
Mt. Gox knowingly traded non-existent Bitcoins for two weeks, filing shows - Cbasedlifeform
http://www.theguardian.com/technology/2014/mar/14/mtgox-knowingly-traded-non-existent-bitcoins-for-two-weeks-filing-shows
======
sillysaurus3
One theory is that Mt. Gox became fractional reserve some time in the past,
either by losing bitcoins or by spending them. Then they were unable to
replenish their supply, so it was a matter of time before a bank run.

The reason I tend to believe this scenario is because it's completely
consistent with their behavior. I watched them very closely, and there seemed
to be no rhyme or reason for their behavior. That is, unless they were missing
everyone's bitcoin for some reason. Then their behavior made perfect sense.

In that scenario, Mt. Gox would have knowingly traded non-existent Bitcoins
for far, far longer than two weeks.

EDIT: I should mention that there's still no evidence whatsoever that
malleability somehow led to the loss of >500,000 BTC.

~~~
jpmattia
> _One theory is that Mt. Gox became fractional reserve some time in the past,
> either by losing bitcoins or by spending them._

Maybe pedantic, but many people have been using _fractional reserve_ wrt Mt
Gox lately. The usual meaning of that term: A bank will loan out deposits,
reserving a fraction for withdrawals. However, a key point is that the bank
holds collateral against the loan, and that collateral has a fair-market
value, so the balance sheet is still positive. (A major problem in the housing
meltdown was that the value of the collateral dropped, making many banks
technically insolvent.)

What Mt Gox did is take money from depositors and either lose or spend them.
That's just either bad business (if they lost them) or fraud (if they spent
them). Calling it "fractional reserve" gives it an air of legitimacy that they
really do not deserve.

Edit: I did not intend to start a discussion on the finer points of bank
accounting. The major point is: To my knowledge, Gox wasn't trying to make
loans with money that deposited with them, which is what a fractional reserve
business is.

~~~
smacktoward
Or, put alternately, it taints _actual_ fractional reserve banking (which has
worked pretty well for hundreds of years) with a sense of being the same kind
of shady business practice as this. (Which may be the point of the comparison,
given the ideological bent of many Bitcoin advocates.)

~~~
danmaz74
AFAIK, fractional reserve is the bete noir for many believers in bitcoin.

~~~
jpmattia
> AFAIK, fractional reserve is the bete noir for many believers in bitcoin.

Then they're hosed, because as soon as somebody somewhere makes a loan using
bitcoin, then bitcoin becomes a fractional reserve currency.

Edit: It seems that some cryptocurrency folks have confused "fractional
reserve" with "fiat". Those are two very different monetary concepts.

~~~
praxeologist
>as soon as somebody somewhere makes a loan using bitcoin, then bitcoin
becomes a fractional reserve currency.

No, there is the other option called full reserve banking.

~~~
chii
i don't get how you can loan bitcoins in any other way other than full reserve
- unless you somehow put trust into the bank (which you have to for fiat
money, but for bitcoins, you can verify and so don't have to trust
credit/notes offered by the lender).

~~~
jpmattia
Because somebody will get the idea to offer of interest on bitcoins in
exchange for lending their coins. And somebody will take that bet.

It's not like cryptocurrencies can change human nature.

~~~
chii
interest bearing loan has nothing to do with the "reserve" you need.

if i borrowed 1 bitcoin from you, and then i default, then how are you going
to pay back that bitcoin to whoever deposited it?

~~~
dredmorbius
Same way you don't get back the exact serial-numbered dollars you loan
(deposit) to a bank. It's not the _identity_ of the bitcoin which matters,
it's the value.

If you want a lockbox, get a lockbox. If you want a deposit account, you're
storing and retrieving fully fungible and interchangeable entities.

------
api
Welcome to the world of completely unregulated finance.

~~~
malka
yeah. Regulated banks would never ever do something that irresponsible.

~~~
bunderbunder
In the US, at least, a bank would have a _very_ hard time doing something this
irresponsible. The FDIC would have noticed the problem and stepped in _long_
before the situation could get this bad.

I'll cut off the inevitable reference to 2007 at the pass by pointing out that
none of the big banks that got bailed out ever made it anywhere close to
digging themselves into a hole as deep as Mt. Gox did. For example, the
biggest bank failure in US history, Washington Mutual, went down with about
$300bn in assets against $200bn in deposits. Creditors ended up getting wiped
out, but deposits were safe.

~~~
dnautics
"Creditors ended up getting wiped out, but deposits were safe."

Deposits were safe, but all of society got kicked by inflation and increased
unemployment. Of course, that only hurts poor people, so, win for the
depositors!

~~~
saalweachter
Inflation from 2007 to 2012 was about 10% (total, not per year). Inflation
from 2002 to 2007 was about 15%.

~~~
dnautics
It's higher than that, because the CPI does a lot of adjustments to the
offical figure. Moreover, your years are cherry-picked; there was a wave of
deflation (that occurred in 2008-2009) as loans went though a cycle of
defaults to clear out bad debt. Finally, the effects of top-down stimulus take
a long time to propagate, especially since the current money multiplier for
dollars is still quite low, and bank's lending activities have been relatively
stagnant (roughly speaking, base currency went up, but debt expansion, which
is what really counts, has not caught up yet because people are reluctant to
go into debt - hence the popularity of debit cards vs. credit cards).
Eventually as people start using debt to paper of catastrophes and
emergencies, the overall indebtedness will increase, and the inflationary
increase in the base currency will propagate into the debt burden, and we will
have a sudden increase in inflation.

I personally think it's unlikely to be hyperinflationary, but it will be very
uncomfortable, especially for poor and middle class.

But, perhaps i should not have used the past tense.

~~~
parasubvert
Inflation actually tends to benefit the poor in the long run, as it devalues
debt. (By definition, the poor don't have a lot of savings and tend to be in
debt). Hyperinflation of course causes problems for everyone, but that's not
going to happen. That said, there's little reason to worry about out of
control inflation for several years to come: these economies still have
enormous under-utilized resources.

~~~
dnautics
No. The poor are typically in debt on short-term scales (days, weeks) which
does not benefit from inflation, and at rates (often double digits) which
inflation does not mitigate.

The rich are typically in debt a lot, via leveraged investment ('trading on
margin'), or, indirectly by things like leveraged ETFs, leveraged currency FX
trading, etc, which enjoy very low, bank-level interest rates because it's
done in bulk. Not to mention banks with direct access to low-interest loans,
(as in bank corporations) which are not begging in the streets for alms (they
get bailouts). These debts that the rich enjoy benefit greatly from
inflationary devaluation of nominal prices.

Moreover, the investment activity of the rich tends to benefit from inflation.

~~~
parasubvert
I think you're badly mistaken.

While I'm sure there are some rich that are heavily leveraged, the majority
are not leveraged that highly relative to their asset base. This has been
shown in most available statistics on household wealth. For example:

[http://www.levyinstitute.org/pubs/wp_589.pdf](http://www.levyinstitute.org/pubs/wp_589.pdf)

In particular the debt-equity ratio of the top 1% (>$8.2m net worth) is 2.8% ;
the next 19% (> $473k < $8.2m) is 12.1%, and the middle three quintiles ($200
dollars-$480k) is is 61.1%.

Moreover, the rich representatives in press & politics (WSJ editorial page,
Forbes, the GOP, etc.) have been clamouring to raise interest rates for the
past 5 years out of inflation fears... for what reason? To benefit the poor?

~~~
dnautics
the paper doesn't account for indirect leverage, that I wrote about in my
post, and also, banks writ large are basically leveraged institutions.

------
bayesianhorse
The main problem with the bitcoin economy is that trust is fatal.

It demonstrates shockingly how much trust in the regular economy is actually
dependent on government regulation...

~~~
dnautics
and this loss of trust is reflected in the drop in bitcoin price from $400/btc
to $600/btc since the incident.

~~~
svenkatesh
I guess it wouldn't follow your narrative to point out that a few months ago
the price was around $1200/BTC.

~~~
dnautics
That preceded the public face of the Mt. Gox situation, which is what the
original comment refers to.

There are always small speculative bubbles here and there, it happened exactly
like that 6, and 12 months prior. It's interesting how bitcoin prices are
highly cyclical. I think there's going to be ONE MORE expansion, in
approximately 3 months, that takes the price of btc to about 5k, although it
may pop as high as 10k on its way. If for no other reason than there are often
self-fulfilling prophecies in finance.

------
rainmaking
Better to let bad banks fail than absorb their losses with taxes.

~~~
Guvante
Except we protected the banks to save the investors. This screws the
depositors.

------
thebokehwokeh2
It's almost as if the purely unregulated bitcoin market is finding out the
pains of being purely unregulated...

------
peter303
It could be a lot longer than two weks. They were having 'technical probelms'
and down much of the time for several months before BK.

------
SilasX
...and Bitcoiners once again discover the need for regulation. If my bank
didn't have a dollar on hand for every dollar it reported as being in customer
accounts, it would be shut down by nightfall and every customer made whole.

Edit: Satire, guys. Sadly, it sometimes becomes indistinguishable from actual
misconceptions. Don't believe me? Similar post from my history:
[https://news.ycombinator.com/item?id=7227291](https://news.ycombinator.com/item?id=7227291)

~~~
Crito
Yeah yeah, satire. However I think it is important to be clear that "bitcoin"
in the US is not "unregulated". There is a reason so many people were using an
obviously fly-by-night exchange based out of Japan instead of an exchange
based out of the US. That reason is regulation. Just because the laws don't
explicitly mention the string "bitcoin" doesn't mean that anything done with
bitcoin is untouchable by the law.

The aspect of bitcoin that is "unregulated" by the US government (meaning "not
controlled by" the US government) is the production of bitcoin. In that
respect, you can think of bitcoin as similar to a bog-standard foreign
currency (which the US does not control the production of).

~~~
kaa2102
Are you suggesting that establishing a bitcoin exchange in the US would
prevent another Mt. Gox? Why?

------
llamataboot
I look forward to joining the class action suits and getting some fraction of
my deposits back in 3 or 4 years.

~~~
Aardwolf
Probably 6 to 8 years, and the price they spend to mail you large amounts of
stylish paper may be bigger than the money regained.

------
aaronapple
Coffin now nailed shut. That's pretty damning.

------
thinkcomp
The Mt. Gox bankruptcy docket from Texas is here:

[http://www.plainsite.org/dockets/index.html?id=6395790](http://www.plainsite.org/dockets/index.html?id=6395790)

