Fraudulent trading activity at Mt. Gox | Hacker News Reader

Fraudulent trading activity at Mt. Gox

willyreport.wordpress.com

648 pointspmorici131 comments

The reason I'm inclined to believe this report's implications about Karpeles is because I spent a long time in Mt. Gox's IRC support channel talking with support reps, and they were paid to lie. They didn't know they were being paid to lie, but they were instructed by management to say "don't worry, all user coins are safe" right up until the day the Mt. Gox crisis report was leaked. They could have said "we are investigating the extent of the problem," but no, Karpeles was paying them to say "nothing is wrong," even while Karpeles was crafting his crisis report to investors about how all the coins were gone.

Karpeles seems to have a history of lying. He was caught in a lie by his employer in 2004: http://newslines.org/mt-gox/joins-linux-cyberjoueurs/

From a game theory point of view, it's interesting that the price at every major exchange depends on every other major exchange. For example, when Mt. Gox was active, if its price went up, BTC-e, Bitstamp, etc would simultaneously go up. It's a natural phenomenon which has rather grim implications: if an exchange is conducting fraudulent activity, then the entire bitcoin trading ecosystem is affected. And since bitcoin is completely unregulated, there's nothing really stopping anyone from manipulating the market. For example, no one knows who's behind BTC-e, but it has a lot of trade volume. What if they're engaging in fraudulent trading as well? There's every incentive to.

The inevitable conclusion seems to be: you can try to come up with a bunch of logical reasons about why the price of bitcoin is going up or down, but you can't ever rule out "the price is due to large-scale fraudulent behavior," i.e. it's a bubble. Bad behavior from one exchange will always affect all the others.

As Karpeles has probably shown, you can become a millionaire by manipulating the market and then escape all consequences by letting your company go bankrupt.

I don't know about "escaping all consequences," unless his idea of "escaping all consequences" is having to watch his back for the rest of his life. Seems like a pretty dumb way to make a few million bucks, IMHO.

Especially since he could have been a legitimate multi-millionaire just by doing things correctly. The market lead MtGox had is something people dream about.

he was probably arrogant enough to assume he could do both.

I worked for a clever, clever, stupid bastard like that once. He could have made legitimate millions but chose instead to cook the books, embezzle a few hundred thousand, set up patsy directors to take the blame, flee the state with his wife and kids, and live under an assumed name.

Either that or, now that it occurs to me, we might have been a front for drug laundering. That would also have fit the evidence. Huh.

It pains me to say this, but "dumb and evil" have been par for bitcoin thus far.

The question is, will the situation change? It might. Many modern reliable systems grew out of shaky or illicit foundations.

But that's little solace in the meantime.

> Many modern reliable systems grew out of shaky or illicit foundations.

Arguably, those systems became reliable because of the adoption of standards of practice, insurance and regulation. Even the mafia has rules (and a means of enforcing them.)

Because Mt. Gox is totally the foundation of bitcoin rollseyes

Mt Gox is not the foundation of bitcoin. Bear-Stearns and Lehman Brothers are not the foundation of the dollar. Yet some bitcoiners seem quite happy to ignore the former, while insisting upon the inevitability of the latter. If the crime and corruption of regulated systems are a valid argument for cryptocurrencies, then surely Mt Gox is a valid argument against them.

  I don't know about "escaping all consequences,"
  unless his idea of "escaping all consequences" 
  is having to watch his back for the rest of his
  life.

If I had stolen a few hundred million dollars from mtgox users and disappeared, my policy would be simple: Anyone who tracks me down and puts a gun in my mouth can have ten times their losses refunded, if they tell me how they found me. Twice their losses up front, eight times after they let me get safely away. The guy with the gun chooses the address to send the refund to.

I doubt more than 5% of mtgox investors have the losses, the stomach and the connections to get me murdered. So I'd still have 50% of the money left over at the end.

alternatively, the guy with the gun will just want everything and you are left with nothing.

I think you might be overestimating the leverage you have with just your BTC

.001% is enough...

If someone has a gun to your head you're not really in a position to set terms. What do you get at the end? A life.

More than lying, he has a history of computer fraud: http://newslines.org/mt-gox/convicted-of-computer-fraud/

I agree with pretty much everything you said but is it true that regulations would have prevented someone like Karpeles from doing the same with say, gold? What regulations prevent this? I'm asking genuinely because I have no idea what regulations exist in that world and I keep hearing that argument from smart people so I guess it's probably true.

Good question. I'd like to know too. It seems like the stock market would be the most relevant arena to seek examples from.

Anyone know what kind of regulations prevent sneaky behavior in the stock market? How do they work?

The important thing to remember is that while there maybe more specific laws against what happened on Gox in other markets that doesn't mean that what Gox did was some how ok in the eyes of the law. A fraud is a fraud customer money _is_ missing.

On the topic of price manipulation in other markets if you follow financial news at all there have been a rash of cases of banks paying large fines and even pleading guilty to manipulation of at least the libor rate and gold prices and there are supposedly more on going investigations into price manipulation.

http://www.bloomberg.com/news/2014-01-06/royal-bank-of-scotl...

http://www.ft.com/intl/cms/s/0/08cafa70-e24f-11e3-a829-00144...

I'm not an expert, but I suspect the clearing mechanism is what would prevent these sorts of manipulations outlined in the post. I'd start your search there.

Regulations on financial institutions break down into several categories:

1) Identifying operators and users, so if fraud happens, the right people can be found and held accountable

2) Requiring paperwork documenting what is happening, again, so if there is a fraud of some kind it can be detected and the responsible parties found

3) Actually trying to prevent fraud, usually this means mandatory audits of some kind

I can't point you to what rules govern a currency exchange in Japan exactly, but the above is how it usually seems to break down.

Gox was AFAIK never audited. How much of a paper trail exists is unclear. The relevant people's identities are known, however.

One other thing I think we should clear up: these rules are usually pretty vague and general. It's not like regulation is something that people opt into or out of depending on their personal preferences. Whatever regulations applied to exchanges and markets in Japan would likely have also applied to Mt Gox.

The problem with trying to argue that the fix is "regulation" in the abstract is "regulation" isn't some singular silver bullet. It's a big pile of rules and people who try to enforce those rules, but often those rules aren't doing what you think they're doing, or they exist to allow punishment rather than prevention, or they're somewhat theoretical because they aren't reliably enforced. This is why lots of people would dearly love to find a way to build a decentralised exchange: in theory it could be more reliable than a regulated institution.

Sure it would. He might have still been able to commit fraud to some extent the way, say, Madoff did (eg by thoroughly falsifying his trail and meticulously avoiding any alarm-raising cash/securities move); but definitely he would not have been able to corner the market with phantom bot accounts with no transaction fees with such ease.

For instance, if the exchange had been regulated as a Designated Contract Maker (DCM) by the US CFTC [1] (which by the way will most likely never happen), it would had been subject to very specific and strict disclosure/auditing, price discovery, capital, risk and monitoring requirements --including for instance strict limits on account aggregation, hard position limits for very large accounts, 'surprise' audits and automated 'alerts' to regulators [2].

Furthermore, if people's complaints or whistleblowers were to persuade CFTC they had a case, they would had had the authority to investigate them, prosecute them, pre-emptively close them down and freeze their assets, and even piercing the corporate veil (eg target Karpeles' individual assets, or even criminal liability) under their broad anti-market manipulation authority [3,4]. At the very least the prospect of harsh prosecution --as opposed to simply wash your hands by declaring bankruptcy and moving on-- should have affected his cost-benefit calculus.

Again this is not to say of course the regulations would have precluded any form of massive fraud or market manipulation (which happens all the time regardless; cf the recent Libor scandal), but definitely it would have made this particular scheme essentially unfeasible.

[1] http://www.cftc.gov/IndustryOversight/TradingOrganizations/D...

[2] http://www.ecfr.gov/cgi-bin/text-idx?c=ecfr&sid=7ccb37730775...

[3] http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/D...

[4] http://www.cftc.gov/ucm/groups/public/@newsroom/documents/fi...

>phantom bot accounts with no transaction fees with such ease.

Never mind the criminally dumb omission of the transaction fees. Gox could have bought a valid trading identity on one of the various websites that sell them, and included the fees (which end up in their pocket anyways) in the transaction.

My day job involves regulatory reporting of OTC and ETD products, although I deal with the technical aspects not the business side so my comments contain some speculation (but the other responses to your question here seem better at that addressing those aspects).

A number of new regulations have come into place in the past few years to help prevent recurrences of recent financial scandals and meltdowns, and to ultimately bring stability to the markets, e.g. the Dodd-Frank Act (DFA) for US parties and MiFID/EMIR (and in the future MiFIR) for EU parties.

These regulations provide for e.g. daily and in some cases semi-realtime (30min) reporting of trading activities. Reports can also go to the counterparties who can dispute or verify trading activities.

Other countries, e.g. Russia, Singapore, Hong Kong, even South Africa are enacting similar pieces of legislation.

In some cases, the trade repositories (companies who accept trade reports) satisfy multiple supervisory bodies e.g. the DTCC will accept reporting under DFA, EMIR, MAS (Singapore), HKMA (Hong Kong) legislation.

Here is the speculative part: You can imagine this gives authorities a pretty good idea of who is trading what, what their exposure is and to who, etc. Because all parties are required to be registered with the appropriate regulatory bodies, I would think the alleged fraud at MtGox would have at least two obvious problems if they were subject to similar regulatory oversight:

(1) MtGox would be registered as brokers and wouldn't be trading parties, so at minimum it'd be very suspicious (and more likely illegal) to see them taking the other side of a trade (they couldn't report using a non-existent party for their side of the trade like they do here as that submission would be rejected since the party would be invalid, and they can't just not report because the counterparty buying the BTC will identify MtGox as the seller in its submissions; they also can't use a random real counterparty because that real party will dispute the trade took place)

(2) even if they legitimately took the other side of the trade (e.g. Mark registers as a trader) while cooking the books, I'd imagine they'd have to reconcile their audited books/bank accounts with their reported trading history, which would reveal fraud (by controlling the trading history they can claim anything; with a regulator, they can't control the trading history).

In effect, regulation of this sort would force all trading claims to balance out across all parties - where they don't, there would be an investigation.

Eh. The regulations are improved but when this happens: http://www.ft.com/cms/s/0/08cafa70-e24f-11e3-a829-00144feabd... "The UK’s Financial Conduct Authority fined the British bank £26m on Friday and reprimanded it for nine years of lax controls for its failure to rein in an options trader who in 2012 drove the gold price lower to avoid paying £2.3m to one of the lender’s clients."

They were caught once in 2012, but its pretty clear the fact it took two years to catch them at it means they probably got away with it for as long as Mt Gox did, given the environment that enabled it lasted 9 years.

That doesn't count LIBOR, etc. When the incentives to break the system exist, it will get broken from time to time even with regulation. Regulation just reduces the frequency and generally requires multiple bad actors to truly manipulate the entire system.

And when 'breaking the system', basically gets you fined [not put in jail for 5+ years], you can generally calculate the degree of risk you are taking and effectively have a chance of just breaking even if you get caught...:/

Mt. Gox wouldn't happen, but the type of people that ran it would have found a different way to 'cheat'.

Libor is an example of lack of regulation, though. There was no oversight involved; some dude at Reuters called up some handfuls of banks and then averaged out the responses, and it was self-regulated via an industry group.

Regulations are about shifting incentives and in the case of Libor the banks involved were both investment and commercial banks and thus had enormous temptation.

Anyhow, you can't eliminate bad actors and thus reducing their frequency and intensity is the whole point. These crises have negative costs to everyone, and for most of these the inefficiency cost of regulations is utterly dwarfed by the cost of big crises.

Won't argue against how much easier the justice system is on you if you're rich.

It was why I wasn't using Libor as the primary example. ;) But ya, it would have been stronger if I hadn't noted it at all I suppose.

Anywho, best of luck :)

One example of laws is insider trading. If you ran Bitcoin exchange, there is nothing preventing owners to exploit information that only they have. It's huge blind spot.

In reality, however, you don't need elaborate specific regulations. Most fraud prevention laws appears to be specific on surface but they always have one subjective caveat that if company knowingly acted in bad faith, the executives could be on trial.

So once a law is enacted saying X is regulated, it just means that enforcement authorities can come after you even if there is a wide spread suspicion of fraud. Then its just matter of invading company's internal documents, emails, databases to find that it acted in some bad faith and broke some law. Outcomes in top cases is typically dectated by public anger, events like proximity of next elections and lobby politics. Law is usually flexible enough to achieve that outcome.

I agree with most of what you said but:

> Karpeles seems to have a history of lying. He was caught in a lie by his employer in 2004

Everybody "has a history of lying", because everybody lies. One incident of lying to an employer about IM'ing (or using Facebook or HN while at work, which almost every HN user has likely done) does not a future fraud make.

Lying is universal - we all do it. Therefore, the wise thing is for us diligently to train ourselves to lie thoughtfully, judiciously; to lie with a good object, and not an evil one; to lie for others' advantage, and not our own; to lie healingly, charitably, humanely, not cruelly, hurtfully, maliciously; to lie gracefully and graciously, not awkwardly and clumsily; to lie firmly, frankly, squarely, with head erect, not haltingly, tortuously, with pusillanimous mien, as being ashamed of our high calling. - Mark Twain

This is what we call "projection". You may lie sometimes, and so you assume other people do as well.

Some of us don't. Personally, I don't have the room in my head for it; there far more important thing to try and remember, and trying to keep track of lies would eat up way to much wetware.

I make no claims as to frequency of non-lying - it be a rare trait. I have met a couple others, though, so "everybody" is incorrect.

>Some of us don't. Personally, I don't have the room in my head for it; there far more important thing to try and remember, and trying to keep track of lies would eat up way to much wetware.

You must have a, ah, very narrow conception of what a lie is.

I mean, sure, most of us don't build a complex and self-consistent web of deception where we maintain several different self-consistent models of reality at once.

But that's not the only sort of lie.

The most common substantive lie, I think, is the "tell them what they want to hear" lie.

E.g. "are you working?" alt-tab "Yeah, I'm working"

Or even more commonly, checking personal email, facebook, or a webcomic on work time, and still putting that '8' on your timesheet.

For me? I don't do this on things that matter, and for me, work matters. e.g. if you ask if I'm working, but I'm on HN? I say, "No, I'm screwing off" If I'm having a hard time focusing, say, and I spend time on HN, my timesheet will have very few hours on it.

But, if you ask "how are you?" Quite often, I will say "fine" even if it is a lie. I excuse this lie by explaining it away as a greeting, but really? I don't want to spend time with a non-standard but more truthful answer, most of the time.

But a lot of people give the expected answer, even when the answer is a little bit important. This is the sort of lie that most people tell.

> You must have a, ah, very narrow conception of what a lie is.

I'm quite aware of all the various types of lies people tell.

> The most common substantive lie, I think, is the "tell them what they want to hear" lie.

No, I don't tell that kind of lie either.

> "how are you?" Quite often, I will say "fine" even if it is a lie.

These really annoy me, because it's a waste of time. It conveys no information. Worse, it can encourage burring problems under a facade of being "fine".

Again, I understand that most people habitually tell "little white lies". That doesn't mean everybody does.

You're missing out. Lying is an incredibly useful social tool that society would maybe fall apart without.

So you're a pathological truth-teller?

I think you missed my point: the OP had linked to an accusation by an employer that Mr. Karpeles had been using IM software while claiming to be working.

If such an innocuous "lie" was any evidence that someone could commit fraud, then we are in big trouble. Because that sort of lie isn't merely rare, ~everyone does so at some point.

They don't necessarily do it to be deceitful, rather because it's easier than the alternative. I don't think it has any moral or ethical quality to it. For instance, say I was having trouble with my girlfriend and couldn't concentrate at work. So I instead was diddle-dallying around and browsing HN.

I don't have the time or desire to explain to my boss the personal reasons why I was on HN, so instead I might say I was "refactoring" or doing code review. The next day, I'm fine and work extra hard to compensate .. no harm, no foul. I think most people would find that to be a reasonable "white lie".

The fraud continues today in China. Those exchanges were caught several times faking volume and placing phantom orders. I think the game now is: fake price hike in China, sell coins for real money on Bitstamp, buy cheaper, repeat. Just look at the recent hike - no news, no reason for 30% jump from $440 to $580 in a week.

> Just look at the recent hike - no news

There was a Federal Election Commission (FEC) decision to allow BTC donations to Political Action Committees (PAC's). Also circle.com showed started taking e-mails and showed a demo video.

Circle.com didn't release much more than we knew already. Regarding donations - you really think the Chinese "investors" care about this?

This does not qualify as a bullish catalyst.

Right now the exchange rate on Bitstamp is USD 576 and the rate on Huobi is RMB 3578. Converted, those prices are within one-half of one percent of each other.

If there are fake price hikes in China, wouldn't Huobi prices be higher? And how would buying coins for real money on Bitstamp allow you to buy for cheaper anywhere else?

Maybe I wasn't clear, but I wasn't talking about arbitraging. I'm talking about faking demand to hike prices and extend profit margin 10-fold. You can do this two ways - you can sell and buy cheaper, but then there's a risk that the price will stay low, so, you have more bitcoins, but less fiat. With this trick, you don't risk anything, and you make both more coins and more fiat.

Having Bitstamp and BTC-e copy the direction that Huobi takes without questioning makes them puppets in the hands of those who control Huobi and the likes. I think it's clear that Bitcoin market is predominantly amateur investors from the trigger-happy kind and the smart crooks can do with the market whatever they want with just a few hundred coins.

As recently the crypto wasn't profitable (the stock market performed way better) and people started to lose patience, some of those crooks had to do something to revive the market and keep doing what they've been doing so far. It's much easier to manipulate Bitcoin than the stock market, Forex, Gold, etc., so, those crooks didn't want to use their unique opportunity.

When you see "to the moon" everywhere, you know the game is back on, and many are gonna get taken advantage of pretty soon.

There are enough arbitrage bots out there now that major differences between the exchanges flatten out rather quickly.

My theory is that Bitcoin is used by the elite in China as just another way of transferring money out of the country. Buying Bitcoin from a Chinese exchange, and selling it on an American exchange, allows you to transfer money between countries, avoiding foreign exchange regulations.

I've heard this so many times! The elite has billions and although you can buy and sell many times working around the market cap of Bitcoin, I don't think it's practical to transfer tens and hundreds of millions as the low liquidity will drive prices up and down crazily. Plus, I have friends in China with money, there are no practical limitations of moving money around as the Bitcoin propaganda portrays it, only because it serves it well.

Further proof that the absurd run-up in November when bitcoin reached $1,200 was illegitimate.

Unfortunately this is plausible: The only reliable way to trigger a run-up in a commodity is to expend a lot of capital to acquire that asset at inflated prices- You'd have to "burn through" a lot of money to get this to happen.

...so, then where was this cache of money that was destroyed to inflate the price? It would have to be a pretty large quantity to have such a drastic impact.

Occam's Razor to me suggests the answer is obvious: The vaporized deposits of MtGox users are the most obvious large cache of money, large enough to cause such a run up.

The next question is, who would do this, and why? The answer suggested by Occam's razor would be "Someone who could modify the MtGox database to create nonexistent fiat currency, but could not (or did not want to) create fake MtGox bitcoin holdings." This is because a person with this power would have reason to trade the "fake fiat" with legitimate bitcoin holders to generate bitcoins that can be leeched out of the site, and this would certainly cause the price to rise.

This doesn't answer however whether it was an inside or external party, I could imagine scenarios both with or without inside actors that would lead to this kind of activity. (Though I'd put my bet on internal fraud, based on the fact that so much effort was put into hiding the fraud and extending it over a long period, as opposed to going for quick profit.)

Doesn't seem obvious to me at all. As a result of bankruptcy proceedings we know that Mtgox has lost primarily BTC deposits, not fiat (on mobile now, but IIRC only $27 million USD was lost which is peanuts compared to the value of lost BTC)

In other words, the situation at Mtgox was the opposite of what you describe: it had a lot of FakeBTC, bit its USD reserves were mostly real.

Whether or not the run-up was "legitimate" in your eyes is inconsequential - the exchange rate ran up to the point that the market could no longer bear, then crashed back to reality. Does the run-up's legitimacy somehow make the current exchange rate illegitimate? I think not.

Actually, the rate ran up to the point that Mt. Gox could no longer bear. Unfortunately, it's rather easy to start an exchange and get people using it (or at least, it's no more difficult than any other startup) so there will probably always be companies willing to manipulate the market for personal gain. And since every popular exchange's price affects every other, manipulation from one will manipulate the price at all the rest.

The modern day bitcoin trader should carefully consider whether they want to be a part of a market where the largest actors aren't bound by the rules they set for everyone else.

Though I agree somewhat with your argument, a true "legitimate market" requires full transparency by all parties without people trading on insider info.

In this case, however, only some parties knew that MtGox's internal accounting was broken. Therefore, the price run up may have been "illegitimate" for a limited time period based on this asymmetry of information.

You are right though that over the long term a market price is always "legitimate" by definition, because of the maxim "something is worth whatever someone is willing to pay for it."

So why did it crash? Why didn't the fraudster just prop up the price?

like all ponzi schemes, it relied on new users getting sucked in. As other exchanges grew and Mt Gox doubts spread, I imagine their growth rate dropped.

Because no fraudster can prop it up indefinitely. Gotta lock in your profits before the crash.

Bitcoin has been pumped up and crashed 3 times. The fraudulent trading of Mt. Gox was only the most recent crash.

According to the actual post, it was at least the last 2 times.

Depends on what you consider a crash. IMO it crashed in November and hasn't had it's next climb yet.

Permalink at http://willyreport.wordpress.com/2014/05/25/the-willy-report...

Thanks; changed.

The ironic thing about this is that the nature of Bitcoin (specifically, the fact that all transactions are recorded in the blockchain) means that auditing a Bitcoin exchange is an eminently solvable problem. To my mind, given the ease with which Bitcoin wallets can be created, any exchange that commingles its clients' Bitcoins should be viewed with suspicion.

Yes, it's easier to dump everything into a few wallets, instead of maintaining individual wallets for every client. However, if the team behind an exchange isn't capable of dealing with the complexity of individual, segregated wallets, you have to wonder whether they're competent enough to run an exchange in the first place.

Segregated wallets doesn't work, that would mean every single trade would be a transaction on the block chain. It would absolutely flood the network and result in massive fees. It literally can't be done that way.

And that inherent inefficiency is just one of the reasons Bitcoin is not the future of finance.

No, it's just why exchanges don't needlessly segregate wallets.

So you went from " if the team behind an exchange isn't capable of dealing with the complexity of individual, segregated wallets, you have to wonder whether they're competent enough to run an exchange in the first place" to "that inherent inefficiency"? Which is it, an inherent flaw in BTC, or ineptitude on the part of the exchangers?

Both.

As others have noted, there are scaling issues with moving every single transaction out into the blockchain.

Luckily, this is not needed. An exchange can prove that it holds all the bitcoin it claims to, and each induvidual account holder can verify the proof as it pertains to their own coins. See this for example: https://iwilcox.me.uk/2014/proving-bitcoin-reserves

Hopefully users will start to insist on these kinds of things in the future.

I'm a fan of RationalWiki's Bitcoin article: http://rationalwiki.org/wiki/Bitcoin

> This is the sort of thing that gets bitcoins called "Dunning-Krugerrands."

A shockingly one-sided article. Probably colored by their aversion to Libertarianism.

Which sentences from the article do you disagree with?

The following is presented as indisputable facts in the article:

Bitcoin is a scam

Bitcoin is a Ponzi scheme

There is zero chance that bitcoin will ever be mainstream

Bitcoin does not have a single advantage over fiat currency

Bitcoin will never be useful for online shopping

None of the problems with bitcoin can be fixed

All bitcoin users and developers are incompetent, does not know anything about economics, does not understand people at all and has no understanding on how to build reliable financial computing infrastructure

Looks pretty one-sided to me.

The reason I asked "Which sentences from the article do you disagree with?" was to have you quote a sentence and then write a rebuttal. We strive to do better on HN than write strawman arguments, and we try to make our critique substantive and thorough. (A handy test: if I can't find a specific sentence to disagree with, I might be arguing a strawman position, so I try doubly hard to be thoughtful in that circumstance.)

Also, on HN, a line in italics usually means "this is a direct quote," so it's generally taboo to put things in italics which you didn't copy-paste from some source. For example, the word "mainstream" never appears in the article, so it shouldn't be in an italicized line.

Actually most individual sentences aren't all that bad, it's more that the overall tone of the article seeks to portray bitcoin as something bad, though it does funnily enough seem to be somewhat pro-dogecoin.

Thanks for letting me know about italics, it was meant as a list and not a quote. I'll make sure to remember for next time :)

Despite what the domain name suggests, the article is not a well-reasoned argument that even has any concrete conclusions.

I find the Dunning-Kruger effect article on rational wiki rather ironic.

Many of the articles on that wiki is written by people with only rudimentary knowledge of the topic that they're writing about, yet the authors claim to be experts, and "debunk" and criticize things without even doing any research.

Take http://rationalwiki.org/wiki/Scrying as an example.

There have actually been quite a few real scientific studies on scrying, and while there may be little evidence of psychic powers, there is good evidence that staring at a point, for example on a crystal ball or the surface of water, leads some people to see dream-like hallucinations at the point where they are staring. See for example http://books.google.com/books?id=am9NAAAAYAAJ&q=crystal+ball...

This is another example of centralization runing things. Once you have a "trusted" exchange, accounts can do shenanigans like buy bitcoins internally for no fiat money, whether through hacking or collusion.

An actual bitcoin exchange should just set up parties to do a 2-of-3 trade. It would be slower, but better for the stability of the currency!

Discussion on r/Bitcoin: http://www.reddit.com/r/Bitcoin/comments/26g46e/the_willy_re...

Well researched findings there. Imagine a world, where the same logs would be public of what and by whom happens on the stock exchanges where all the high frequency trading is happening these days...

So, the world we live in right now then? All trade data, even HFT sourced, is available from exchanges. The only possible exception is dark pools or other crossing networks, but in general it is quite possible to know who bought what from whom, when and for how much.

> All trade data, even HFT sourced, is available from exchanges.

You mean it's available to government regulators, but not to the general public, correct?

If stock and option trades are part of the public record, there are lots of questions I'd like to answer for myself. Otherwise, we're just taking the word of other people (the regulators).

Here's one question: I'd like to know who specifically was behind the huge volume in put options on United and American Airlines stock immediately before the 9/11 attack. Someone was essentially shorting those two airlines, and only those two. (For example, Bloomberg data showed that on 6 September 2001, the Thursday before the attack, the put-option volume in UAL stock was nearly 100 times higher than normal: 2,000 options versus 27 on the previous day.) The 9/11 Commission report concluded that, "A single U.S.-based institutional investor with no conceivable ties to al Qaeda purchased 95 percent of the UAL puts on September 6 as part of a trading strategy", but they refused to identify who it was.

Everything is not so transparent unless there's some public repository for all this information that I'm not aware of.

This is chilling.

What are the odds that this wasn't "insider trading" with the attackers?

> What are the odds that this wasn't "insider trading" with the attackers?

Extremely high.

http://www.snopes.com/rumors/putcall.asp

I'm sure it was an innocent oversight for you to leave off the remainder of the 9/11 commission's quote;

"""

A single U.S.-based institutional investor with no conceivable ties to al Qaeda purchased 95 percent of the UAL puts on September 6 as part of a trading strategy that also included buying 115,000 shares of American on September 10.

Similarly, much of the seemingly suspicious trading in American on September 10 was traced to a specific U.S.-based options trading newsletter, faxed to its subscribers on Sunday, September 9, which recommended these trades. The SEC and FBI, aided by other agencies and the securities industry, devoted enormous resources to investigating this issue, including securing the cooperation of many foreign governments.

"""

Yes, that world, of course :)

The trade data is available to market information companies, other trading partners and of course the regulators, but is the subscriber data too? E.g. who gave the order to the trading partner?

Oh and yes, it's not really public...

Step 1: create USD out of thin air.

Step 2: buy BTC at $1200.

Step 3: sell BTC at $200.

Step 4: profit!

Yes, this is exactly right, but you should clarify:

Step 1: create USD_FAKE out of thin air.

Step 2: buy BTC at 1200 USD_FAKE on MtGox.

Step 3: sell BTC at 1100 USD_REAL on Bitstamp.

Step 4: profit!

Whoever sold you BTC in Step 2 isn't going to accept USD_FAKE for their coins. Doesn't this scam fall apart right there?

There's something like $600M missing. Were people really leaving that much fiat on account at Gox?

I don't follow your argument. The person selling the bit coin in 2 assumes that when the number in their account balance goes up by USD_FAKE that there was really money to back it up. They have no way of knowing that Mt Gox didn't ever have that money.

I think that is the point they are trying to make.

Mt. Gox didn't let you withdraw real currencies other than JPY, most interestingly the dollar, from approximately last August. This meant that when you were selling BTC for USD, you were actually accepting a USD liability of Gox -- Bitcoiners sometimes called them GoxBux or GoxUSD. It's a number in a database and now, apparently, something which you'll eventually be allowed to assert as a claim in their liquidation, but it is not actually a dollar.

The failure to allow withdraws in currencies they supported is why many people were speculating that Mt. Gox was insolvent, for much of the year prior to them admitting insolvency. As it turns out, we were probably right.

I think that is called quantitative easing.

The Bitcoin community has had a term for your USD_FAKE concept for a long time: GoxBux.

Also:

Step 1: Spend users' deposited BTC until you can no longer cover withdrawals.

Step 2: Freeze Bitcoin withdrawals.

Step 3: Wait while the internal Gox BTC price plummets as people try to get their money out.

Step 4: Buy up the "bad" BTC at the deflated prices until it's all gone. Nobody will ever know the difference.

Start : (Markus: $0) (Joe: 1BTC)

Step 1: (Markus: $1200) (Joe: 1BTC)

Step 2: (Markus: 1BTC) (Joe: $1200)

Step 3: (Markus: $200) (Joe: 1BTC, $1000)

Step 4: Piss off Joe by preventing him from withdrawing his imaginary profits.

I don't understand what Markus gains in this situation.

Markus' $1200 isn't his (in fact, it never existed), whereas Joe's $200 is very real. Markus gains $200.

Assuming "Joe" represents the entire userbase of Mt. Gox, which deposited its own money into the system:

Start : (Markus: $0) (Joe: 1BTC, $200)

Step 1: (Markus: $1200) (Joe: 1BTC, $200)

Step 2: (Markus: 1BTC) (Joe: $200 + 1200)

Step 3: (Markus: $200) (Joe: 1BTC, $1200)

Assuming Markus withdraws fiat before Joe does, Mt. Gox only had $200 in real money and $1200 in fake make-believe numbers, so Joe is left unable to withdraw.

But it seems like if they were pumping the price up, then a lot of active traders would be holding fake USD. Mt. Gox can't tell if it is accepting real or fake USD while dumping. I think my first post outling a possible scenario that generate nothing except perceived loss to users once they can't withdraw.

When a user does not yet have sufficient USD on deposit with Gox to buy the bitcoins they want, they deposit more, and MtGox now has more real USD under their control. It's not a matter of selling the coins for real vs fake USD.

The question is how much new cash was really put into Mt. Gox to buy while they were dumping and the price was crashing?

I wonder if the information even exists to create a ledger of all the real dollar deposits and withdrawals that Mt. Gox carried out. I suppose even if that ledger made sense they could be sending the $200 to an account (or multiple accounts) controlled outside of the business.

As one of the many people who lost money in the Gox implosion, this is nauseating to read. On a less related note, I heard they recovered 1/5 of the missing bitcoins awhile ago. Anyone know what will happen to that 1/5?

According to they official announcements, these are going to be liquidated to pay some part of the debt to creditors.

I've got your back: https://news.ycombinator.com/item?id=7777831

Our money was lost the moment we decided to transfer it to a third party. That 1/5 probably won't recover very much of it, if any of it, for reasons explored in that thread.

Whether it's Mt. Gox or Coinbase, money we put into a webwallet is no longer ours. It's the legal entity's. If they go bankrupt, which can happen for a variety of reasons, sometimes unfair ones, then that money is gone. Best magic trick ever.

Try to be at peace with the loss. Easier said than done; it was difficult for me. If you need someone to talk to, please feel free to shoot me an email.

Thanks for the information and advice. I figured as much, my hopes weren't too high. I don't think I'm going to be investing in anything like Bitcoin for a long time. Best of luck.

Don't forget, 'real' bank accounts work like this as well. The money is no longer yours once you deposit into an account. The bank represents it as a liability on its balance sheet. As an account holder you are an 'unsecured creditor' of the bank. I have a feeling a lot more of us will be aware of this arrangement within a year or two, once the bail-ins begin.

US banks have FDIC insurance to protect deposits up to $250,000 [1]. To the extent that you trust the US government you can trust that your money is safe in a US bank up to the stated FDIC limits. Banks fail all the time. There have been 8 failures in 2014 so far and not a single penny of depositor money has been lost. You can see a list of every bank failure and the outcome here [2].

The simple and incontrovertible fact is that the US banking system is as close to 100% safe as you can get. Bitcoin isn't anywhere close.

[1]: http://www.fdic.gov/deposit/index.html [2]: http://www.fdic.gov/bank/individual/failed/index.html

Be careful regarding FDIC insurance. Most investment instruments: stock, bond, mutual funds are not covered by FDIC protections. [1]

[1] http://www.fdic.gov/consumers/consumer/information/fdiciorn....

False.

In many countries currency deposits (up to a certain level) are protected by law and government guarantees.

I didn't say you won't get your money but that legally speaking the money, once deposited, is not yours any more, it is an asset of the Bank. This is why you'd need insurance/government-guarantees during a bank failure, otherwise you'd be treated just like a stock or bond holder who holds no collateral.

"From a legal and financial accounting standpoint, the term "deposit" is used by the banking industry in financial statements to describe the liability owed by the bank to its depositor, and not the funds that the bank holds as a result of the deposit, which are shown as assets of the bank." - http://en.wikipedia.org/wiki/Deposit_account

"Bank deposits are simply a record of how much the bank itself owes its customers. So they are a liability of the bank, not an asset that could be lent out." - p.http://www.bankofengland.co.uk/publications/Documents/quarte...

Your intention was to imply the risk was the same. This is not true.

http://www.fdic.gov/deposit/deposits/

The buy-bot has been speculated about since January at least: http://www.reddit.com/r/BitcoinMarkets/comments/1uosly/daily...

Is this the first article that links the leaked data to the "buy-bot"?

How does this fake_usd demand driving up the price of Bitcoin tenfold compare with the New York Fed's ex nihilo asset purchase program?

(I assume you're referring to QE1, QE2 and QE3)

It's say a supermarket advertises bread for $1. Anyone who reads the ad, will consciously or unconsciously believe that the dollar has value. Now multiply this effect by all the similar advertising over many years and you'll see that the dollar is the strongest brand ever.

When the financial crisis hit in 2008, the public starting saving and they choose the most stable brand they could find (the dollar) and the brand was well on it's way to get even stronger.

The way to counter act it was by flooding the market with money (lowering interest rates and later printing money).

Bitcount does not derive it's value in the same way and printing bitcoins is fixed by the block chain rules.

And to close the point, the US Government doesn't go bankrupt, because they never actually get called out to show their accounts of (fake) money. Their new money is as good as the rest, meaning that their actions dilute all dollars equally, instead of only wiping out accountholders at one institution.

I wasn't really talking about the dollar, I was talking about the effect on the assets being purchased (MBS securities, and indirectly other assets on the financial markets). Notice how much the stock market and house prices have gone up in the last few years.

It is indeed unfortunate when people like Karpeles manipulate such perspective technology-based market as btc was. The trust is irreplaceable, and the bitter taste which users of mtgox experience each time they hear about btc has already had almost devastating effects on bitcoin economy. Lesson learned.

Did anyone grab a mirror before the site disappeared?

"willyreport.wordpress.com is no longer available. This blog has been archived or suspended for a violation of our Terms of Service."

Here's google's snapshot: http://webcache.googleusercontent.com/search?q=cache:http%3A...

Exactly the reason why technology must be open and transparent. Sadly, decision makers that define economic policy and allow organizations to reach this level of misuse (or misconduct) know little to nothing about what these technologies are capable of, or to what extent they can be compromised and manipulated. Kudos to the tech makers and users who do understand for maintaining a watchful eye and not hesitating to report wrong-doing, or the suspicion of wrong-doing. How can we get these guys in office instead of the people that are currently holding back good technology while letting loose the bad?

Isn't this almost exactly the opposite of the problem here?

What appears to have happened here is something completely unrelated to the technology. The same thing could have happened in any financial exchange.

There were two difference that made it possible here: 1) the investors may have been technical experts but were financially naive and dramatically underpriced the risk, and 2) the market was completely unregulated, so the financially naive investors had no protection from those who weren't so naive.

MtGox customers surely ate not technical experts. Technical experts would hold their own wallet instead of handing it over to some guy in Japan who was publicly known to be unable of running a secure website, let alone a financial exchange.

I think the "unable of running a secure website, let alone a financial exchange" part of your comment goes to the "dramatically underpriced the risk" part of my comment.

Denying their technical expertise is more interesting. I've heard that theory often, and yet there are plenty of people I thought were technically proficient who lost money.

Indeed, I have some (small) amount of money in another Bitcoin exchange - it is convenient.

Perhaps the level of technical expertise of these users is roughly that of an average HN reader: ie, somewhat higher than the general population.

One of the core developers lost over 330 BTC to Mt Gox. Tell me they are not technical experts.

The issue is much deeper than just Mt Gox. It's the entire cloud ecosystem. There would have to be a whole paradigm shift back to P2P and local computing before people stop trusting a Mt Gox. Just because BTC was a radical new P2P currency doesn't mean that all users suddenly realized that they should stop trusting cloud providers. And until there's a distributed BTC exchange, I don't think you can fault the users here.

I think the problem here is basically misconduct in an unregulated industry. The US and other governments have taken some positive steps towards recognizing BTC and finding ways to bring it into the regulated landscape. I would share your outrage if governments simply outlawed BTC and went after users and entrepreneurs as criminals. However, we're basically all in agreement that BTC is risky and unregulated but legal, and in cases where laws are being enforced against individuals/companies in BTC it's actually to legitimize it as a whole.

It would be interesting to see what exchanges had higher prices during the climb to see who started it.

I don't think the bot is responsible for either bubble.

But, if it was, the bitcoin world owes everything to Mark Karpeles. Because of the price surges it got all the media attention, VC investments, hundreds of companies popping up, millions of users...

... and hundreds of thousands of people losing everything they had in Mt. Gox (at best) and straight into Karpeles' pocket (at worst).

Are you sure we owe him?

I lost some money there too, I've been their customer since 2011.

But if the main reason for the April and November bubbles is Willy, than the current (amazing) state of bitcoin is thanks to him.

These kinds of market manipulation shenanigans only reduces trust in bitcoin, so no, we don't owe that fuckwad anything.

I did gain (ever so slightly) from the higher price, and I didn't have any money with MtGox so no loss there. But I'm still unhappy about it, because I want to see bitcoin succeed in the long term.

Unfortunately every market is highly manipulated... And in any market you deal with people who have more information than you. The game is trying to understand the manipulation.

Bitcoin - The economy of WoW, writ large.

WoW has real economy? please

This is classical EVE Online ponzi scam.

http://www.tentonhammer.com/eve/news/eve-online-ponzi-scheme...

http://massively.joystiq.com/2011/08/12/biggest-eve-online-s...

http://www.lockergnome.com/news/2011/08/18/how-two-people-sc...

http://en.wikipedia.org/wiki/Bernie_madoff

The world (of warcraft?) economy.

blog_nutella

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