Too Big To Fail? Crypto-Community Calls For Mt. Gox Bitcoin Bailout

By February 27, 2014Bitcoin Business
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Too Big To Fail? Crypto-Community Calls For Mt. Gox Bitcoin Bailout

The collapse of Bitcoin exchange Mt. Gox is already being described as Bitcoin’s “Lehman Brothers moment”, with the phrase “too big to fail” following close behind. Only this time, no politician is going to call for a bailout.

After protesters began to gather in Tokyo to demand  their money back from Mt. Gox, rumors began to swirl that perhaps CEO Mark Karpeles had found investors who were willing to step in and save the day. After a brief moment of elation, these hopes were dashed. If Mt. Gox could collapse so quickly, the world wondered, how could anyone trust Bitcoin again?

Now that the dust has begun to settle, the crypto-community is discussing solutions of its own. With no central bank or government likely to do anything but send the cops in to cuff alleged wrongdoers, a few of Bitcoin’s most passionate supporters are discussing bailing out Mt. Gox themselves.

The world of Bitcoin communicates using online forums, generally under pseudonyms to maintain the partial anonymity offered by cryptocurrencies. “This is a true test for Bitcoin and the community,” wrote a BitcoinTalk user called btc237ftw, whose name merges the acronyms for Bitcoin and “for the win”.

“[A bailout] will be the best thing for Bitcoin as we are in the transition stage between Bitcoin being an innovative tech to a regulated and trusted mainstream innovative tech. In order to make this transition we need support from the community and the world. It is not the time to be cynical. It is not the time to say I told you so. This is the time to help.”

Stick together, the crypto-champion said, and the Bitcoin community will be “stronger than ever”. On top of this, they will all become richer, as restoring market confidence would cause the price of the digital cash to buoy iy back up.

“It’s not in the long term interests of the community to allow large numbers of people to lose money,” wrote the user alyssa85. “It wasn’t then and it isn’t now. Think very hard before you advocate the “selfish at all costs” model, which is quite different from a decentralized model.

“If these types of incidents start to happen very frequently, either Bitcoin or regulation will happen because the victims become so numerous, they eventually make up the majority of the community. If this works out, then the Bitcoin community will be stronger than ever. Also, don’t worry about the bail-outers, they will get their Bitcoin value increased, self recognition for knowing they did the right thing and a lot of commissions and future funds.”

Some users suggested that all Bitcoin users should donate a small amount of their virtual stash to help recapitalize Mt. Gox, which is missing about 750,000 Bitcoins. They compared this idea to the Troubled Asset Relief Program, which amounted to about $475 billion, or roughly $1500 per American taxpayer. Others recommended that Mt. Gox begin issuing its own rescue bonds, which would pay out when the exchange stabilizes.

A crypto-relief scheme might sound far-fetched, but something comparable has happened before. Back in 2011, Karpeles himself stepped in to save the Bitomat exchange, which at the time was the third largest in the world before it collapsed with the loss of 17,000 Bitcoins. Karpeles bailed out the Polish exchange and incorporated it into Mt. Gox itself, saying the exchange wanted to “to put our Bitcoin where our mouth is.”

“The acquisition of Bitomat is a windfall for its users, especially in the wake of such a sudden and unsettling event,” Karpeles said at the time. “Also, for the first time ever on a Bitcoin exchange users are now able to access a substantially larger market with their local currency, so we think it’s a happy ending all around.”

Not everyone agrees that a Bitcoin bailout is advisable or even possible. The Mt. Gox boss is unlikely to see much charity from the members of the Bitcoin community who lost huge sums of money in the Gox crash. Cryptocurrency advocates are also notoriously wary of anything that smacks of state intervention. To some, a bailout goes against the decentralized, transnational nature of the currency.

“At least we’ll see a free market at work with no bailout for the losers,” an opponent of propping up Mt. Gox wrote.

“If anybody dares to bailout Mt. Gox, they shall be excommunicated from crypto forever,” another raged.

There are several key reasons why a Bitcoin bailout would be a difficult prospect. The first is that the collapse of Mt. Gox has allegedly put something like 750,000 Bitcoin out of action, amounting to 6 percent of the world’s supply of coins. The only person with anywhere near enough Bitcoin to bail out Mt Gox is likely to be Satoshi, the mysterious creator of the currency. Also, in the cut-throat, buccaneering world of Bitcoin, why would someone with that kind of ready cash help out Karpeles when they could start a rival exchange themselves and net even more money?

“”Bailouts are a mentality for the legacy centralized financial system where specific entities are needed so the whole system doesn’t collapse,” another forum user wrote. “Bitcoin was created for the explicit purpose of not needing such a process. Mt. Gox just a limb that can fall off.  The organism will continue to thrive.”

Personally, I’d like to see the community try to do something.  This is a new kind of problem for a new kind of currency. It is not beyond the ken of the crypto-community to try and stabilize Mt Gox in some manner, or at least help the little people who have lost money. Throughout history, compassion has often proved incompatible with capitalism. Why should this remain the case with cryptocurrencies? Perhaps it’s time Bitcoin’s most powerful advocates came out of the shadows and showed us they care about their creation. That would truly be a historic moment in the history of this nascent economy.

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