A blessing in disguise for Bitcoin?

Major bitcoin exchange Mt Gox’s current -- perhaps terminal -- ailment has put the virtual currency under pressure, but does it spell doom for Bitcoin or is this the start of something beautiful?

Just where Bitcoin fits into the global currency markets has been subject to much conjecture and the collapse of Mt Gox is the latest bit of bad news to send the crypto-currency’s value into a tailspin.

That’s not exactly a new feeling for Bitcoin believers because oscillating wildly is what Bitcoin does best; and the main reason for that is that we still haven’t figured out how to define bitcoin’s purpose.

On one hand, Bitcoin is gaining momentum as virtual cash but it also retains all the allure as a means of investment. So is it cash or is it gold? Surely it can’t be both.

Cracking this code is crucial to Bitcoin’s future and far from being a death knell for the crypto-currency Mt Gox’s travails could be the catalyst to securing its future.

Regulators bay for blood

The Mt Gox fiasco has galvanised the regulators but the knives have been out for a while.

Earlier this year, New York's financial regulator revealed new details on how the state intends to get virtual currencies to play by the rules -- an endeavour designed to weed out the volatility associated with crypto-currencies and the operators that have gleefully utilised the relative anonymity that Bitcoin provides.

Normally, any talk of regulatory oversight sends Bitcoin prices tumbling -- but that’s not quite the case this time around.

After dropping more than $100 as Mt Gox’s problems came to the fore, the crypto-currency is actually starting to rebound.

There’s that volatility again -- but the good news is that the growing pains and the repeated boom and bust cycles can be mitigated, provided regulators understand the decentralised peer-to-peer nature of the virtual currency.

The big risk is that an overarching emphasis on money laundering and criminal activity could be counterproductive.

As Ariel Deschapell points out in this spirited post on Coindesk, regulators need to be aware of their limitations when it comes to enforcement. Pushing bitcoin further into the dark web doesn’t help anyone.

Virtual currencies are here to stay

But rather than rail against the heavy hand of regulation, Bitcoin enthusiasts are clamouring for more regulatory oversight. Why? Because crypto-currencies are more mainstream than we would like to imagine and the demise of an online exchange just isn’t going to make or break bitcoin. It might have done a couple of years ago, but not anymore.

Not when more merchants are signing up to accept bitcoin payments and the veneer of subversion cherished by libertarian geeks is giving way to more start-ups and companies looking to implement virtual currencies into their business models.

Bitcoin’s proponents say that a lot of these developments are happening under the purview of seasoned venture capitalists and financial experts.

University of Western Australia's David Glance says that the demise of Mt Gox is a necessary step in removing the so-called amateur operators out of the game and strong regulation might actually be the driver for more conventional financial businesses to jump into the crypto-currency market.

“There’s no way in the world crypto-currencies are going away,” Glance says.

The current regulatory regime might only just be waking up to the implications of virtual currencies, but it’s a necessary step in giving mainstream users the security they crave.