Kiyoshi Ota / Bloomberg News

A Mt. Gox customer protests last week outside the Tokyo headquarters of Mt. Gox and its parent company.

Editorials: Bitcoin’s magic money has very real losers

Published: Thursday, Mar. 6, 2014 - 12:00 am
Last Modified: Saturday, Mar. 8, 2014 - 6:12 pm

“Follow the money,” the Watergate informant Deep Throat supposedly advised Washington Post reporter Bob Woodward in a dark parking garage.

Back in the 1970s, they were following money you could find, such as cash and checks. Today, it’s a bit harder to track because of Bitcoin, the virtual currency favored by libertarians and people who don’t want anyone to follow their money.

Bitcoin, at face value, is a kind of monetary commodities market. The value of a one bitcoin unit can rise and fall depending on traders’ interest and speculation. The price can swing wildly between $1 per bitcoin to more than $1,200. The current exchange rate is about $650.

A Bitcoin transaction requires a passcode, unlike, say, handing someone a dollar bill. It’s like Monopoly money, minus the cool different colors. Indeed, Monopoly’s manufacturer, Parker Brothers, is probably more reliable as a source of backing than Bitcoin.

Some Bitcoin aficionados aren’t exactly operating within the law, either. For example, Silk Road, the recently busted Internet drug marketplace, used Bitcoin enthusiastically. Other, more reliable businesses, such as Overstock.com and the Sacramento Kings, accept Bitcoin. But these recent events should cause them to reconsider.

The news that Mt. Gox, the Japanese virtual currency exchange, had lost 850,000 bitcoins, worth $480 million, through hacking, is extremely troubling. This led Mt. Gox’s chief executive officer, Mark Karpeles, to seek a very non-libertarian solution: filing for bankruptcy. He did bow right before his news conference. Nice touch.

And, last Sunday, the Canadian virtual currency outfit Flexcoin announced that it, too, had lost $600,000 through hacking.

Oddly, the origin of Bitcoin was on the fantasy gaming website “Magic: The Gathering Online Exchange,” which is how the acronym “Mt. Gox” came about. Intended as a way to exchange fantasy cards, Bitcoin morphed into its own fantasy game, except there were real winners and losers who will not see their $480 million again.

The fantasy of a completely free market works great until it doesn’t. The notion of intrusive government is truly dreadful until one needs to hide from one’s creditors. Karpeles did say he was “very sorry” to the people who lost all that money.

Nor is a Bitcoin a nice, boring Federal Reserve note backed by the full faith and credit of the U.S. government. It’s not a credit card or a check guaranteed by an established bank, nor is it protected by the feds.

At the moment, given a choice, we suspect that Karpeles and his magic money friends might run right into the warm virtual embrace of Federal Reserve Chairman Janet Yellen and not the libertarian novelist Ayn Rand.

The growing distrust of governmental institutions is behind the growth of the virtual currency. This week, China banned it, and Thailand did so last year. In the 1930s, the United States created all sorts of safeguards to protect banking assets and stock trades.

The creation of the Federal Deposit Insurance Corp., which backs deposits up to $250,000, may be more big government, but you’re going to be able to get $100 bills out of the ATM this morning.

Bitcoin is an object lesson for anti-government nihilists, some of whom hold great sway in the Republican Party. We create institutions to protect common people, and, with heavy oversight, most of them actually work.

We can have real currency backed by governments, readily traceable, or we can have virtual currency. Bitcoin, for the moment, works just dandy until the next smart hacker comes along.

Doesn’t seem like a good exchange.

Read more articles by the Editorial Board



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