For a lot of people, bitcoin can be a trip to the midway of a county fair where all sorts of opportunities and prizes await the next sucker, um, investor. Or the virtual currency can be a funhouse where mirrors distort reality and what appears large is really small and vice versa.
Lack of regulation combined with rapid growth and a strong criminal element has created an unfamiliar landscape for most bitcoin investors. Before the FDIC insurance program in 1933, creditors, including savings depositors, were expected to do their own due diligence and determine if any given bank was safe for deposits. An unfounded rumor could easily fuel panic and a run on the bank.
Observing the Mt.Gox bitcoin exchange is the most recent incarnation of those old days.
Mt. Gox was one of the largest bitcoin exchanges until the site became a cyber-theft victim, forcing the company to halt all bitcoin withdrawals. For a few days earlier this month, cash withdrawals potentially offered an enormous payday for bitcoin buyers on its exchange.
A bitcoin on Mt. Gox is trading for about $125 per coin, while the CoinDesk index of several other bitcoin exchanges currently prices a bitcoin near $570.
The $445 price disparity creates a potential arbitrage opportunity, albeit one filled with peril. If Mt.Gox resumes bitcoin withdrawals, a $125 bitcoin investment inside the Mt. Gox exchange should immediately jump in value to $570, the overall market value -- or perhaps more because Mt. Gox resuming business as usual will likely fuel renewed overall confidence in bitcoins.
However, there is another way to view the pricing discrepancy: The difference is the market's odds that Mt. Gox will go out of business, leaving creditors and users twisting in the wind from losses. In other words, the market is pricing about an 80% chance that Mt. Gox will not resume bitcoin withdrawals.
If those odds sound attractive to you, by all means take a chance. I wouldn't touch it.
You may want to skip forward until 1:55 into the video.
In fact, if Mt. Gox was a publically traded stock I would short it. Watch this YouTube video of an exchange between Mt. Gox's CEO Mark Karpales and a creditor who flew from London in an attempt to get his money back. The sound quality is poor, but it provides a sense of the challenges creditors are facing.
Karpales brushes the client off as an annoyance and offers no solutions, maybe because he doesn't have one. If Karpales knows there isn't a likely positive outcome, there isn't much incentive to try to keep customers. The market no longer believes it's a technical issue preventing bitcoin withdrawals, but a financial one.
If Mt. Gox doesn't have the bitcoins available for customers to withdrawal, its only viable option for survival may be to only allow cash withdrawals until enough bitcoins are exchanged for cash that Mt. Gox is able to operate again. Also, the $445 arbitrage opportunity mentioned early is available to one, namely Mt. Gox itself.
Karpales may have tipped his hand when he resigned from the board of the Bitcoin Foundation. Why would he resign if Mt. Gox was about to resume business as usual? On the other hand, why would he continue on the board if he was about to exit the bitcoin business?
These are questions all bitcoin investors, especially ones with money inside of Mt.Gox should be asking right now.
At the time of publication the author had no position in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.