Schaeffer's Trading Floor Blog

Major Trouble in Bitcoin Land

Examining the virtual disappearance of a virtual currency exchange

by 2/26/2014 7:30 AM
Stocks quoted in this article:

In a development that will shock exactly no one, there's major trouble in Bitcoin Land. From Reuters:

Mt. Gox, once the world's biggest bitcoin exchange, looked to have essentially disappeared on Tuesday, with its website down, its founder unaccounted for and a Tokyo office empty bar a handful of protesters saying they had lost money investing in the virtual currency.

The digital marketplace operator, which began as a venue for trading cards, had surged to the top of the bitcoin world, but critics -- from rival exchanges to burned investors -- said Mt. Gox had long been lax over its security.

It was not clear what has become of the exchange, which this month halted withdrawals indefinitely after detecting "unusual activity." A global bitcoin organization referred to the exchange's "exit," while angry investors questioned whether it was still solvent.

When we last checked on the virtual currency, the most striking observation was that it had spent a relatively large amount of time (a couple of months) in a relatively small range. That's incredibly unusual for a frothy asset class. Either they keep frothing or they implode; they rarely just find a range for any amount of time.

Well, guess which way Bitcoin went? Here's how it looks on Mt. Gox (chart courtesy of BitcoinCharts.com; click to enlarge):

Mt Gox chart since December 2013

That's quite the collapse. Alas, it's apparently not quite that bad. Bitcoinaverage.com indexes several exchanges and paints a slightly different picture (click chart to enlarge):

Chart of Bitcoin since November 2013

By "slightly," I mean they had the price at $493, as opposed to $135 when I hit up these charts yesterday morning about two minutes apart. So, it's only lost 50% of its "value" in six weeks, as opposed to more than 85%.

Yes, it instills me with tons of confidence. My sympathy goes out to anyone with money stuck at Mt. Gox, but it highlights the duality of the risks associated with Bitcoin. There's the price risk always associated with a volatile "asset" class, and there's the counter-party risk associated with tying money up with some shady, anonymous entity. At least the iPath S&P 500 VIX Short-Term Futures ETN (VXX) dribbles away its value over time on a liquid and transparent exchange! USA! USA! USA!

And that reminds me -- I never got approved for my tradable Bitcoin volatility ETN. BitVXX will have to remain on the cutting room floor.

I don't know enough about Bitcoin to make any sort of prediction as to where it goes from here. Venture capitalist Fred Wilson believes it's a bump in the road. Time will tell, I guess. And on the bright side, maybe the Winklevoss twins will be featured in another movie.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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