Cryptocurrency bitcoin has been touted as the ‘world’s safest currency’ by its large band of supporters. Overnight, that illusion was shattered, as its former leading exchange – Mt Gox – went offline, seemingly never to return given reports of a sizeable theft and possible insolvency.
The news has the potential to bring the digital currency to its knees.
Mt Gox – a service which matches buyers and sellers like any normal exchange and holds bitcoins on behalf of investors – has long been the pre-eminent bitcoin exchange, but problems recently began surfacing as denial-of-service attacks led it to halt withdrawals.
It has now all but shut down its site, leaving only a vague message that reads:
“In light of recent news reports and the potential repercussions on MtGox's operations and the market, a decision was taken to close all transactions for the time being in order to protect the site and our users. We will be closely monitoring the situation and will react accordingly.”
It has also deleted all of its prior messages on microblogging site Twitter and abandoned its head office in Tokyo as users of the site ponder where their money has gone.
While bitcoin users have many alternative exchanges to buy and sell the currency, the Mt Gox issues show the downside of a lack of scrutiny from financial regulators.
Still, supporters of the currency insist bitcoin is fine; it was merely the exchange that was problematic. But the empty shell that is now the Mt Gox website will erode trust. And with it over $300 million worth of bitcoins may have been lost as speculation mounts of the theft of 740,000 bitcoins.
The valuation of those lost bitcoins is dropping fast, with the digital currency falling 20 per cent to below $US500. When I last wrote about it at the end of November it was seen surging past the $1000 mark for the first time amid a frenzy of activity.
The wild gyrations in value over the past 12 months are perhaps mere teething problems, but it doesn’t bode well for a secure store of value. After all, how many currencies move 20 per cent in a month, let alone 20 per cent in a day?
Regulators in Mt Gox’s base of Japan, meanwhile, are seemingly indifferent to the news. The Financial Services Agency in the Asian nation summed up the major problem with bitcoin: it actually isn’t a cash substitute as its use as a store of value and medium of exchange is, at best, trivial.
"Bitcoin is not a currency; it is an alternative to currencies, like gold," a spokesperson for the Financial Services Agency declared.
"We are only responsible for currencies and therefore bitcoin is not subject to our regulatory oversight."
Bitcoin, which has no owner or manager, has been shrouded in mystery since its inception and the latest debacle will stir suspicion that some are cleaning up at other people’s expense. But other leading exchanges have launched an offensive; adamant a few bad eggs have merely tainted what is the future for global finance.
"This tragic violation of the trust of users of Mt Gox was the result of one company's actions and does not reflect the resilience or value of bitcoin and the digital currency industry," the companies – BTC China, Coinbase, Bitstamp, Kraken, Blockchain and Circle – contended.
It was a similar sentiment echoed by one of bitcoin’s most prominent investors Marc Andreessen, a Silicon Valley investor who has revelled in early investments in Facebook, Skype and Twitter, who came out strongly in the cryptocurrency’s defence.
“(The) market price of (bitcoin) dropped going into Mt Gox shutdown, and then has risen since. This is exactly what one would predict for a normally functioning financial market without systemic risk,” he told his followers on Twitter.
“Mt Gox had to die for bitcoin to thrive. Its former role from early bitcoin days has been supplanted by better, stronger entities.”
Andreessen, a major investor in Mt Gox rival Coinstamp, appears overly optimistic in downplaying the situation.
After all, confidence and faith are all a currency has to determine its value and while cryptocurrency may be the way of the future, the big question is: can we trust bitcoin anymore?
Unless there is proper oversight, greater transparency and a stabilisation of its price, the answer is a blatant no.