The bitcoiners gag on Mt. Gox

The old line about people going broke bit by bit, then all at once, certainly seems to describe the life cycle of Mt. Gox, the bitcoin exchange firm that appears to be on the verge of extinction.

As my colleague Chris O’Brien is reporting, the Tokyo-based firm has replaced its old home page, which used to offer its customers the ability to “trade with confidence,” with a largely blank page bearing the notice that it has decided to “close all transactions for the time being.” The implication is that, if you had assets at Mt. Gox, they may not be there anymore. Things are so bad that it’s not quite clear how much of the bad news about Mt. Gox is real and how much is fake; all that’s known for sure is that there’s a lot of bad news.

We’ve been following this mudslide for some times as it has gathered momentum. But as we’ve observed, the most important issue presented for the bitcoin community is not the failure of Mt. Gox, at one time the largest bitcoin trading firm in the world, but the community’s insistence that its problem is limited to Mt. Gox.

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The bitcoin faithful are still kidding themselves about this. Amazingly, they’re still at it. A joint statement issued Monday by six bitcoin trading firms says the Mt. Gox collapse is “the result of one company’s actions and does not reflect the resilience or value of bitcoin and the digital currency industry.”

Right. The fact is that the Mt. Gox affair is a stark warning, to these firms and their customers, that bitcoins are a playground desperately in need of adult supervision. The bitcoin community’s supposed chief virtue, its lack of centralized governance, has been exposed as its most dangerous shortcoming.

It was always the case that bitcoin, to be effective, had to assume some of the structure and accommodate more of the regulation that its founders and most vociferous backers despised. Without that, the great mass of businesses and individuals wouldn’t risk trading bitcoins. As bitcoins were set up, for example, transactions are irreversible, whether they’re legitimate or fraudulent; who wants to deal in a medium of exchange where there’s no recourse for victims of illicit transactions?

Bitcoin trading doesn’t have to become identical to commercial and central banking, but it has to go part of the way. We’re already seeing that in some of the proposals for legitimized exchanges, such as that of the trading firm SecondMarket. But if big players in the bitcoin business keep insisting that the only problem they have is that Mt. Gox mismanaged its affairs, they’re going to be unpleasantly surprised. The next Mt. Gox is probably lurking around the corner, holding a sock filled with wet sand.