Insuring the Bitcoin loss with another digital currency

BY Simone Pathe  March 5, 2014 at 4:48 PM EDT

When the Japanese Bitcoin exchange Mt. Gox fell last month, it took Bitcoin holders’ money with it. Japan, like the United States, does not recognize Bitcoin as a currency, so there’s little straightforward recourse for people who lost their coins in the $460 million hack attack.

So what happens to the value of all those lost Bitcoins? Enter Goxcoin — a new digital currency that would insure the assets trapped in Mt. Gox. According to Wired, speculators can buy the rights to those lost Bitcoin assets — in Goxcoin. If it’s looking like those assets will never be recovered from the hacked exchange, speculators can sell those assets (again, in Goxcoin). But, if you do think those assets will be recovered one day, you can buy more Goxcoin.

Goxoin would be a minted digital currency, a “strange hyper-speculative bitcoin derivative,” as Wired describes it, that would be backed by claims to those trapped Bitcoins. The value of the coins is to be determined, but theoretically, one Goxcoin would represent one Bitcoin lost in Mt. Gox.

The idea’s not going anywhere without the approval of Mt. Gox CEO Mark Karpeles — and that’s a longshot. However, issuing Goxcoin would provide a strong incentive to track down the missing 850,000 Gox Bitcoins — whose discovery would drive up the price of Goxcoin — were it to be created.

As PBS NewsHour explored with Forbes’ Kashmir Hill, there’s little precedent for recovering a loss of digital currency that’s not actually regulated as currency.

Goxcoin’s supporters describe the predicament on their website:

As far as the Japanese legal system is concerned, bitcoins might as well be pencils, and Mt.Gox might as well be a pencil factory. If nobody insures pencils, and there is no claim process to recover pencils, the pencil value is reckoned into a dollar amount, which is then discounted and paid out as the recovery of missing or stolen funds, over a number of years.

…For people with bitcoins in the system this is a terrible outcome. Your should-be-deflationary bitcoin value has become anchored to a fiat price that reflects insolvency.

Until Tuesday, people whose Bitcoins were stolen in the Mt. Gox hacking could still just trade their lost Gox Bitcoins for “real” Bitcoins (albeit, less of them) on a site like Bitcoinbuilder.com. But as of this post’s publishing, an announcement on their site says they won’t be accepting Gox Bitcoin trades since Mt. Gox filed for bankruptcy protection.

To learn more about the rise of Bitcoin, watch our Making Sense segment below, and read about how gamblers wager billions on unregulated Bitcoin sites.