I hate to use sensationalist-looking headlines, but this one is warranted. Bitcoin investors are in for more massive trouble.
My first article on Bitcoin was quick to point out a couple of things:
- I thought the currency was definitely not viable due to security risk, and;
- I thought that without the government's backing, the currency was actually borderline illegal.
A couple of weeks ago, I penned the article "Bitcoin Just Died", citing the recent DDoS attacks as an example of just how vulnerable the currency is. People in the comments section to this article told me that I was simply nuts or that I didn't understand enough about the currency.
Well, here's something that I do understand. This week, Mt. Gox, one of the currency's biggest exchanges, just went offline and took hundreds of millions of USD worth Bitcoin equity with it. Mt. Gox had claimed in the past that it handled about 80% of all global trades for BTC/USD. Issued a statement? Planned downtime? Nope, neither. It just shut down and went away without telling anyone or saying anything.
The unverified document called "Mt. Gox Crisis Strategy Draft" that's making its rounds online is putting out the number of 744,408 BTC that have just disappeared. Could you imagine walking into a Wells Fargo tomorrow and having them tell you your account and money contained therein simply didn't exist anymore? And, in the face of this, Mt. Gox is just shrugging its shoulders:
"While we are unable to comment on whether or not Mt.Gox's business operations employed operational best practices and reasonable accounting procedures, we can assure the public that the bitcoin protocol is functioning properly," it said. Mt.Gox was not immediately available to comment when contacted by CNBC.
The Wall Street Journal asked Karpeles last Monday about the company's solvency or protection for customers' funds. Karpeles replied that the matter is "confidential," adding that the company had discussed its business model with Japanese authorities "to ensure that we are operating within the law here."
You can read the "Mt. Gox Crisis Strategy Draft" document .pdf here. The document says that Mt. Gox has about $32 million in assets and about $175 million in liabilities, as it's missing 744,408 BTC. This is a taste of what you're in for:
Sites like coindesk.com painted a bit of a different story, suggesting that Mt. Gox could potentially be shutting down for a rebranding and acquisition:
UPDATE (25th February, 09:28 GMT): The source code on Mt. Gox's website now reads "put announce for mtgox acq here" leading some to speculate on the motives behind the document leak:
A document has surfaced suggesting that troubled Japan-based bitcoin exchange Mt. Gox will close for one month as part of a four-step rebranding plan, and that CEO and former Bitcoin Foundation board member Mark Karpeles will step down from his executive position as part of the process.
A shutting down - rebranding - whatever you want to call it, it doesn't matter, it's not going to change anything. Where is the $160-$350 million in lost Bitcoin equity going to come from for the people that have lost massive amounts of money trading the currency? People can continue to tell me that I don't "get it" about the currency, but what do you think when you hear stories about guys like Kolin Burges, who are simply out hundreds of thousands of dollars with no regulators or insurance to turn to:
There has been a small protest outside Mt.Gox's former offices in Tokyo since Feb. 15. Two Mt.Gox customers, including Kolin Burges a former software developer from the U.K. who gave up his job to trade bitcoin, traveled to the capital in the hope of retrieving their investments.
Burges, who has over 200 bitcoins stored at Mt.Gox, told CNBC via telephone that it was still a surprise to learn of the website's disappearance despite the rumors of insolvency. He added that he had been at the company's offices again on Tuesday and no Mt.Gox staff had been seen.
Of course, these are the risks you run when you're investing in anything that isn't government-regulated. Bitcoin fans, who formerly didn't want regulation, are now clamoring on for it, claiming "this is the reason we've wanted it all along." Right.
And of course, the price of Bitcoin has continued to tank overnight on this news.
In my last article, I politely suggested "reallocating funds". Today, that attitude has moved more towards, "get the hell out".
If you're looking to reallocate funds that you have moved from Bitcoin, why not put them in the original currency, gold (NYSEARCA:GLD)? Or, if you're looking for something with a little more exposure, silver (NYSEARCA:SLV). The metals are both experiencing insane returns over the last 20-year period, and are both arguably in the middle of a tremendous long-term bull run. There are tons of arguments out there against gold and silver, as you may have noticed over the past couple of years, but in the long term, as long as we are not heading back to the gold standard, both metals will rise in value correlating with inflation. And risk? The central banks hold it in reserve, so the risk is virtually zero.
Move it to gold, move it to equities, move it to bonds - but, make no mistake, it is time to give up on the Bitcoin fallacy and get your money out.
Best of luck to all investors.
Disclosure: I am long SLV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.