It’s all over the interwebs, the Mt. Gox bitcoin exchange appears to have gone bust. This will be an interesting test of whether I was wrong about bitcoin or simply wrong too early.
Worth pointing out the real problem that bitcoin solved. Which was how do you make sure that someone doesn’t spend a digital currency twice? That blockchain and the calculation of it was that method. Unfortunately, there seems to have been an error in there and it was possible to spoof the exchange (certainly Mt. Gox and possibly others) so that said bitcoins could indeed be spent twice. No, leave the technical details aside, that is really what happened.
As a result there’s a hole of 700,000 bitcoins or so inside Mt. Gox and this is something like 6% of all bitcoin in existence.
OK, break the bench and start over.
But this is where I think it all gets interesting. Some are saying that this will knock the confidence out of bitcoin and thus the grand experiment is all over. Unless, of course, confidence is quickly restored. There’s at least one document floating around suggesting that large holders of bitcoin should chuck a few into the pot in order to fill the hole. Which seems fair enough: if confidence is lost then the price falls: better perhaps to have 94% of your holding at a $500 valuation than 100% of it at a $1 one.
Could be, could be. But as I say I think this is where it all becomes interesting. I’ve long been of the view (whether because I’m wrong or because I was right too early) that it’s all going to end in tears. And the crucial point is, I think, about whether it is indeed confidence alone that is supporting bitcoin.
To make a digression: fractional reserve banking is a very silly system in many ways. Certainly there are innumerable people who have abused said system over the centuries. And vast numbers who have gone bust by doing so: others who have gone bust not by abusing it but purely through the bank runs that the system is liable to.
However, every time the system crashes and burns it is rebuilt. For despite its logical silliness it’s an incredibly useful thing for people to use. So much so that despite those repeated crashes and burnings we keep shoring it up again and starting the whole process over again.
And that, I think, is going to be the interesting test for bitcoin. Does this knock in confidence kill the whole thing? Or is it indeed such a useful tool that we gloss over the failure as part of the experimental process and thus full speed ahead anyway?