Wednesday, February 26, 2014

A few words about Bitcoin

I've read a lot about yesterday's collapse of Mt. Gox ... most of what the mainstream media is reporting is pretty accurate.  There's a few things they don't really emphasize, though, and I think are important facts to keep in mind:
  1. Mt. Gox was a trading exchange.  It was a currency exchange.  People went there to buy Bitcoins (with other currencies) and to sell Bitcoins (for other currencies).  It wasn't Bitcoin users who lost money in this; it was Bitcoin traders.  And, for the most part, these were currency exchange speculators.  Not Bitcoin users.  The Bitcoins that were removed from Mt. Gox's digital vault were held as deposits; in other words, Mt. Gox was acting as a bank.  Here's the thing:  if you are a Bitcoin user; you don't put your money in someone else's vault.  You don't deposit your money into a bank.  That's the very reason Bitcoin exists; so that we can all be our own banks.  And there are very safe ways to keep Bitcoins.  Trading exchanges and banks are more likely to kill Bitcoin than anything else.  Screw them.  If you decide to use Bitcoin; don't even THINK in traditional banking terms. 
  2. There was no failure of Bitcoin; there was no inherent weakness or flaw in the system; the security protocols are sound. Surprisingly (to me) most of the news media has reported it just that way. The blame all belongs to Mt. Gox and what happened cannot be blamed on inherent weaknesses in Bitcoin.  This was essentially a bank heist and an inside job.  If anything, I believe it points out the inherent risk of the banking system.  Thefts of this scale (there were 745,000 Bitcoins involved, about US$357 Million) are certainly not unheard of with traditional currencies; the fact that governments back up deposits and cover for the banks with TAXPAYER money changes nothing.
  3. This incident has been used by some to claim that Bitcoin is a huge Ponzi scheme. I think that's ridiculous.  If that's true, the entire federal reserve system is a Ponzi scheme. And that may well be the case.
  4. The value of Bitcoin is holding steady today at about US$567=1btc.  That's a huge fall from the $1000 it shot up to in December, but keep in in mind, a Bitcoin was worth only $200 as recently as November 2013.  So it's still some 250% above that.  This is only a partial adjustment of a speculation driven (artificial) spike in the demand for Bitcoin, and the correction needed to be made. 
If anything, I believe this theft will only demonstrate the robustness of Bitcoin and the weakness of the banking system.

Again, if you own Bitcoins, keep them in your possession and guard them.  Don't know how?  Google it.