FOCUS: Why Defenders Say Collapse of Mt. Gox Is Good for Bitcoin

The collapse of Mt. Gox, the largest Bitcoin exchange according to BitcoinCharts.com, and the potential loss of $300 million by its customers who wouldn’t get their bitcoins out, might seem like bad news to some.

But for many in the Bitcoin community, it’s actually being seen as a welcome development. And the blow it’s caused to Bitcoin’s credibility seems to have supporters rallying together.

Part of the reason is Mt. Gox, while one of the first Bitcoin exchanges, had seen its reputation decline in the past year as it suffered glitches and other issues. In that vein, many Bitcoin enthusiasts say: Good riddance.

“There have been red flags around Mt. Gox for some time, which, in part, led to it losing its role as the dominant Bitcoin exchange,” said Jeremy Liew of Lightspeed Venture Partners. “Hopefully, now there will be an opportunity for a U.S.-based, regulatory-compliant exchange to build meaningful liquidity.”

Others argued the $300 million loss and the ensuing bad publicity would be a short-term issue. Indeed, they noted that after declining for a couple of weeks, the price of bitcoins has begun to rise.

“Bitcoin is already very volatile, and the negative PR from the experience is definitely a setback for the ecosystem,” said Adam Draper, who founded the Boost startup accelerator. “But the community is rallying behind Bitcoin very heavily in response, and I think it will have limited impact on the trust of the protocol/currency overall.”

Some noted other Bitcoin-related businesses remained sound despite the Mt. Gox situation.

“Bitcoin is not going away – it is a game-changing technological innovation,” said Brian Klein, a partner at Baker Marquart LLP who has written and spoken about Bitcoin. “Every day, established and respected entrepreneurs are setting out to build great Bitcoin businesses and will do so.”

Barry Randall, portfolio manager for Covestor, also argued the issue may be more about Mt. Gox than Bitcoin as a whole. Security seemed to be a problem for Mt. Gox, he said. The real question is whether other Bitcoin exchanges learn from that and have stronger security in place, he said.

“So the problem here is with Mt. Gox, and not, it seems, with the security or permanence of Bitcoin or the encryption mechanism on which Bitcoin relies,” he said. “That said, it’s not clear if any other Bitcoin exchanges, like Coinbase or Bitstamp, have security measures in place that are any more sound than those of Mt. Gox.

“The bottom line is that the Mt. Gox’s demise is mostly bad news for Mt. Gox, its clients and the short-term value of Bitcoin. But if Mt. Gox’s problems result in better security procedures, then Bitcoin may emerge stronger from this episode.”

Fred Wilson, a partner at Union Square Ventures, which has invested in Coinbase, said in an online post that he actually went out and bought some bitcoins because he feels “good buying when there is blood in the streets in any market. It is my favorite time to buy.”

In the post, Wilson said events such as the Mt. Gox collapse are just part of the natural order of things when it comes to revolutionary technologies.

“We are witnessing the maturation of a sector and part of that will inevitably be failures, crashes and other messes,” he wrote. “Almost every technology that I’ve watched come into a mass adoption has gone through these sorts of growing pains. One big difference is that in addition to technology, we are also talking about people’s money when we talk about Bitcoin. To me, that doesn’t change the discussion and the implications, but it sure does amplify the emotions around it.”

One of the most vocal defenders of Bitcoin on Tuesday was Marc Andreessen, whose venture firm Andreessen Horowitz has invested a little less than $50 million in Bitcoin startups.

In a series of online posts, Andreessen said, “This is exactly what one would predict for a normally functioning financial market without systemic risk.”

He added, “Every important new technology has birthing pains. PC did, web did, Bitcoin does. Our enthusiasm and commitment unchanged.”