Why The Mt Gox Failure is a Good Thing

Mt. Gox was once the largest bitcoin exchange. Now it lies in ruins. How could this be a good thing?

Say it with me, “It wasn’t bailed out!”

Free markets are a beautiful thing. They operate on a principal called creative destruction. Out with the old or unsatisfactory, and in with the new or more efficient.

Point one: Now that Mt. Gox has failed, similar organizations have a strong incentive to learn from their mistakes, and there is no moral hazard or perverse incentive from bailout for similar organizations.

When the US government bailed out the large banks during the recent financial crisis, they made two problems. The first was they created bad incentives by eliminating fear of failure – that’s what we just talked about in point one. There’s another point. When the government bailed out the banks who’s money did they use? Obviously the money of the taxpayer. “Hold it right there!” a witty neokeynesian or left-moneterist might respond. “Government can bail out banks by printing money, so it need not be tax money per se.” Technically you’re right smartass, but printing money creates an inflation tax so the point remains. If government neither prints nor taxes, the final possibility for sourcing bailout money would be to forego production of other government services.

Point two: Mt. Gox’s failure is far less costly to society than social manipulation by government through bailout funds, regardless of the source of those funds.

Finally, as previously mentioned, Mt. Gox was previously an institution of the bitcoin social order. Now it lies in ruins. You know what doesn’t at all lie in ruins? Bitcoin itself, the acceptance rate of bitcoin, nor the price. The price has dipped arguably as much as $150 from $700 where it was recently hovering on this news, but for bitcoin veterans this is in fact less than nothing.

Point three, the final point: Like the failure of Silk Road, the failure of Mt. Gox further demonstrates the resilience of bitcoin itself, unlike traditional currencies which would collapse along with their centralized counterpart institutions.

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