The implosion of Mt. Gox exposes a paradox about bitcoin, which I have been groping for in some writings. Assume that the bitcoin software works perfectly (though there is some question about this) or can be made to work perfectly (as advocates argue). Bitcoin still has a problem with the “joints”–the gap between the network itself and the ordinary (non-expert) users without which it could never be more than a marginal phenomenon. Ordinary people will need to rely on institutions–exchanges like Mt. Gox and other services–and they will not rely on them unless they can trust them. But, unlike bitcoin itself, these institutions are run by human beings who can make mistakes or engage in fraud. Hence the need for regulation. Thus, bitcoin will prosper only if it is integrated into the regulatory infrastructure, but that means that it cannot operate as a decentralized currency outside of government control. Yet it is that feature that makes bitcoin so attractive to its most ardent supporters. I expect that legitimate investors and merchants who may benefit from it will push the government to normalize bitcoin by regulating the intermediary bitcoin institutions, at which point it will no longer be an autonomous currency but just a useful piece of software.

N.B.: journalists reflexively describe bitcoin as a means of transferring value without using an intermediary, but for ordinary consumers that is the case only in the sense that it is true for currency as well. You could put a bunch of dollars into a wheelbarrow and wheel them to the store. Banks exist because this is impractical, and in the same way bitcoin intermediaries like Mt. Gox exist because it is impractical for most people to wheel around bitcoins on their own.