The Japanese exchange Mt. Gox has long been one of the Bitcoin community's most prominent institutions. It has also been one of its biggest PR headaches. On Friday, the exchange announced that it was declaring bankruptcy.
Few Bitcoin insiders were surprised, as the exchange has been plagued with problems for years. In 2011, the value of a bitcoin soared from less than $1 to more than $32. Much of this trading occurred on Mt. Gox, which found itself unable to keep up with the demand. The servers began to freeze up, helping to trigger a collapse in the currency's value. By November, one bitcoin was worth just $2. A similar scenario played out in 2013. As the price of one bitcoin soared from $13.50 to $266, Mt. Gox's servers started to buckle under the strain, helping spark a wave of panic selling that pushed the price back down to around $50.
Getting overloaded due to excess demand is a nice problem to have. Mt. Gox's other problems have been more serious. Last year, the exchange announced a deal for the Bitcoin start-up CoinLab to manage its North American trading. But the deal fell apart, leading CoinLab to file a $75 million lawsuit against its former business partner. Then in August, the U.S. government seized $5 million in funds belonging to Mt. Gox over an alleged failure to comply with money laundering laws.
Meanwhile, customers were finding it harder and harder to get their money out of the exchange. In August, Mt. Gox announced a two-week suspension of dollar withdrawals. Ever since then, customers have complained that withdrawal requests have been processed slowly, if at all.
Earlier this month, Mt. Gox announced a suspension of bitcoin withdrawals. That sent the price of bitcoins on the exchange into a tailspin. Now, it looks like customers will get only a fraction of their money back, if they get any at all.
The good news for the Bitcoin community is that Mt. Gox isn't the only exchange in town. While Mt. Gox has dwindled in popularity, other exchanges have risen to take its place. According to Bitcoincharts.com, the most popular exchange is now a European firm, Bitstamp. And while bitcoins have fallen to less than $400 on Mt. Gox, bitcoins on Bitstamp, and other exchanges, are going for about $650.
And this is one of Bitcoin's great strengths. Right now, companies such as BitStamp, BitPay, Coinbase and (until recently) Mt. Gox are important players in the Bitcoin ecosystem. But Bitcoin itself is an open-source technology platform. It's not owned by anyone, and its success doesn't depend on the success of any specific bitcoin-based company. If the current crop of Bitcoin businesses fail, a new generation can and likely will emerge to take their place.
Of course, customers unfortunate enough to entrust their Bitcoins with Mt. Gox have gotten burned. Bitcoin is still in a "Wild West" phase of development, and it's not really ready for ordinary users. But over time, this process of trial and error should make the surviving businesses in the Bitcoin economy more sophisticated and trustworthy. The new generation of businesses that take Mt. Gox's place will learn from the exchange's mistakes. And regulators will demand greater transparency and accountability from Bitcoin exchanges.
There's an obvious analogy to the first dot-com bubble. In the 1990s, hundreds of start-ups attempted to build businesses on top of the World Wide Web. Some of them were badly run. Others chose business models that proved unsustainable. Many squandered their investors' money.
Yet the collapse of the dot-com bubble wasn't a sign that the Internet had failed. Quite the contrary. The flood of capital into the Internet economy and the subsequent shakeout was terrible for investors, but it probably accelerated the Internet's development. Out of the chaos emerged enduring companies like Yahoo, Google, Amazon and eBay.
The Internet was going to succeed whether or not Pets.com and Webvan did. By the same token, Bitcoin's success doesn't depend on the survival of Mt. Gox or any other bitcoin firm.
Mt. Gox Bitcoin exchange files for bankruptcy