Mt Gox is doomed, even if it reopens for external trading

For the past 72 hours I’ve been closely following the Bitcoin crisis over at Mt Gox. At the time of writing, the BTC is trading at around US$120, with a 24 hour low of $91.50. It would probably be even lower if it weren’t for the large number of speculators buying in, hoping that Mt Gox will recover and reopen for business as usual.

Bitcoin index plumets

However, in the laws of microeconomics, speculating in this type of environment would be a huge mistake. I understand that buyers are already aware of the risk of insolvency, and are banking on the price returning to normal if and when the exchange reopens. But this is where the flaw exists. You see, there are a huge number of existing Mt Gox customers who currently have their Bitcoins locked up in limbo, and they are not happy campers right now.

According to reports on Bitcoin forums and IRC channels, a large number of these investors want to exit the exchange at the first given opportunity. Many were hoping that the announcement made on February 20 would give them some sort of indication of when this might be, but alas it was an underwhelming message written by what appeared to be an intern with poor PR skills. This motivated even more disgruntled Mt Gox clients to offload the rights to their Bitcoins, inevitably driving the BTC index further down.

Now think about this: The best case scenario for Mt Gox is to reopen its doors and allow withdrawals, perhaps with some tighter restrictions attached. But now think about those frazzled and fed up customers who want nothing more than to purge Mt Gox and, as a result, are preparing for a mass exodus. This means that supply will outstrip demand on a huge scale, and guess what that means for the BTC.? Yes, that’s right, it won’t be returning to the US$500+ levels which everyone has become accustomed to. In fact, microeconomics tells us that it would actually drive the price further down.

In my opinion, insolvency is still the most likely outcome, but the point I’m making here is, even with the best case scenario, reopening withdrawals will be like opening the flood gates. Mt Gox has contaminated the crypto currency world, and anyone with common sense would, at the very least, want to withdraw their BTCs and place them into another, safer exchange.

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