When I started looking into the Bitcoin startup ecosystem in early 2013, there was something that was just off about half of the founders I met.
“I consider myself psychologically unemployable,” BitInstant CEO Charlie Shrem told me in a phone interview last year. He described how he built BitInstant with an autistic Welsh hacker named Gareth Nelson whom he had never met in real-life. The call was full of bizarre clicking noises. Shrem kept getting distracted and he exuded a certain paranoia.
“You can’t trust anyone. Sometimes, you can’t trust your own team,” he told me.
Then when I met Mt. Gox’s team in Tokyo back in November, Mark Karpeles and Gonzague Gay-Bouchery talked to me through their lawyer. Once the world’s leading exchange, they were being challenged by BTC China and Europe’s Bitstamp in volumes and were grappling with lawsuits against CoinLab and a U.S. government seizure of $5 million.
“Even if we say something we believe and it’s the truth or we’re being honest, it could be misinterpreted,” Karpeles told me at the time. “We get our customers’ emails and we are screaming inside.” (He’s pictured at the top left, taking a Reuters interview on top of a bouncy ball.)
Unfortunately, I didn’t get any answers, but Karpeles handed me a stack of Mt. Gox security cards that generated one-time passwords. I passed through their lobby, which they were turning into a Bitcoin-powered cafe for retail experimentation, on my way out into Shibuya’s streets.
Then one by one, they fell.
Last month, Shrem was arrested at New York’s John F. Kennedy airport on money laundering charges. Last night, Mt. Gox’s website disappeared as the company halted trading amid purported losses of 750,000 bitcoins. (That’s six percent of all bitcoins in circulation.) Both Karpeles and Shrem are now out of the Bitcoin Foundation, the nonprofit organization guiding Bitcoin’s standards and adoption worldwide.
While Bitcoin has had a long and volatile history given numerous thefts and scams, Mt. Gox may represent its biggest crisis in confidence to date. For well over a year, Mt. Gox was Bitcoin’s largest and most visible player as the biggest exchange in the world.
Not only is the sheer headline size of the losses enormous at $400 million, the cryptocurrency crossed over into mainstream consciousness last year. In Bitcoin’s more obscure days, a choir of true believers rallied every time a hoax or theft emerged. But a collapse at this scale may irreparably damage the Bitcoin’s image in the eyes of retail investors. Or at least set it back a few years.
As of this morning, the currency’s price seems to have found a floor of around $490 to $540.
The feeling in the local Tokyo entrepreneurial and Bitcoin community was that the Mt. Gox team was well-intentioned, but incompetent to the point of gross negligence. While Mt. Gox hasn’t replied to my requests for comment, I’ve spoken with other Bitcoin entrepreneurs and enthusiasts who have communicated with the company’s leadership in the last few weeks. What is in the leaked deck on Scribd describing a crisis management strategy matches what they were told.
“I couldn’t believe what I was hearing. I thought I was going to black out. You would at least reconcile your books regularly,” said one Bitcoin entrepreneur, who declined to be named because they have collaborated with Mt. Gox before. “You would have had to screw up on so many levels for something like this to have happened.”
So is Mt. Gox the new version of Friendster, the early social networking leader that buckled just before Facebook surged ahead?
Bitcoin’s next generation of founders is cleaner, more pedigreed and suited to Wall Street’s and Capitol Hill’s tastes. They are no less libertarian or wolf-like.
Unlike the Bitcoin’s first generation of entrepreneurs, they are not outsiders. They are the establishment. Circle CEO Jeremy Allaire has taken a company public. His company, along with Coinbase and Bitpay, are backed by the Valley’s most prominent venture firms including Accel, Andreessen Horowitz and Founders Fund. Barry Silbert, a high-profile Bitcoin angel investor who built SecondMarket into a formidable marketplace for shares in privately-held and pre-IPO companies, is preparing his own Bitcoin exchange for launch. Even Mt. Gox’s original creator Jed McCaleb, who sold the site to Karpeles and Gay-Bouchery years ago, is starting what appears to be a new exchange.
U.S.-based regulators, who have been surprisingly favorable toward Bitcoin over the last year, are bound to ask more questions in the coming weeks. We may see companies operating without money transmitter licenses facing more scrutiny. That’s a good thing.
“In the short term, it has an impact on trust and on the counter parties,” said Micky Malka of Ribbit Capital, which is backing Coinbase and BTCJam. “[But] you are seeing the system maturing – where the rookies and the players that were never transparent or had issues with the regulators are being taken out of the system.”
Now that some rot has been cut out of Bitcoin’s core, it’s time for the second wave of founders to step up.
–Jonathan Shieber contributed to this report.
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