Better Bitcoin Exchanges Could Balance Out the Destruction of Mt. Gox

In what comes as absolutely no surprise to the most informed denizens of BitcoinLand, the cryptocurrency’s oldest exchange, Mt. Gox, has gone offline and is largely rumoured to be insolvent. In the lead-up to Mt. Gox’s eventual collapse, which began when the exchange halted all withdrawals after months of long waits for customers trying to pull their USDs and BTCs out of the company, Andreas Antonopoulos, Blockchain.info’s chief security officer, called Mt. Gox “amateurish and incompetent.”

Andreas’s fury was spawned by the company’s apparent inability to recognize a bug in the Bitcoin protocol, which was documented in 2011, called transaction malleability. This essentially means that thieving Bitcoiners were allowed to make phony withdrawals from Mt. Gox—if Gox is telling the truth about the cause of its insolvency. Transaction malleability or not, Mt. Gox's auditing in the years leading to its imminent collapse is extremely suspect.

Last night, what appears to be an internal presentation detailing the company’s plan for an insolvency announcement (after weeks of dodging the issue with sketchy press releases) was leaked onto the Bitcoin subreddit. Victoria Turk, Motherboard’s UK editor, has an excellent round-up of what has been a very chaotic 24 hours for Mt. Gox and Bitcoin at large, which you can read right over here to stay in the loop. If you want the TL;DR version, Mt. Gox may owe its customers up to $350M in lost Bitcoin and another $55M in USD.

One of the big questions right now (besides the obvious: How could Mt. Gox fuck up this badly?) for Bitcoin investors is how the market will handle the impending avalanche of negative press, price volatility, and further drama from the fallout of Mt. Gox.

In the face of Mt. Gox’s collapse—which has dropped Bitcoin prices into the $500s—will the buzz disappear completely? The key hurdle for entrepreneurs who aren’t running shoddy exchanges is to distance themselves from the crappiness of Mt. Gox and insure that, however much as possible, people don’t equate Bitcoin to the failure of an exchange whose largesse was more due to its first mover status than anything else.

This will be a huge challenge given that Mark Karpeles, Mt. Gox’s shamed CEO, gave interviews to Forbes and the Wall Street Journal that pivoted on a “Blame Bitcoin” defense regarding his company’s forthcoming insolvency—which at the time he was clearly trying to cover up. In what reads as a bafflingly arrogant statement today, Karpeles told the WSJ, “We are very surprised that anyone could fault MtGox instead of the bitcoin software."

To put things in perspective, Mt. Gox’s failure has been easy to spot from miles away. For one, the name Mt. Gox means: Magic the Gathering Online Exchange, because the platform was originally used to trade Magic the Gathering Cards. When it switched over to a Bitcoin exchange in 2010, as pointed out by /u/TuringCompleteEther, they weren’t even able to properly hash their passwords—revealing user passwords in plain text in exchange URLs.

This kind of insanely irresponsible business practice—along with Karpeles’s unapologetic comments against Bitcoin itself to reporters in the mainstream media—has caused other Bitcoin exchanges to assert they are not vulnerable to the same bug that Mt. Gox chose to ignore. Coinkite, a Toronto-based “cryptobank,” recently rolled out an audit report feature that allows its customers to verify that the company is indeed solvent. If Mt. Gox is being honest when it says its insolvency is due to the transaction malleability bug, one would assume some basic accounting could have prevented the damage from growing to the point it’s at now.

I spoke to Coinkite’s founder and CEO, Rodolfo Novak, this morning for his thoughts on Mt. Gox’s collapse and how it pertains to his business. “It's been known that Mt. Gox had issues for a long time now. I'm glad this chapter is finally over and professional companies can take cryptocurrencies forward," he said. "We have a big commitment to transparency. Users’ funds are segregated and allocated to their own private key. We believe that all web wallets, exchanges and websites holding your funds should provide proof of reserves—users should demand it.”

Likewise, news broke today that SecondMarket is planning to launch a US-based Bitcoin exchange in New York. Along with exchange services, SecondMarket is also rolling out a trading desk, “digital currency asset management,” and a $20 million investment into the company, as reported by CNN. Once this gets rolling, it’s sure to have a very positive impact on the Bitcoin market—and will likely help to prop up the credibility of the cryptocurrency in the face of what is going to be some serious fear, uncertainty, and doubt caused by the shittiness of Mt. Gox

Then there are the kayak-loving Winklevoss twins, who are in the process of founding a Bitcoin ETF that will allow investors who are wary of Bitcoin’s price volatility to get in on the action by purchasing shares of the ETF’s Bitcoin holdings. The Winklevii filed their initial application to the SEC for approval last week.

On Monday morning, a brand new Bitcoin exchange opened its doors in Cyprus called Neo & Bee. It’s the world’s first brick and mortar Bitcoin exchange, and is offering debit-like consumer cards charged with Bitcoin to customers, instantaneous transaction times to make buying a ham sandwich with Bitcoin possible, and POS machines for merchants looking to accept the cryptocurrency. Cyprus is already home to the world’s first cryptocurrency master’s program, and the country is beginning to embrace Bitcoin in a big way.

For the people of Cyprus, who had to deal with bank bail-ins where deposits were literally seized from accounts, distrust in the existing financial system has been running high since the wealth confiscation crisis began. This, even in the face of today’s majorly bad news, is a massive opportunity for Bitcoin entrepreneurs looking to funnel some of the cash people are hiding under their mattresses into the cryptocurrency economy. And that’s exactly what Neo & Bee purports to have done.

In the flashy video that Neo & Bee released to announce its emergence into the Bitcoin market, a confident announcer asks: “Can we ever have a normal haircut without being reminded of bail-ins, unscrupulous bankers, and vanishing deposits? And when we make financial transactions, will we not wonder what new restrictions the bank will impose on our own money? The time is right for change, and change is indeed coming.” The haircut metaphor refers to a banking scheme of the same name, and the message is clear: Bitcoin offers an escape from the crimes of the bankers. And judging by anecdotal accounts of what sounds like a successful launch event, Cypriots are excited to invest.

All in all, it does seem like the Bitcoin market will bounce back with a wave of impressively professional services that are currently in their infancy. The damage caused by the poorly run Mt. Gox exchange will certainly ripple out in the cryptocurrency world for quite a while—though the hyperbolic nature of the leaked presentation, which states that Mt. Gox’s collapse could be the “end of Bitcoin,” seems to overstate the damage.

It’s horrible that Gox has managed to lose so much of their customers’ money due to their incredibly poor business practices. But for those of us who have watched the market carefully while observing the former Magic Card hub’s various failures, this is not a surprise. For those who are taking the long-view of Bitcoin, this is a large speed bump that will cause a lot of people grief for a long time; but there are bigger and better services on the way that will be able to learn from this crucial example of how not to run a Bitcoin exchange.