The Mt. Gox caper, in which 744,408 Bitcoins disappeared from the Tokyo-based cryptocurrency exchange, doesn’t mean Bitcoin is destined to die, but it probably will.
If you want a backgrounder on the theft, try this or this.
A lot of people are asking whether this theft means the end of the once high-flying pseudo-currency. Others have suggested Bitcoin’s demise is not a fait accompli.
Maybe I’m being naive, but isn’t “real” money stolen from banks all the time? Why would Mt. Gox theft mean that Bitcoin itself is doomed?
— Mathew Ingram (@mathewi) February 25, 2014
Looking at it that way, an argument might—might—be made that this theft won’t be fatal.
At the current exchange rate, the lost Bitcoins—equivalent to about six per cent of all the Bitcoins in circulation—are worth US$395 million. What would it be like if a similarly-sized theft of U.S. dollars occurred? According to the St. Louis Federal Reserve the total value of Greenbacks in circulation is $1.24 trillion. So you’d be looking at a theft of around US$74.5 billion. (The total money supply in the U.S. is far higher, at close to US$14 trillion, but while the money supply of Bitcoins will technically hit its upper limit of 21 million units by around 2020, some have argued the actual supply of the currency could theoretically exceed that. A long-winded way of saying, let’s stick with what’s in circulation.)
Now, US$74.5 billion is a whopping sum. But even if someone mounted the crime of the century and made off with that amount from a bank, it would probably kill the bank, but wouldn’t collapse the U.S. dollar. In fact, if you you look at some of America’s biggest white collar frauds (Enron springs to mind) the losses to shareholders would be in that range.
But let’s face it, Bitcoin isn’t an established currency like the U.S. dollar, backed by the “full faith and credit of the United States.” It’s a plaything of corporate anarchists that exists solely on the faith its users place in it that their investment/deposit isn’t going to walk out the virtual door in someone else’s pocket. The only hope I can see for Bitcoin’s survival after this is the creation of a deposit insurance system, similar to the FDIC in the U.S. or the CDIC in Canada, which protects a bank customer’s deposits up to $100,000 in the case of failure. But I have no idea who would ever bankroll such a scheme since a Bitcoin’s value could be anywhere from zero to infinity.
UPDATE: So my initial belief that the name Mt. Gox was a play on Fort Knox was so very wrong. It’s an acronym, for Magic: The Gathering Online Exchange. Good grief.
UPDATE 2: Duncan Stewart goes much deeper here in looking at bank thefts vs Bitcoin exchange thefts. After tallying up all the Bitcoin thefts since 2011, and drawing on FBI bank robbery stats, he concludes “the annual losses due to theft in the Bitcoin currency would have been roughly 1,000 times greater than the equivalent losses in the U.S. dollar currency ecosystem over the same time period.” An interesting read.