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5 reasons Bitcoin might survive the Mt. Gox debacle

The crash and burn of Mt. Gox -- a significant exchange for the Bitcoin payment network -- has left many wondering whether the virtual currency can survive the event. Some have opined that the system is on the "verge of collapse."

Except, there's strong evidence to the contrary. As Joe Weisenthal at Business Insider points points out, data shows that the Bitcoin market has largely recovered and "basically totally erased" the Mt. Gox meltdown. But how could that be if the concept is about to fail?

The answer is that maybe it's not going to fail. There are five reasons why the infrastructure may be strong enough to move beyond the problem and even grow in use.

Exchanges are decentralized

A currency crash is an ugly thing. Typically a currency is backed by the power and reputation of a sovereign power. Although values can go up and down, there is something of apparent substance behind traditional currencies.

But that doesn't mean sovereign currencies are unassailable. The history of hyperinflation in various countries testifies to how that primary source of support can suddenly fall apart.

Unlike traditional currencies, there are various independent but cooperating exchanges that keep Bitcoin working. According to the New York Times, Mt. Gox was the victim of theft to the tune of 6 percent of all bitcoins in circulation. That's an enormous loss, to be sure, but clearly not enough to break the trading system because of its decentralized nature.

Problems are in mechanisms, not concepts

Stealing is a grave problem in the financial world, particularly as criminals had regularly tapped Mt. Gox for years. Other exchanges have also experienced some thefts, though not to the same degree. Any currency, bank, or other institution has to be concerned about theft and how to prevent it, whether in the form of armed robbery, electronic incursion, or embezzlement.

The larger financial industry has managed to trade currencies, stocks, bonds, and other financial instruments successfully for years over electronic systems. It wasn't that the underlying concept of Bitcoin was necessarily mistaken, but that the implementation at a single exchange was flawed. Certainly that is a concern, as there isn't a single regulating agency that can maintain operational standards, but it is a problem that can be fixed.

There's a context for the exchanges

One of the concerns about Bitcoin is that there is nothing intrinsically behind the value of the coins, only trading. But then, the same is true about any currency. The days of precious metal-backed monetary systems are long gone. The real value of money of any sort is a common agreement that it is a proxy to direct trade of goods, services, and work.

Bitcoin has seen significant volatility. That makes it more difficult to use as a broad form of exchange, because someone has to calculate the instantaneous fluctuation in value. If you take a payment and the value suddenly drops, you could be out of luck. At least the existence of markets means that the value of bitcoins is not completely isolated. People do traffic in commerce using them and trade them in normal currencies. And the volatility is attractive to many investors, because it is a mechanism for making money.

Bitcoin is catching the attention of businesses

More companies are saying that they will take payment in bitcoins. Although this is likely in an attempt to gain attention from the media, it also shows a growing acceptance to treat Bitcoin as a legitimate form of payment. (We've yet to see whether the Mt. Gox incident will put them off.)

Enough people want it to succeed

The bottom line is that many people, whether because of political philosophy, belief in technology, or perception of opportunity, see Bitcoin as a trading system that they want to work. So long as enough people keep their faith about Bitcoin, its future will likely continue.

There is the news that the Winklevoss twins are continuing their pursuit of an exchange-traded fund called the Winklevoss Bitcoin Trust. Whether that is good for the Bitcoin concept is to be seen.

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