Submitted by Mike Krieger of Liberty Blitzkrieg blog,

I was going to start this article by stating: “Mt. Gox needs to get its shit together.”

But its too late for that. Much too late.

Mt.Gox has been the dominant Bitcoin exchange pretty much since the beginning. In its brief history, it has suffered several bad setbacks, with the one last spring an incident I am intimately familiar with. There were plenty of reasons to give them a pass in the past, and many of us did. It was early. It was a complete and total Wild West and all of us interested were learning this thing together. There were bound to be some major growing pains. Gox made some changes, came back up and a great deal was forgiven. Not this time.

Bitcoin is no longer in Phase 1 of its evolutionary cycle. I believe Phase 2 for Bitcoin began in earnest back in November 2013, when the Senate Committee on Homeland Security and Governmental Affairs held its first hearings on the topic. Those hearings made it clear that, at least for the moment, no significant roadblocks would be put in place to prevent people from transacting with one another using the crypto-currency. Phase 2 also saw the largest Bitcoin investment to-date, a $25 million infusion led by Silicon Valley VC firm Andreessen Horowitz, as well as acceptance by major U.S. retailers, with Overstock being the most significant. Bitcoin is becoming serious, and serious means serious accountability.

As a free market currency, the market will decide the products required to keep the Bitcoin protocol open and functioning to its highest potential. The disruption of Mt. Gox will be another test for Bitcoin. A test which certainly represents a psychological challenge, but probably not much more than that. Bitcoin will survive and come out of this stronger than it was before, just as it has done so many times in the past. However, I do not believe Mt. Gox will be so fortunate.

Mt. Gox is likely to continue to lose customers on its way to ultimately becoming marginalized as an exchange. In fact, Bitstamp is already trading more volume than Mt. Gox and I’d expect this lead to grow going forward. It also provides opportunities for more market players, although the various government rules and regulations out there have definitely stalled such growth, particularly in the U.S., which is not host to any exchange of significance.

Personally, I do not see how anyone is going to feel comfortable trading or holding sizable BTC balances on Mt. Gox after this fiasco. After all, being able to move your bitcoins from one place to another is the most fundamentally important part of the protocol. If people begin to question the ability to do this, they may start to question the usefulness of Bitcoin itself, which is not something any of us want to see.

That said, Mt. Gox’s decline is nothing new, as it had already begun following the serious issues early last year. Coindesk reports that:

For example, on 16 April, the number of bitcoins traded on Mt. Gox alone equaled 572,186 BTC (90% of the total of the three exchanges). In contrast, on 18 December there was a roughly equal dispersion across BTC China, Mt. Gox and Bitstamp, with a volume of 93,934, 109,723, and 137,070 BTC respectively.

Now here’s a really powerful graph showing the volume traded on the top three exchanges that demonstrates what I am talking about:

Graph courtesy of Coindesk.

As you can see, Mt. Gox has already been in decline, and I expect that to accelerate going forward. In fact, the price on Mt. Gox usually trades at a significant premium to Bitstamp, but is right at this moment trading at a $40 discount. This is not good.

Graph courtesy of Coindesk.

What I really want to see is Mt. Gox resolve this issue as soon as possible so that the Bitcoins tied down with them are released and can be freely moved around by their owners. If this happens soon, Bitcoin will rapidly emerge from this difficult moment much stronger and hopefully with some more important lessons learned.