Mt. Gox Shuts Down: Collapse Should Come As No Surprise 232
New submitter Dan541 writes in with word that Mt. Gox has halted all operations indefinitely. A statement from the CEO: "As there is a lot of speculation regarding MtGox and its future, I would like to use this opportunity to reassure everyone that I am still in Japan, and working very hard with the support of different parties to find a solution to our recent issues. ... In light of recent news reports and the potential repercussions on MtGox's operations and the market, a decision was taken to close all transactions for the time being in order to protect the site and our users. We will be closely monitoring the situation and will react accordingly."
MrBingoBoingo writes that we should not be surprised Mt. Gox appears to have failed "The recent closure of the famous Bitcoin exchange Mt. Gox has grabbed a lot of media attention lately, but people involved heavily in bitcoin have been raising alarms about business practices at Mt. Gox for quite some time now. With the Mt. Gox failure being Bitcoin's biggest since the collapse of the ponzi run by Trendon Shavers, also known as Pirateat40, it might be time to revisit the idea of counterparty risk in the world of irreversible cryptocurrency."
Risk? (Score:5, Insightful)
Risk? In a commodity that has regular 2x and 0.5x value swings in a single day? Say it isn't so!
Re:Is MtGox Bitcoin? (Score:5, Insightful)
MtGox is a large part of the Bitcoin "brand."
Much of the value attributed to Bitcoin comes from the perception that it can be traded, easily, for traditional currency, and how do you do that? Well, the main place to do it is (was) MtGox.
If you hold a stock that trades on the NYSE, part of its value is that NYSE market. When stocks fall off the major exchanges onto "the pink sheets," they almost invariably lose value just from the de-listing.
The MtGox failure is worse, it's like a bank failure - your coins are in there, but can you get them out now?
Regardless of history, it is true that Bitcoin is "just another cryptocurrency" and MtGox is "just another exchange" but, they are both significant brands in their space, and perception of them will weigh heavily on all similar cryptocurrencies and exchanges, regardless of "reality."
Re:Can someone explain this theft? (Score:4, Insightful)
Re:Is MtGox Bitcoin? (Score:2, Insightful)
No it wasn't and hasn't been for a long time
Re:Can someone explain this theft? (Score:5, Insightful)
I don't understand Bitcoins in general, but I *really* don't understand the process where they could be stolen. Could someone please explain it? Car analogies OK.
A car analogy? Sure. You're a classic car collector. Because storing and securing your classic cars is such a pain, you decide to entrust them to a business that is fairly well known and respected in the hobby. This business, for a modest fee, says they will keep your classic cars in a secure garage, and also let you sell them to other collectors who are customers of the same service without having to physically move them.
For a while all this works OK. People deposit their cars for safekeeping, they withdraw their cars, they trade them, everything is fine. A few mix-ups and glitches, but nothing out of the ordinary for a business of this size. Then at some point there's a "security problem" that keeps people from taking their cars back. The business says it's because of some kind of flaw in the software they use to track them, but they're working on getting it fixed. They give a date. The date comes and goes, and people still can't get their cars back. The CEO of the company gives excuses – he can't talk about what actually happened, but he promises everything will be OK if the collectors just give him a bit more time. There are complicated issues, but no, your cars haven't been stolen, pinky swear!
Eventually a hobbyist organization that this CEO is a member of decides to kick him out, and puts out an announcement saying that his company is insolvent – as everyone suspected for some time now, he doesn't have the cars he was supposed to be keeping in safe storage for his customers. No one knows where they went, who has them now, or if the theft was internal or external.
And because this company was holding ~6% of all the classic cars in existence, it's kind of a big deal.
Bitcoin is Nuts. (Score:5, Insightful)
To play Bitcoin, you have to trust your Bitcoin exchanges. Those are BANKS, people. UNREGULATED banks!!! Banks have a history of really screwing depositors over when they're unregulated. Bank panics?? Why we have the FDIC?? Think about this for half a fucking second.
How do you know where "your" Bitcoins are right now?
One of the benefits of money is that it's backed up by a social superstructure (police, judiciary, the army, etc.). Bitcoin has none of that. You are on your own.
Re:Can someone explain this theft? (Score:5, Insightful)
Re:Cryptocurrency (Score:2, Insightful)
It would have been fine if they'd kept it in their mattresses, but instead they gave it all to a guy who used to manage Magic The Gathering card swaps.
No, they didn't. They gave it all to a guy who bought the business of a Magic The Gathering card swaps side from its original programmers and organizers, extending the site as an afterthought for Bitcoins worth cents at the time.
It was easier to replace lost Bitcoins than cards in stock. MtGox committed the ultimate fault for any business plan: the one thing they had no contingency plan for was success. They had no clue how to patch up the holes in their inventory (or probably even how to take inventory) when the holes became expensive because Bitcoins took off.
Re:Can someone explain this theft? (Score:2, Insightful)
Exactly, and before FDIC insurance there were massive upheavals of the monetary system (i.e. people lost their life savings) due to bank runs.
FDIC insurance is backed by the government's power to borrow money, and more importantly to print money. This means that the FDIC can never be insolvent.
There is no equivalent for bitcoin, and there can never be, because no one can print bitcoins. That means that the best an insurer can do is cause you to worry about an insurance collapse instead of a banking collapse. (We got a taste of this in the real world with AIG, and it wasn't pretty.)
Re:Is MtGox Bitcoin? (Score:5, Insightful)
Always think of an online wallet as asking some stranger to hold your money and promise to give it back. We're used to this idea because traditional banks are federally regulated and insured, but without those protections it's a terribly foolish practice. The only reason to let someone else hold your money would be if they could do so more securely and with a reasonable guarantee. Online wallets/exchanges can provide neither.
Re:Risk? (Score:5, Insightful)
You are right to be sarcastic but you are dead wrong in conflating volatility risk with counterparty risk. The two are actually completely orthogonal -- you can have very little risk of volatility but high counterparty risk, or high/low (and high/high low/low for that matter).
The key is to distinguish from the risk inherent in the fulfillment of the contract and the risk that the contract will not be carried out.