From our content partner New America Media:

On February 25, 2014, Mt. Gox, the world's largest Bitcoin exchange, suddenly went offline. The event may not mean much to the layman, but make no mistake, it's a huge blow to the techno-libertarian fantasies of Silicon Valley's elite.

Bitcoin is a digital currency, or "crypto-currency," that exists solely on the Internet. There's a cap on the total number of Bitcoins that can be made, and its value is determined by a series of very complex algorithms.

Bitcoin’s origins are murky. Some speculate it was created in response to the 2008 recession, promising anonymity and escape from regulation, monetary policy and central banking authorities. These promises made it particularly alluring to Silicon Valley libertarians - as well as drug dealers, Ponzi schemers, and other unscrupulous types.

The virtual currency is stored on individual users’ computers and devices or on online repositories, in “digital wallets,” and like cash, can be transferred directly to other users, bypassing banks, brokers and - most importantly to the libertarian crowd - regulators. Users can trade regular currency, like US dollars, for bitcoins on digital exchanges. Each transaction is checked against a public ledger of all bitcoins ever made - or “mined” - to ensure users aren’t trading bitcoins they don’t actually have.

If this sounds complicated, it is. Bitcoin’s machinations are incredibly complex and arcane, even to those in tech and finance circles. And critics have long pointed out critical vulnerabilities: astronomically high volatility, the ability of big holders to game the currency, and a complete lack of recourse for those whose bitcoins are compromised.

Still, Bitcoin evangelists touted it as a revolutionary concept that promised to change ("disrupt") the way we approach money. And until recently, it appeared likely, gaining support from prominent investors and technorati, including Facebook’s famous Winklevoss Twins, despite skeptics’ concerns. Its peak value was once $1,200 per Bitcoin.

Things Fall Apart

But then, over the past several months, cracks started appearing. In October 2013, the FBI seized Silk Road, an online marketplace for drugs, weapons and other contraband that conducted all its transactions with bitcoins, and indicted its owner, Ross Ulbricht, on narcotics trafficking and money laundering charges. They also seized 29,655 bitcoins, worth over $28 million, from Silk Road’s servers. Bitcoin’s promise of anonymity turned out to be an illusion.

Then, in December, the Chinese government banned third parties and financial institutions from dealing in bitcoin. The following month, the Justice Department indicted Charlie Shrem, who founded Bitcoin startup BitInstant, on money laundering charges. After a surge in popularity and increasing mainstream acceptance, these setbacks indicated that Bitcoin’s promise of escaping regulators was little more than a pipe dream.

Finally, on February 25th, 2014, the most high-profile and devastating setback occurred, threatening to possibly sink the digital currency. Mt. Gox, the world’s largest bitcoin exchange, suddenly went offline. There were already indications that something was afoot at Mt. Gox, which earlier this month froze all bitcoin withdrawals. While there are several bitcoin exchanges still operating, Mt. Gox was the largest, holding bitcoin deposits worth over $300 million, money that is - for all intents and purposes - as good as gone.

Adding insult to injury, a prominent bitcoin blogger posted a document, allegedly from Mt. Gox, which posited that the online exchange was insolvent, and suggested strategies to contain the fallout, one of which was blacking out the website.

While the document is unverified, its implications - of gross mismanagement at best, and a flat-out Ponzi scheme at worst - were severe enough for the blogger to sell all his bitcoin holdings and publicly admit that the party may very well be over. Sure enough, Bitcoin was trading at less than $500 as of the time of writing, an almost 60 percent drop from its peak value.

Technology Meets the Real World

This is where the techno-libertarian fantasy falls apart. All the people who had money in Mt. Gox just found out - the very hard way - that the dreaded government regulations they were running away from were put in place for very good reasons. There’s no FDIC insurance for bitcoin deposits.

Already, people on Reddit and Twitter are crying foul, claiming a conspiracy by bitcoin opponents to undermine the currency. The simpler - and more plausible - explanation is that technology doesn’t exist in a vacuum. Mt. Gox’s failure is a perfect example of how such extreme libertarianism crumbles once it encounters the real world.

Silicon Valley has long been criticized as living in a bubble. The tech industry entertains ideas that enchant and spellbind its top brass even as they befuddle outsiders. Venture capitalist Tim Draper announced a plan to split California into six separate states. PayPal founder Peter Thiel wants to create self-sustaining, floating communities, where the tech elite can happily disrupt away in international waters.

Both ideas will fail, for the same reason bitcoin did.

Thiel’s sea colony is particularly reminiscent of BioShock, a best-selling, critically-acclaimed video game about Rapture, an undersea society - founded on similar libertarian principles - that completely and utterly implodes on itself. Fanaticism and authoritarianism soon take over, transforming Rapture into a frightening dystopia that’s all but collapsed by the time the game starts.

It’s a lesson for those in Silicon Valley who wish to innovate successfully. If you want to effect real change, step out of your bubble and innovate with the world, not around it.

New America Media