I pity the fool who didn’t listen.
Ever since May 2013, I’ve been warning against investing in the wannabe currency, Bitcoin. I called it nothing more than an “insidious currency scam.”
Lo and behold, one of the most prominent Bitcoin exchanges, Mt. Gox, disappeared this week.
Like a thief in the night, it moved offices, shuttered its Twitter account and closed down its website – without any explanation.
And just like that, every sucker who owned any Bitcoins on the exchange lost everything.
Like Erik Voorhees, the man behind Bitcoin-sharing website, Coinapult.com. He had over 550 Bitcoins on Mt. Gox, worth almost $300,000. As he conceded, “I will never get any of that back.”
No. You won’t.
If you’re also among the unlucky ones, don’t say I didn’t warn you.
Heck, don’t say the Bitcoin insiders didn’t warn you, either.
Back in April 2013 – in an incredibly tragic twist of irony – Mark Karpeles, Chief Executive of the now-defunct Mt. Gox, said, “If you buy Bitcoins, you should [keep] in mind that the value could be zero the day after.”
Well, thanks to you, Mr. Karpeles, that day has officially arrived.
As a result, ex-Federal Reserve Bank examiner, Mark T. Williams, says that the “high-profile collapse could trigger a Lehman Brothers-type chain reaction throughout the Bitcoin market.”
I couldn’t agree more…
To be fair, trouble has been brewing at Mt. Gox, which once handled 80% of all Bitcoin trading, ever since it halted customer withdrawals on February 7. But that was supposed to be a temporary move, whereas this one appears permanent.
I say that because, in the aftermath of the sudden closure this week, documents surfaced revealing that Mt. Gox held just 2,000 Bitcoins, while customer deposits totaled almost 625,000 Bitcoins.
The reason for the discrepancy? Theft!
As a result of a technological vulnerability, hundreds of thousands of Bitcoins, worth more than $300 million, were stolen. The size of the heist represents about 6% of all the Bitcoins in circulation.
Making matters worse, the theft went “unnoticed for several years.” That means Mt. Gox has been operating as a sham this whole time.
It also means there’s no chance that the masses will ever put any trust in Bitcoins. How can they after a development like this?
In the immediate aftermath of the news, the remaining Bitcoin exchanges and prominent early-stage investors went into full-on crisis management mode, issuing bold statements to “reassure investors of both Bitcoin’s viability and their own security protocols,” as Reuters described.
They couldn’t possibly be biased, now could they?
My personal favorite defense comes from Voorhees: “Let me suggest that the lesson is not that Bitcoin is broken. Bitcoin is fine. We are building a new financial order, and those of us building it, investing in it, and growing it, will pay the price of bringing it to the world… Devastation will befall us repeatedly.”
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Regulators, Mount Up!
All the reassurances in the world aren’t comforting anyone.
Case in point: The downward trend in average Bitcoin prices, excluding the Mt. Gox exchange, continues to this day.
Ultimately, the failure of Mt. Gox proves that self-regulation doesn’t work. Even diehard Bitcoin believers realize this.
Last month, Jeremy Liew, a leading Bitcoin investor at Lightspeed Venture Partners, vigorously opposed regulation. Now he thinks it’s an absolute must for mainstream adoption.
And yet, freedom from regulation is the whole point of the Bitcoin experiment, right? That’s how all the early adopters pitched it, at least. But we can go ahead and flush that pipedream down the toilet.
When There’s One Cockroach…
Like good opportunists, the two largest remaining exchanges, BTC-e and Bitstamp, are trying to fill the void left by Mt. Gox. But, as the saying goes, when there’s one cockroach, there are many more.
Or as Williams asserts, “The problems at Mt. Gox are not isolated; they are systemic to the Bitcoin industry.”
Indeed. What happened at Mt. Gox could happen anywhere else. Hackers are that good. And with Bitcoin prices still above $500, more than enough incentive exists.
On a more practical level, in the wake of the Mt. Gox failure, are you really ready to wire money to Bulgaria or Slovenia or Cyprus and trust it will be handled securely? And are you willing to wait several days for Bitcoin trades to settle? Because that’s what investing in Bitcoins requires.
And are you really ready to put your trust in a cryptocurrency with a Vice Chairman on its foundation who was recently accused of money laundering?
Bottom line: Bitcoin’s days are numbered. Literally. Williams predicts that Bitcoin “will trade for under $10” by June 30, 2014. A bold prediction, no doubt. But the point is clear – Bitcoin doesn’t stand a chance at ever gaining widespread adoption. Or as Dennis Gartman says bluntly, Bitcoin is “nothing more than a scam of the first order.”
My advice? The same as Gartman’s: “Utter and complete avoidance of all things Bitcoin related.”
If you’re absolutely dead set on throwing away some money, consider technology blogger extraordinaire John Gruber’s approach: “In lieu of Bitcoin, I’ve stuck to flushing $100 bills down a toilet. I’m deep in the red, but at least I understand exactly what’s going on.”
Ahead of the tape,