Last week, one of the largest Bitcoin exchanges in the internet, Mt. Gox, announced that it was filing for bankruptcy. A week before that, it had been a repository for over $400 million worth of the digital currency, and now it was down to nothing. Mt. Gox blamed a ‘hacking’ attack for the loss of the money, but questions remain over exactly how that much money can suddenly disappear – understandably enough, the people who had Bitcoin invested in Mt. Gox are rather angry, and death threats to the CEO have already begun to pour in. For most of us, however, this is rather a confusing subject – what exactly is going on here?
Bitcoins are a digital ‘cryptocurrency’. Essentially, they provide an online, and largely unregulated, replacement for ‘real’ money. They are not recognized as legal tender by any government in the world, but there is nothing to stop individual merchants accepting them as payment, and then converting them back into legal money by selling them on the open marketplace that sites like Mt. Gox were supposed to provide. One of the great advantages of Bitcoin, its proponents say, is that it allows money to be moved anonymously and outside of the traditional banking system. Grand claims have subsequently been made that this will help people protect their wealth from autocratic governments, and could be used to provide mobile banking services to the poorest people in developing countries.
In reality, of course, that isn’t what Bitcoin has been used for. The combination of anonymity and the requirement for a fair amount of technical knowledge means the currency has been monopolized by westerners with various agendas. In particular, it’s fairly useful for money laundering, and was also used to buy drugs and other illegal goods and services on the now defunct Silk Road website. It’s also become an investment opportunity – as the use of Bitcoins became more normalized, investors sunk money into them, and pushed the ‘real world’ price up to sometimes astronomical levels (although the price has also fluctuated rather wildly). Even today, in the wake of the Mt. Gox scandal, one Bitcoin is worth almost $680.
And there’s the real brunt of this issue. The people who had money invested in Mt. Gox have not really lost $400 million. They lost maybe a few thousand dollars each, which they invested when the price of Bitcoin was lower. The financial bubble around Bitcoin simply inflated that money to ridiculous and unsustainable proportions. These are not the poorest of the poor who are being hurt, or brave defenders of our freedom in the face of government tyranny – they’re just a bunch of libertarian westerners who could afford to throw down a thousand dollars on an unregulated digital investment product. They gambled, they chose the wrong place to do it, and it blew up in their faces. But this was never an issue of helping the poor – it was just rich kids playing around with finance like usual.
It looks like Bitcoin will stumble on despite the loss of so much money – there are many other exchanges beside Mt. Gox, and hopefully most of them will be somewhat better run. But if Bitcoin does collapse in the next year or two, don’t worry too much – we won’t be losing a tool for freedom and for lifting people out of poverty, as some have argued; we’ll just be getting rid of yet another pointless, puffed-up financial bubble that only really benefits the rich.
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