who may want to keep part of their wealth hidden from authorities who have access to conventional financial accounts, and end-of-the-worlders who think civilized society is on the highway to hell and that for some reason they will be better off owning bitcoins when we all arrive there.
Bitcoin enthusiasts like to call it a digital currency, or cryptocurrency because of its encrypted nature. But it is clear now, amid the wild fluctuations in Bitcoin’s price, that it is not a true currency at all. It is really a commodity whose price fluctuates according to its quality and according to supply and demand.
As of this week, there are two grades of Bitcoin. One of the Mt. Gox variety, which nobody can access while the site is down and which may no longer truly exist at all, was worth only about one-sixth of every other bitcoin yesterday.
Some people are always willing to offer value, albeit not very much value, to take a chance on a possibly worthless asset. This is why shares of companies that are obviously about to go bust can trade for a price greater than zero. But at least we know the shares exist, whether in tangible or intangible form, and there are government authorities available to vouch for their validity, if not their value. Bitcoin, sponsored by no government and outlawed by some, has no such backing. Ask any Mt. Gox user today whether that is a plus, as bitcoin holders have heretofore maintained. (Authorities from Tokyo to New York are already probing the Mt. Gox collapse, and some sort of follow-up action seems likely.)
True money serves two functions: as a store of value and as a medium of exchange. Bitcoin thus far gets only fair marks as a medium of exchange, since there are only a limited number of places where you can freely spend it. You can swap your (non-Mt. Gox) bitcoins for real money, but you can do the same with any other commodity, like diamonds or Hondas. Diamonds and Hondas are worth money, but they aren’t money.