The sudden collapse of the Mt. Gox bitcoin exchange Tuesday demonstrated to the public just how risky the virtual currency can be. Prosecutors have rushed to investigate, and regulators in the U.S. and Japan, where Mt. Gox was based, are mulling how to extend their purview to bitcoin trades. One senator even called for a ban on the currency. Investors, however, have long been keenly aware of the perils associated with the volatile commodity. While the currency is in its infancy, those with little appetite for risk should stay away. But it's too early to write bitcoins off or treat them like a banking system in dire need of oversight.
As with gold, bitcoins are in limited supply, and their value rises or falls with the demand from investors. They are bought and sold electronically through online exchanges and stored in digital wallets that only their owners can open. The strong security built into the technology also deters counterfeiting and boosts authenticity, which is one reason online merchants are starting to accept them in lieu of credit cards.
Those are the pluses. On the other side, the anonymity bitcoin provides has made it popular among those who buy and sell guns and illegal drugs online. The currency has also been prone to bubbles. Three times since late 2012, the value of bitcoins has skyrocketed, only to plummet days or weeks later. The most recent bust, triggered when Mt. Gox's customers sought to empty their accounts, led the exchange to shut down.
Why Mt. Gox foundered remains a mystery, and investigators should find out whether financial crimes played a role. But its failure should not be seen as a death knell for bitcoins; prices stabilized quickly after Mt. Gox shuttered, showing that investors aren't ready to give up on the virtual currency. And why should they be? Bitcoins may have lost half their value since last year's peak, but they're still selling for 56 times the price they were at the beginning of 2013. Meanwhile, venture capitalists have poured more than $98 million into bitcoin-related start-ups.
Many of those venture capitalists are betting that bitcoins will mature into an ultra-low-cost alternative to Visa and American Express. That's not likely to happen, though, until bitcoin starts behaving less like a high-risk stock and more like a currency, with far more stable prices. That process is best left to those who have bet on bitcoins, free from the dictates of regulators who can't possibly move as fast as the technology. It's appropriate for governments to guard against bitcoin-related crime. But rather than trying to regulate away bitcoin's financial risks, governments should let the relatively small community of users — all of whom got involved of their own free will — absorb the growing pains.