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Will the Bitcoin Industry Go Down with Mt. Gox?

Will the Bitcoin Industry Go Down with Mt. Gox?
By Jennifer LeClaire

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Whatever safeguards were being used by the Mt. Gox bitcoin location were compromised, but that doesn’t necessarily mean that the bitcoin technology is inherently untrustworthy or can’t become more mainstream. We’ve yet to see a flood of retailers or others that accept bitcoin rescind support following the bankruptcy of Mt. Gox, said analyst Ross Rubin.
 


Mighty Mt. Gox has fallen. Yes, the world’s largest bitcoin exchange on Friday filed for bankruptcy protection in Japan.

How bad is it? Well, Mt. Gox is reporting it may have lost nearly $500 million worth of the virtual currency after hackers broke into its computer database.

Until today, there was plenty of speculation about the future of Mt. Gox. Now, there’s at least some speculation about the future of bitcoin exchanges like it.

“First of all, I'm very sorry," said Mt. Gox CEO Mark Karpeles at a news conference in Tokyo. "The bitcoin industry is healthy and it is growing. It will continue, and reducing the impact is the most important point."

Will Bitcoin Survive?

Will it? That depends on whom you ask.

Moshe Cohen, assistant professor at Columbia Business School in New York, told Reuters this may be telling for the level of traceability of the transactions.

“Bitcoin has been telling us that it is more traceable than cash,” Cohen said. “The question is, how much more and is there the potential for real recourse in the case of theft.”

Mark Williams, a former Federal Reserve Bank examiner who currently teaches finance at Boston University's School of Management, told NBC News that Mt. Gox failed to protect itself from a known flaw -- and he thinks its decline is indicative of larger problems in the system.

"Mt. Gox is a microcosm of the problems that exist in the bitcoin infrastructure by its very nature," Williams said. "When you have decentralized transactions, anonymous coins and a low-control environment, then you expose investors to great risk."

Not Inherently Untrustworthy

We caught up with Ross Rubin, a principal analyst at Reticle Research, to get his take on what the theft and bankruptcy means for the bitcoin industry. As with many new technologies, he told us there are legitimate concerns about reliability and trustworthiness with bitcoin. Stories like Mt. Gox don’t help.

“Clearly, whatever safeguards were being used by [the] Mt. Gox bitcoin location was compromised, but that doesn’t necessarily mean that the technology is inherently untrustworthy or can’t become more mainstream,” Rubin said.

Good point. Here’s another one from Rubin: Despite all the media coverage, we’ve yet to see a flood of retailers or others that accept bitcoin rescind support for the alternative currency following the theft and subsequent bankruptcy of Mt. Gox.

Cash is Also Vulnerable

As Rubin sees it, accounts that rely on credit card-related technologies are frequently compromised. Look no further than the recent Target hack for how widespread damage can be done through trusted vendors.

Although he doesn’t have a crystal ball, Rubin feels confident that one incident isn’t going to put the kibosh on bitcoins.

“Such incidents are not uncommon with new technologies and not uncommon whenever there is potential financial gain, but it doesn’t necessarily mean that we shouldn’t use it,” Rubin said. “Credit cards are stolen and so is cash.”
 

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