$480 Million Theft Won’t Stop Bitcoin

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Last Updated on: 3rd March 2014, 01:52 pm

This week the world’s largest Bitcoin exchange, Mt. Gox, filed for bankruptcy.  Over $480 million of investor money went up in smoke.   

It’s not known if it was fraud or theft from hackers outside the company, but either way the implosion of Mt. Gox rattled investors.

On the heels of this massive Mt. Gox failure, it would be very easy to dismiss Bitcoin as a flash-in-the-pan phenomenon and declare it dead.

Many financial pundits speak of Bitcoin as if they’re talking about Justin Bieber – acknowledging that it’s seen some glory, but it’s quickly becoming the punch line to a joke.

Bitcoin’s credibility has certainly taken a hit.    But let’s distinguish between a failure of an exchange and the failure of Bitcoin.

Bitcoin: One of the All-Time Great Financial Innovations

I feel it’s here to last, just like all of the great financial innovations in history.

Rarely are there ever new things in the world of finance, but I’d compare it to all of the great financial innovations of the last 2600 years…

Year                        Innovation

600 BC                   Gold Coins (Lydia)

600 AD                  Paper Money (China)

1285                       Government Bonds (Italy)

1602                       First Stock IPO  (Dutch East Indies Company)

1774                       Mutual Funds (Netherlands)   

2009                      Bitcoin (Satoshi Nakamoto)

Lydia’s gold coins ceased to circulate in 546 BC, but a multitude of governments have used them as currency since.      From time to time governments abandon gold as legal tender, but they always return to it when they sufficiently screw up their currency. (see Utah, Arizona)

The East Dutch Indies Company declared bankruptcy in 1800, but stock IPO’s continue to this day.   Italy may have been the first government to issue bonds, but these days America does it the best. (that’s not a good thing)   Paper money and mutual funds now account for trillions of dollars in value, none of the original issues are still around.

Clearly, all these innovations have stood the test of time.  And even if the original financial instrument no longer exists, the market for each has proliferated and prospered.

And now I’m adding Bitcoin to the list.  

Isn’t it a bit premature to add Bitcoin to this list after just 4 years?

Not at all.

Bitcoin per se may or may not be around for the next few centuries, but I believe that digital currency will exist for the next several hundred years, no matter what it’s called in the future.

This flies in the face of the experts who expect Bitcoin to collapse at any given moment.

With Bitcoin currently trading around $550, experts ask, “Why does Bitcoin have any value at all?”  The pundits say it’s not worth anything, claiming there’s no intrinsic value and no government backing.  

In other words, they want to know what’s to stop it from going to zero, its rightful price in their opinion.  

There’s no government backing, I will agree.   I actually think this is a good thing in light of the constant assault on the value of the dollar by the same people charged with its safekeeping.

But I’ll tell you exactly where the value lies…

What Makes Bitcoin Valuable and Sustainable

The thing that makes Bitcoin valuable is the fact that people value freedom, and they value privacy.    And Bitcoin represents both. 

The fact that Bitcoin is designed for fast, low-fee transactions is icing on the cake.   But Bitcoin’s real value lies in our innate human instinct that tells us all that freedom and privacy are valuable. 

After all, what would you pay for your personal freedom?    And what’s it worth to you for your money to be free? 

I wonder how Mikhail Khodorkovsky, once the richest man in Russia, would answer these questions.   Khodorkovsky has been rotting in prison the last 10 years because he backed the wrong party – not Putin.

Freedom from capital controls, government manipulation, devaluation, and confiscation has a value.  Just ask anyone from Venezuela, Argentina, or Greece if they value such freedoms.

So too is it valuable to keep your financial affairs private, when you wish.   Just ask anyone who’s had their assets frozen or confiscated unjustly, as has been done from time to time even in the U.S.

These are the things makes Bitcoin valuable, and sustainable.  

I suspect that Bitcoin’s value will be inversely proportional to the amount of freedom and privacy we currently have.   The equation would look like this:

Bitcoin Price =           1           

                              Freedom

where a low level of freedom puts a higher price on Bitcoin.

At the moment the novelty of the “Bitcoin movement” is wearing off, and the real price discovery begins now.

And Bitcoin lives on.