Mt. Gox Bankrupt?

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A week after Mt. Gox said it would temporarily prevent customers from removing their bitcoins from its online bitcoin exchange, the site has become the cheapest place in the world to buy the digital currency. Why? Because some investors think Mt. Gox is about to go bankrupt.

Welcome to the world of bitcoin, the Wild West of finance, a place where hackers and scandals and insane price fluctuations are just part of doing business. Mt. Gox, a digital currency pioneer that was once the world’s largest bitcoin exchange, is imploding before our very eyes. Investors who have accounts with the exchange are selling their bitcoins, even though they may have trouble getting hold of the proceeds. That’s because they suspect — not unreasonably — that if the company does go bankrupt, it will be be easier to retrieve their stranded funds as U.S. dollars rather than as bitcoins.

The result: bargain bitcoin prices at Mt. Gox, for anyone daring enough to take advantage of them
For the better part of the past year, bitcoins were unusually expensive at Mt. Gox. While other exchanges — BitStamp or BTC-E, for example — traded the digital currency at roughly the same rates, you had to pay a 8 to 10 percent premium on Mt Gox. As we reported back in November, people were charging extra to trade their bitcoins for U.S. dollars because it was hard to get dollars out of the Japanese exchange. But now it’s hard to get bitcoins out too. About two weeks ago, Gox suspended bitcoin withdrawals, blaming a flaw in the bitcoin wallet software that has affected Gox and at least one other exchange.

As a result, something odd has happened. Bitcoin prices have plunged dramatically on Gox, while remaining pretty much level on the other exchanges. On Tuesday, the price of a bitcoin on Bitstamp was $640. On Gox? $250. Investors are speaking through the market, and they’re saying that they’ve lost confidence, according to Donald Marron, director of economic policy initiatives at the Urban Institute, an economic policy think-tank. “It does sound like people worry that they’ll never get their bitcoins out,” he says.

But there’s another explanation for the low bitcoin price on Mt. Gox. Some investors are worried that the exchange will go bankrupt, and if that happens, they think it will be better if the exchange owes them dollars rather than an ill-defined digital currency. “I was advised that if I thought Gox was insolvent, it is better to have a fiat claim against them than a bitcoin claim, which no legal standing,” says one Gox investor, who asked not to be identified. He has about 90 bitcoins locked up in the exchange.

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