Mt Gox

Rumors are swirling that Mt Gox is in trouble. The top three stories on Coindesk right now are about Mt Gox.

If the rumors are true, it’s a sad day for the Bitcoin sector as Mt Gox was the first Bitcoin company I transacted with and probably was for many of us.

But the wonderful thing about a globally distributed financial network is that if one of the nodes goes down, it doesn’t take the system down. Bitcoin’s architecture is similar to the Internet’s architecture. There is no centralized control point. No single point of failure.

Our portfolio company Coinbase and a bunch of the other leading platforms in the Bitcoin sector put out a joint statement last night. You can read it on the Coinbase blog. Here is the critical paragraph of the statement:

Bitcoin operators, whether they be exchanges, wallet services or payment providers, play a critical custodial role over the bitcoin they hold as assets for their customers. Acting as a custodian should require a high-bar, including appropriate security safeguards that are independently audited and tested on a regular basis, adequate balance sheets and reserves as commercial entities, transparent and accountable customer disclosures, and clear policies to not use customer assets for proprietary trading or for margin loans in leveraged trading.

There is a lot of venture capital being invested in the Bitcoin sector right now. Much of that investment is going into the infrastructure, processes, and technology to provide the kind of safeguards that are mentioned in that paragraph. We are witnessing the maturation of a sector and part of that will inevitably be failures, crashes, and other messes. 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.

Full disclosure: I bought a little Bitcoin today. Not much. But I always feel good buying when there is blood in the streets in any market. It is my favorite time to buy.

#hacking finance

Comments (Archived):

  1. JimHirshfield

    Distributed nodes, yes. But when all your coin is in one of those nodes that explodes, the distributed architecture doesn’t mean squat, right?

    1. Andrew Kennedy

      Yeah. It’s the eggs in one basket thing. All your eggs in a decentralized, unregulated and speculative digital currency?

    2. fredwilson

      yup. there are a number of ways to deal with this1) keep your coins in your own wallet (under the mattress)2) distribute your coins among mutiple hosted wallets (banks)3) someone should figure out how to insure hosted wallets and the like

      1. Andrew Kennedy

        #3 is effectively a privately backed fdic

      2. a

        why not a top-layer service to automatically facilitate #2?

      3. JamesHRH

        3) is a big time opportunity.3) is like Andreessen building Netscape.

        1. JimHirshfield

          Who insures the insurer?

          1. JamesHRH

            Sheesh, you are a tough marker.I don’t think anyone stands behind VISA. You just need to get the revenue up to create profits that would then back stop……You can see my issue with the Bitcoin idea here…….but that is what VCs are supposed to do. Bridge the chasm, no?

          2. JimHirshfield

            Every insurer is insured. They call it reinsurance. It’s what AIG did (does).

          3. David Clarke

            And of course the reinsurer is ultimately backed by the government that stands behind the fiat currency. oops…

          4. JimHirshfield

            🙂

          5. JamesHRH

            I know some UHNW individuals who self insure.I would be surprised to learn that VISA outsources the insurance of CC fraud.When you have the stacks…….

          6. Andrew Kennedy

            @jameshrh:disqusBerkshire Hathaway is perfect for this. They can take the hurricane/catastrophe type risk (just a slice, not all of it) and bring credibility to the vehicle for a hefty premium.

          7. pointsnfigures

            Cash.

        2. Andrew Kennedy

          yes, it is. It’s what FNMA did for mortgage liquidity starting in 1938. There needs to be a corporate FNMA.

      4. LE

        someone should figure out how to insure hosted wallets and the likeInsurance is based on being able to accurately assess risk so to be able to charge a premium (which can then be invested (say in real estate)) and payout any claims. [1] [2]There is no way to assess the risk really in this so I would doubt that any time soon a traditional insurance company would ever get involved in this industry. Anything is possible of course.[1] (This is one of the reasons that nobody has successfully offered any type of “legal” insurance iirc). I once had a client in the 80’s who tried to do that. But they were fraudsters, sold some policies, and then stiffed us for the money they owned us (we were a vendor of theirs). When I went to collect in person they literally took a gun out of the drawer and said “fuck you”.[2] Also the reason why it’s easy to buy life insurance but hard to buy disability insurance.

  2. Andrew Kennedy

    I think you are right and that this is a growing pain. Great time to buy.

    1. JimHirshfield

      One of many growing pains, no?

      1. Andrew Kennedy

        more to come i am sure.

      2. LE

        Well as Fred pointed out (indirectly) it is similar to early twitter fail whales. Except that there is money involved in this one.

        1. JimHirshfield

          Oh, minor diff. hahahah.

          1. LE

            Some of the animals are more equal than others.

    2. jason wright

      yes, from the right seller. what a fuck up this has been.

      1. Andrew Kennedy

        I agree. It’s hard to call this anything else.

      2. Iv

        Did you/everyone expect it to be smooth sailing?

        1. jason wright

          when a new idea is born of a pseudonym there’s always likely to be trouble ahead. this is a tsunami event.

  3. Bill Towers

    If the rumors are true? I’m inclined to believe that the leaked PowerPoint is real, and if so, was probably shared with the likes of Coinbase and it’s Board. While I understand that there are confidentiality issues with things you HAVE seen, if you’ve never seen that document before, I think that’s an interesting fact you can and should share…

    1. fredwilson

      i have not seen the leaked powerpoint yet. i read about it on Hacker News though

  4. awaldstein

    We are used to messiness with tech. Culturally patient with itWe are not used to messiness with consumer dollars. Behaviorally a non starter.This is unchartered territory.

    1. fredwilson

      that’s right in a sense. certainly consumer dollars and tech platforms being one and the same is uncharted territory. but we have seen plenty of bank failures over the years. now that the FDIC insures them, it doesn’t hurt depositors any more

      1. awaldstein

        So is the consumerization of Bitcoin possibly dependent on the insurability of consumer assets invested in it?

        1. Josh S

          I believe so, at least in part, because I think the viability of bitcoin as a mainstream currency is dependent on consumer confidence. Consumers won’t have confidence if a company holding their bitcoins (and it’s not just been Mt. Gox to date) suddenly goes out of business or is hacked, and they lose everything.I think insurability of assets is one part of the solution. The second being regulation/auditing of companies holding bitcoins for consumers by a trusted third party. This may be a government agency, NGO or nonprofit, but someone has to go in and audit these companies holding bitcoins on behalf of consumers to:1) make sure they have proper security in place2) make sure they have proper processes in place to prevent fraud3) make sure they will remain solvent and able to pay out the bitcoinsI think it would be in the best interest of bitcoin startups to create a nonprofit consortium that comes up with a standard in which companies are audited against.

          1. awaldstein

            If consumer confidence is an end goal, there had best surface someone or some entity that is conscious of how the mass market thinks and responds.Love the arena of people who can mouth that failing markets are a good thing. They may be but not for people and their dollars.

          2. MFishbein

            Not good for people and their dollars in the short term but good in the long term as the companies that don’t serve their customers fail and better companies enter the market

          3. awaldstein

            Of course, that is the law of the jungle.But what then are you saying Bitcoin is? Currency? A protocol?As a general rule, economies and market aren’t determined by the type of currency on a consumer level.Using your example, how would Bitcoin even touch the consumer in a way as formative as you imply?

          4. MFishbein

            Re q 1: either one. Doesn’t matter.Re q 2: I’m not sure what you’re asking. But taking a guess…over time the good companies, the ones that serve their customers, will survive, and the bad companies will fail. Customers benefit as a result

          5. pointsnfigures

            Failure is good for other people when your money isn’t involved!

          6. MFishbein

            I mostly agree but I don’t think it could be done by bitcoin companies because it would be inherently biased. It would need to serve, and be paid for, by bitcoin users

          7. Josh S

            The companies couldn’t do it themselves, but having them support this type of effort I think would go a long way to gaining consumer confidence and helping them avoid government regulation. The best solution would be a multi-stakeholder effort, bringing in financial, regulatory and compliance experts, IT security experts, bitcoin experts, and others who can develop a comprehensive standard and compliance program against which these companies can be audited.

        2. fredwilson

          not sure dependent is the right word but insurability will bring a lot more adoption

          1. awaldstein

            I like the care of your response Fred.I’d be interested to see a list of the apps that people are building if one exists.

          2. SubstrateUndertow

            The costs associated with auditing and insuring against distributive malfeasance only has to compete, at the end of the day, with the ongoing social costs of the present malfeasance on Wall Street and at the FED.In the long run is that such a high bar?

      2. JamesHRH

        This is the main complaint though.The distributed ledger does not have a 3P guaranteeing transactions, which holds true for banks (FDIC), bank issued credit cards (vast resources of CC networks), real estate (Trust Co), etc.It is important to remember that the turmoil in the early days of credit cards was exactly what you describe here – a player in the network going haywire (back in the 1960’s, people’s dogs got valid credit cards in the mail).But the VISA, MC, AMEX cards survived because the was a single point of backup for the occasional failures in the system.That’s bitcoin’s achilles heel, although it is solvable.

        1. JLM

          .Visa and Amex thrived because they extended CREDIT.They allowed you to buy today what you could not pay for until the future.Merchants thus wracked up sales that were otherwise not available to them.Over time the benefits became broader but never really wandered far from their original base.When talking up BitCoin this is a huge consideration.JLM.

          1. PhilipSugar

            This is so correct. They made transactions happen that would not have happened. That is worth a ton and is why they were in the transaction stream. (via their fees)Google does the same thing when you search and click and then buy. What people do not understand is that while the merchants will bitch about the fees, they cannot stop, because it drives transactions. The fees are not about the cost to move money, they are about the value of driving purchases.

          2. JLM

            .I believe YOU are the one who originally oriented my thinking along these lines by something you said on another blog post.Bit of plagiarism never hurt a chap, righto?I attribute it to YOU.JLM.

          3. PhilipSugar

            No wonder “I agree more with you than you do with yourself.”

      3. JLM

        .A hidden but important fact is that banks were always highly regulated.One had to acquire a charter, undergo a pretty thorough physical, have a lot of experience to be able to shoplift a bank charter.And, still, they failed wholesale because what went unregulated was the market.JLM.

        1. MFishbein

          They failed because they took on too much risk…but they’ve actually been “bailed out”…so not only has the regulation prevented competition, it’s enabled banks to not need to compete based on safety

          1. JLM

            .Most failures are the subject of undercapitalization. Look at the banks that actually failed in 2013 and you will see they were primarily new community banks with low levels of capital. Most were located in secondary markets.Once upon a time, a few guys got together at the country club and put $3MM in the pot and opened a bank that could then grow to $100MM in assets — 3% capital required.They were 80% loaned up and made 300-350 bp net spread over their cost of deposits. Again, with only 80% of the assets loaned up they washed the face of $100MM from an ROI perspective. Cost 1% to run the shop and 1% in loan loss reserves.They made $1MM on $3mm invested. Not a bad business.But then the FDIC insisted that every asset (mortgages, loans, etc) be “marked to market” — valued at an instant in time even when the loans were not close to maturity and the assets might have a cyclical value.The only answers available were:1. Fold the tent; or,2. Raise more capital to cover the magnitude of the loan losses.Many early bank charters had “capital maintenance” provisions which arguable required the owners to pony up more capital if capital ever fell to less than 3%.Very few existing investors wanted to put good money in after bad and new investors did not want to invest in trouble. Raising new capital was very, very tough.Banks have almost no competition these days. Look at the nature of the products — all the same. Look at the cost of funds, almost nothing.The big issue is the segmentation amongst national, regional and community banks. We are not creating jobs because the examiners are scaring the crap out of the community banks who used to finance successful entrepreneurs. Alas, today, no such luck.Banking is a very low risk undertaking when it is, in fact, banking. Where the risk may creep in is when a bank is also an integrated investment bank, equity investor, trader and a number of other financially oriented deal shops.These kind of institutions are not the ones failing today and you will not find big money center banks amongst those on the 2013 failure list.Sorry about the Swiss village.JLM.

    2. WA

      William M and I spoke to this last November as to the messiness with consumer dollars. Nail on the head. Traction for Bitcoin as a ubiquitous commoditized currency cannot offer utility without complete consumer behavioral buy-in as a stable non-fluctuating currency. Which became it seems the war chant of the naysayers in the press an governments over the following few months.

    3. ShanaC

      It is chartered territory. Albeit one we haven’t seen since the civil war

      1. awaldstein

        Not to me Shana.I simply don’t know what it will look like when/if it meets the mass market. If it does.

  5. AlexHammer

    Mt Gox and Pony virus thefts are a big blow at the same time. I believe in the future of digital currency, but the areas of theft and fraud need a comprehensive strategy to be developed and articulated, and that has not been done in any significant respect to date.

  6. Matt Zagaja

    Regular banks fail all the time. One need only read the press releases:”Syringa Bank, Boise Idaho, was closed today by the Idaho Department of Finance, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Sunwest Bank, Irvine, California, to assume all of the deposits of Syringa Bank.”http://www.fdic.gov/news/ne…I bet anyone who had money in the Mt. Gox exchange is wishing the FDIC insured their deposits now.

    1. JamesHRH

      See above comment, but people who require FDIC deposits do not own Bitcoin today, which is the Chasm it has to cross.

  7. AlexHammer

    PS Your comment about buying Bitcoin is perhaps meant to encourage others, and is well and good in that aspect. But more important than confidence, fundamentally, is an explanation on security breakthroughs on which that confidence should be based. Otherwise there is not clear indication that the confidence is sustainable and can, over time, be believed. Thanks.

  8. Bill Phelan

    Fred….a fundamental question I have been scratching my head on. If there is a programmatic cap on the number of Bitcoins, then how can this be considered a “currency” rather than a commodity?

    1. fredwilson

      i don’t know if its a currency, a commodity, or something else

      1. mickwe

        Curious – doesn’t your investment thesis in btc-related companies require taking a stand on this point? If it turns out to be a commodity, doesn’t that limit its potential as a protocol?

        1. JamesHRH

          Don’t think so, from a tech perspective, the currency / commodity / coin stuff is not what gets everyone fired.Its the underlying distributed transaction ledger that does not require 3P trust intermediation that has everyone excited. Not that I think that will get adopted, but hey.

        2. fredwilson

          it is a protocol but part of the protocol is a store of value. whether that store of value is a currency, a commodity, or something else is not clear in my mind

          1. pointsnfigures

            This depends on how you use it. If you provide a service to me and I give you Bitcoin in return-currency. While I hold it under my mattress, it’s a commodity that has to be hedged (or not if I want to assume all the risk of holding) Protocol seems to be something in the future that Ethereum is working on. I love the example of title search or posting your idea on the ledger, avoiding the need for costly TM, Copyright, or other legal protection (in the short term)

      2. Jerome Camblain

        I believe it is mostly a technology for frictionless payment. E-merchants with a net profit margin around 5% cannot continue to be charged 3% for payment processing. Credit card companies charging that fee, were mostly charging for payment fraud insurance. They do not provide that service anymore as they now do charge-backs. So why do merchants continue to pay that much for processing without the insurance component?I see activists asking Ebay/Paypal split to create value…Bitcoin technology is the dark cloud above PayPal stock price. Bitcoin is the technology that will drive payment processing fees toward a fairer marginal price – (Fred, please see my email today)

    2. Pete Griffiths

      Surely there have been many currencies that have had a finite cap? E.g conch shells, gold…

    3. William Mougayar

      I would say both, and also a protocol for money transactions.

    1. fredwilson

      mind meld

    2. jason wright

      ‘he'(?) said that? where did that quote come from?

      1. JimHirshfield

        @liad:disqus made it up?

  9. LIAD

    Aside from the macro issues of their failure I couldn’t help but think about how things played out within the Gox offices.Taking their statements as completely honest and that their implementation of transaction checking was to blame, a Gox developer would have had to approach his and boss and say something along the lines of:’Remember that withdrawal logic I wrote, well there was a little bug in it which resulted in over $350mm being irretrievably stolen. Erm, sorry’

    1. fredwilson

      not that much different than explaining this to your bosshttps://en.wikipedia.org/wi…

      1. JamesHRH

        Some financial stories would never get through a story meeting at a major Hollywood studio…..the London Whale’s given name is Bruno Iksil?

      2. Chimpwithcans

        Fines, a year by year comparison:2011 – JPM, $2.4bn; BofA, $12.4bn2012 – JPM, $6.1bn; BofA, $15.7bn2013 – JPM, $25.7bn; BofA, $17.4bnLayoffs, a year by year comparison:2011 – JPM, 1,000; BofA, 14,0002012 – JPM, 74; BofA, 16,0002013 – JPM, 17,000; BofA, 4,2002014 – JPM, 8,000; BofA, 0

  10. Tom Labus

    Does it have to be Bitcoin?Maybe they’re gone and it starts over

  11. Guest

    This is one of your bolder investments. I love the volatility around it–it’s one of the most exciting developments in the past 20 years. (lame comment but just tipping the hat)

  12. Aaron Klein

    This is going to be a fascinating case study for a new era. Our society tends to define things, accurately or inaccurately, with a single word and it’s tough to get people to give things a second look.Obamacare = DisasterSarah Palin = DumbBitcoin = ?My worry is that yesterday’s news cements the word “fraud.”When wrong perceptions have hardened in the past, we’ve always been able to find ways to change the perception. I wonder how possible that is today in the age of Twitter, personalized feeds and the ability to ignore messengers you don’t agree with.It’s going to be fascinating to see how it unfolds.

  13. Guest

    Real people lost a lot of money today. There is nothing “wonderful” about this situation no matter how you try to spin it.I think the tone of this is pretty much all wrong.

    1. JamesHRH

      If you put your rent money in BItcoin, your biggest issue is judgement, not lost capital.

    2. MFishbein

      People lose money in all kinds of investments…stocks, the US dollar, startups, houses, college, gold, commodities, art, etc.Bitcoin is a risky asset. Most people know that. A market or economy where no one can ever lose would not be a healthy one.

  14. markslater

    the pricing volatility is awesome to watch right now……amazing stuff.

    1. awaldstein

      bitcoin as a spectator sport for certain.

      1. RichardF

        more like a blood sport!

        1. awaldstein

          The rub is that we love x games, but we don’t want to play with our dollars unless you are a day trader.Love this process. Seems like fun and games rather than a serious march towards a new way to transact.

          1. RichardF

            I agree Arnold, I would like to dip in and try it for micropayment purposes but haven’t come across anything I’d use it for yet.

      2. markslater

        no spectating here!

  15. William Mougayar

    Nobody said that watching the Bitcoin sausage-making was going to be pretty.1. The Mt Gox issues are rooted in a known weakness of Bitcoin, called the “malleability issue”. It’s an undesirable property of Bitcoin, and exchanges need to deal with it on their own, because the core Bitcoin designers haven’t. It’s a known issue since 2011. You can read about it here https://freedom-to-tinker.c…2. That leaked document looks like it was written by an external crisis management firm for Mt. Gox, suggesting they move their identity to Gox and ask for a bail out (but that won’t work) http://www.scribd.com/doc/2…3. This means that the exchanges (like Coinbase and others) need to continue being extra vigilant by building their own technology on top of the Bitcoin system. Bitcoin itself is not resilient without services on top of it.4. This also is prompting people to ask if another model is totally distributed exchanges, e.g. http://www.mastercoinwallet… where you don’t depend on one central exchange.Now, I’m going to reload my Coinbase wallet. I had bought some at $550 on Friday. It’s $500 today.

  16. andyswan

    I have a hard time with bitcoin. I think the technology is admirable and amazing, but the people running the show are complete financial morons.They make insane claims like “it’s fraud proof” and then an entire exchange goes poof.They make ridiculous claims like it will save businesses tons of money because of reduction in CC fees, without acknowledging that the fees associated with CCs HAS NOTHING TO DO WITH MOVING THE CURRENCY.They even promote it as a “safe haven” investment when the entire concept is preposterous. A safe haven that fluctuates 100’s of % points? A safe haven that requires a decentralized connected network of computing power to verify your ownership? Are they even serious???It reminds me of the people promoting financial change while sleeping in bird-shit and drumming in circles.Fred…. you and coinbase (which seems to me to be legit and intelligent) have a big hill to climb to lose the charlatans that have infected bitcoin. I know you’re up for the task but watching all of this within the bounds of logic and reason has been a frustrating experience.

    1. JamesHRH

      I am not sure if I have ever up voted one of your non-humourous posts.You are 100% right on target with the added bonus of not being super negative.

      1. Matt A. Myers

        He must of had a good day after posting LikeFolio’s Stock Ticker Chrome Extension on HackerNews. 🙂

        1. andyswan

          Lotta good days in a row for ol’ LikeFolio lately! (knock on wood)Glad you noticed it 🙂

          1. Matt A. Myers

            Upvoted it too :)Good things rolling here too. I’m preparing for a crowdfunding campaign, already did one interview, doing a few more tomorrow. Pledge rewards are coming together nicely too. I’ll share about it all when ready. 🙂

          2. andyswan

            i’m in

    2. William Mougayar

      With the passage of time, the good guys will be more dominant than the bad guys.Remember when Las Vegas was flooded with organized crime and illegal activities in its early days. It took some time to flush that out.

      1. awaldstein

        You are suggesting patience as the answer here?

        1. William Mougayar

          Definitely. There’s lots of works in progress. It’s not an ideal situation yet.

          1. awaldstein

            I don’t know.Sure stuff sorts itself out but the idea that this will get resolved by dint of passage of time is not sticking with me.If you had $20M to invest, where would your bet be?

          2. William Mougayar

            $20M to invest in Bicoin related stuff?I would invest in the companies that are building out infrastructure and related services at the middleware and applications level, including hardware products for security.

          3. awaldstein

            Seems like that should be your next post then!

          4. CJ

            Definitely the time of the middleware and the middleman. They’re always the first to go but make serious coin before they do.

          5. William Mougayar

            well, there’s good and bad middleware.

          6. Antonis Polemitis

            Email (SMTP): Invented 1984Web browsing: Invented 1993E-commerce: Invented ~1995?Cryptocurrencies: Invented 2009One would have gone very wrong judging the final outcome of email in 1988, web browsing in 1997, e-commerce in 1999. 🙂

          7. awaldstein

            You’re a bit late on commerce ;)And I get your point but when you play with money and money not by the institutions but by people, the dynamics are just different.

          8. JLM

            .Yes, indeed, we always forget how long it takes to become an overnight success.JLM.

          9. PhilipSugar

            So true. Add ethernet, wireless ethernet, and power over ethernet.

          10. JamesHRH

            I am not sure how you are setting your origin dates on email, but I had a pretty good handle on the future of web browsing by 1998 @ the latest & e-commerce by 1999.Tick tock tick tock.

          11. Matt A. Myers

            I still think Bitcoin is fundamentally flawed, and as soon as a system is created that has the same or similar attributes or characteristics but that deals with the problems relating to fairness that I have seen, then only then will there be able to be mass adoption; I’m reminded of your market size reply to me 🙂 … though I still believe if a system exists that deals with all issues then the market shares divided will end up moving towards the more fair system.

      2. Jameson Lopp

        The good guys are already more numerous and dominant than the bad guys, in my opinion. 🙂

        1. William Mougayar

          They are, but the bad/incompetent ones are quick to get media attention, unfortunately. It’s about mindshare vs. marketshare.Good guys don’t make the news like bad guys do. Dog bites man vs. man bites dog.

          1. SubstrateUndertow

            Generically speaking all complex/organic/distributive systems rely on that characteristic “distributive redundancy of function” as a key statistical tactic for swamping out the inevitable failures inherent in their complexity.In the aggregate, genetic survival strategies care little about the localized statistical-costs incurred by a distributed-instantiation-failure, as long as a robust eco-system in insured/secured via those localized statistical failures.Human volition, on the other hand, makes humans acutely cognizant/fearful and strategically focused on never playing the distributed-insurance role of the localized-instantiation-failure. No one wants to lay down their financial survival of the team!When humans use that “distributive redundancy of function” as an organic strategy it must always be paired with some sort of social-contract/enforcement-mechanisms by which the group insures all the participants against the statistical risks/costs of being that “unlucky-instantiation-failure Guy”.Isn’t that “collective safety net requirement” the idealogical stumbling block, the vestigial value system, that bars libertarians from fully entering into this scary new world of social-organics. Their fears are of course well founded but there is obviously no stopping this train. So the sooner we all get onboard, the sooner we will arrive in the promise land ;-)The “medium is the (social evolutionary-massage) message”.And the internet as a medium catapults us up-level, where synchronized “distributive redundancy of function” becomes an organizational dynamic/strategy that is now available to us as a commoditized toolset.But for humans, that bottom-up organic-organizational-dynamic gifted to us by the internet’s global reach into synchronizing “distributive redundancy of functions” mandates a matching top-down personal-survival-insurance component not generally required in lower level biological regimes.The very gifts that makes us so special, our cognitive self-awareness and our highly volitional personal-survival strategies demand extra entrance fees before we humans can successfully enter into the world of applied distributive-social-organics.In a biological world of organic strategies, it’s extra tough being US! Or maybe we’re at our evolutionary hull-speed because we’re just too damn clever by half?Our premium entry-fee mandate that we juggle extra hard to operationalize a generically-reusable set of optimized top-down audit and collective-insurance functions. We need to fine tune the tipping point between those top-down collective-insurance functions and the bottom-up power of “distributive social organics”.Lets not throw out the magic mojo of “distributive social monetary organics” with the as-of-yet seminally-dysfunctional collective-insurance-function bathwater!So yes !Discovering how to optimally dovetail reusable organic-organizational-dynamics within the extraordinarily complex constrains of human volitional self-interests will take some very serious patience.Yes. . . Yes. . . I know it is vastly easier said than done.But we have really smart people on the ground like Fred working the details !

      3. WA

        Interesting note. Space abhors a vacuum and if memory serves correctly organized crime syndicates were replaced with organized Wall Street syndicates with MGM shareholders enjoying 85% ownership of the strip. Even Icahn left the game there selling the Stratosphere pre-meltdown.

        1. William Mougayar

          Hopefully, we’ll get a better end balance with Bitcoin 🙂

        2. JLM

          .The only difference between the Mob and Wall Street is that the Mob is more organized and honorable.JLM.

          1. CJ

            They were anyway, before they all wanted to be in movies. LOL

      4. StreetEYE (@streeteye)

        The problem is… if a statement like that has meaning, the ‘good guys’ are ‘dominant,’ then there is a central nexus of control, and it’s not that different from a currency controlled by the Fed or the ECB.The whole point of Bitcoin is to be outside anyone’s control. You can be an anonymous black market, or a legit market subject to audits, reporting requirements, taxes, anti-money-laundering. But you can’t be both.

        1. William Mougayar

          But the reality of “decentralization” promise is that you still need to build central layers on top of the pure Bicoin protocol in order to ensure some security and resiliency around it.Complete decentralization is still a myth, and lives in technical papers. That doesn’t mean we won’t make progress towards it. It will be a step-wise process.It’s a relative thing. We need more decentralization, and less centralization. That doesn’t mean you totally remove one in favor of the other. The right balance is the reality.[Disclosure: I’m advising a handful of Bitcoin related startups, so I’m close to the heat, right in the kitchens]

      5. Jed

        so bitcoin is a network of casinos. not an inspiring analogy.

        1. William Mougayar

          that’s reality. Where it’s going is the better focus, not where it has been.

      6. Matt A. Myers

        This is why I still have hope for the idea of democracy and capitalism. There have been gains for all – the good and the bad guys – but I feel the good guys haven’t quite yet gotten the chance to shine. It’s coming though.

        1. CJ

          Good can only outwit evil if there is a force somewhere playing equalizer. Doesn’t have to be a supreme being force, could just be the force of good people or whatever but there has to be a greater equalizer in play for rule playing to defeat cheating and I’m just not sure of that in this world.

          1. Matt A. Myers

            Can you give examples of what you’re describing as an equalizer?From my current understanding of what I am taking from what you said – the equalizer is there. The yin / yang cycle exists in the universe – it will trickle down – else humanity and social structures and the like wouldn’t have evolved to the point we have now.There are multiple keys required for each big shift to occur though, and once all keys exist, then they can unlock towards the next been change / shift.Technology and the ability to organize, and as a foundation as well the ability to learn and access to information, are some of these keys.

          2. CJ

            I don’t necessarily feel that good’s defeat of evil led us to this stage of evolution, we could be here just as easily from evil realizing that unmitigated evil results in the annihilation of everyone. In other words Yin/Yang could be false and enforced in order to ensure a balance favorable for only a certain few and that process could be hidden to the rest of us.

      7. JLM

        .Uhhhh, the organized crime element in Las Vegas is alive and well.It has gone underground as unions controlled by the mob investing in the real estate which houses the gambling.The mob doesn’t skim from the operations, they get a piece of the proceeds through a participating mortgage and then skim from the mortgage.The mob has long since gone legit in the US while continuing to operate criminal enterprises.The third generation all have MBAs and are conducting extravagant money laundering not on the income statement but on the balance sheet. It is way more difficult to find laundered money on the balance sheet than on the income statement.JLM.

        1. ShanaC

          how do you know this?

          1. PhilipSugar

            Because he is not naive. He doesn’t even mention how food gets bought and delivered, construction and maintenance happen, and trash gets hauled.

          2. JLM

            .These businesses once had a chance of being dismantled as the “fruit of the poisoned tree” but now are so well established and financed that the next generations may literally not know they are involved in organized crime except for where the dividend checks are sent.JLM.

          3. ShanaC

            So. No proof.

          4. JLM

            .Most is first hand knowledge that I would not want to discuss personally or publicly but much of it is public knowledge.JLM.

          5. Dave Pinsen

            My sense here in NJ is that there has been more money to make in pretty much legitimate businesses that are cozy with government than in organized crime for a while. The market for infrastructure projects here, for example, doesn’t seem too competitive. The guy whose construction business built most of the new wing on our local medical center is also the chairman of the board of that medical center. When federal transportation money trickles down to local highway projects here, he those contracts too.And he happens to do good work. In the late ’90s, he ran a $120 million project that replaced an awful cloverleaf highway interchange built in the 1930s with a flyover ramp, and he finished it ahead of schedule and under budget. I also doubt he does anything illegal to get these contracts. He doesn’t have to. He’s just the established guy here, and it’s not like a handful of twenty-something computer programmers backed by VC money are going to disrupt him. They don’t have any steam rollers, they don’t know anyone who knows how to handle a jackhammer, and they don’t have his relationships with the local players.

          6. JLM

            .Find out who supplied the concrete? What unions worked the job? Who provided the waste removal and cartage?JLM.

          7. PhilipSugar

            Or what the required labor rate for any of those jobs was/were.

          8. Dave Pinsen

            I think part of the high wages is pols who have never gotten their hands dirty with blue collar work having no idea what the labor requirements are. Not only do these construction guys get paid well, but they usually look overstaffed, with one guy working a power tool, while a couple of other guys stand around.

          9. PhilipSugar

            Working with the government is very strange. They want to make sure you don’t make too much money, but because as you say they have no clue you spend way too much money and have all sorts of perverse incentives.So in this case the government wants to make sure that your guy doesn’t make more than roughly 10% profit. If he made 30% there would be howls.So instead of a project coming in at lets say $100mm where it costs him $70mm, and he makes $30mm, the project comes in at $300mm costs him $270mm and he makes the same $30mm.In a perverse way he wants to pay the really high rates and have two guys stand while one works. That is how you get to those high numbers. That and the unions, politicians and whomever else like to set the rates really high so they can get a cut. Here is the prevailing rate in DE you must pay this by LAW. http://dia.delawareworks.co… A painter is making $58/hr. So figure with overtime (and there is going to be a lot of that she makes $174k add in the fringe and you will see how a project that might have cost you $70mm goes to $270mm.

          10. Dave Pinsen

            Probably friends and or relatives of the general contractor.

        2. William Mougayar

          true, to some extent.

        3. CJ

          You make that sound so romantic JLM. BRB…going to become the Wolf of Vegas. 🙂

          1. JLM

            .The bad boys always have more fun and the girls, the girls like them better.Wall Street is just the mob for non-Italians, no?JLM.

      8. John Revay

        Happy Birthday William!

        1. William Mougayar

          Thanks John!

          1. ShanaC

            🙂 Happy Birthday

          2. William Mougayar

            thanks !

          3. Abdallah Al-Hakim

            Happy belated birthday!

    3. Antonis Polemitis

      So true. The one important lesson over the last twenty years about technically important 4 year old open platforms is that if one company that uses the platform is badly managed, that means the platform is doomed.That is why the unfortunate experiment of ‘the internet’ sadly ended in 2001 and had to be shut down when a few hundred billion dollars of investor money was vaporized by short-sighted, self-serving promoters in the VC / entrepreneur community. Right?Be patient. Mt. Gox was always a clown-show and while I sympathize with the customers, it had a year of warning signs that ‘Something was wrong’, including bank account seizures, lawsuits, regulatory violations, trading failures and blocks on USD withdrawals. You know, like MF Global, but with less money at stake.The firms in this space backed by name brands (Fred, Marc) in the space a year ago had 2 employees (2!). The finance and banking sectors have 500 years of infrastructure work behind them and still regularly blow up and reach into taxpayer pockets to pay for their sins, something that will not happen here.Give this 3-5 years – amazing things will happen.

      1. andyswan

        I don’t disagree and I never said bitcoin was doomed. I just said it needs to rid itself of the morons that have been running the show (and pushing the currency price to ponzi levels)

        1. Antonis Polemitis

          Well, today’s events are the first part of your comment coming true.The biggest clown show in BTC is finally gone. Now that leaves an empty playing field for the USVs, A16Z to push aggressively for consumer-grade tech and value proposition (aka, easy to use, some level of 3rd party insurance on deposits and so on). If there are any two firms up to this challenge, it is these two.On price/ponzi levels, I have no idea if it is too high, too low or just right and, if I might be so bold, neither do you. But we can say that it is a market and certain things do seem to react in market-like ways — aka Mt. Gox debacle was priced in well before today.I do know the following (which is admittedly circular): If BTC is going to transact in any meaningful with the current currency system, both price and trading liquidity have to go up, not down because otherwise you can’t move money through it without impacting the exchange rate and working against yourself.For context, right now it does about $100M of trading daily against a few trillion dollars daily in traditional currencies and its money supply is 1/3000th of the major currencies. The bigger that gap is, the larger bid/ask spreads will be, particularly for large transactions.

          1. JamesHRH

            I think a lot of us – even the more vocally negative like me – tend to list out the needs that you have listed.That list existing gives BTC a chance at success, but not much else.I put it 50/50 that BTC = MySpace. That’s still good new for PMarcA & THe Bartender. They will have PhD in the space for when it really crosses over.

          2. Antonis Polemitis

            We will see. I can’t quantify this but my gut feel is that it has escape velocity. Building 2-sided markets is very hard so the odds that #2 rebuilds all this and does better, well, they are non-trivial.

      2. ShanaC

        Or they have nuclear winter….

    4. LE

      have a big hill to climb to lose the charlatans that have infected bitcoinI think that’s a really good point. God knows the domain business has never got rid of the dreamers and charlatans despite huge amounts of money swashing around and a for sure legitimate sector.You know what? I can’t even do a deal with someone I know, from the same town, with the same background (graduated from an Ivy) that is an attorney to boot without having them try to play me. It’s that bad. This is really what I call a “stage 4” mental disorder. Where you can’t even draw a line on who to lie to and who not to lie to.They make insane claims like “it’s fraud proof”Call this one the “we’ve got this figured out” thing. Not even smart enough to be circumspect in their statements when trying to take advantage of the gullible.This happens every time a new programming language comes out as well. “We’ve fixed all the issues in x it’s different this time”. Except it’s not.

      1. PhilipSugar

        My problem is I don’t know who “they” is and I don’t think there is one. The foundation?I think its a really interesting concept, and I didn’t really understand until I had it explained to me like a 5 year old: https://medium.com/future-o…And yes, every new technology will have charlatan’s involved. The problem as awaldstein pointed out is we are talking about money not just technology.I agree that each time a new person comes out and says we can solve this problem easily (in this case fraud and lack of transaction fees) they are wrong, however I think that naivete actually pushes us forward, because you don’t have people that say you can’t do that which is the easy thing to say and holds you back.And I think your acquaintance doesn’t even know when they lie to themselves. Those are the truly scary people.

        1. LE

          however I think that naivete actually pushes us forwardbecause you don’t have people that say you can’t do that which is the easy thing to say and holds you back.Agree that naivete is the mother of invention and taking chances. But that’s a bit of a survivorship bias at play. Law of large numbers. The basis of angel investing.I’ve told the story about the guy who told me my idea wouldn’t work and have acknowledge that he was right but that I was right as well. There was evidence supporting the conclusion he made (from years of experience) and yes I knew nothing so I took a chance and made out. But it wasn’t because he was wrong it was because if enough people try enough things one sperm managing to get the egg.Put another way tell me about all the people that facebook didn’t hire that went on to form companies that were sold for 19 billion.

        2. awaldstein

          I’m a believer that pragmatic optimism, even with a wishful side to it can change the world.The language around Bitcoin even by the most knowledgeable sounds like code talk to me. I understand it but nothing needs to be that obscure.

          1. JLM

            .There are a lot of things in life that are binary — optimism v pessimism — and it is always better to invest in the one that has a smile on its face.No tombstone has ever been carved which said: Charlie was a great pessimist.”JLM.

        3. SubstrateUndertow

          Sure, new technologies have always been gamed by the defectors.Thats not going to change!Over time systemic processes always emerge that push those defector to the margins where the collective-insurance costs of dealing with their malfeasance becomes an expectable cost of doing legitimate business for the rest of us.Same this time round!Maybe the focus should be on developing generic reusable audit and collective-insurance cost mechanism as Fred seems to be working on?

    5. fredwilson

      great comment Andy. i wrote about the three phases we’ve been through and the two phases to come a while back http://avc.com/a_vc/2014/01…the key to getting from the first three to the next two is growing up and being legit. i am doing what i can to help the companies we work with to get there. a good first step is avoiding those pie in the sky promises that nobody can keep

      1. andyswan

        Yes you have been very good at keeping a “sober” enthusiasm for your pick and axe company during the rush.

        1. fredwilson

          sobriety comes from being drunk earlier in my life

          1. andyswan

            how was the hangover?

          2. fredwilson

            painful but 2000-2003 was the most important period of my professional life. that’s where i learned most of the important lessons

          3. andyswan

            Everything in moderation including moderation I suppose.You make a good point. I’m so glad we started our first business in late 2000 instead of 1998. SO GLAD. I wonder if I’d even be alive.

          4. pointsnfigures

            2009 to today my 2000-2003…..working hard to see the other side.

          5. CJ

            A like wasn’t enough to convey how much I like this plainly spoken but very witty sentence.

      2. PhilipSugar

        And I give you credit. Invest $50k on your first post…..even today…..as good of a return as WhatsApp. A tip of the hat.

    6. JLM

      .I agree more with you than you do with yourself.JLM.

    7. Aviah Laor

      But somehow we do need a solution that does not rely on government regulations, a market that can regulate itself without government intervention. It will take time.

      1. andyswan

        agree 100%

  17. Simon

    Signed up to coinbase nice simple layout, very understandable for a newbie, then the killer can only buy coins with US bank accounts and if I buy with credit card 3+ pc fee plus any cash withdraw fees. Do you know when the UK banks will be able to be accepted as means of payment Fred ?

  18. MFishbein

    Failure is healthy for markets, Bitcoin included. If Mt. Gox does not properly serve it’s customers, customers will stop using it, and Mt. Gox would fail. The failure creates opportunity for companies similar to Mt. Gox to compete based and safety and security. Just like if your laundry detergent stains your clothes you will use another one.If there were some regulatory authority that was keeping Mt. Gox alive despite it not serving it’s customers, you would have…well…the US economy 😉

  19. jason wright

    i applied for a Mt Gox account. turned me down. wanted me to become a paperwork bitch. i went elsewhere, and that’s worked out so far…after some initial teething trouble with funds transfers from bank to bank, which is the great irony.I also tried coinbase last summer. wanted a US bank account. said at the time they were working on changing that requirement. still is the requirement i think.it amazes me that an exchange would allow so much bitcoin to be stored on systems connected to the network. stand-alone creates friction, but it’s safe.i don’t believe that some hacks are external.

  20. Michael Ferrari

    It is unfortunate. Not sure what the reasons were behind their ultimate demise, but supports the need for these types of companies to adhere to certain forms of regulation most importantly those that deal with on-boarding of it’s customers and proving identity when opening an account. Saw your interaction at a recent New York hearing on bitcoin suggesting bitcoin/Fintech companies should be able to operate (for an initial period of time) without having to build out such costly regulatory systems like “Know Your Customer”, The Patriot Act, etc. I’m curious if your thoughts have changed?

  21. jason wright

    i wonder how the Japanese authorities will react to this?The Olympus affair, the Recruit scandal, these made the Japanese business environment look like a very polite corporate gangster culture.

  22. howardlindzon

    I dont know if there is blood in the streets, but there is snickering in the streams! I am with andy below…but happy to change my mind at higher prices

    1. Antonis Polemitis

      Oh please re: Andy comment.1. Mixing up the layers of the stack = CHECK! (The currency is fraud-proof; it has not magically eliminated counterparty risk for higher level applications)2. Failing to account for disruptive technologies improving over time = CHECK!3. Failing to note that this is triply true in open technologies = CHECK!There is nothing about Mt Gox failure that is new news. They have been an operational disaster-show forever. This is like ‘Pets.com run idiotically, HTTP is doomed’Work needs to be done in the space – but remember, 4 years ago BTC was a white paper. The 500 year finance industry won’t be recreated overnight. It will take 10 years.

    2. William Mougayar

      But Bitcoin is more than just currency. We need financial services on top of it, and around it; and that will make the ecosystem stronger.

  23. jason wright

    and so, the pressing issue of my day is do i buy a bitcoin or do i buy a shiny new smartphone? this is the level of my life right now :-)to more tasteful things. i’ve just eaten a fantastic late lunch of sea bass and pea soup. so nice.

  24. inadarei

    “Bitcoin’s architecture is similar to the Internet’s architecture. There is no centralized control point. No single point of failure.”Welp, yes and no. While Internet’s architecture is indeed exceptionally resilient, it is in no way bulletproof. By now we have amassed a lot of unfortunate examples of how it can be compromised. Internet can be controlled both locally (various country-level “walls” filtering access) as well as: globally (Net Neutrality issues, compromised security protocols, back-channel access into major systems).It’s one thing when compromised Internet means your Netflix video is slow and grained, it’s completely different when your money can get lost.Not taking the risks that are present even in the most distributed architecture seriously is—irresponsible. There is no “purely technical” solution here. Bitcoin-like approach may be an improvement, but outright ignoring all of the experience in the traditional finance infrastructure, and being all radical about it is somewhat childish.

  25. Josh S

    Fred, I think your thoughts here miss the crux of the issue. Yes Mt. Gox will go down in flames and bitcoin is decentralized so it will live on. But many, many people are about to lose hundreds of millions of dollars because there is no consumer protection for companies holding deposits. This wasn’t the first time a bitcoin exchange/wallet went under and left people with big losses and it certainly won’t be the last.Bitcoin is a sound technology and will last, but will consumer confidence in bitcoin survive? And isn’t that what is needed to ensure bitcoin continues to thrive?Without some form of regulation (and I know most bitcoins advocates are anti-regulation), this will continue to happen. Without some third party (and it doesn’t necessarily have to be government) auditing bitcoin companies to ensure they have adequate protections in place, it will be hard for consumers to know who to trust and who not to.

    1. LE

      But many, many people are about to lose hundreds of millions of dollars because there is no consumer protection for companies holding deposits. This wasn’t the first time a bitcoin exchange/wallet went under and left people with big losses and it certainly won’t be the last.What type of consumer protection are you proposing? Insurance protection? More information? Some type of government auditing?auditing bitcoin companies to ensure they have adequate protections in placeAuditing just makes fraud a bit harder to do. Doesn’t eliminate it.In fact it might very well create a false sense of security causing people to lose even more money.To me the only thing that really makes sense is some kind of insurance. But that insurance isn’t going to come from the government for sure. And if it comes from a private company just remember what happened to AIG during the banking crisis (luckily GS was in that one so the bottom didn’t fall out).

      1. Josh S

        Sure, nothing is foolproof, but I think both insurance (which would have to be private) and regulation/auditing need to be part of the strategy.The auditing doesn’t completely eliminate the risk, but it can help if done correctly by a trusted third party. The third party doesn’t have to be government. In fact, if the bitcoin industry were smart, they’d pre-empt government regulation by forming a nonprofit entity to do the auditing based on a multi-stakeholder, consensus developed standard.If you look at Underwriters Laboratories (UL) as a model (where I used to work for many years), it’s a 120 year old organization that develops industry standards and then tests and audits to them. Is it foolproof, no? Have there been products in the past 120 years that have caught fire or hurt someone, of course. But consumers trust it and it is in UL’s interest to ensure compliance with standards both from a legal perspective and to ensure continued consumer trust in the mark. This same philosophy could be used for bitcoin.

        1. LE

          I would venture to say that most normals have no clue what UL is. Walk into a starbucks and take a survey.I know about UL and have since I was a kid remembering asking my father what the symbol meant. He had to get some of his electrical products which he imported UL listed.Today of course when you buy any product you don’t think about UL listing since this is not the 40’s anymore).I get your point of course.But keep in mind that UL is an organization that was almost certainly formed by engineers (not money people) (checks wikipedia to verify, and yes):Underwriters Laboratories Inc. was founded in 1894 by William Henry Merrill. Early in his career as an electrical engineer in Boston, a 25 year old Merrill was sent to investigate the World Fair’s Palace of Electricity. Upon seeing a growing potential in his field, Merrill stayed in Chicago to found Underwriters Laboratories.Also keep in mind that UL runs essentially a lab with scientists and evaluates physical products. So unless the manufacturer is submitting one product and distributing another this is not in any way similar to doing auditing and verifying the black box of electronic transactions with respect to fraud. That’s really a key point.Not saying that “the perfect cheer” couldn’t be set up. But it wouldn’t be the same as NHTSA testing cars or UL testing electronics either.

          1. Josh S

            UL does more than evaluate physical products. Much of the work is global auditing of companies and facilities. Everything from paperwork audits of processes to quality auditing. Not exactly the same as what’s needed, but combined with financial expertise I could see this be a model to build on specific to bitcoin. There’s a lot of other precedence for nonprofits to audit their industry as well, including FINRA I believe (on mobile now so can’t verify)

          2. LE

            UL does more than evaluate physical products. Much of the work is global auditing of companies and facilities.Today, yes. But when did that actually start?Strictly a guess (not knowing the history of UL) but I think that came much much later (at scale) in the development of UL. And the world of course was much different in the early 1900’s than it is now.http://www.ul.com/global/en…So at whatever point UL started doing what you are referring to (and it was almost certainly not back at the start) they had significant street cred to be able to pull it off.

    2. fredwilson

      maybe regulation is the answer. but there are other options. insurability of deposits might be another approach.i feel badly for those that lost hundreds of millions, for sure. but its not the first time and won’t be the last that people put too many eggs in one basket, particularly a risky basket, and got burned.

      1. Perry Ismangil

        I’m hearing arguments even in the normal banking, insurance for depositor (like FDIC) makes the institution takes more risks.

      2. Antonis Polemitis

        There were many many warning signs about Mt. Gox that people chose to ignore. Does not mean they deserve to be defrauded by any means, but it did not come out of the blue either.

  26. TaylorMiles

    24 Bank Failures in 2013 and 3 Already in 2014. One exchange going down is just a part of the healthy evolution of this new technology, just like forest fires are part of the healthy forest ecosystem. This is going to be an important test for the CryptoCurrency community as a whole. I purchased a few too last night around $470. Its nice to see the pricing holding up even after all this.

    1. Josh S

      Except when a bank fails, the FDIC comes in and takes over to ensure consumers don’t lose money. In this case, many people may lose hundreds of millions of dollars because there isn’t similar regulation and insurance for bitcoins.

      1. TaylorMiles

        @disqus_2V60l525Ug:disqus Yes. This is very true, but in this case I believe the vast majority of those invested in bitcoin trading on MtGox were well aware that this was a risky venture, without the protection of FDIC insurance. Also keep in mind The FDIC only insures certain asset classes, so there are still investors, and customers who loose money when a bank fails. Its not 100% insured by the FDIC.

        1. Antonis Polemitis

          Exactly. Bitcoin does not have the risk/return profile of cash right now on either dimension.

    2. LE

      24 Bank Failures in 2013 and 3 Already in 2014. One exchange going down is just a part of the healthy evolution of this new technologyBank failures are an inconvenience. There is FDIC insurance. So unless you are keeping more than $250k in one titled account it’s not something that most people loose sleep over.

    3. JLM

      .A total of 24 bank failures in 2013 is insignificant. I watch that sector a bit — long story. I believe there is not a single example, could be wrong, in which the FDIC did not force a shotgun marriage. The banks failed financially on a technical basis but the going concern was forced into a new parent with a stronger balance sheet.This is important because once the FDIC insurance is paid out the current assets of the bank are evaluated. Many are traded at par and the balance are traded at some discount to book value.The bank’s capital is exhausted in applying it to the failed uninsured assets. This is the definition of a “failed” bank — one whose liabilities are in excess of its assets even after the absorption of its excess capital.The funny thing is that often the mere passage of time will allow a troubled asset to recover its original book value — hence the curse upon “mark to market” rules which arbitrarily pick a date of reckoning with no recognition of the nature of the assets and the asset life.So what if a land loan is currently under water if it will recover value — full value plus accrued interest — in 5-10 years. Was it ever really under water?This is the lesson of the late 1980s S & L crunch — if the Feds had held firm, everything would have recovered one hundred cents on a dollar. It would have been OK to decapitate the crooks but that should be done in good times also.JLM.

  27. dredding

    Questions: How many (much?) bitcoins were being held by Mt. Gox? What has happened to them? Are they lost forever?

  28. WA

    Perhaps if Comcast entered the fracas the government would get behind it instead of in front of it….That would turn the press in its favor and perception being reality,,,

  29. LE

    But I always feel good buying when there is blood in the streets in any market. It is my favorite time to buy.Not to make money but for the entertainment value and to re affirm a business hypothesis.

  30. tony solinan

    I agréé with people like William Mougayar good Ordinary folk,will always be better than those who are out to make money or think they are acBetter than working class folk,who just want toLead à normal life,who dont. Think they are better because they those with wealth!

  31. LE

    There is an upside to all of this which is of course publicity that you can’t buy:http://www.usatoday.com/sto…You know even if all the press had to say was that Marilyn was found in the nude it’s still good for Marilyn. And her estate.This is all the inevitable “dead body parts on ebay|craigslist” moment that made so many early internet companies by giving them free mass publicity. I’m sure Brian Williams will be talking about this on NBC nightly news. And WSJ and NYT will as well (possibly front page). Then all the local papers will amplify it.Normals will be aware of this event because of the publicity but if bitcoin survives this (and it will, right?) in the end this is a positive for the community not a negative (which it is for the people who lost out..)

  32. LE

    But I always feel good buying when there is blood in the streets in any market. It is my favorite time to buy.Also reminds me of my dad, circa 1987 after the crash.Was interviewed on the news (a “man on the street” type thing) down at the local stock broker office on Market street in Philly. Wish I had a copy of the interview.I remember him saying “I’m here to pick up some bargains”.

    1. WA

      And Warren to Shareholders.

    2. JamesHRH

      Seriously? Stones.

  33. Siminoff

    I understand that new technology can be messy, I live that every day.However something that I have not understood while watching/buying/selling bitcoin is why Gox had a much higher sell price for bitcoin for the weeks/months proceeding the collapse. I kept asking people who know bitcoin and they kept giving me different answers on this but nothing seemed to really add up.I have looked for a thoughtful article on the topic post collapse but have not seemed to find someone that has dug into this in a deeper way.Discrepancies should not occur in markets like bitcoin as arbitrages that big never exist. While the explanation coming out of Gox might be 100% correct and true it does seem fishy that before they fell, the price on their exchange was artificially high, brining in more coin and not allowing that money to be withdrawn.I will buy more coin, on coinbase, but going to wait as I am not sure if all of the blood is out yet.

  34. Pete Griffiths

    i suggest we separate two things that most comments are conflating:a) bitcoinb) cryptocurrencies/altcoinsBitcoin is the equivalent of CP/M. It is the first significant cryptocurrency and it represented a major step forward – notably in the way a network deals with trust. But there is surely little reason to suppose that it is necessarily the end of the story any more than CP/M was the last operating system for microprocessors.The bitcoin protocol was novel but has some real problems. It can be improved upon but it is tricky to introduce radical changes into the network. Hence there is an opportunity for second generation altoins. Indeed, there is opportunity for products that use some of the notions introduced by bitcoin but generalize the notions beyond the application areas of coins. (eg Etherium)Most altcoins are little more than bitcoin forks with a marketing twist. They are still CP/M.It may well be that some of the challenges bitcoin is facing may – in the longer term – be best addressed not by building out the ecosystem around bitcoin but rather by a superior core product. A truly second generation offering.I strongly suspect that bitcoin is no more likely to be ‘the solution’ than were conch shells and CP/M. This is very early days.

    1. Andrew Kennedy

      “Most altcoins are little more than bitcoin forks with a marketing twist. They are still CP/M.” #bingo

    2. William Mougayar

      Not all alt-coins are going to be alike. Ethereum has solved issues and limitations that Bitcoin has, and potentially could emerge as a strong one.

      1. Pete Griffiths

        And Etherium shouldn’t even be seen as just a coin.Bitcoin -> forks -> colored coins -> Etherium and others

        1. William Mougayar

          you’re right that Ethereum is a lot more than an alt-coin. It’s a new protocol and infrastructure that enables new capabilities that are harder to accomplish with Bitcoin.

          1. Pete Griffiths

            They can’t be accomplished at all with Bitcoin. Bitcoin’s scripting is not Turing complete.

          2. William Mougayar

            of course, that’s one of the limitations of bitcoin.

  35. William Mougayar

    The jokes in the bitcoin community today:- Word of the day, “POOF”- New word to add to dictionary, “GOXED”Kidding aside, 2 serious words that you should get familiar with:- Malleability issue- Cold storageAsk your Bitcoin provider how they are dealing with them.

  36. Bernard Desarnauts

    Bought my first bitcoin today via Coinbase and I only chose them because USV is behind them. Trust is indeed important.

  37. Jason Drake

    lol you bought way too early… have fun losing

    1. Matt A. Myers

      Considering they own 27+ million shares of Twitter, and presumably large chunks of shares of some very successful businesses, their investment in Bitcoin so far is pocket change.

    2. fredwilson

      haven’t bought much and what i’ve bought, i have largely given awayi disclosed all of this on this blog a while backhttp://avc.com/a_vc/2013/11…

      1. Antonis Polemitis

        There are very few scenarios where Fred’s investment in Coinbase does well and the price of bitcoin collapses. So there is nothing inconsistent in his actions.

  38. ppearlman

    the new blog looks pretty awesome.

    1. fredwilson

      thanks

  39. LE

    In case anyone missed this news the domain gox.com was transferred yesterday to the mtgox guy:Domain Name: GOX.COMRegistry Domain ID: 816800_DOMAIN_COM-VRSNRegistrar WHOIS Server: whois.godaddy.comRegistrar URL: http://www.godaddy.comUpdate Date: 2014-02-24 17:29:44Creation Date: 1997-10-09 23:00:00Registrar Registration Expiration Date: 2017-10-08 23:00:00Registrar: GoDaddy.com, LLCRegistrar IANA ID: 146Registrar Abuse Contact Email: [email protected] Abuse Contact Phone: +1.480-624-2505Domain Status: clientTransferProhibitedDomain Status: clientUpdateProhibitedDomain Status: clientRenewProhibitedDomain Status: clientDeleteProhibitedRegistry Registrant ID: Registrant Name: Mark KarpelesRegistrant Organization: MtGox Co.,Ltd.Registrant Street: Cerulean Tower 15FRegistrant Street: 26-1 Sakuragaoka-choRegistrant City: ShibuyaRegistrant State/Province: TokyoRegistrant Postal Code: 150-8512Registrant Country: JapanRegistrant Phone: +81.345206200Registrant Phone Ext:Registrant Fax: Registrant Fax Ext:Registrant Email: [email protected]comWas for an undisclosed amount of cash and bitcoins.http://www.domaininvesting….I’ve dealt with the broker mentioned and consider him reliable as a source.Transfer happened possibly yesterday but definitely after Feb 21st.(Previous owner shown):Domain Name: GOX.COMRegistry Domain ID: 816800_DOMAIN_COM-VRSNRegistrar WHOIS Server: whois.godaddy.comRegistrar URL: http://www.godaddy.comUpdate Date: 2014-01-21 18:29:05Creation Date: 1997-10-09 23:00:00Registrar Registration Expiration Date: 2017-10-08 23:00:00Registrar: GoDaddy.com, LLCRegistrar IANA ID: 146Registrar Abuse Contact Email: [email protected] Abuse Contact Phone: +1.480-624-2505Domain Status: clientTransferProhibitedDomain Status: clientUpdateProhibitedDomain Status: clientRenewProhibitedDomain Status: clientDeleteProhibitedRegistry Registrant ID: Registrant Name: Andy BoothRegistrant Organization: Booth.comRegistrant Street: 19 MilnholmeRegistrant Street: SmithillsRegistrant City: BoltonRegistrant State/Province: LancashireRegistrant Postal Code: BL1 6TBRegistrant Country: United KingdomRegistrant Phone: +1.3863415880Registrant Phone Ext: Registrant Fax: Registrant Fax Ext: Registrant Email: [email protected] Admin ID:

    1. Matt A. Myers

      Does GOX have a meaning? Global Online eXchange?

  40. jason wright

    So Fred, if rumors were swirling that one of your portfolio companies was in trouble how would you handle it? what would advise the company’s founders to do?

    1. fredwilson

      tell the truth and as soon as you possibly can.i was once in a board meeting when we got news that meant the stock was going to go to near zero. the only choice we could make was to disclose it immediately and that is what we didthe stock went to near zero and the company was ultimately liquidated. my wife and i lost over a hundred million of paper value personallyit was the right thing to do.

      1. Andrew Kennedy

        wow. wow. great comment.

      2. jason wright

        so yes. reputation is worth more than a paper loss.

        1. LE

          Reputation is for sure important.But more important that reputation is not going to jail.

          1. jason wright

            and going to jail erodes reputation.

      3. JamesHRH

        Its a shame that you don’t have compelling personal experiences to back up your stated principles……….

      4. LE

        That must have been a tremendous shock.I can imagine the pain of that moment. And afterwords.The closest thing I ever had to a tremendous shock was in a medical test that was misinterpreted and I though I was going to die. (The next was when my ex wife said she wanted a divorce…no ramp up to that one completely blind sided).The funny thing about any shock though is that your brain thinks it’s the end of the world and reacts in that way even if to others it may seem less than death.

        1. Andrew Kennedy

          wow.

      5. ZekeV

        For a public company board, this is not just good business but also good legal advice. If an insider has material nonpublic information, the board should want to make it material *public* information as soon as it can (without violating deal-related NDAs, public offering quiet periods, etc.).I think private company boards face a harder decision. If an insider has information that, if disclosed, would harm the business, then the board has to weigh duties to private shareholders vs. duties to consumers. I would argue that the company’s and investors’ long-term interests are well-served by a policy of forthrightness and transparency. But not everyone sees it that way, for sure.

  41. JLM

    .Regulation is a funny thing. A pinch is good and a handful is toxic.This is the “spice” analogy. A pinch makes the soup more savory and a handful ruins it.Bitcoin arguably suffers from missing that objective third party regulation — the pinch. As an embryonic business — no harm, no foul. Yet.Many industries form an industry group which standardizes practices and injects just a bit of rulemaking but also creates an industry forum to create a degree of professionalism, air grievances and to create a certain camaraderie.Examples would be the Urban Land Institute, the Building Owners and Managers Association and the Int’l Council of Shopping Centers. These organizations promulgate standard definitions, methodologies and forms. They are very useful.The anonymity of the Internet — perhaps a perfectly desirable thing — may be a real obstacle to such an organization.Until the Swiss banks institutionalized American tax cheating, their anonymity was quite useful. The ability to simply put assets beyond the clutches of American courts and judgments had great utility. The ability to manage tax free transfers of wealth amongst family members was also a great service.JLM.

    1. Antonis Polemitis

      I will be very surprised if the emerging professional wallets/exchanges don’t eventually develop a code of conduct / standards on security, auditing of balances, insurance, etc

      1. ZekeV

        The sooner, the better!

  42. ShanaC

    Run on the bitcoin bank?

  43. Shaun Kruger

    None of this dissuades me from thinking there are opportunities in bitcoin, but it does make me think really hard about trust, transparency, and auditing in the bitcoin projects I am working on.

  44. Perry Ismangil

    By the time the infrastructure of trust, governance with the associated insurance and fraud guarantees, we will be back to same costs structure, I bet…

    1. Antonis Polemitis

      i highly doubt it. Visa and Mastercard have 65%+ EBITDA margins. Those are not margins that one would expect to see in a competitive environment.

      1. Andrew Kennedy

        +1

      2. intosh

        Why are you comparing this to Visa and Mastercard? Visa and Mastercard are lending you money. Is Mt. Gox and other bitcoin exchange lending money and offer the same services as Visa and Mastercard?

        1. Antonis Polemitis

          issuers lend you money, not visa/mastercard. they are the payment network and most comparable to coinbase/bitpay

  45. James Morgan

    Hey Fred … Hopefully – and don’t take this the wrong way – some of the that blood was yours – cos that makes it an even better time to buy, just to complete the quote you mentioned 😉 [full disclosure: some of the blood was mine and I’m buying too]

  46. Ted Duchampe

    At what point will you admit defeat on Bitcoin? What exactly will it take to concede that the ol’ jigsay is upsay? How much bitcoin fraud and how many millions of $ lost will it take? Is the strategy just “hope” at this point, is there a line somewhere?

  47. JamesHRH

    Tough week so far @fredwilson – Mt Gox, Ray Felton……what NY Jet is in trouble right this very minute?

  48. RasorialGymnast

    Gox is done for. Anyone still expecting they’re coins is delusional. ALSO if you still had coins there and were around for bitcoin for the last 2 years, your a complete idiot. http://goo.gl/XS5RtT

  49. tony b

    What if you’re not a libertarian nut . . .is there any advantage to using Bitcoin in that case? It seems like a very convoluted Rube Goldberg system compared to paper money.

  50. Kand Remand

    Left Mt Gox for Coinbase about three months ago, am glad I did.Anon-Works dot COm

  51. D_Merkel

    Currencies & trade cannot exist in a vacuum apart from legal systems, because fraud is a crime. Contracts need enforcement mechanisms.Bitcoin is just another form of fiat money, but with no government to adjudicate disputes and theft. Gold would be better, but even it can be debased. Tungsten, anyone?

  52. ilan peer

    ‘Blood on the street’ always sounds so brutal and harsh. How can people think of money when there’s blood on the street?

  53. pointsnfigures

    I am late to this party. Was moving apartments yesterday, and had no internet. I have been watching Bitcoin avidly, blogging about it, and talking to people about it. Prior to investing in startups, I was a futures trader for 25 years, and was on the board of $CME-taking it from an open outcry exchange to electronic (and a mutual to a publicly traded one) I own 0 Bitcoin currently.There isn’t one exchange trading Bitcoin that I trust. They have zero clue about their responsibility to the marketplace, or how to run a market. All they care about is transaction volume, and that is the wrong way to think about running a Bitcoin exchange.Matching up trades is the easiest part of running a marketplace. The hard stuff is the operations on the back end. Pays and collects, getting money here and there. Having a trade register and making sure every penny gets into the right account at the right time. Futures exchanges do it twice a day-stock exchanges take minimum of three days to do it. (different regulations and platforms). Compliance, having transparent rules of trading, and punishing the people that violate them is also a big part of it. Traditional exchanges speak softly and carry big sticks.There are a few certainties I know of. First, it generally takes 30 years for highly disruptive innovation to begin to be maximized in society. Economists have charted this over time. The printing press needed people to catch up and learn to read. Steam engines needed track to be laid, and manufacturing to catch up. Etc etc etc. We are at the beginning of the game for Bitcoin. Hard to know if it’s something yet or not.For us to find out though, volatility has to be tamed. There is one guaranteed way to do it, and that is with a futures contract that allows holders of Bitcoin to hedge their risk. Merchants cannot hedge now either. That crimps commerce, because the true cost of Bitcoin is significantly higher than cash because of the slippage between the Bid/Ask, the volatility, and risk of holding it.In order to have a successful futures contract, there needs to be a clearinghouse. The clearinghouse steps in between the two counterparties, and assumes all the risk of the transaction. For providing this service, the clearinghouse charges a fee, and asks each side to post margin. Margin changes based on the underlying volatility of the contract, and concentration of positions. In the case of Bitcoin, margin would probably be implied based on relationships to major fiat currencies.That means fees. It means there is no free lunch and I am not certain what that landscape looks like. Will the community trade fees for service? Or, do they want everything for free?I think there is a lot of potential for Bitcoin. That being said, “market failures” like this will make adoption hard. Losing $375M isn’t pretty.I can quote you chapter and verse on different commodity frauds and other types of financial frauds over time. Bernie Madoff, Gov/Sen Jon Corzine, Enron, Onions in the late 1950’s. Financial fraud has been with us since finance was invented. We can tick them off together…My friends that are relatively high up in the finance industry are unconvinced that Bitcoin is real. Tulip bulbs, fraud, etc. The situation with Mt. Gox isn’t helping to change their opinion. I don’t know what would change their opinion, but if there was real money to be made on the straight and narrow, they’d jump in. While I remain sort of skeptical-I have come around to the idea that there are huge advantages with Bitcoin that could make international commerce flow easier.The futures industry in the US was started in 1848. It had a pretty nefarious reputation until the early 1960s when it set up the National Futures Association (NFA). The NFA is a private regulator of the entire futures industry to make sure things are on the up and up. There is also a government regulator (CFTC) which is similar to the SEC. Japan had futures contracts for Rice in the 11th century. Futures contracts exist because they are needed, and they work.Obviously, Bitcoin is affected by the same things every new product is affected by the same marketing cycle every product has. It’s early in the game. But, if there are more and more Mt. Gox’s, it will be hard to get people off the on deck circle and into the game.

  54. Matthew DeBord

    I’d find your blood-in-the-streets conclusion innocuous if it weren’t for a USV portfolio company having something to do with trapping my BTC/USD in Mt. Gox. Dwolla was how I transferred funds in and out and when that conduit was closed by regulators, I left my $$$ parked. An admittedly tiny amount of $$$ on a relative basis, but it seems that given your enthusiasm for BTC, you and your partners could have done a better job in retrospect of vetting this risk to Dwolla users who also sought BTC stakes.I was rather lazy about not liberating my BTC sooner, but still. Maybe I’m missing something here. I’m on Coinbase as well, but that’s a less direct way to obtain/trade BTC.Honestly, I’m starting to become rather disturbed by the attitudes of major-league VCs toward BTC during this period when some of the early true believers (I don’t count myself as one) and clearly getting hosed.

  55. Patrick Nguyen

    Does no one see the glaring problem of bitcoin as a currency? It is not durable/indestructible. Finite number of bitcoins to ever exist is set at 21 million (by design). If someone loses their wallet or private keys, the bitcoins become forever dormant because the private keys can never be recreated (by design). Even if bitcoins are divided into a fractional value, mathematically speaking, eventually, there will be 0 active bitcoins:21M * 1M (dividing bitcoin into fractional pieces) – dormant bitcoins (lost private keys) = 0 active bitcoins over time.This becomes a simple game that I call #bitcoinHungerGames. Hype up bitcoins to increase demand and market capitalization. Destroy other people’s private keys to decrease supply. Eventually, you will be the last one standing and your bitcoins are worth all of the market capitalization. If you think that this will never happen, consider the 850k bitcoins lost by Mt. Gox is about 4% of the 21M bitcoins to ever exist.Think about it. @tnguyen1213