Bitcoin exchange Mt. Gox has gone down — but could there be an upside for the cryptocurrency?

On Monday night Mt. Gox shut down its website and is no longer operating; a brief note on the homepage is all that currently remains. This follows the deletion of all messages on its Twitter account. The exchange appears to be making its best attempt to simply disappear. CEO Mark Karpeles reportedly sent an email to Reuters noting, "We are currently at a turning point for the business. I can't tell much more for now as this also involves other parties."

A turning point indeed.

Mind you, much of the information surrounding the events as they have been unfolding is emanating from anonymous or unusual sources. Earlier this month Mt. Gox suspended withdrawals and there was increasing speculation that what was once the largest bitcoin exchange was having severe operational problems. But Mt. Gox was not communicating these fundamental events with even a modicum of transparency.

(For more on the basics of bitcoin, check out Yahoo Finance tech reporter Aaron Pressman’s primer.)

On Tuesday there are unverified reports that the approximately 750,000 bitcoins held in Mt. Gox accounts has been stolen. At the current $500 price per bitcoin, that comes to a total of $375 million.

The spread

In recent weeks, the spread between the average bitcoin price on all other exchanges and the bitcoin price on the Mt Gox exchange had been widening, reflecting a decreasing level of confidence that money in Mt. Gox bitcoin accounts would ever be available for withdrawal.

At the time of the last price quote on the Mt. Gox exchange Monday, bitcoin was shown at $135. This compares to an average price of $550 on all the other exchanges around the same time.

This means traders attempting to make a market on Mt. Gox were pricing in an approximately 75% chance that the Mt. Gox bitcoin were worth zero. So, although there had been no official announcement or press release, the news was seeping out and significantly affecting price behavior.

More broadly, the Mt. Gox trainwreck has acted, increasingly, as an overhang on the value of bitcoin as well as its progress as a technology and a potential currency. Who can take it seriously as a vehicle of value transfer or storage while one of the largest and oldest exchanges was on lockdown and such a huge spread existed?

The sooner this debacle was resolved, no matter how bad, the better for the technology and the price.

Bitcoin still trading 10 times higher than a year ago

While we all marvel at the precipitous decline in the average price of bitcoin across exchanges over the past few months, from a high above $1,100 to the recent price just above $500, it's important to note that, over the past 12 months, it has still increased in value by ten fold. So, while it appears there might be a crisis of confidence, the market is still affording bitcoin 10 times more value than it did in February of 2013.

Sure, it has been one heck of a bumpy ride, but perhaps this just represents the extreme birthing pains of a completely new type of currency.

Prominent evangelists step up

Prominent bitcoin proponents have been out Tuesday expressing support for the viability of the currency, especially as a technology and protocol.

Tuesday morning, Andreessen and Horowitz's Marc Andreessen was quoted on CNBC's Squawk Box:

"Mt Gox has been obviously broken and possibly outright crooked for months. As seen in trading spreads. This is like MF Global. Not some huge breakdown of the underlying technology or other exchanges. Bitcoin protocol is unchanged and other bitcoin exchanges and companies are doing fine."

A bit later in the morning, Fred Wilson, of Union Square Ventures, wrote on his blog:

But the wonderful thing about a globally distributed financial network is that if one of the nodes goes down, it doesn’t take the system down. Bitcoin’s architecture is similar to the Internet’s architecture. There is no centralized control point. No single point of failure.

Both of these venture capitalists have made investments in this space and so they have skin in the game. Still, their vote of confidence is critical to restoring more-constructive actions after this Mt. Gox event.

Discounting the negative

Sometimes in equity markets, impending negative news events push a stock price lower as the news becomes increasingly widely anticipated.

Then, when the bad news is finally officially released, the stock experiences one last whoosh lower, completing a bottoming process. The longer the period between when the negative expectations begin rising and the official release of the information, the more the bleeding.

So, even before the news is released, there are fewer and fewer sellers as the event approaches.

In some respects, we’ve been seeing a similar phenomenon occurring with bitcoin. The increasing spread between the Mt. Gox exchange and the average price of all the other exchanges represents the increasing expectation of the Mt. Gox event that is finally happening right now.

Perhaps this last flush from $600 to $420 over the past 24 hours (before recovering to above $500 this morning) was that final whoosh.

Wilson adds later in his blog post,

I bought a little bitcoin today. Not much. But I always feel good buying when there is blood in the streets in any market. It is my favorite time to buy.