For those of us who have resisted the urge to invest any financial or intellectual capital in bitcoins, the collapse of Mt. Gox, the largest trading platform for investors in the virtual currency, can be observed with detachment, and even amusement. But some, perhaps many, “owners” of bitcoins aren’t so lucky. The old-school cash—dollars and euros and yen—that they swapped for a string of digits appears, at first glance, to have been lost.
Kolin Burgess, a British bitcoin investor who spent much of Tuesday protesting outside of Mt. Gox’s abandoned office, in Tokyo, told a reporter for Reuters that he thought he had accumulated Bitcoins that were worth three hundred thousand dollars at the market’s peak. “I’m very angry,” he said. “It looks like that’s disappeared.”
Something else that’s vanished is Mt. Gox’s chief executive, Mark Karpeles, whose last communication was an e-mail to reporters in which he said, “We should have an official announcement ready soon-ish.” That missive was sent shortly before Mt. Gox’s Web site went down, and a document turned up online that claimed more than seven hundred thousand bitcoins had gone missing from Mt. Gox “due to malleability-related theft.” Since only about 12.4 million of the virtual coins have been “minted,” it looks like about six per cent of all the currency outstanding is unaccounted for.
How can you steal a virtual currency, the great advantage of which is that it is supposed to be impervious to outside scrutiny or manipulation? More easily than you might think, evidently. According to an informative and rightly scathing piece for The Economist, Bitcoin’s “blockchain”—the online ledger in which every transaction carried out in the currency is recorded (without revealing the identity of the parties concerned)—contains a bug that allows hackers “to steal Bitcoins by making it appear that transactions didn’t occur—a problem exacerbated by Mt. Gox’s custom software … which made the bug even easier to exploit because it used an automated system to approve withdrawals.”
In case you are a bit confused—I know I am—let’s just go over that again. Bitcoin is based on cryptography. And yet, as far back as 2011, when it was largely the preserve of drug dealers and software geeks, some developers and entrepreneurs associated with it were already aware of a potentially serious vulnerability at the heart of the electronic-accounting system that constitutes its essence. But they didn’t do anything about it, and some of them, including, today’s events suggest, Karpeles and perhaps some of his colleagues at Mt. Gox, took steps that exacerbated the problem. Meanwhile, they promoted Bitcoin as a safe and secure medium of exchange that would eventually allow people all over the world to bypass the costly banking system.
Of course, that vision may yet come to pass. With venture capital pouring into the sector, and with even the likes of Ben Bernanke saying that virtual currencies could perform a useful economic function, Bitcoin still has plenty of boosters. “Mt. Gox is one of several exchanges, and their exit, while unfortunate, opens a door of opportunity,” the Bitcoin Foundation, which until a few days ago numbered Karpeles among its directors, said in a statement. “This incident demonstrates the need for responsible individuals and members of the bitcoin community to lead in providing reliable services.”
Indeed it does. For now, though, Bitcoin, like innumerable speculative vehicles before it, appears to be falling victim to what John Kenneth Galbraith, in his book on the 1929 stock market crash, referred to as “the bezzle.” In any economy, Galbraith noted, crookery and theft are present. But, particularly when money is plentiful and financial markets are rising, “the rate of embezzlement grows, the rate of discovery falls off and the bezzle increases rapidly.” It is only after the market falls and “audits are penetrating and meticulous” that much of this chicanery is uncovered.
Bitcoin fits the pattern pretty well. Between June and December of last year, its value on the Mt. Gox exchange went from less than two hundred dollars to more than twelve hundred dollars. More recently, its price has been oscillating wildly, causing concern among some investors. Then, a couple of weeks ago, came the revelation that cyberthieves had been exploiting the bug in the system, and panic-selling began. By the time Mt. Gox shut down, the value of bitcoins traded on it had fallen to less than a hundred and fifty dollars. At Bitstamp, another big exchange, which is still operating, the price fell to four hundred dollars.
Is this the end of Bitcoin? Almost certainly not. Many people operating in the black economy will willingly take a few risks to conduct their business. And, for everybody else, the promise of a cheap and ubiquitous electronic-payment system remains. But in the very week that the first bitcoin ATM opened in Boston, the notion that hundreds of millions of people are going to trust their wages and savings to an unregulated and opaque electronic currency just suffered a big blow.
Photograph: Kiyoshi Ota/Bloomberg/Getty
