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Although Bitcoin is decentralized from a technology perspective, time has shown that the cryptocurrency is susceptible to the same types of market fluctuations that would affect any commodity. The creation of Bitcoin—and the act of moving and transferring it—are highly distributed processes, yet there are a few lynchpins that look much like a central authority.
On Feb. 7, Mt. Gox, a Bitcoin exchange site, publicly reported that it was having delays on its system for Bitcoin (BTC) withdrawals.
“In our efforts to resolve the issue being encountered by various Bitcoin withdrawals, it was determined that the increase in the flow of withdrawal requests has hindered our efforts on a technical level,” Mt. Gox stated. “To understand the issue thoroughly, the system needs to be in a static state. In order for our team to resolve the withdrawal issue, it is necessary for a temporarily pause on all withdrawal requests to obtain a clear technical view of the current processes.”
In a fully decentralized system, one would think that a technical glitch on a single node would not have a significant impact on an entire distributed cryptocurrency. Yet that is precisely what happened.
During the Mt. Gox shutdown, the value of Bitcoin as measured in U.S. dollars declined precipitously. Bitcoin’s value dropped to just over $650 per BTC after averaging approximately $850 per BTC prior to the Mt. Gox glitch. As of 4 p.m. Eastern Standard Time on Friday, Feb. 7, some of that value had been restored, with Bitcoin trading at an average of $732 U.S.
This isn’t the first time in recent months that Bitcoin’s value has taken a dive. In mid-December 2013, Bitcoin’s value fell from an average of $1,000 U.S. to about $500 after BTC China, which is a large Chinese Bitcoin trading exchange, announced that it was no longer able to accept Chinese currency to trade for BTC.
The fundamental risk here is liquidity.
A fully decentralized system should have liquidity that is a function of its distribution. Yet what we see here with Bitcoin are the same types of challenges facing any type of equity or currency. For various reasons, Mt. Gox has emerged as a central trading hub for Bitcoin, so even though the technological mechanisms behind the Bitcoin currency’s creation and transfer are distributed, those who trade Bitcoin have congregated in a central spot.
Value for any commodity declines when there is perceived risk. If there is a single point of failure for liquidity—say a Mt. Gox—that’s a risk and one that should not really exist in a distributed system.
To be fair, there are many trading hubs for Bitcoin, it’s just that Mt. Gox is likely the most popular one. Bitcoin is still a nascent marketplace, too, so it’s perfectly understandable that people would want to fall back on a standard, central point to exchange value.
It will take time for old habits in this new world economy to change.
Sean Michael Kerner is a senior editor at eWEEK and InternetNews.com. Follow him on Twitter @TechJournalist.