Former Mt. Gox CEO Heads to Trial in Japan Over Missing Bitcoins
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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.
Wait, you don't need to do anything to MtGox's coins to sell BTC on MtGox if you've hacked them - their coins, as far as the exchange goes, are just records in a MySQL table. So for MtGox's explanation to be true, the hacker would have needed just wallet-access on MtGox, then turned around and sent MtGox's coins right back to MtGox, hoping to cash out via MtGox before MG noticed and undid the orders?
That said, it's not impossible that, say, a rather young hacker got into Mt. Gox, and naively sold stolen coins during the incident. Most people are not familiar with how exchanges work, and so they may not have known that a large sell order would evaporate the order book. It's important to remember that most people who are adapt at technology do not necessarily have financial acumen as well. It's a tangential skill set.
But yeah, we can speculate in all sorts of ways. Maybe the 2011 hack was fake; a way for Karpeles to pilfer the coffers. Again, hopefully something more concrete will come out of the trials.
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.
After it's collapse, a void was created for other exchanges to rise. A more balanced system ensued.
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.
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.
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.
Quality research. /s
This is akin to saying HTTPS was hacked, when YAHOO got hacked.
By analogy, the 'the web' does not only mean HTTP or even the exclusively just the various protocols involved. (to name a few on the client side: ip, tcp, dns, http, http/2, tls, ws/wss etc.)
The term also refers to the use of browsers, hosted websites and the culture surrounding how society interacts online with these sites. In short, 'the web' is an ecosystem just like bitcoin.
With that said, it's widely accepted that the proof of work system has not yet been compromised, nor has the network itself. However, let's not gloss over the fact that there's a rather established hacking problem in the space affecting a broad audience.
ransomeware, hacked exchanges, personal wallet attacks, online wallet attacks, 2fa attacks. Even a few of the most paranoid and technically savvy early adopters, have fallen victim to such schemes.
"Bitcoin has suffered hacking incidents" is clearly talking about the ecosystem having hacking incidents, not the coin itself being hacked.
Though I guess you made this comment earnestly, so it wasn't that clear...
The article itself is not a HN thread.
A journalist who has done enough research would know the nuances of the cryptocurrency language. Journalists understand that the meaning of their newspaper pieces is hardly dependent on their thoughts while writing. Instead it is tied to the text. It's the journalist's job to educate everyone, and sentences as the above are a barrier to education/adoption/rejection/informed opinions/innovation.
Disclaimer: I haven't owned Bitcoin for years, and I'm bearish on most cryptocurrencies in the short/medium term. I.e. I've got no horse I'm betting on.
> spent money lavishly, including on
> prostitutes
I agree that the guy's use of prostitutes isn't relevant to understand the story, however, it adds colour, rightly or wrongly. If the article had said he spent the money sending his kids to private school, or investing in his wife's business, we might think of him as a caring family man. Instead, we get the image of a lavish playboy lifestyle.
> How do you mean?
> for at least 150 years