I worry about MtGox. This week I worry less than last week, because the chatter about insufficient liquidity is dimmed, and the Gox/Bitstamp difference has recently been as low as $4, and is now under $10. Maybe everything will be fine. I speculated a couple of weeks ago that even with a serious bitcoin net short position MtGox could engineer its own bailout by supporting litecoin.
Still, like my scoutmaster used to say before a backpacking trip: “Hope for the best, prepare for the worst.”
A meltdown at MtGox would panic the bitcoin markets, antagonize US regulators, and slow down adoption. The bitcoin community should seriously think about how to avert, or at least cushion, worst case scenarios.
So, I worry.
I think, too, about just not hitting the publish button. After all, who wants to start a bank run on what is morally the bitcoin central bank? But I think there are enough people talking about potential problems at MtGox, and the situation has dragged on long enough, that I won’t be adding too much fuel to the fire with my speculative maunderings. To my serious readers, especially those with money at Gox: please don’t take this in the spirit of shouting fire in a crowded theater. Instead, understand a plea to treat a dangerous situation with the gravity it deserves, and ideally to stock up on fire extinguishers while there is still time.
To summarize the current situation, there is a problem withdrawing USD from MtGox, and here and there we see evidence of problems withdrawing EUR and even BTC.
BTC therefore trades at a 8-15% premium on MtGox compared to the other major exchanges, and traders talk of “MtGox price” for bitcoin versus the price elsewhere.
Big traders keep patronizing MtGox for several reasons. Habit/Inertia. The higher prices are great, if you believe MtGox will eventually solve it’s problems, or that failing that you can beat the stampede to get out in time. MtGox has high volume, good for buying a large amount of bitcoin without moving the price too much. MtGox is bot friedly, and bot trading is profitable, so the bot traders stay. But every day, they’re a little more antsy. The last Gox trader I talked said he watches Gox ask volume, and as long as it’s over 30k he feels secure. It’s well over 30k now. But change happens fast.
To understand the USD withdrawal problems, try to think like an AML/KYC (anti money-laundering/know-your customers rules) enforcer. A regulator’s job, day to day, consists of attempting to open accounts under fake names or using fake documents, and then freezing accounts where that money resides, levying fines, and generally raining down bureaucratic hell on the offender.
MtGox doesn’t hold customer fiat funds. Banks do.
MtGox doesn’t have one bank account from customer. They pool funds from hundreds or thousands of accounts.
It’s unknown how may total US bank accounts are held but MtGox, but my guess is not that many. Maybe tens. So every account freeze really hurts.
Unfreezing isn’t easy, because it requires justifying all the cash inflows since the beginning of time, including when MtGox was being run with High School level IT as a trading card site for Magic nerds.
It doesn’t take much to screw up accounting, and lose track of what funds came from where. When business is booming and you are on a roll, screw ups can be papered up by just sacrificing some profits. But that doesn’t wash with hostile regulators, whose primary concern isn’t how much funds are present but how and for whom the funds are accounted for. As little inconsistencies leak up, unfrozen accounts may be refrozen if the banking cops aren’t satisfied.
My read on the situation is that USD withdrawal may never be a smooth and easy on MtGox, due to MtGox having fumbled the AML/KYC identity verification conditions in the early days. MtGox just don’t have good relationship with any US bank, and while investigations proceed, they are unlikely to achieve one. And the investigations could continue forever for all intents and purposes, due to accounting irregularities early on.
So, the key question is does MtGox have enough bitcoin to support an orderly wind down with customers taking funds out in BTC, going forward.
Slow as molasses USD withdrawal isn’t really a problem, as long as users can withdraw promptly via bitcoin, even if it is expensive bitcoin.
But how secure is the MtGox bitcoin position?
Absent audits from a creditable accounting company, there’s no way to know for sure. There’s a good write-up at
that covers the basics of what is known. The good news is that MtGox made huge bitcoin profits over its lifetime, which are more than enough to cover the holes in operating capital due to seized accounts and the lawsuit filed by Coinlab. The bad news is that no one knows if MtGox kept the bitcoin, or traded it for fiat. A worst case scenario has the MtGox operations team panicking when the bitcoin price was low (like 60-80) and cashing out to USD to cover the lawsuit+seizure shortfalls. Now the price is high again, but how much bitcoin do they actually have? As long as miners keep sending bitcoin to MtGox, and the bot traders are waving their magic wands, bitcoin withdrawals are probably safe for the time being, even if the bitcoin position is net short. But bank runs can come out of nowhere, or even be engineered by hostile players who want to drive the bitcoin price up and then down, by provoking a panic. We saw it in April, and we could see it again.
Who will buy MtGox?
Someone, I hope.
I think, for the right price, a deal could be made, and this would be very positive news for the bitcoin economy, .
Whoever buys MtGox would be buying a headache. They would have to deal with the mess of unknown and unverified account holders from back in the day. They might never get some USD accounts unfrozen, or at least have to wait a long time. There would be fines. And of course there is the matter of the Coinlab lawsuit.
But, it’s a potentially very profitable headache. MtGox has enormous brand recognition and revenues to go with it, both bitcoin and fiat. And I think the right kind of buyer would inherit enormous goodwill for fixing what a lot of players known in their gut to be a serious problem. I think the ideal buyer would be an American credit union with a strong balance sheet, good IT, good relationship with regulators, and obviously bullish on bitcoin. I could also see a russian or chinese buyer. For the right kind of money, regulators can be made to see reason, and lawsuits go away.
If no one buys MtGox, the next best thing would be to bring back credit default swaps, like we had for PirateAt40 debt in 2012. A CDS mediated bankruptcy would still be painful for bitcoin, but it would be a lot more orderly.
As a parting thought, I’d like to take a second to recall everything good MtGox has done for bitcoin. MtGox took a lot of risks, and tGox put bitcoin on the map.
Maybe the MtGox operations team is just out of their depth, though well intentioned. Maybe they just want a nice payout, and for the stress to be over.
I know I would.