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Peter R’s Theory on the Collapse of Mt. Gox
- TrainedMonkey 13y agoThis is as plausible as anything else I've heard so far.
- easytiger 13y agoI very much need a ;TLDR. Not through laziness but through hatred of the patronising prosaic style which stopped me reading.
- pmccall777 13y agoActually, I'm pretty sure it was laziness.
- corresation 13y agoTLDR; In this hypothetical, thieves robbed MtGox in 2011 and the operator has been desperately trying to cover for it and delay since.
- marincounty 13y agoVSDR--very short, did read. I once had a English teacher tell the class, 'just don't use cliches, or cute language'. I felt that was too strick, but I now understand the wisdom.
- josh2600 13y agoThe question for me after all this is simple: Is it that 'Everything is a Ponzi scheme until it isn't' or is it that 'Nothing is a Ponzi scheme until it is'?
- meowface 13y agoI think in the real world, there is a large mix of both. Hard to know the true percentages of either category, though.
- joe_the_user 13y agoWell, Regardless of how exactly it happened, I think the big thing is that anything that operates as "just an exchange" has the potential to operate as a fractional reserve bank instead (IE, just operate with enough money to cover day-to-day transactions and not-have/use-for-something the remaining funds people think you have in your vault). So basically, trusting any unregulated entity that claims to have stuff in its vaults is an inherently dangerous thing since such entities inherently tend to fail all at once when they fail (because they can mask either a series of small failures or a failure large enough to bankrupt the company but still not large enough to clean out the customers - yet).
- gpcz 13y agoIt also shows what happens in an environment without insurance. If Mt.Gox was insured, this catastrophe would have been avoided for the customer by either the insurance company paying out or by Mt.Gox never getting hacked due to the security controls that the insurance company would have demanded. This, of course, raises the questions of "who insures the Bitcoin insurance company" and "how do the insurance companies protect their Bitcoin now that they are a target?"
- glesica 13y agoWhich is why government insuring bank deposits isn't such a crazy idea. If the government collapses and can't stand behind the policies, then you have some really big problems on your hands and it is likely that private insurers wouldn't have fared much better. If the government doesn't collapse, everyone gets made (more or less) whole again. Basically, when the government is your insurer, there is no "Who insures the insurer?" problem, or at least the problem becomes moot.
- TrainedMonkey 13y agoRight, because if government does not collapse there is nothing stopping them from printing all the money they need to cover their obligations.
- rheide 13y agoAssuming that MtGox (let's say MtGox, not Mark) did indeed introduce transaction malleability as a feature, that should be very easy to prove with source control commit logs. But if the malleability vulnerability was already there to begin with, it would be very hard to prove indeed that MtGox was taking advantage of it. Edit: I should also add that Mark in particular has not proven himself smart enough in my eyes to pull something like this off. In terms of technical skill, yes, but this requires a very human approach to deception which I, based on the conversations I've seen him have, do not think he possesses.
- mkonecny 13y agoMtGox didn't use source code control.
- rheide 13y agoAnother great reason to assume ignorance rather than malice.
- talas9 13y agoHow.. convenient.
- bdcravens 13y agorheide was talking about the Bitcoin source control.
- rheide 13y agoNo actually, I meant the MtGox source code that deals with transactions. The malleability issue was known long before MtGox announced the exploit. It's possible that MtGox initially handled transactions correctly, but later introduced the malleability issue so they can blame their problems on that. Like I said before, I don't believe that's the case though.
- meowface 13y ago
- dangrossman 13y agoOf all the speculative explanations so far, this one would make the best plot for a movie script.
- GigabyteCoin 13y agoHe's certainly a great writer. The thing that was lacking were the sources.
- laichzeit0 13y agoIf you've been in the bitcoin world since at least before the first MtGox "crash" at $40 then it would be obvious which events he's talking about. Granted it's being being turned into a narrative but the history is spot on. I wouldn't have bothered putting in sources if I were him either, it's time consuming and those who know the history of the events wouldn't need it.
- deleted 13y ago[deleted]
- thenmar 13y agoTone down the superior attitude. Sources benefit everyone.
- laichzeit0 13y agoIt's not about being superior he's posting on bitcointalk the audience would be very familiar about the sequence of events. It's posted in "speculation" I.e. It's a hypothesis based on what everyone in the bitcoin world observed and he created a plausible yet possibly completely fictional technical hypothesis for what happened behind the scenes. There's no "sources" to back it up. It's like when HN goes offline. It's an observable fact. Writing what you "think" happened to explain this fact is the speculation part.
- danielweber 13y agoIt's of course a theory. But "I'm going to make up this accidental shortfall today by making bigger bets tomorrow" is how a lot of fraud starts innocently.
- tlrobinson 13y agotl;dr: Mt Gox had a lot of coins stolen in 2011 and has been running a fractional reserve ever since. Mark tried to delay the inevitable insolvency by creating a bot to manipulate the price, and eventually tried to cover it all up by blaming "transaction malleability" attacks. One of many plausible explanations. It's going to be really interesting seeing how this actually plays out.
- tdees40 13y agoBitcoin folks need to understand that fractional reserve banking doesn't mean holding less in assets than you have in liablilities; it simply means that you hold less cash (or very liquid assets) than you have liabilities. What the author of this post describes is just fraud, not fractional reserve, and while libertarian types love to conflate the two, they are emphatically not the same thing.
- baddox 13y agoWell "fraud" implies deception. I think the argument that "libertarian types" make is that very few people understand how money works at a high level (namely that the money supply can increase up to the money multiplier), and perhaps that the people who administer high level finance deliberately set things up to benefit themselves at the cost of the "common man." I don't think many people argue that fractional reserve banking literally constitutes fraud in the traditional civil or criminal justice system.
- _delirium 13y agoMurray Rothbard is probably the most influential example. He argued that fractional-reserve banking is fraud and should be effectively outlawed by regular tort law (not by government regulation). He had a bit of a running disagreement with Von Mises over it: http://www.garynorth.com/public/9714.cfm http://www.garynorth.com/public/9714.cfm
- etherael 13y agoThat article was interesting about the utilitarian Mises vs the natural law Rothbard, but it was completely wrong about the 100% reserve clause Rothbard insisted as essential being necessarily enforced by the state. It sounds like the writer has not heard of Rothbard's proposed anarchocapitalist systems, polycentric laws and competitive arbitration and enforcement organisations.
- wizardry90210 13y agoI did notice that the owner of a large mining pool was receiving error notifications from Mt. Gox. This mining pool has tampered with mined blocks to include religious messages, so they'd definitely be in a position to do transaction malleability attacks to provide Gox with plausible deniability. /r/bitcoin thread with sources: http://www.reddit.com/r/Bitcoin/comments/1zifxf/why_is_the_admin_of_the_secondlargest_mining_pool/ http://www.reddit.com/r/Bitcoin/comments/1zifxf/why_is_the_a...
- tlrobinson 13y agoI recall hearing Mt. Gox had some sort of deal with Eligius where they'd include Mt. Gox's transactions for free. I don't know what Eligius got in return, if anything. The religious messages thing is a strawman. Miners are allowed to include whatever they want in the coinbase. It's common among pools, and hardly considered "tampering". https://bitcointalk.org/index.php?topic=38007.0 https://bitcointalk.org/index.php?topic=38007.0 Edit: more info: http://www.reddit.com/r/Bitcoin/comments/1zifxf/why_is_the_admin_of_the_secondlargest_mining_pool/cfu7y1a http://www.reddit.com/r/Bitcoin/comments/1zifxf/why_is_the_a...
- PhrosTT 13y agoWhat is "GoxBTC" vs "Real BTC" ?
- wiredfool 13y agoGoxBTC is BTC that you had in your account at Mt Gox, essentially, an entry in their database. RealBTC is what you got when you finally got it out of them, to spend elsewhere.
- deleted 13y ago[deleted]
- burritofanatic 13y agoSomeone please work on the screenplay, and please have David Fincher direct.
- wpietri 13y agoWhat I like about this story is how consistent it is with decades of stories from financial fraud. E.g., the downfall of Nick Leeson and Barings Bank: http://en.wikipedia.org/wiki/Nick_Leeson http://en.wikipedia.org/wiki/Nick_Leeson Poor internal controls, greed, arrogance, and snowballing losses that lead to greater and greater risks. And then disaster, at least in the cases we hear about.
- jheriko 13y agoi'm just (still) glad i didn't buy into the latest fad because of common sense. all stories aside i believe that bitcoin is unsafe - and that this has been /blatantly/ obvious since i first encountered it as a suggested method to launder money and fund criminal activity. don't buy unregulated 'currencies' with a strong history and incentive for money laundering and facilitating the black market. its violates the spirit of the law of pretty much every nation on earth. whilst i genuinely believe that cryptocurrency is possibly the way forward - certainly a global currency which is independent of such whimsical things as nation states, politics and commodoties - i also think that it took a spectacular lack of common sense or 'street smarts' to actually spend money on bitcoins. nice story... but i am indifferent to its truth - it doesn't negate the obvious risk of investing in bitcoin. but then many will say 'the greater the risk the greater the reward' and they are precisely correct. NB: i barely trust the bank - i have a bank account 'under duress' as most of you probably have - that i would like to see my earnings from employment. how did that happen? why should banks have any involvement in my remuneration for work. /i would very much rather cash in hand that you can't fuck up for me because you are gambling it on the stock market under the pretense of running a business/. its not like we have self inflicted financial crises as a result or anything at all... :/
- pacofvf 13y agosome people, which probably use tin hats, thinks that bitcoin was made by the government because it makes the flow of money more traceable, since all the operations are public. The government will never use bitcoin or bitcoin-based currencies because then they couldn't cover their own traces.
- dublinben 13y agoSerious organized crime operations would also never use Bitcoin for the same reason. Physical cash still offers superior anonymity and obfuscation to BTC. Also, when you're laundering hundreds of billions of dollars, you can use real banks and the legitimate world financial system, not some fishy online currency.
- bentcorner 13y ago
- sqs 13y agoThe risk that something like this is what happened is why Bitcoin companies (and other companies that deal with money) should have mandatory vacation policies for employees. With a mandatory vacation policy, it's much harder to a single person to commit fraud, since keeping up a fraudulent scheme requires daily attention to create fake books and records. https://sourcegraph.com/blog/mandatory-vacation https://sourcegraph.com/blog/mandatory-vacation
- GigabyteCoin 13y agoThat's an interesting idea. A mandatory vacation sure would have put a stop to "Brian Molony"'s systemic theft from CIBC much earlier. iyww Biran Molony was the real life person behing the movie "Owning Mahowny".
- rodgerd 13y agoIt's not just an interesting idea - it's very much the norm in much of the banking industry in my neck of the woods. It's generally considered one of the best ways of picking up internal fraud. One example that springs to mind from Australia was a branch staffer who had managed to rack up A$5 million dollars in fake mortgages. Went on holiday, the stand-in noticed dozens of mortgages to the same PO Box, did some digging...
- gwern 13y agoAnd also use Gregory Maxwell's proof of solvency scheme: https://iwilcox.me.uk/2014/nofrac-orig https://iwilcox.me.uk/2014/nofrac-orig
- marincounty 13y agoYes, this is a good idea, but you need smart people auditing the books(system). The smart part is a problem. Industry hires too many credentialed fools. Hire a criminal to catch a criminal.
- higherpurpose 13y agoP2P crypto-exchanges can't come soon enough. Now the hacker's focus will be on Bitstamp and Coinbase. Hopefully they'll do everything they can to protect themselves, but it's probably just a matter of time before they get broken, too.
- smoyer 13y agoI'm thinking about opening up an exchange for crypto-currencies with a guarantee that deposited coins are put directly into a cold wallet. The only drawback I can see is that (so far) I don't see an easy (and secure) way to make withdrawals instantaneous. Perhaps my background in hardware systems leads me to solutions that use physics to solve certain security problems, but to me, sending bitcoins to an unconnected computer over a unidirectional link seems trivial.
- jamesaguilar 13y agoYou can't put money directly into a cold wallet, if I understand correctly. If you can manipulate it directly then it's hot by definition.
- pygy_ 13y agoYes, you can, as long as you have an address (Public key). A wallet is just a private key. The transaction history, and thus the ballance of an address is held in the blockchain, in the ether. To spend the coins, you must have at hand: * the current blockchain * the private key * a connection to the network.
- Geee 13y agoHowever, these can be on different devices. Transactions can be signed on an offline machine. Also, you need just the unspent transactions to sign a new transaction, not the whole blockchain. Bitcoin Trezor works this way, http://www.bitcointrezor.com/ http://www.bitcointrezor.com/
- whyenot 13y agoIs that true even if you only spend some of coins and not all the coins? I seem to remember there being something very tricky about this if you are using a paper wallet.
- paps 13y agoYou can add coins to a paper wallet many times. What is considered risky is spending only a fraction of the paper wallet, for the following reasons: - you just used the private key for creating a transaction, so the chances of it being compromised increases - the client you used might have sent the change to another address while you're thinking the remaining coins are still in the paper wallet But if it's done well, yes, it's possible to spend a fraction of a paper wallet.
- dredmorbius 13y agoI'm predicting the imminent collapse of Mt. Gox collapse stories, following an indeterminate period of irrational exuberance.
- Spooky23 13y agoThis shouldn't be surprising. The same sort of things would happen back in the good old days when we were on the gold standard. Usually the catalyst in those days was some sort of financial stress at moment of weakness for the bank. In the 19th century, Typically this was in the fall before the receipts from the harvest came in. Small banks would have minimal reserves, and failures could easily cascade. I'm surprised with all of the rhetoric about fiat money that nobody figured this out sooner.
- leoc 13y agoApparently the gold market is still heavily fractionally reserved today, too.
- leoc 13y ago> I'm surprised with all of the rhetoric about fiat money that nobody figured this out sooner. My experience has been that goldbugs usually just don't want to be told about or think about this, so I'd expect things to be the same among Bitcoin supporters. And presumably a number of the clever boys will quietly reason that even if, later on, Bitcoin goes the way of all money, the people who were in on the ground floor will still have made their killing.
- laichzeit0 13y agoIt's interesting to note that the transaction malleability issue was a known problem to MtGox at the very latest by November 2013. [1] I know this first hand because I was on #mtgox at the time speaking to support staff trying to get some of my own coin out, which I eventually did get. I personally think that at this point they themselves were "wtf is going on?" about the issue and couldn't really explain what went wrong. Between that time and now they surely must have understood the problem well enough to either use it as a "feature" or try and fix it, which they didn't. https://bitcointalk.org/index.php?topic=324918.0 https://bitcointalk.org/index.php?topic=324918.0
- TerraHertz 13y agoWhen bitcoin started it was touted as anonymous, reliable and secure against fraud and theft by central authorities (especially government.) I had some doubts (and other interests) so didn't bother getting into bitcoins. Now we find out that bitcoin definitely isn't secure, and fraud by central authorities is just as possible as with any complex system of representing monetary value. I really think it's a universal Law - let there be any kind of central body involved in a system where there are profits to be made by dishonesty, and there WILL be dishonesty. MtGox turns out to be no different to the FED and any other fiat money authority. No different to the bullion markets, and their empty gold vaults (gold stolen, due to fractional reserve fraud.) I think I'll stick to keeping gold and silver pieces in an old sock. The only true value store is in-your-hand allodial, and never, ever abstracted to ones and zeros (or paper.)
- etherael 13y ago> Now we find out that bitcoin definitely isn't secure If anything is secure, then bitcoin is. That doesn't mean that it protects people from their own incompetence when it comes to security, there's no getting around that at this stage. > and fraud by central authorities is just as possible as with any complex system of representing monetary value. Only when you actually trust a centralised authority with the private keys in question, which people should not be doing in the case of businesses like mtgox which were obviously utterly incompetent right from the start. Plaintext passwords in http get queries embedded in plaintext emails? Come on, that would've twigged my "this is a really dumb idea" sense even before I started software development. > MtGox turns out to be no different to the FED and any other fiat money authority. Exactly, which is irrelevant to the security of bitcoin itself. It's like saying a currency itself has a security vulnerability because a security guard at a bank was incompetent, it doesn't work like that. > I think I'll stick to keeping gold and silver pieces in an old sock. Gold and silver are just as vulnerable to centralised betrayal when held by a third party, and bitcoin is just as invulnerable to centralised betrayal when you hold it yourself. Your analogy compares two entirely different situations in order to make one look better than the other.
- lucb1e 13y ago> Now we find out that bitcoin definitely isn't secure If Bitcoin is not secure because an exchange got hacked, then bank accounts are not secure because phishing exists. Or cash is not secure because it can be stolen.
- mathattack 13y agoGreat story. It certainly is a plausible one that changes the culpability of the owners. (From theft to slippery slope, both still bad)
- stcredzero 13y agoMark decided that he would do what he thought was right: he would slowly earn back the lost bitcoin with MtGox trading fee profits and eventually make his customers whole again. He still had over 500,000 BTC left—he moved 424242.42424242 BTC between bitcoin addresses and convinced the community that MtGox was solvent. So, bitcoin is actually a hybrid fiat+cryptocurrency? Since there is little transparency, a significant fraction of the BTC market capital might actually exist as fiat! Version 2 of a cryptocurrency protocol needs to protect against incompetently implemented exchanges as well. EDIT: Apparently, there is a BTC scheme for proving solvency. Making this mandatory for exchanges would go a long way to improving things.
- dragontamer 13y agoIts what economists have been trying to tell the BTC community for years. Some people get it, some people don't. Think about the money supply. http://en.wikipedia.org/wiki/Money_supply http://en.wikipedia.org/wiki/Money_supply There is not only the MB money supply (total number of paper dollars that exist), there is also the M1 money supply (MB + number of Traveler's Checks, and other highly liquid bank inventions), and M2 (which includes deposits). The true size of the monetary base can artificially grow and shrink in ways completely uncontrollable by the central-authority. This is true with both the USD and Bitcoins. The ultimate reminder is... the US implementation of fractional reserve banking forces banks to do no worse than 10%. In unregulated markets, the "banks" (ie: MT. Gox) will tend to lie and cheat, and will have ratios at far far worse rates.
- stcredzero 13y agoYes, but the BTC infrastructure itself provides a cryptographically strong method of proving reserves. If a large nation decided to implement its own hybrid fiat/cryptocurrency, it would basically be an unstoppable juggernaut, assuming no one ever broke the crypto protocols in a widely exploitable way. (And even then, the fiat currency might survive.)
- dragontamer 13y ago