What Does the Mt. Gox Meltdown Mean for Bitcoin? Maybe Not Much

Due to popular demand, we are working on a podcast about Bitcoin. Last night, I interviewed Marc Andreessen on the subject. His v.c. firm has invested roughly $50 million in Bitcoin-related companies, including CoinBase, and they are looking for more. It was a fascinating interview, in part because Andreessen has been personally involved in so many major digital events of the past 20 years. 

In light of today’s news about the meltdown of Mt. Gox, the most prominent Bitcoin exchange to date, here is a preview of a section of last night’s interview with Andreessen. His view is vigorously contra the notion that the end of Mt. Gox would mean the end of Bitcoin; in fact, he would take that as a sign of progress:

DUBNER: The last few weeks happen to have been particularly volatile for Bitcoin. Real events and the news coverage of those events that again capture a lot of people’s attention — so there’s intense volatility, there are some exchanges that are glitchy or hacked, depending on what you read. There are continuing stories about how this can be fraudulently used and there’s continuing excitement about the speculative nature of the Bitcoin currency. When you see those stories, what do you do? Do you just say this is the noise that inevitably comes with a big new technology and some of these are real problems, some of these are not, and we’ll get through it? Or, do those point to elements of Bitcoin that indeed are weaker than other elements and should be addressed somehow?

ANDREESSEN: So there’s been very little actual substantive news in the last couple weeks. So like, for example, the actual price of Bitcoin has not moved that much. What’s happened is one particular exchange, which is the now the sort-of infamous Mt. Gox exchange, is in some kind of crisis. And specifically, it seems to be in a liquidity crisis that is similar in some ways to the MF Global event from a few years ago, if you remember that, on the commodities market. And so Mt. Gox is in this crisis. And we’ll see what happens with the crisis: they may go bankrupt, they may get sold, they may shut down, they may, by the way, be just fine. We don’t know yet. But they’re just one of many places where Bitcoin is traded. They were at one the point the largest place Bitcoin was traded. Over the last 9-12 months, they have been displaced by a series of others that seem to be much better-run, that people seem to be doing much better on. People point to the price of Bitcoin falling, [but] what they’re really pointing to is the price of Bitcoin in the Mt. Gox exchange falling. But that is basically an artifact of people betting on Mt. Gox itself failing, as compared to Bitcoin itself being lower. If you look at the price of Bitcoin on the other exchanges, it’s been quite stable. And so we think this is an example of exactly what I was talking about, which is, in the early days of a technology like this you’ve got various people doing various things. Some of them are serious and credible, some of them aren’t. In the early days of the Internet, you had various fly-by-night ISPs, some of them went out of business. You had various fly-by-night e-commerce operators, some of them went out of business. … One way to look at it is basically Mt. Gox has to fail in order for Bitcoin to go mainstream because Mt. Gox was never set up to be able to take Bitcoin mainstream, which is basically what’s happening now. The good news is we have many new companies that are much more serious and much better run. 

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  1. Adam B. Levine says:

    MT.Gox is trying to appear systemically important so early bitcoin holders will “Bail them out”. Unfortunately for MTGOx it probably isn’t going to work.

    Fortunately for Bitcoin, this failure while painful will be a cleansing for the market that will result in less instability overall because this bad actor (incompetence rather than malice) has been expelled from the ecosystem, which is appropriate since they are failures.

    I work full time in Bitcoin, have been in the thick of this thing and I LOVE FREAKONOMICS, it is the inspiration behind my show Let’s Talk Bitcoin! now almost a year old and growing strong.

    Thanks for everything you do!

    Adam B. Levine
    Editor-in-Chief
    Let’s Talk Bitcoin!

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    • Salvador Rico says:

      I think the bitcoin podcast might really help the bitcoin community to understand several aspects of bitcoin from an economic perspective. The community seems to lack some understanding of many economic principles (even basic ones). It’s understandable because of the background of most of us, but it seems that if you really want to disrupt the financial and economic system you need to really understand the economic impact of this technology. Monetary policy, economic incentives of each party, effects in taxation, financing, economic growth, interest rates, public policy, etc.

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  2. Alex BB says:

    On BBC Question Time, Prof Robert Winston, made a flippant remark that if Scotland gained independence from the UK, and could use sterling; “then what would they do? Use Bitcoin?”. It received the polite laughter it was due. But could this be a realistic prospect?
    As someone ruining a start-up, I am adopting all kinds of free web based technology to run my business. Is there any reason why Bitcoin wont flood in to fill currency vacuums like this? For instance, If the Ukraine starts to have currency issues what is to stop people trading in Bitcoin until the national situation stabilizes?
    I’d be fascinated to know what your take is on these questions.
    If a nation did start trading Bitcoin, would they ever get off it?

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    • Adam B. Levine says:

      We explored this exact topic with austrian economist Jeffrey Tucker late last year in a discussion entitled “Bitcoin could be the Euro for the World” http://youtu.be/bdFEPIo7wGg?t=22m31s

      The TL;DR is Yes! Bitcoin allows anyone to essentially opt-out of their national money and opt-in to the currency of the internet. While national currencies have value that is strictly localized, Bitcoin opens up the entire world as a viable e commerce or p2p market.

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      • James says:

        I don’t believe it opens up the entire world: it opens up a very small (but globally-distributed) fraction of the world that is willing to deal in bitcoins.

        If a local currency such as Ukraine’s fails, why would people prefer to deal in bitcoins rather than the long-accepted (hence a high probabliity of future stability) and nearly universally traded Euro or US dollar?

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  3. Eric Yeoh says:

    I think Felix made an excellent point about Bitcoin is seen more as of an investment vehicle than a real currency. Sadly though, most individual investors do not have the where with all or skills to trade something as volatile as bitcoin, I doubt many Wall St. professionals have that skill either without a derivatives market to hedge.
    Secondly, it is apparent that small Bitcoin companies (in comparison to large Banks and Governments), are a lot more vulnerable to hacking than Bitcoin itself. I do not doubt that Bitcoin encryption software is secure, however I imagine professional criminal organizations would launch attacks that trouble even the largest banks on smaller less well funded companies like Mt. Gox. Essentially the whole reason why more criminals knock off banks rather than forge dollars, though they can do both.
    Third, the volatility in Bitcoin is reflective of both early stock market booms and busts and early gold price fluctuations. Without a governing body to control it, the price is solely based on the human emotion rather than real free market forces (supply and demand). Human emotion is rarely ever taken in consideration in free market studies.
    In conclusion, I believe there it is possible for this crypto-currency to exist, but not in its current form. To the dismay of libertarians and economists alike, I think there is a need for a governing body like the FED that can smooth out the volatility through price manipulation. Its a difficult enough job to do even when you have trillions and all the power in the world to manipulate currency markets. (Technically, I think the FED would be doing a better job if they didn’t have the second mandate).

    I pose a final question to Freakanomics: in a hypotheical situation, taking both Adams and Alex’s post in mind, at what point would Bitcoin become TOO BIG TO FAIL? If countries used it as primary currency with no governing body on the currency, would this lead to more volatility and very violent crashes? #Gold bubble, #tulips, etc…

    Just food for thought. I’m looking forward to this podcast.

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    • Adam B. Levine says:

      Hey Eric,

      You’re looking at an efficient, free market system and misunderstanding the failures to be indications that all actors like it are failures merely undiscovered by the market. You interpret the information as such because in the modern financial system we use, this is true!
      Too big to fail banks cannot be allowed to fail because they are heavily interdependent with lines of credit, loans and derivatives binding all the financial institutions into one giant ball of risk.

      In that paradigm, MtGox is a harbringer of things to come, but fortunately we don’t live in that world any more.

      In the free market world of Bitcoin, MTGox is an outlier who was successful because they were one of the first, but more importantly because their name (MTGOX) became synonymous with the thing they were trading (bitcoins). MTGox *always* had an inferior service, and had frequent problems but the insistence of the media in conflating MTGOX and Bitcoin meant that the least informed people about Bitcoin were being directed to the least capable and most overwhelmed exchange because it was easier than explaining Bitcoin actually has no one price at all, only tons of spot prices because each exchange is a little pond of liquidity, an ecosystem unto itself.

      It’s wonderful you think Cryptocurrency can exist, and it’s a little amusing you think it can’t exist in its current form. The reality is it does exist, people use it every day and even in this great catastrophe (I say with no small amount of sarcasm) it’s still being used right now, and it still works right now to deliver verifiable, irreversible value anywhere in the world, in minutes instead of days for pennies instead of dollars.

      Bitcoin is volatile early in its lifecycle *because* it is small and the monetary base is tiny in comparison to any of the currencies people are using to to move value into it. And that is what is happening, value is moving out of the legacy financial system and into the new financial system. If you bought bitcoin at any point before November of 2013, you have done very well and the “volatility” is just a question of how much profit you can realize at any one point.

      Scary things are scary, and this is made far worse by MTGox’s unwillingness to communicate on any level, but nothing has changed except a badly run business that’s been badly run for years has reached a pivot point.

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  4. freeway4 says:

    Fyi, any time a government has tried to prop up a currency that currency gets crushed by the market and the government loses boatloads of money in the process.

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  5. Steve Cebalt says:

    Bitcoin is a solution in search of a problem

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    • Hannes Naude says:

      When I want to send money to family overseas, I can fly there and deliver cash faster than my bank can complete the transfer. In fact I can fly around the world in less time than my bank can transfer the money. I consider that a problem.

      I can specify the amount of local currency that I want to send, but the bank cannot tell me how many dollars will arrive at the other side. I consider that a problem.

      The bank cannot tell me what the total cost will be since the transfer is done in multiple hops and at each step another bank takes a cut. I consider that a problem.

      When a merchant accepts a credit card payment it is taking a risk that the payment will be reversed after goods have been delivered because of credit card fraud. I consider that a problem.

      A solution in search of a problem? I suspect people said the same about e-mail in its early days. Sometimes it is hard to see just how crappy oour current system is until something better comes along.

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      • Eric R says:

        “When a merchant accepts a credit card payment it is taking a risk that the payment will be reversed after goods have been delivered because of credit card fraud. I consider that a problem.”

        And with BitCoin you have the same problem in reverse. As a buyer you have no recourse when the seller doesn’t deliver.

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      • Jenglish says:

        Aren’t these transactional problems vs. “currency” problems? Essentially, bitcoin is just creating an intermediary currency that helps solve transaction problems. Long term, I can see some benefit to holding a universal currency from a currency hedge perspective, but given that we all live in a particular economy, it seems that we’d still want to primarily hold the currency associated with our local economy.

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    • Phil Persinger says:

      Steve–

      Bitcoin is an experiment to verify a dream of an super-efficient, ultra-modern currency free of any outside regulation: a machine that would go if itself. We’ll just have to see how it turns out.

      That said, I’m not sure that it’s any different from any other currency or security: its value fluctuates relative to other currencies; it’s vulnerable to hacking and therefore to manipulation and counterfeiting; it’s admittedly an object of speculation. It depends on the faith of its users, and therefore vulnerable to complete collapse should that faith evanesce.

      What it lacks is clear regulation, and it will be interesting to see how diligent the Bitcoin community is in “beating the bounds” of its commons to keep hackers, governments, etc., at bay and to ensure that its own members are playing by the book.

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