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The Inside Story of Mt. Gox, Bitcoin’s $460M Disaster

99 points by esalazar 13y ago

nakedrobot2 13y ago
Nothing new here if you have been following the story. It is a glossy, quick summary of all the conjecture that has been posited thus far in many other places, not delving into really any detail or saying anything new. I am sure this story is going to get much weirder before it sees any semblance of sunlight or truth. And it might take many years for that to happen.
- natdempk 13y ago
  Agreed, this was pretty far from the "inside story" of Mt. Gox and was more just about Karpeles incompetence and personality faults. "seated, inexplicably, on top of a blue pilates ball" really irked me, because its not inexplicable. The guy probably has back or circulation problems, give him a break instead of giving him crap for every last detail of his life. There's more than enough to critique about the fact that he ran the largest bitcoin exchange into the ground.
  - wpietri 13y ago
    I own a couple of those balls, and I still think it's inexplicable that he would sit for a Reuters TV interview on one. Watch the video here: http://www.youtube.com/watch?v=LLjlOw3TVc8#t=1m10s http://www.youtube.com/watch?v=LLjlOw3TVc8#t=1m10s If you are trying to project that you are the CEO of a stable financial institution, having a lot of people say, "What the hell is he sitting on?" is not the best PR strategy.
    - cma 13y ago
      Should I cancel my Google Wallet account? http://www.corechair.ca/wp-content/uploads/2013/03/google-exercise-ball1-300x300.jpg http://www.corechair.ca/wp-content/uploads/2013/03/google-ex...
      - wpietri 13y ago
        Actually, that's a great example of how to use those well for PR. When's that photo from, something like 2005? Before? Early on, Google did a great job of creating a young, hip, fun image. They wanted people to like them. Miracles and wonders, all from these slightly goofy Californian eggheads! But that's not the kind of image you want to create for a financial trading platform on which you want people to deposit lots of money and feel safe. You could go brilliant and edgy or respectable and serious. But goofy? Nope. I can't imagine he had a PR person there for the interview. Just another sign that he wasn't qualified to run a billion-dollar business.
boon 13y ago
When are we going to see a change in the rhetoric? This isn't Bitcoin's disaster, it's wholly Mt. Gox's.
- kerbs 13y ago
  I wouldn't go that far. If people are comparing Bitcoin to ye old Dollar, then the lack of regulation that can lead to a disaster like this is something people need to be aware of.
  - boon 13y ago
    I don't disagree that in a post-regulation world, people are going to have to be more cautious with their monies from a security and risk perspective. That's a good thing. But a lack of regulation still doesn't make this Bitcoin's disaster. You're doing a great injustice to those of us that did lose money to assign blame to any party other than Mt. Gox.
    - bunderbunder 13y ago
      > I don't disagree that in a post-regulation world, people are going to have to be more cautious with their monies from a security and risk perspective. That's a good thing. Those who forget history are doomed to repeat it. Do some reading on what financial life is like for most people in a pre-regulation world. Presumably the post-regulation one wouldn't be terribly different.
      - boon 13y ago
        No one is forgetting history. I think those of us pointing out that Bitcoin enables perhaps less regulation is because it provides new technologies for self-regulating and self-organizing. n of m wallets, self-executing contracts, autonomous organizations, etc. are all paradigms that we've never seen before and solve some of the efficiency/regulatory problems of the past. One could imagine a world where the government doesn't regulate, it only provides guidelines that all people can use as a framework or template for the self-contracting they do with potential risk.
antonius 13y ago
The biggest red flag for me was Mt.Gox not declaring itself as money transmitter and being fined by the U.S Government as a result. Knowing it would have a great deal of American users and that it would have to abide to rules, Mt.Gox overlooked this. Everything that followed only validated my decision to stay away.
- anologwintermut 13y ago
  US law is pretty clear on the fact that Mt. Gox is a money transmitter (you don't have to actually transmit money to be one, just things equivalent to money). Whether they are subject to US jurisdiction or not might be debatable (though not really as far as the feds are concerned if they have US customers).
  - bunderbunder 13y ago
    > Whether they are subject to US jurisdiction or not might be debatable If you're worried about what the courts have to say about the subject, it isn't debatable in the slightest. They're the ones who get to decide what the rules are, period. If you don't care what a jurisdiction's courts have to say about the rules governing financial services, you really have absolutely no business offering financial services in that jurisdiction.
  - oijaf888 13y ago
    Do you know if CCP Games is registered as a money transmitter? Eve ISK has value and is as equivalent to money as bitcoins so they should fall under that umbrella right?
    - ecdavis 13y ago
      ISK is not as equivalent to money as bitcoins. For one, there's no CCP-endorsed way to turn your ISK into money.
  - dragonwriter 13y ago
    > US law is pretty clear on the fact that Mt. Gox is a money transmitter US law is pretty clear on the fact that Mt. Gox is a money transmitter because Gox did, in fact, transmit money (that is, it had USD denominated accounts for users and distributed funds to other people from those accounts to other people at the direction of the account holder.) > (you don't have to actually transmit money to be one, just things equivalent to money). That might be true, but its irrelevant, as Gox (and any other exchange that exchanges a commodity for money, whether or not the commodity itself is also money) actually transmitted money, not merely "things equivalent to money".
epaga 13y ago
This is anything but the inside story. The only "insider" information is the one guy who interviewed at Gox and claimed they don't use any VCS (but he made this claim a while ago).
coldcode 13y ago
It's pretty clear from this story that the "CEO" had no business running a half billion dollar business, much less a lemonade stand. It seems he mostly lucked into the business and luck doesn't work as a business plan, especially in a financial business.
- alewis2005 13y ago
  Yeah, but you don't understand the idiom 'much less'.
- mwfunk 13y ago
  I had no idea lemonade stands were so complicated! :)
  - yogo 13y ago
    It might not be, but incompetence can lead to bad things, like people dying from accidentally being poisoned from lemonade purchased at a stand.
  - snorkel 13y ago
    Unfortunately this guy doesn't posses the motivation and focus to even run a lemonade stand because he'd rather be hacking on cash registers instead. CEO was not his calling, and neither was CTO.
ck2 13y ago
Somewhere in an alternate universe, MtGox was run correctly, they brought on litecoin this week and lifted it into high double digits.
alecsmart1 13y ago
Am not sure when mobile phone became a requirement- "Bitcoin promises to give a bank account to anyone with a mobile phone, no ID required."
- ghshephard 13y ago
  Is it possible for me to use my iPhone to make a payment with bitcoins? Does apple allow bitcoin wallets onto the Apple Store?
  - pseudonym 13y ago
    Short answer, no. Long answer: http://www.pcworld.com/article/2095060/apple-removes-blockchain-last-bitcoin-wallet-app-from-mobile-store.html http://www.pcworld.com/article/2095060/apple-removes-blockch...
- andreasvc 13y ago
  A phone is a sufficient but not a necessary condition for using Bitcoin. It makes sense to mention phones instead of computers since in developing countries there are significant numbers of people with a phone but not a computer.
aianus 13y ago
How did Mark Karpeles afford to buy MtGox from McCaleb?
- psykovsky 13y ago
  A fair amount of BTC and USD together with 12% on the company allied to the fact Jed was kind of expecting the difficulties ahead and wanted out. But I mean OUT, really OUT...
ChuckFrank 13y ago
Even if Bitcoin balances can be made bullet proof, the Achilles heal is that it is not a legal tender, and that there are no market fundamentals to contribute to its exchange rate. My 660 Trillion Zimbabwe dollars, sitting here on the desk, are solidly in my possession. So what? P=0 means they have zero use value other than as a conservation piece. Interestingly, when I show them to people and they handle them (Produced by the British Bank Note Company that makes currency for a lot of countries) they frequently falsely conclude that the are phony. They have a hard time reconciling "real" with "worthless" Whether or not Gox slid into fractional reserve banking is interesting, since if they did (I doubt it) they were basically betting against their depositors. To do that they would have had to taken Bitcoin balances as they came in, sold them for hard currency, wanted for Bitcoin to fall, buy it back, and pocket the difference, at the same time being able to honor withdrawals so there was not a bank run. The way this ended suggests that either something else happened, or they "bet the farm" and shifted virtually all of the Bitcoin deposits at a hard currency Bitcoin price below what it is worth now. The got caught "short" bigtime like in a margin call for stock bought on the margin.
habosa 13y ago
Sounds like Karpeles is a guy with a short attention span who looks for low-hanging fruit and ignores the big issues because he may not be able to solve them. I have this issue with projects too, but of course I never ran a 9-figure Bitcoin exchange.
- swalsh 13y ago
  Its not the role of the CEO to solve those issues, its his role to make sure he has people who DO know how to solve it working on it, and to make sure they have the resources they need to do it. He seems better suited for a role as CTO, though even that may be a stretch...
brianpgordon 13y ago
This is the relevant paragraph for "our crowd:" > Mt. Gox, he says, didn’t use any type of version control software — a standard tool in any professional software development environment. This meant that any coder could accidentally overwrite a colleague’s code if they happened to be working on the same file. According to this developer, the world’s largest bitcoin exchange had only recently introduced a test environment, meaning that, previously, untested software changes were pushed out to the exchanges customers — not the kind of thing you’d see on a professionally run financial services website. And, he says, there was only one person who could approve changes to the site’s source code: Mark Karpeles. That meant that some bug fixes — even security fixes — could languish for weeks, waiting for Karpeles to get to the code. “The source code was a complete mess,” says one insider.
- guelo 13y ago
  I would only feel safe using a completely open source exchange to hold my money.
  - erobbins 13y ago
    I guess you don't use any online banking services?
    - tbyehl 13y ago
      US banks have FDIC insurance to protect depositors against insolvency.
  - shin_lao 13y ago
    What matters isn't open source or not. What matters is code quality.
    - guelo 13y ago
      As a customer, how would I know the code quality if it's not open source?

99 points by esalazar 13y ago

Nothing new here if you have been following the story. It is a glossy, quick summary of all the conjecture that has been posited thus far in many other places, not delving into really any detail or saying anything new. I am sure this story is going to get much weirder before it sees any semblance of sunlight or truth. And it might take many years for that to happen.

natdempk 13y ago
Agreed, this was pretty far from the "inside story" of Mt. Gox and was more just about Karpeles incompetence and personality faults. "seated, inexplicably, on top of a blue pilates ball" really irked me, because its not inexplicable. The guy probably has back or circulation problems, give him a break instead of giving him crap for every last detail of his life. There's more than enough to critique about the fact that he ran the largest bitcoin exchange into the ground.
- wpietri 13y ago
  I own a couple of those balls, and I still think it's inexplicable that he would sit for a Reuters TV interview on one. Watch the video here: http://www.youtube.com/watch?v=LLjlOw3TVc8#t=1m10s http://www.youtube.com/watch?v=LLjlOw3TVc8#t=1m10s If you are trying to project that you are the CEO of a stable financial institution, having a lot of people say, "What the hell is he sitting on?" is not the best PR strategy.
  - cma 13y ago
    Should I cancel my Google Wallet account? http://www.corechair.ca/wp-content/uploads/2013/03/google-exercise-ball1-300x300.jpg http://www.corechair.ca/wp-content/uploads/2013/03/google-ex...
    - wpietri 13y ago
      Actually, that's a great example of how to use those well for PR. When's that photo from, something like 2005? Before? Early on, Google did a great job of creating a young, hip, fun image. They wanted people to like them. Miracles and wonders, all from these slightly goofy Californian eggheads! But that's not the kind of image you want to create for a financial trading platform on which you want people to deposit lots of money and feel safe. You could go brilliant and edgy or respectable and serious. But goofy? Nope. I can't imagine he had a PR person there for the interview. Just another sign that he wasn't qualified to run a billion-dollar business.

boon 13y ago

When are we going to see a change in the rhetoric? This isn't Bitcoin's disaster, it's wholly Mt. Gox's.

kerbs 13y ago
I wouldn't go that far. If people are comparing Bitcoin to ye old Dollar, then the lack of regulation that can lead to a disaster like this is something people need to be aware of.
- boon 13y ago
  I don't disagree that in a post-regulation world, people are going to have to be more cautious with their monies from a security and risk perspective. That's a good thing. But a lack of regulation still doesn't make this Bitcoin's disaster. You're doing a great injustice to those of us that did lose money to assign blame to any party other than Mt. Gox.
  - bunderbunder 13y ago
    > I don't disagree that in a post-regulation world, people are going to have to be more cautious with their monies from a security and risk perspective. That's a good thing. Those who forget history are doomed to repeat it. Do some reading on what financial life is like for most people in a pre-regulation world. Presumably the post-regulation one wouldn't be terribly different.
    - boon 13y ago
      No one is forgetting history. I think those of us pointing out that Bitcoin enables perhaps less regulation is because it provides new technologies for self-regulating and self-organizing. n of m wallets, self-executing contracts, autonomous organizations, etc. are all paradigms that we've never seen before and solve some of the efficiency/regulatory problems of the past. One could imagine a world where the government doesn't regulate, it only provides guidelines that all people can use as a framework or template for the self-contracting they do with potential risk.

antonius 13y ago

The biggest red flag for me was Mt.Gox not declaring itself as money transmitter and being fined by the U.S Government as a result. Knowing it would have a great deal of American users and that it would have to abide to rules, Mt.Gox overlooked this. Everything that followed only validated my decision to stay away.

anologwintermut 13y ago
US law is pretty clear on the fact that Mt. Gox is a money transmitter (you don't have to actually transmit money to be one, just things equivalent to money). Whether they are subject to US jurisdiction or not might be debatable (though not really as far as the feds are concerned if they have US customers).
- bunderbunder 13y ago
  > Whether they are subject to US jurisdiction or not might be debatable If you're worried about what the courts have to say about the subject, it isn't debatable in the slightest. They're the ones who get to decide what the rules are, period. If you don't care what a jurisdiction's courts have to say about the rules governing financial services, you really have absolutely no business offering financial services in that jurisdiction.
- oijaf888 13y ago
  Do you know if CCP Games is registered as a money transmitter? Eve ISK has value and is as equivalent to money as bitcoins so they should fall under that umbrella right?
  - ecdavis 13y ago
    ISK is not as equivalent to money as bitcoins. For one, there's no CCP-endorsed way to turn your ISK into money.
- dragonwriter 13y ago
  > US law is pretty clear on the fact that Mt. Gox is a money transmitter US law is pretty clear on the fact that Mt. Gox is a money transmitter because Gox did, in fact, transmit money (that is, it had USD denominated accounts for users and distributed funds to other people from those accounts to other people at the direction of the account holder.) > (you don't have to actually transmit money to be one, just things equivalent to money). That might be true, but its irrelevant, as Gox (and any other exchange that exchanges a commodity for money, whether or not the commodity itself is also money) actually transmitted money, not merely "things equivalent to money".

epaga 13y ago

This is anything but the inside story. The only "insider" information is the one guy who interviewed at Gox and claimed they don't use any VCS (but he made this claim a while ago).

coldcode 13y ago

It's pretty clear from this story that the "CEO" had no business running a half billion dollar business, much less a lemonade stand. It seems he mostly lucked into the business and luck doesn't work as a business plan, especially in a financial business.

alewis2005 13y ago
Yeah, but you don't understand the idiom 'much less'.
mwfunk 13y ago
I had no idea lemonade stands were so complicated! :)
- yogo 13y ago
  It might not be, but incompetence can lead to bad things, like people dying from accidentally being poisoned from lemonade purchased at a stand.
- snorkel 13y ago
  Unfortunately this guy doesn't posses the motivation and focus to even run a lemonade stand because he'd rather be hacking on cash registers instead. CEO was not his calling, and neither was CTO.

ck2 13y ago

Somewhere in an alternate universe, MtGox was run correctly, they brought on litecoin this week and lifted it into high double digits.

alecsmart1 13y ago

Am not sure when mobile phone became a requirement- "Bitcoin promises to give a bank account to anyone with a mobile phone, no ID required."

ghshephard 13y ago
Is it possible for me to use my iPhone to make a payment with bitcoins? Does apple allow bitcoin wallets onto the Apple Store?
- pseudonym 13y ago
  Short answer, no. Long answer: http://www.pcworld.com/article/2095060/apple-removes-blockchain-last-bitcoin-wallet-app-from-mobile-store.html http://www.pcworld.com/article/2095060/apple-removes-blockch...
andreasvc 13y ago
A phone is a sufficient but not a necessary condition for using Bitcoin. It makes sense to mention phones instead of computers since in developing countries there are significant numbers of people with a phone but not a computer.

aianus 13y ago

How did Mark Karpeles afford to buy MtGox from McCaleb?

psykovsky 13y ago
A fair amount of BTC and USD together with 12% on the company allied to the fact Jed was kind of expecting the difficulties ahead and wanted out. But I mean OUT, really OUT...

ChuckFrank 13y ago

Even if Bitcoin balances can be made bullet proof, the Achilles heal is that it is not a legal tender, and that there are no market fundamentals to contribute to its exchange rate. My 660 Trillion Zimbabwe dollars, sitting here on the desk, are solidly in my possession. So what? P=0 means they have zero use value other than as a conservation piece. Interestingly, when I show them to people and they handle them (Produced by the British Bank Note Company that makes currency for a lot of countries) they frequently falsely conclude that the are phony. They have a hard time reconciling "real" with "worthless" Whether or not Gox slid into fractional reserve banking is interesting, since if they did (I doubt it) they were basically betting against their depositors. To do that they would have had to taken Bitcoin balances as they came in, sold them for hard currency, wanted for Bitcoin to fall, buy it back, and pocket the difference, at the same time being able to honor withdrawals so there was not a bank run. The way this ended suggests that either something else happened, or they "bet the farm" and shifted virtually all of the Bitcoin deposits at a hard currency Bitcoin price below what it is worth now. The got caught "short" bigtime like in a margin call for stock bought on the margin.

habosa 13y ago

Sounds like Karpeles is a guy with a short attention span who looks for low-hanging fruit and ignores the big issues because he may not be able to solve them. I have this issue with projects too, but of course I never ran a 9-figure Bitcoin exchange.

swalsh 13y ago
Its not the role of the CEO to solve those issues, its his role to make sure he has people who DO know how to solve it working on it, and to make sure they have the resources they need to do it. He seems better suited for a role as CTO, though even that may be a stretch...

brianpgordon 13y ago

This is the relevant paragraph for "our crowd:" > Mt. Gox, he says, didn’t use any type of version control software — a standard tool in any professional software development environment. This meant that any coder could accidentally overwrite a colleague’s code if they happened to be working on the same file. According to this developer, the world’s largest bitcoin exchange had only recently introduced a test environment, meaning that, previously, untested software changes were pushed out to the exchanges customers — not the kind of thing you’d see on a professionally run financial services website. And, he says, there was only one person who could approve changes to the site’s source code: Mark Karpeles. That meant that some bug fixes — even security fixes — could languish for weeks, waiting for Karpeles to get to the code. “The source code was a complete mess,” says one insider.

guelo 13y ago
I would only feel safe using a completely open source exchange to hold my money.
- erobbins 13y ago
  I guess you don't use any online banking services?
  - tbyehl 13y ago
    US banks have FDIC insurance to protect depositors against insolvency.
- shin_lao 13y ago
  What matters isn't open source or not. What matters is code quality.
  - guelo 13y ago
    As a customer, how would I know the code quality if it's not open source?