4 ms·

Mt. Gox and the Mother of All Short Squeezes

13 points by worldvoyageur 10y ago

yoklov 10y ago
Is there a way to read this article without signing up for something?
- hiccup 10y ago
  click the web link above
chollida1 10y ago
> There was, however, one problem with such a plan. Any market where you yourself are the chief liquidity provider and in which flows remain pretty one-sided is also a market where you end up taking on the risk, regardless of whether or not you’re front-running your customers, benefiting from privileged information or setting withdrawal limits — this is largely because you’re dealing with paper profit creation. In some cases, a self-fulfilling feedback loop might even occur in which no matter how much bitcoin you pre-buy to sell to your customers at a premium, the underlying capital needed to acquire the bitcoin becomes proportionally ever larger in ratio terms. So you end up short-squeezing yourself to ruin. So they speculate that he started with a bitcoin shortfall and attempted to buy bitcoins on his own exchange to buy his way out of the shortfall, but in doing so exacerbated the problem by increasing the price of bitcoin because mt. gox was really the only buyer of any size on teh exchange? I can't think of another market where this has occurred. Can anyone else come up with a similar scenario that's played out like this in the past? Worth reading the referenced article as well: http://www.thedailybeast.com/articles/2016/05/19/behind-the-biggest-bitcoin-heist-in-history-inside-the-implosion-of-mt-gox.html http://www.thedailybeast.com/articles/2016/05/19/behind-the-...
- elevensies 10y ago
  I as also trying to understand this. I think what they're saying is that MtGox had more demand for bitcons than supply -- and the whole market did generally. When demand increases faster than supply, the price must rise. So by losing 80kBTC, they were in the same situation as if they had shorted 80kBTC. They benefit from the price going down, and suffer from the price going up. And moreover, to act as a liquidity provider when the market movement isn't random, but instead most people are buying BTC which is going up, is also a money losing position -- MtGox is the only seller of BTC which keeps rising. I think this implies they were buying BTC off-exchange. But since MtGox users are buying more than selling, MtGox doesn't have to convert their cash back into BTC -- MtGox's losses are occurring in BTC and are essentially invisible, but when they lose money in BTC, they are effectively increasing their short position. I'm not fully seeing how the feedback loop would operate, I think you'd need to factor in MtGox's total capital, their short postion, and the market size ... I can see how their position gets worse and worse. I can't think of any historical precedent though. The final result is kind of like the Salad Oil Swindle, but the path taken is different. edit: maybe a bucket shop in bull market would be a similar mechanism.
- rspeer 10y ago
  > Originally, the company had been created as a platform for trading playing cards. Pokémon probably is the most familiar version in the West, but these were for Magic: The Gathering, a game that was popular among kids who gave up on any hope of being “cool” at high school; a dungeons and dragons sort of card game for obsessive fans. Who the heck is their audience here? Who knows what Bitcoin and MtGox are but needs MtG explained to them in this ridiculous way?
deleted 10y ago
[deleted]

13 points by worldvoyageur 10y ago

yoklov 10y ago

Is there a way to read this article without signing up for something?

hiccup 10y ago
click the web link above

chollida1 10y ago

> There was, however, one problem with such a plan. Any market where you yourself are the chief liquidity provider and in which flows remain pretty one-sided is also a market where you end up taking on the risk, regardless of whether or not you’re front-running your customers, benefiting from privileged information or setting withdrawal limits — this is largely because you’re dealing with paper profit creation. In some cases, a self-fulfilling feedback loop might even occur in which no matter how much bitcoin you pre-buy to sell to your customers at a premium, the underlying capital needed to acquire the bitcoin becomes proportionally ever larger in ratio terms. So you end up short-squeezing yourself to ruin. So they speculate that he started with a bitcoin shortfall and attempted to buy bitcoins on his own exchange to buy his way out of the shortfall, but in doing so exacerbated the problem by increasing the price of bitcoin because mt. gox was really the only buyer of any size on teh exchange? I can't think of another market where this has occurred. Can anyone else come up with a similar scenario that's played out like this in the past? Worth reading the referenced article as well: http://www.thedailybeast.com/articles/2016/05/19/behind-the-biggest-bitcoin-heist-in-history-inside-the-implosion-of-mt-gox.html http://www.thedailybeast.com/articles/2016/05/19/behind-the-...

elevensies 10y ago
I as also trying to understand this. I think what they're saying is that MtGox had more demand for bitcons than supply -- and the whole market did generally. When demand increases faster than supply, the price must rise. So by losing 80kBTC, they were in the same situation as if they had shorted 80kBTC. They benefit from the price going down, and suffer from the price going up. And moreover, to act as a liquidity provider when the market movement isn't random, but instead most people are buying BTC which is going up, is also a money losing position -- MtGox is the only seller of BTC which keeps rising. I think this implies they were buying BTC off-exchange. But since MtGox users are buying more than selling, MtGox doesn't have to convert their cash back into BTC -- MtGox's losses are occurring in BTC and are essentially invisible, but when they lose money in BTC, they are effectively increasing their short position. I'm not fully seeing how the feedback loop would operate, I think you'd need to factor in MtGox's total capital, their short postion, and the market size ... I can see how their position gets worse and worse. I can't think of any historical precedent though. The final result is kind of like the Salad Oil Swindle, but the path taken is different. edit: maybe a bucket shop in bull market would be a similar mechanism.
rspeer 10y ago
> Originally, the company had been created as a platform for trading playing cards. Pokémon probably is the most familiar version in the West, but these were for Magic: The Gathering, a game that was popular among kids who gave up on any hope of being “cool” at high school; a dungeons and dragons sort of card game for obsessive fans. Who the heck is their audience here? Who knows what Bitcoin and MtGox are but needs MtG explained to them in this ridiculous way?

deleted 10y ago

[deleted]