The Bitcoin Paradox That Undid Mt. Gox

This article was originally published in The Wall Street Journal on February 27, 2014.  The full text of the article can be found here. Late Monday night, the main exchange for the bitcoin virtual currency, the Tokyo-based Mt. Gox, shut its site, ceased all trading, and entered de facto bankruptcy. This followed months of delayed withdrawals, building consumer frustration, and a leaked document suggesting a gap between assets and liabilities of up to $350 million.

Many bitcoin watchers—who also tend to be advocates—were stunned, but I wasn't. A few days before the shutdown, I had written an article for Coindesk, the leading online bitcoin news platform, called "Why Mt. Gox May be Headed for Bankruptcy." I used historical indicators from my experience in the online poker world to explain why Mt. Gox fit a pattern of virtual-wallet bankruptcies—namely, fund seizures, poor payment processors and technical accounting incongruities.

The Mt. Gox failure sparked many headlines, but the exchange's problems are hardly unique, and will likely cause other bitcoin exchanges to fail. Foremost among these—the same struggles encountered by online poker operators for a decade—are gray-market payment processors, the potential for additional government seizures because of unclear regulatory environments, and the lack of ring-fencing around customer deposits.