CITI: Bitcoin Now Faces 3 Risks

The demise of Bitcoin-exchange MtGox appears to be upon us: They've halted all trading operations, and have been subpoenaed by both U.S. and Japanese authorities.

Hardcore Bitcoin supporters say they're relieved, as they're ready to put the months-long saga of Gox's issues behind them.

But to the outside world, the fall of what was once the largest Bitcoin exchange in the world is carrying a lot more weight. In a new note, Citi currency strategist - and the bank's defacto Bitcoin analyst - Steven Englander basically asks: What's the point of Bitcoin now?

Many of his comments echo our take in the week leading up to Gox's shutdown about how huge a setback this was not only for mainstream Bitcoin adoption, but also for the central tenets that got Bitcoin off the ground in the first place.

Englander first argues that Bitcoin may now be too decentralized. That, of course, strikes at the promise of Bitcoin as a democratic, unregulated technology.

But for Englander, the technical glitch that hit not only Gox but other exchanges "seems to have been known for years without the Bitcoin developers instituting a complete fix," he writes. "So one question is whether the decentralized structure, which is the attraction to many, makes it too cumbersome to enact essential fixes."

Plus, as we wrote, the hacks also belie the notion that Bitcoin was immune to security issues.

"Bitcoin transactions [were] thought to be impregnable and turned out not to be," said Englander. "Earlier security questions had centered around everything except the possibility that there might be a fraudulent transactions record. The imperviousness to fraud was one the big attractions of Bitcoin and the surprise exploitation of a known defect is a setback. Now it looks like just another payments system that has to worry about fraud."

So this leaves three risks to Bitcoin, which we'll summarize:

• That Joe Public runs away out of fear the safety of his money can't be guaranteed
• That other, better digital currencies come along, relegating Bitcoin to the sidelines
• That big banks themselves co-opt the still-relevant technological developments embedded in Bitcoin and junk all the bad parts

There is no sign yet that that bullet final is imminent. But we are aware that certain banks have shown outsized interest.

He concludes: "Bitcoin's market cap on paper by far exceeds that of the competition and that are many Bitcoin holders heavily invested in Bitcoin, so it has a first mover advantage. However as a store of value, its only value is reputational, and recent developments have shaken that reputation."

Bitcoin prices were at $557 as of 10 a.m. according to Coindesk.