Grave concerns re MtGox

Monday, 08 April, Year 5 d.Tr. | Author: Mircea Popescu

There are two major points to consider before proceeding to the actual discussion.

I. The suspicion of self trading. You probably vaguely know about the one time two years ago when Bitcoin nearly died. What happened there was that MtGox ignored reports about accounts being broken into for about two weeks (customer's fault! weak passwords!) only to have it forced upon them that in fact they had a security hole (which was never in fact discussed, documented or explained - MtGox does deceit, not post-mortems).

Through that security hole being exploited somebody gained control of an account which had a balance over 400`000 BTC. The hacker soon discovered that it is not possible to withdraw the entire amount, because of limits in place based on the dollar equivalent value. Consequently he sold BTC all the way down to 0.01, and so withdrew a good chunk of "worthless" coins.

The question here is whether somebody was indeed holding 400`000 BTC (close to 10% of all BTC then in existence) on the exchange, in spite of there being no real need and no actual advantage to doing so. Alternatively it would be perfectly possible for MtGox to simply maintain an account loaded with virtual BTC (ie, an infinity thereof) for the purpose of trading on the market. The temptation to do so would be significant, or to quote some other random geek :

Earlier this year, I had this “genius” idea which led me to making a fatal mistake. I thought I could provide a hedge fund service for Bitmarket users. There were other sites providing this service so I guesses that it could be successful.

There is currently no way to know whether in fact it was a customer account that was compromised, or if the hacker simply tore into MtGox's own fractional reserve vault.

II. The long history of deceitful communication. I will simply refer the curious reader to a recent case study titled "It’s been an epic few days: What happened?". That aside, on the balance of evidence MtGox is by a significant margin the most deceitful Bitcoin business out there, if we exclude the actual scams. Personal study of the matter is by all means encouraged, you might start by searching "MtGox" on the btctalk forum.

And now that we're on the same page, here's what made it into today's summaries and popped right off the screen :

mt-gox-scam-generation

To go with that, allow me to quote from a discussion of Stock Generation :

On March 20, 2000, SG unilaterally suspended all pending requests to withdraw funds and sharply reduced participants' account balances in all companies except the privileged company. (Applying "Rule 13" to all participants' accounts.)

Two weeks later, SG peremptorily announced a reverse stock split for its highest-yield company, applying "Rule 18", which caused the share prices to plummet to less than 1/100,000 of their previous values, while other shares (including those that were "guaranteed" not to decrease in value) were devalued by 50% to 95%.

At about the same time, SG stopped responding to participant requests for the return of funds, yet continued to solicit new participants through its website.

The situation at MtGox is about as follows :

  • Huge trade engine lag (click on chart for source and more spans). mt-gox-1-day

    In principle in a situation where the minimum unit equals two minutes "anything can happen". This situation may, of course, be explained by incompetence. It may just as well be explained by strict need : if you are running a fractional reserve system that's blowing out you simply can't afford any manner of precision. Time precision least of all.

  • Arbitrary "waiting queue". The company declares a queue which can in no way be verified by anyone. Accounts are randomly "flagged", go to bottom of queue. Withdrawals are frozen in the interval. Even if the locking of existing accounts may not, a queue may, of course, be explained by an influx of new users trying to buy bitcoin. It may just as well be explained by strict need : if you are running a fractional reserve system that's blowing out you simply can't afford any certain liabilities. Thus randomly suspending accounts to be reinstated at unspecified times in the future (just as soon as more dollars are sent in) makes perfect sense.i

I would say that on the balance of evidence available, MtGox is more likely to be a scam than a legitimate operation at this point. The trifecta of tight lipped yet deceitful reps ; soft as opposed to hard liabilities coupled with a tendency towards further softening and arbitrary, case-by-case handling of accounts showing extreme sensitivity to public exposure is present and that's enough for my needs.

At this point I would advise anyone against keeping any sums on MtGox overnight, fiat or BTC. Their reaction will probably be to make transfers even slower, in an attempt to discourage capital flight. Take a moment and think things through : if your reason for keeping capital on MtGox is that you don't want to wait for their excessive transfer delays, isn't this in and of itself proof that you really shouldn't be there at all ?

I may, of course, be wrong. This is not a determination of fact. This is a determination of risk. Simply put, if you're not making 50% round trip you're taking more of a chance dealing with MtGox than you're being paid for.

———
  1. This is by no means a singular case. Consider this recent example. []
Category: Bitcoin
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19 Responses

  1. I think you're just wrong. Don't attribute to malice what can be explained by ignorance. Do you really think the owners of MtGox, whose identities are well known, would get away with this kind of fraud? It's not like they are some anonymous internet guy. The police would know where to find them, and this isn't some lawless country, it's Japan.

    Also, the transfer delays are not MtGox's fault, they make funds available as soon as they receive them. The delay is caused by banks.

  2. Mircea Popescu`s avatar
    2
    Mircea Popescu 
    Tuesday, 9 April 2013

    Experience shows that having your identity well known is not necessarily an effectual deterrant to this type of fraud. People end up doing all the time, they get sucked in for whatever reasons their arrogance forces upon them, after which it grows on itself and it becomes unstoppable. Madoff is the controlling example.

    In principle anything can be argued to have been ultimately caused by banks. This argument would obviously be more or less convincing depending.

  3. BingoBoingo`s avatar
    3
    BingoBoingo 
    Tuesday, 9 April 2013

    A healthy number of people know Trendon Shavers identity...

    If Gox continues bleeding market share enough to reach the point any fractional reserve system could be exposed. The bigger any fractional reserve the less market share they'd have to lose to break a scheme.

  4. Mircea Popescu`s avatar
    4
    Mircea Popescu 
    Tuesday, 9 April 2013

    That is true. In a sense decentralisation is the safest weapon Bitcoin has to protect itself from fiat exchange corruption.

  5. There is currently no way to know whether in fact it was a customer account that was compromised, or if the hacker simply tore into MtGox’s own fractional reserve vault.

    They've couldn't simply steal from their clients, ignoring hacking reports because they were 'hacking' accounts themselves?

  6. subSTRATA`s avatar
    6
    subSTRATA 
    Wednesday, 10 April 2013

    The fact most people still use Gox is disturbing. One major issue with Gox would ruin Bitcoin big time, so where is decentralization? But it is pointless to speak of it, Bitcoin is at the stage when real life herd types became majority of BTC users, which means that we others are sort of fucked. I totally don't like the current situation, I'd prefer Bitcoin to go back underground.

  7. Mircea Popescu`s avatar
    7
    Mircea Popescu 
    Wednesday, 10 April 2013

    You mean like now ?

    noiframe=http://polimedia.us/dtng/c/src/136562118454.png width=500 height=250>

  8. Kim Jong Un`s avatar
    8
    Kim Jong Un 
    Thursday, 11 April 2013

    Mircea you are one -huge- faggot
    you just want to devaluate btc so you can finally buy half a bitcoin yourself with your allowance money.

    Stop this faggotry right now or I will nuke your ass to Timbuktu.

    I mean it.

    Sincerely,

    Kim Jong

  9. He would rather enjoy world slave center.

  10. oyvinds`s avatar
    10
    oyvinds 
    Sunday, 11 August 2013

    Some months later and this is the situation:

    - MtGox declared a "withdraw freeze" and nobody could make withdraw requests for two weeks.
    - A lot of people report big withdraws made before this freeze still have not come through.
    - People have now been waiting 2 months for USD withdraws and 1-3 months for EUR withdraws.

    https://bitcointalk.org/index.php?topic=179586.540

    You were spot on ahead of your time.

  11. Mircea Popescu`s avatar
    11
    Mircea Popescu 
    Sunday, 11 August 2013

    It happens.

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