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Bitcoins, Stage 2: “Bring in the Feds!”

Written by Gary North on February 26, 2014

When you think “Mt. Gox,” think “Enron.”

When something this devastating happens to the biggest exchange in an experiment designed by anonymous Japanese programmers, the industry is not going to recover rapidly. Other firms in this industry now have a real marketing problem.

The disappearance of the Mt. Gox Bitcoins exchange is a major setback for the future of Bitcoins. It will keep out serious money until the industry is regulated by major governments. The move toward regulation has already begun. This will accelerate it.

Representatives of surviving Bitcoins firms assure us that this is just a minor setback. But it is not a minor setback. When the biggest Bitcoins exchange in the world goes belly-up, and it takes an estimated $409 million worth of investors’ funds with it, the market cannot attract new investors easily. The sheep have now seen what can happen to them. The official assurances from rival firms do not deal with this fear: “It can happen again. Investors will be left with nothing.” How can the survivors prove this is wrong? No one even knows what happened. There is o recourse. It was all private. It was all based on trust. Those who trusted some kid have lost their money.

From day one, Bitcoins were sold to libertarian investors on the basis that they are unregulated. This, we were assured by promoters, would make Bitcoins into worldwide libertarian money. Now, the “new, improved” Bitcoins will be regulated by the Securities and Exchange Commission and the Federal Reserve. Faith must be restored in Bitcoins. The solution? Bring in the Feds!

The biggest promoters of Bitcoins are the Winklevoss brothers, the guys who sued Mark Zuckerberg, and got rich doing it. They have bought shares in Bitcoins companies. They are starting an ETF for Bitcoins. They have decided to name it Winkdex.

These boys are not marketers. First, Winkdex sounds like something you clean your windows with. Anything that cleans your windows may also clean your clock. Second, for older people, it sounds like Winky Dink, a TV cartoon character of the 1950’s.

Nobody understood the whole bitcoins thing from the beginning. People understand gold. They do not understand algorithms. When an algorithm is created by a Japanese programmer or team of programmers with a fake name, you’re not going to get major support from the financial community. The financial community is not going to put its money into this, because an industry has to be regulated by the government to attract big money. You have to go to the Securities and Exchange Commission, as the Winklevoss brothers did last year. You have to come under Federal Reserve scrutiny. Plans are ready to create a market for Bitcoins. Banks will be involved. The government will regulate it.

(For the rest of my article, click the link.)

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6 thoughts on “Bitcoins, Stage 2: “Bring in the Feds!”

  1. I've lost what little respect I ever had for Gary North, though it was never much to begin with.

    He has become a gloom and doom sayer, ranting about a process that he doesn't even understand. Now I'm not a Bitcoin guru, mind you. But I do understand it and it really does make sense. But we don't have the space here, to go into the ins and outs of how Bitcoins work. So let's just look at a couple of facts that blows North's conspiracy theories out of the water.

    First, when Mt. Gox shut down, the Bitcoin market dipped slightly below its critical support level of the 200 day moving average, but recovered quite quickly. That's because savvy Bitcoin investors saw an opportunity to make money from the panic of a few. The Bitcoin exchange rate is pretty close to where it was, before Mt. Gox shutdown.

    Second, prior to the Mt. Gox shutdown, Gox had been expressing concern about a security flaw in the Bitcoin software. It was a security flaw that everyone in the community already knew about and there were procedures in place to deal with it. But there was concern that the reason Mt. Gox was making such an issue about it was that they had been hacked.

    Finally, there is now a document out that indicates that Mt. Gox had over 700,000 Bitcoins stolen from their exchange. The authenticity of this document is not yet determined. But it fits with the facts and with word that has leaked out from Bitcoin insiders.

    In fact, the Mt. Gox shutdown is no more or less than I would expect to see if a major stock exchange were to be hacked.

    Bitcoins are neither a panacea, as many Libertarians want us to believe, nor a conspiracy, as North wants us to believe. It's simply an investment opportunity, that if played with the same kind of caution that one would use investing in the stock market, offers a decent return on investment. Personally, the only thing keeping me out the the Bitcoin marketplace is that I haven't figured out how to short Bitcoins and I don't put my money in anything where I can't make money on both the rise and the fall. I make almost as much money going short on conventional stocks, as I make going long. Give me that same type of opportunity in Bitcoins and I'll be in there in a heartbeat.

    As with any investment, you shouldn't put any more money into Bitcoins than you can afford to lose and you need to have an exit strategy. But it's certainly not the great conspiracy that North seems so panicked about. It's just an investment and as with any other investment, you need to do your homework… something that North obviously hasn't done.

  2. "…the “new, improved” Bitcoins will be regulated by the Securities and Exchange Commission and the Federal Reserve."

    That's putting the foxes in charge of the hen house! We all remember what a bang-up job the SEC did with all the perpetrators of the wire and mortgage-backed securities fraud a few years ago. Destroyed all their investigative files and didn't return one indictment against Wall Street.

  3. I think the author would make a perfect stringer for our "Pravda" or "Red Star". Maybe their American audience is growing but here in Russia I'm fed up with the anti-capitalist propaganda long ago (including the financial demagogy of the said "Pravda"), so – not a single line of Comrade North any more in my reading. Rostislav, Saint-Petersburg, Russia

  4. "Nobody understood Bitcoins from the beginning"

    No, Gary, you don't understand Bitcoin, which is made apparent by your continuing inaccurate articles on the subject. You refer to MtGox as the largest Bitcoin Exchange, when that has not been the case since mid-2013. You continually refer to MtGox users as investors, when MtGox was merely providing a service to individuals buying and selling between one another.
    MtGox, did not buy and sell Bitcoins.

    People who purchased their Bitcoin and sent them to their personal wallet lost nothing in this situation, only those who chose to store assets on MtGox. This was always discouraged as when you store your Bitcoin or Fiat with a third party such as MtGox, you lose all control.

  5. I have to agree with JohnG and shuadoom, Dr. North has almost no working knowledge of Bitcoin and it shows. I do take one exception to both Dr. North's statements and those of some commentators, Bitcoin was never designed to be anything more than a payments system. The fact that the value has continued to increase over time has made it an investment for speculators but they get what they deserve, both good and bad. Dr. North seems proud to say that he sounded the warning on Mt. Gox in advance but cybersecurity analysts had been trumpeting their problems for over a year. Overall, the two articles by Dr. North demonstrate an appalling lack of knowledge of Bitcoin, the current infrastructure and the people behind it. There is no "new, improved Bitcoin", just a Bitcoin whose charlatans are getting their comeuppance. As for no big money coming in, Dr. North should check out the investments being made by VC companies. One Bitcoin company, Coinbase now has over 1 million clients and 23,000 merchant accounts including some bigger names like Overstock.com. The Chicago Sun-Times happily lent their name to a Bitcoin based charity drive. I hope the Feds keep their noses out of this. Bitcoin is doing fine on its own.

  6. Even with the current situation as it is, it's still easier to buy bitcoins than it is to buy gold. People selling gold, as far as I've seen (which, I'll admit, isn't much), are trying to sell certain units at certain prices, which can be expensive, and you can't buy partial units, where you can buy partial bitcoins. It's a lot easier of an investment than gold.