
Mt. Gox and the Mother of All Short Squeezes - worldvoyageur
http://ftalphaville.ft.com/2016/05/20/2162507/mt-gox-and-the-mother-of-all-short-squeezes/
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chollida1
> There was, however, one problem with such a plan. Any market where you
> yourself are the chief liquidity provider and in which flows remain pretty
> one-sided is also a market where you end up taking on the risk, regardless
> of whether or not you’re front-running your customers, benefiting from
> privileged information or setting withdrawal limits — this is largely
> because you’re dealing with paper profit creation. In some cases, a self-
> fulfilling feedback loop might even occur in which no matter how much
> bitcoin you pre-buy to sell to your customers at a premium, the underlying
> capital needed to acquire the bitcoin becomes proportionally ever larger in
> ratio terms. So you end up short-squeezing yourself to ruin.

So they speculate that he started with a bitcoin shortfall and attempted to
buy bitcoins on his own exchange to buy his way out of the shortfall, but in
doing so exacerbated the problem by increasing the price of bitcoin because
mt. gox was really the only buyer of any size on teh exchange?

I can't think of another market where this has occurred. Can anyone else come
up with a similar scenario that's played out like this in the past?

Worth reading the referenced article as well:

[http://www.thedailybeast.com/articles/2016/05/19/behind-
the-...](http://www.thedailybeast.com/articles/2016/05/19/behind-the-biggest-
bitcoin-heist-in-history-inside-the-implosion-of-mt-gox.html)

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elevensies
I as also trying to understand this. I think what they're saying is that MtGox
had more demand for bitcons than supply -- and the whole market did generally.
When demand increases faster than supply, the price must rise. So by losing
80kBTC, they were in the same situation as if they had shorted 80kBTC. They
benefit from the price going down, and suffer from the price going up.

And moreover, to act as a liquidity provider when the market movement isn't
random, but instead most people are buying BTC which is going up, is also a
money losing position -- MtGox is the only seller of BTC which keeps rising. I
think this implies they were buying BTC off-exchange.

But since MtGox users are buying more than selling, MtGox doesn't have to
convert their cash back into BTC -- MtGox's losses are occurring in BTC and
are essentially invisible, but when they lose money in BTC, they are
effectively increasing their short position.

I'm not fully seeing how the feedback loop would operate, I think you'd need
to factor in MtGox's total capital, their short postion, and the market size
... I can see how their position gets worse and worse.

I can't think of any historical precedent though. The final result is kind of
like the Salad Oil Swindle, but the path taken is different.

edit: maybe a bucket shop in bull market would be a similar mechanism.

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yoklov
Is there a way to read this article without signing up for something?

~~~
hiccup
click the web link above

