
The Missing Mt. Gox Bitcoins - dwwoelfel
http://blog.wizsec.jp/2015/04/the-missing-mtgox-bitcoins.html
======
bewaretheirs
The author says "MtGox operated at fractional reserve for years". A better and
more conventional way to put it: it was _insolvent_ for years.

~~~
dec0dedab0de
aren't they essentially the same thing?

~~~
haberman
When you operate a fractional reserve, other people/businesses owe you at
least as much money as you owe to your deposit accountholders.

When you're insolvent, you can't cover your obligations. Even if you called in
every loan you'd made, it still wouldn't give you enough cash that all your
deposit account customers could withdraw all their money.

Calling Mt. Gox a "fractional reserve" is giving them way too much credit.

~~~
wongarsu
Being insolvent means that they can't cover your obligations _right now_. If
you deposit 100BTC in my wallet, I invest it for a year and you want it back
right now I'm insolvent because I can't pay you right now; despite my books
being perfectly balanced.

In the event of everyone wanting to withdraw their money at once, operating a
fractional reserve and being insolvent are basically the same (unless you can
instantly get the money out of your investments). That's a major reason why
fractional reserve banking is frowned upon in the bitcoin ecosystem.

~~~
roblev
Fractional reserve banking can be done with bitcoin just as with any
underlying "base asset" such as gold or Federal Reserve Banknotes. It just
means that the banks can lend most of the asset, and must keep back a fraction
for liquidity purposes (in case a depositor wants some of their asset back).

In many ways Fractional Reserve Banking would be much more risky with bitcoin
than with banknotes; with banknotes at least there is a lender-of-last-resort
central bank. The central bank can create additional money at will to lend to
a bank that is in a liquidity crisis, to see it through the crisis. With
bitcoin, there is no such operator.

Now if nobody ever lends or borrows bitcoin, then there will be no issue - but
lending and borrowing has been quite central to commerce over the last couple
of centuries, with mostly decent effects. Personally I'm not sure bitcoin
economics are that well thought out!

~~~
mikekchar
To be honest, I don't see how you could possibly do fractional reserve with
Bitcoin. By definition fractional reserve is lending more currency than you
have. Banks can do this because they are allowed to create the money that they
lend. So if I am allowed a 10:1 ratio of lending and reserve, as long as I
maintain $1 in my reserve, I'm allowed to lend $10. Those $10 are poofed into
existence when the loan is created, though.

As another person mentioned, I think you are confusing lending with reserve
banking. A bank (or any entity) is allowed to lend as much money as they want
to someone if they are actually lending money that they have. That's not
fractional reserve. Fractional reserve creates money. The fraction limits how
much money you are allowed to create.

You can't do that with Bitcoin by design. Of course, you can lend money (that
you have) with Bitcoin. There is currently no automated way to record that the
transaction was a loan as opposed to a payment, but that's true of all
currencies. In fact Bitcoin had some plans to implement contracts in the
protocol, but I don't think anyone has done it yet.

If I am to opine slightly, I think that Bitcoin's lack of ability to do
fractional reserve is probably a mistake. I think it relegates it to a payment
method as opposed to a viable currency. The problem with Bitcoin as a currency
is the lack of availability. Although it often doesn't look like it, I think
the purpose of a currency is to get resources into the hands of people who
need resources, but don't have it. With Bitcoin, the currency is a limited
resource and those that have it have no particular reason to spread it around.
With a more traditional currency, the money supply can grow to match demand.
The banks which create the currency have an incentive to loan money because
the money that they are loaning is springing into existence at that time --
they aren't loaning their own money. The only thing the banks need to worry
about is that on average, the growth produced by the loan is greater than the
interest charged. Having a fluid money supply like this allows people who do
not have money to get it and reduces inefficiencies (i.e. people being idle
because they don't have the resources to produce something).

Having said all that, I have no idea how you could implement fractional
reserve in a distributed system and have any protection for horrible abuses.
Until that problem is solved, I can't really see a way for this kind of
currency to act as a true currency (as opposed to a payment method). If I
remember correctly, there was a review of Bitcoin by a prominent economist a
few years ago that pointed out this problem.

~~~
roblev
Sorry but I do disagree with few things you say.

> A bank (or any entity) is allowed to lend as much money as they want to
> someone if they are actually lending money that they have.

No they are not. There are supervisory limits on what a bank can lend
(leverage ratios, capital adequacy rations etc.).

> By definition fractional reserve is lending more currency than you have.

No it is not, it is lending a fraction (less than 100%) of the money that has
been deposited with you.

I think the confusion comes from that in todays banking system there are two
sorts of money that seem very similar - the base money (federal bank notes)
and the bank money (loans/deposits of federal bank notes). The loans/deposits
can also be used as money but crucially they are NOT the underlying money even
if it is very easy to convert one to the other (depositing or withdrawing the
base money). Example: I can buy something with the fact that Chase bank owes
me bank notes (with the loan I made to it), by changing the ownership of that
loan to the shop I want to buy something from. I have a bank card that makes
that transfer very simple.

The 10:1 ratio is a limit on bank money (loans / deposits) to base money
(federal bank notes). Both sorts of money are denominated in dollars, but they
are different and have different supply and demand.

To recap, by keeping careful records of the loans / deposits, and making
systems to easily transfer ownership of the loans and deposits, these loans
end up also having characteristics of money - they can be used for
transactions, for accounting etc.

> You can't do that with Bitcoin by design

You absolutely can. The loans/deposits form of bank money could work with
bitcoin as the base money, and you could have the same rules around fractional
reserve, capital adequacy rules, liquidity ratio rules etc. that the normal
banking system has.

------
Andrew_Quentin
The author states that the bitcoins were stolen over time, however, the graph
shows that between June and November 2011 there is a gap due to missing data.
It then opens in November 2011 with a huge gap between actual btc and expected
btc of some 500k bitcoins. Practically almost all the "missing" bitcoins.
Suggesting therefore that either they were "lost" sometime between June-
November 2011 or they were hidden at the time somewhere on blockchain or that
the authors have made some sort of mistake.

I am not sure how such a huge amount of bitcoins can be "lost" within such a
short period of 4 months. Leaving open the option that there may be some mix
up with the internal data or that the analysis is incomplete.

~~~
mikkom
Doesn't this cover it quite well?

> The "gap" in the left-most part of the graph is caused by MtGox bitcoins
> that we temporarily lose track of ( _likely as they pass through old cold
> storage that we have not yet mapped out_ ). They later reappear in known
> addresses, which marks the "end" of the gap.

~~~
wongarsu
And the third graph (the difference between observed and expected BTC
holdings) nicely supports that. Almost all of the BTC from that gap reappear.

~~~
jstanley
He's talking about right after that gap. At the start of the gap the disparity
between real and expected holdings is small, but right after the gap, the
disparity is huge, implying a lot of btc were lost during the gap, or a
mistake has been made in the analysis.

~~~
wongarsu
Yes, almost all of the ~600BTC from that huge increase in expected BTC
holdings during Jul-Oct 2011 are unaccounted for. But this seems completely
orthogonal to the fact that they loose track of ~450BTC during that timeframe,
which this "gap" is about.

Those are two seperate events in the same timeframe: The ~450BTC which cause
the gap all reappear in November 2011, while the disparity is growing at a
rate that perfectly matches the disparity growth after the gap (see third
graph).

Also these ~500BTC aren't "almost all" "missing" bitcoins, but only half of
the bitcoins they can't account for.

~~~
makomk
The problem is that they have no way of knowing how many BTC they actually
lost track of during that period or whether all of it did reappear. For those
5 months they have no idea which addresses Mt Gox was keeping the vast
majority of their BTC in or how much they had, and if any funds remained in
those addresses after November 2011 the whole argument breaks down. They're
assuming that none did because the amount of funds in addresses they know
about after the gap is roughly the same as before the gap - but the amount of
BTC that Mt Gox's accounts claimed they have _doubled_ during that time
period, and there's no way to tell whether Mt Gox actually had a shortfall or
there was more BTC but only a portion of it got moved to known addresses.

------
Animats
It's embarrassing for the Tokyo Metropolitan Police that they haven't cracked
this case yet. They're one of the biggest police departments in the world and
have extensive resources. Yes, their in-house computer crime department is
new, but they could draw on expertise at the national level or from outside
Japan.

~~~
damian2000
I read a book recently that went into some detail about tokyo police's methods
regarding a series of murders in the 1990s/2000s. In that account at least
they didn't seem very compentent in their investigative skills - they were
largely focused on getting confessions from people. Probably not relevant to
the MtGox case.

[http://www.goodreads.com/book/show/7555367-tokyo-
hostess](http://www.goodreads.com/book/show/7555367-tokyo-hostess)

------
frevd
How do you convert big amounts of bitcoins into cash, even over time, without
leaving a trace? Isn't there bank account information involved leading to
individuals, which a criminal investigation could request?

~~~
JoeAltmaier
Fundamentally, Bitcoin is about not having any of that info. If it were a
responsible financial institution, then there would have been federal
regulations regarding reporting, reserves etc. But the miracle of bitcoins is,
somehow it isn't subject to any reasonable oversight.

~~~
wyager
>If it were a responsible financial institution

Are you under the impression that it's an institution at all?

The whole reason Bitcoin is interesting is that it's not under the control of
a company, group, or government.

~~~
Nursie
>> The whole reason Bitcoin is interesting is that it's not under the control
of a company, group, or government.

In reality it's under the control of the lead developers and the people that
run the very few large mining pools. As shown by their collusion to fix
blockchain forks etc etc.

~~~
wyager
>In reality it's under the control of the lead developers

Only because they've done nothing wrong (thus far). If there was any hint of
foul play, they would be out.

The people that run the mining pools don't "control" bitcoin to any
substantial degree. And, again, if they seriously abused their power, a
trivial software fix would be to change the proof-of-work algorithm, instantly
obsoleting the miners' equipment.

~~~
Nursie
At the very least any action like that would create a huge schism and split
the community and the currency.

I'm not trying to say that these actors have done anything bad, just the idea
that it's not under control of a few central authorities isn't really grounded
in observable fact...

------
Sealy
Thank you for these posts. We need to keep awareness of the issue as high as
possible as it will become easier and easier for both the forces and
liquidators to dilute the funds left for payout down to nothing over time.

------
lifeisstillgood
What I take away from this is that despite a totally open and visible
accounting system (the blockchain) it is still possible to hide transactions -
no wonder we have been stuffed preventing tax evasion.

------
wongarsu
How do they know that those BTC went to exchanges? The probably can check
which BTC went back to Mt Gox, but how do they know that a particular
receiving address belonged to e.g. Bitcoinica?

~~~
FatalLogic
One probable method would be to look at the addresses that other people used
to deposit to an exchange. Many people make this public, for various reasons.

I assume the investigators would see a pattern of many small deposits being
moved directly from those deposit addresses into the exchange's hot and cold
wallets, which contained large amounts of money. That pattern could be
recognized and the exchange's main wallets identified beyond reasonable doubt.
Withdrawals from the exchange could also be tracked, I assume. Probably there
is more sophisticated analysis of addresses clusters involved too.

------
fugyk
Why hasn't Mt. Gox disclosed what they know about the attack?

~~~
Mahn
Reportedly because the police is still investigating the case and publicizing
everything could harm the (slim) chances of finding the criminals.

------
wongarsu
Something I find eye-catching is that from Jul-Oct 2011, just shortly after
the proof of solvency, the expected BTC holdings double while the observed BTC
holdings don't seem to move very much. If that was a random hacker attack it
would be exceptionally good timing.

