
Former Mt. Gox CEO Heads to Trial in Japan Over Missing Bitcoins - brakmic
http://www.sbs.com.au/news/article/2017/07/09/former-mtgox-ceo-heads-trial-japan-over-missing-bitcoins
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fpgaminer
This article feels wanting. It doesn't cover much of any details about Mt. Gox
and instead goes off on tangents about the former CEO's personal life, and the
cryptocurrency ecosystem...

I'll see if I can make up the gap. I'm no expert on the Mt. Gox story; it's
extensive and full of speculation, but here's what I remember.

Mt. Gox has suffered multiple bugs, hacks, etc during its existence. But the
two significant events occurred in 2011 and 2014.

2011, the price peaked at something like $30 and quickly collapsed to $0.01.
As explained by Mt. Gox, this was due to a hacker breaking into the exchange
and stealing a large amount of funds. The drop to $0.01 was caused by the
hacker selling a bunch of those coins on the exchange, eating through all the
orders on the book.

Fast forward; February 2014 started off with Mt. Gox shockingly halting all
Bitcoin withdrawals. This was followed through the month with a number of
disconcerting moves, from Karpeles leaving the Bitcoin Foundation to the
closing of Twitter accounts. Little information was released by Mt. Gox
officially during this time. At the end of February Mt. Gox filled for
bankruptcy, claiming they had lost 750,000 Bitcoins (worth nearly $2 billion
at today's valuation). Mt. Gox announced that they believed the coins were
most likely stolen by hackers.

So what's the story here? Through the events of 2014 Mt. Gox was not the least
bit transparent. Halting Bitcoin withdrawals, and then a month later
announcing bankruptcy and that coins had been stolen without any information
in between was very disconcerting. In addition, prior to 2014, they had halted
USD withdrawals and had run into other banking difficulties in the interim.

The most damning evidence was released by a Tokyo security company WizSec,
which concluded that "most or all of the missing bitcoins were stolen straight
out of the Mt. Gox hot wallet over time, beginning in late 2011."

If true, it meant Mt. Gox had been losing money for years. People reasonably
didn't believe Mt. Gox could not have known about this.

The prevailing theory now is that at some point, likely early 2013 or sooner,
Karpeles found out they had been bleeding coins. Karpeles would have then been
faced with having to announce the loss of a significant percentage of customer
funds. It would be the death knell for Mt. Gox. Karpeles would lose his
business, and customers would suffer.

Was there an alternative? Maybe. What if, instead, they kept quiet. And what
if they used their dominate position in the Bitcoin trading ecosystem to
manipulate the market? Slowly, casually manipulate the price of Bitcoin
upward. A rising price would compel investors to invest more, and sell less.
That would mean more deposits coming into Mt. Gox, and less withdrawals going
out.

Basically, Mt. Gox would be operating with fractional reserves. As long as
there wasn't a "run on the bank", they could continue to operate without
anyone knowing what happened. In fact, if they could keep this going long
enough, the lost funds could be made up slowly using fees and personal funds.

So the prevailing theory is that Karpeles realized and executed this plan.
Exactly when this would have occurred is up for speculation.

Obviously, things didn't go as planned. June 2013, Mt. Gox had to suspend USD
withdrawals. This had a really nasty side effect. Basically, to get your money
out of the exchange now, you had to buy BTC and then withdrawal those coins to
sell on a different exchange with functioning USD withdrawals.

The result is a rapidly rising price, because of increased buy pressure.

The end of 2013 sees the price of Bitcoin rapidly rise 500%. As with most
rapid explosions in price, we saw a correction shortly after.

By the end of January 2014 the price had fallen ~30%.

If our suspicions are true regarding Mt. Gox, this would be fatal. Lots of
investors making 500% returns in the span of two months, and then seeing a
market correction downward? You bet they're gonna sell and pull out. A run on
the bank.

So February 2014, they had to halt BTC withdrawals, and the sham was up. The
rest is history in the making.

This court case will be terribly interesting. Will any of this theory be
proven true? Other theories abound. Some argue the coins were merely stolen by
an insider, or a company Mt. Gox was working with. Some argue they were stolen
by Karpeles himself. Hopefully some kind of compelling evidence one way or the
other will come to light during the course of the trial.

Regardless, this case is making history for Bitcoin exchanges. It will
certainly be a story that puts fiction to shame.

~~~
frankchn
> Basically, Mt. Gox would be operating with fractional reserves.

I would not call what happened to Mt. Gox "operating with fractional
reserves."

In a normal financial system, fractional reserve banking means that a bank
retains X% of its customers' deposits as a "fractional reserve" while lending
out the rest to other customers, often with either collateral (home, auto) or
high interest rates (credit cards) to mitigate the risk of nonpayment. In this
case, the bank can balance its asset (loans) and liabilities (deposits)
balance sheet.

In Mt. Gox's case, they simply lost the bitcoins they were supposed to safe
keep rather than making loans or anything like that, and are thus insolvent.

------
TaylorGood
I'm not convinced he doesn't still have the coins.

------
swalsh
The collapse of Mt. Gox was probably one of the best things to happen to
Bitcoin.

~~~
wizu
Could you elaborate? I'm really curious as to how!

~~~
fpgaminer
Couple things.

One of the points of Bitcoin is that you become your own bank. But a lot of
people ignored that and stored their coins on exchanges like Mt. Gox. The loss
of funds to the collapse of Mt. Gox is a constant reminder not to do that.

(NOTE: Yes, storing coins on your own was certainly not easy. It's a tad
easier now with hardware wallets, but there's a lot more to do. But everyone
managing their own funds with their own private keys is still ultimately goal
of Bitcoin.)

The collapse of Mt. Gox was one of the first, huge financial scandals in the
Bitcoin ecosystem. It has made users more critical of trading platforms, which
is always a good thing.

It was also a nice shock to the system for naive investors who weren't aware
of the true risks of investing in volatile assets like Bitcoin.

Of course, Mt. Gox was also incredibly destructive to the Bitcoin ecosystem.
So it's a bit like arguing that the Great Depression was the greatest thing to
happen to the American economy.

~~~
beaner
> everyone managing their own funds with their own private keys is still
> ultimately goal of Bitcoin

No it isn't. The goal is to enable financial freedom, so that the people who
want that level of control over their money can have it, but those who see
benefits from having their money cared for, can do that too.

If I think I'll probably lose my bitcoin trying to store them myself, and that
they're probably safer on Bitcoin Service X, I should be able to keep them
there. I should also be aware of the tradeoffs.

Remember all those stories of people losing millions of dollars because they
kept their crypto on hard drives? I know it's easier now, but it's still a lot
of work. You can manage that work. Many people can't.

IMO the philosophy of Bitcoin is not "you should do things this way," but
"it's important that people be able to do things this way, if they want to."

But the Mt Gox event did help make it clear that people should be selective
about how they store their money.

~~~
fpgaminer
> No it isn't. The goal is to enable financial freedom, so that the people who
> want that level of control over their money can have it, but those who see
> benefits from having their money cared for, can do that too.

Sorry, bad phrasing on my part. Perhaps it's better said as "Enabling people
to be their own bank is one of the goals of Bitcoin."

Of course, financial freedom is the umbrella goal of Bitcoin, you're right.
Part of that is making it possible to be your own bank. Importantly, that
means making it _easy_ to be your own bank. We want it to be as easy for the
average person to manage their coins themselves, as it is to manage USD at a
bank. That way, even though users are free to use centralized services, there
should be no reason to.

------
galeaspablo
_> Bitcoin has suffered hacking incidents including one last year in which a
major Hong Kong-based exchange Bitfinex suspended trading after $65 million in
the virtual unit was stolen._

Quality research. /s

This is akin to saying HTTPS was hacked, when YAHOO got hacked.

~~~
EA
Or that fiat currency is hacked when someone gets pickpocketed on the street.

~~~
bpodgursky
In terms of proportion, it is more like if someone walked into Fort Knox to
count the gold and discovered that it was all missing. Sure, it doesn't
discredit the * concept * of state-backed currency, but it would be
informative.

~~~
smcl
Slightly related - there's weird (probably unfounded) suspicions around gold
stored in the US on behalf of some countries. May or may not have led to
things like Germany repatriating its gold reserves:
[http://www.zerohedge.com/news/2017-02-09/bundesbank-has-
comp...](http://www.zerohedge.com/news/2017-02-09/bundesbank-has-completed-
gold-repatriation-new-york-fed-three-years-ahead-schedule)

~~~
bpodgursky
Yeah, I was going to use the NY fed reserve bank as an example, but I know
about the rumors and didn't want to open that can of worms.

------
peteretep

        > spent money lavishly, including on
        > prostitutes
    

I do not like what journalism in 2017 looks like.

~~~
andrepd
How do you mean? Phrases like that have been a staple of journalism for at
least 150 years.

~~~
mschuster91
And that needs to be changed. Sex work needs to be dragged out of that puritan
hellhole, and highlighting thhat he spent money on prositutes but not anything
else just perpetuates the view of sex work as "bad".

~~~
revelation
That is very laudable, but I'm not sure if prostitutes are ever going to
qualify for a business expense

~~~
logicchains
They might if buying them for one's potential clients instead of for oneself?

~~~
maxsavin
From what my buddies in finance tell me, these things are expensed as dinners.

~~~
jlgaddis
Yep, meals and "entertainment".

