I literally got messages from all over the world today asking me my thoughts on the sudden shutdown of Mt. Gox (mtgox.com), given my continued interest in the future of bitcoin technology. Of all the articles that came out today, the WSJ one is probably the best I’ve seen, but I found the need to list what I felt were the N most important facts to keep in mind:
- Mt. Gox was neither Lehman, not MF Global, nor Bernie Madoff – Lehman sent ripples of losses throughout the financial system starting with anyone to whom it owed money, either as an unsecured bond issuer or undersecured derivative counterparty. Lehman’s closest businesses to the Mt. Gox exchange were its government bond trading desks, and customers generally did not lose money because they bought their US Treasury bills from Lehman rather than from RBC. The unexplained disappearance of BTC750k (US$35mio) does sound a lot like a little Bernie Madoff, but Mt. Gox was not an asset manager either. Perhaps a better comparison would be to Enron: one case of fraud and failure did turn off some people to energy trading for a while, but the world continued to need advances in trading energy risk, so the markets continued to grow.
- Web-based businesses can and do fail – but the Internet technology they use continues to grow and improve. ISP failures did nothing to slow the spread of e-mail, the failure of Pets.com and WebVan did not slow the growth of online shopping, and a dollar store going out of business has no relation to any decline in the dollar. Online businesses should not become “too big to fail”, and rather should be the nimble test grounds of innovation and evolution.
- Lesson 1: Don’t keep coins on a site you wouldn’t trust as much as your bank – One of the greatest advantages I see in bitcoin technology is the ability to separate transactional services from custodial services. You can keep bitcoin on an Android phone, a USB stick or hard drive just like you would keep cash in your wallet, home safe, or mattress. You can backup this bitcoin in a way that you can’t back-up your cash, and you can secure it with your choice of passwords and other crypto technology. You of course can still keep coins with an online company like Coinbase, but I am unaware of any credit rating service or deposit insurance scheme that should make you feel your coins are as safe there as they would be at a bank or on your laptop. Institutional investors have long been able to keep their stocks and bonds with a different custodian away from their broker, but most individuals are very new to this idea and may take some time to take advantage of this.
- Lesson 2: Brick and mortar presence is just what Bitcoin needs for public confidence – One reason old bank branches were always in big, expensive, elaborate, well-guarded buildings was for show: they wanted to prove they were there to stay, and that your money there was safe. Bank branches and safes are still remarkably common in Asia, and people here still like paying cash and shopping in person. Our local exchange ANX should probably consider the timing fortunate: they are opening the first brick and mortar bitcoin retail store in Hong Kong this Friday. The ability to exchange and spend bitcoin in person for something tangible is a critical next step for the demographics that stereotypically might have been sceptical of any store of value that only exists online: women and over 50s, especially in Asia.
- Lesson 3: Keep the risks in perspective – following lession 1, counterparty risk is easy enough to avoid, and for most users, the initial risk of using Bitcoin may be mostly the operational risk of setting up wallets and passwords correctly. But as I tweeted last week, it took me a minute to open a Bitcoin wallet, and a month to open a company bank account, so adopting bitcoin technology will probably result in a huge decrease in operational risk in the long run (see the article on streamlining bond trading). The biggest risk by far is still pain old market and liquidity risk: too many merchants may be reluctant to accept bitcoin not only because not enough of their customers want to use it yet, but because it is too easy to lose over 10% or more of the value of the bitcoin a merchant charges between collecting from the customer and exchanging, and vice versa for the buyer, unless they are both hooked up to their exchanges at the point of sale. For this, I have been far more interested in 2nd gen applications of Bitcoin technology that would back up a far less volatile currency, such as colored coin, which may be the way I implement my idea for Beachcoin.
So in short, I don’t believe Mt. Gox is in any way much more than another blip / hiccup for bitcoin, and especially for cryptocurrency technology in general. There is just far too much (and growing) need to further reduce the cost, effort, operational risks and time delays in moving money around.
