(I’m assuming the rumors of Mtgox’s demise are not exaggerated, though it’s too early to tell).

It can currently be expected that whoever had money stored in Mtgox, will not see it again.

I am truly sorry for all those who have lost their money this way, certainly if this is a significant amount or even the entirety of their bitcoins.

But I also believe that people should take responsibility for their decisions and not expect too much sympathy if they make mistakes that cause them harm. I, too, have done nonsensical things which cost me a lot of money, and I try not to blame for them anything or anyone but myself.

Holding a significant amount of bitcoins on Mtgox was a mistake. Not just any mistake, but an antithesis to a core idea of Bitcoin. Bitcoin is about being decentralized and not having to trust anyone else to use. So what is the point with trusting all of your money with someone else?

There is a simple rule for trust – weigh what the other side has to gain from embezzlement, and what he has to lose. Anyone holding quantities of money for many people has a very strong incentive to get up and run, even if he has a successful business. 4 years in the market is really not enough time to build a reputation and trust that will justify deposits in the amounts Mtgox had.

And it’s not like Mtgox had a clear track record in these years. They’ve had lots of hacks and a variety of problems, and for almost a year it’s been nearly impossible to withdraw USD and there have been talks about insolvency.

Perhaps in a few years there will be a service reliable enough for the simple individual to trust with their money (preferably with a multisig arrangement or suchlike). But for now we are all early adopters and we should make the effort to learn how to store our bitcoins securely. It’s not trivial but not rocket science, and there are guides such as my previous post about paper wallets. Even with some basic methods you can reach a high level of surety. We hear all the time about people losing money they trusted with someone else, but despite all the talk of hackers we rarely hear of people whose own wallets were hacked. One can also divide his funds between different places (one of which could have been Mtgox) so that if anything happens one would not remain with nothing.

Back to the subject at hand. There are two problems with holding bitcoins on Mtgox. One is that an Mtgox wallet is not really designed for everyday use, so whoever has his money there is in fact stating that he has no interest in using Bitcoin but sees it purely as a speculative investment. This is not a problem in itself – it is legitimate to believe in Bitcoin and to want to profit from this belief. But part of this belief should be a belief in using Bitcoin in the way it was designed. And putting all of your bitcoins with someone without sufficient reputation and without layers of cryptographic or regulatory protection is not the way Bitcoin was meant to be used. So in essence, whoever has put his money with Mtgox is looking to profit from a belief but is not really acting on this belief. (Either that, or he doesn’t really believe in Bitcoin and simply wants to ride a trend, which is worse.)

For a long time people proficient with Bitcoin have been recommending not to hold funds in shared wallets such as Mtgox. I point that out not for gloating or a childish “told you so”, but simply to clarify that this is not hindsight, putting money in Mtgox is problematic and one could have known it was problematic. This must be taken in consideration to understand that the problem is not with Bitcoin, and to learn from it how to be more careful in the future.

I should clarify that exchanges are necessary, but this is what they are, exchanges. People who want to invest in Bitcoin, should buy and get them out of the exchange. People who want to day trade, should weight the profits of trading against the risks of holding money there.

The summary of the Mtgox issue is that (probably) an exchange that has been struggling for a long time is shutting down, and people who acted against the spirit of Bitcoin lost from it. The implications for Bitcoin are not major, beyond a self-fulfilling prophecy – people think this has implications for Bitcoin, and that itself harms Bitcoin.

I hope we all learn something from this story, and that despite the pain we will not stop believing in Bitcoin. It is not the currency which has failed us, it is us who have failed the currency.