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One theory is that Mt. Gox became fractional reserve some time in the past, either by losing bitcoins or by spending them. Then they were unable to replenish t

One theory is that Mt. Gox became fractional reserve some time in the past, either by losing bitcoins or by spending them. Then they were unable to replenish their supply, so it was a matter of time before a bank run. The reason I tend to believe this scenario is because it's completely consistent with their behavior. I watched them very closely, and there seemed to be no rhyme or reason for their behavior. That is, unless they were missing everyone's bitcoin for some reason. Then their behavior made perfect sense. In that scenario, Mt. Gox would have knowingly traded non-existent Bitcoins for far, far longer than two weeks. EDIT: I should mention that there's still no evidence whatsoever that malleability somehow led to the loss of >500,000 BTC.

philwelch 13y ago
That's not how fractional reserve works; that's just fraud. With fractional reserve, a bank holds maybe 1/8 of account balances in cash and the other 7/8 in loans due to the bank. So if eight people each deposit $100,000, the bank holds $100,000 in cash and can make three mortgages for $200,000 each plus ten $10,000 car loans. Either way they hold sufficient assets to cover their deposits, just not all of those assets are fluid. (The bank earns enough interest on the mortgages and car loans that they can pay interest to their depositors and take some profit off the top.)
- wpietri 13y ago
  Exactly. And for those unfamiliar I'll add that banks face a classic problem: their loans have long terms, but their deposits can be withdrawn at any time. That is normally not a problem, but there are issues and edge cases that we handle with things like bank capital standards, deposit insurance, and swift government takeover and resolution in the case of bank failures. For those interested in this, I strongly recommend Sheila Bair's "Bull by the Horns". She was the head of the FDIC up to and during the 2008 financial crisis, and this is her memoir. She's a fiscally conservative Republican, but one who strongly believes in the value of regulation as a way to create a sound economy so that all citizens can thrive. The book was fun to read, and it gave me a much better understanding of the forces at play and why good regulation of banks is immensely valuable to us all.
  - defen 13y ago
    > banks face a classic problem: their loans have long terms, but their deposits can be withdrawn at any time. Borrow short and lend long - great work if you can get it. Of course, this practice is fundamentally unsound (it provides nasty game-theoretic incentives to participants), but it tends to work "well enough" in practice that no one really cares, especially when there is a lender of last resort who is able to print money at will.
    - gibybo 13y ago
      What are some of the nasty game-theoretic incentives it provides to participants?
      - defen 13y ago
        If you think a bank run is going to happen, you want to withdraw your money ASAP, before it's all gone. Everyone else does the same - so you can get a self-fulfilling prophecy, even if everything would have been fine if everyone had stayed calm. For personal banking, this is largely mitigated by FDIC insurance, because the Fed can print enough money to cover small bank failures without anyone noticing or caring. However, if you're fucking around with collateralized debt obligations (CDOs)...2008 happens.
        GFK_of_xmaspast 13y ago
        I don't think the majority of bank failures work that way.
        wpietri 13y ago
        Now they don't. But bank runs were common in the past: http://en.wikipedia.org/wiki/List_of_banking_crises http://en.wikipedia.org/wiki/List_of_banking_crises
        GFK_of_xmaspast 13y ago
- sopooneo 13y ago
  I was under that impression they could make loans of 72/8 of their account balances. I may very well have misunderstood, but I had thought banks could loan out a given dollar multiple times at once. No?
  - stormbrew 13y ago
    No. The reason there's a multiplier effect that gets talked about a lot is because the money you borrow from the bank then ends up in another bank account (of the person you were borrowing money to pay). The bank it's deposited in there can then lend out against that deposit. But each bank loan is balanced, to the reserve ratio that bank operates at, to a corresponding deposit.
Tuna-Fish 13y ago
I've been saying this for a while now, including on HN. > The reason I tend to believe this scenario is because it's completely consistent with their behavior. Another reason to believe this is that it is something that has happened often in the past before modern banking regulations. Seriously, read history of banking in Netherlands or England, the idea: "Oops, I just lost my customer deposits. I'm probably going to get lynched now. But hey, if I just hide this until I make the loss back from fees/reckless trading, I'll be able to pay my customers back and avoid being lynched. It's a win-win." Is something that at least hundreds, if not thousands of bankers have had over the course of history. As far as we know, it never works.
- HockeyPlayer 13y ago
  > As far as we know, it never works. Only because when it does work, you never find out.
  - OnyeaboAduba 13y ago
    Im not sure about banking but its worked for a couple local bookies I know
- a-priori 13y ago
  As far as we know, it never works. There's no way to know how often this sort of thing has happened in the past. We only find out about the cases where a bank is not able to earn back it's loss and runs out of cash. At that point they have to admit they're insolvent. If the bank was able to earn back the money and become solvent again, then no one outside the bank would know it happened and the bank would have every reason to cover it up to save its reputation.
  - etanazir 13y ago
    As far as we know, fractional reserve works within some range of standard deviation.
- Scuds 13y ago
  > As far as we know, it never works See also, the fate of Barings Bank http://en.wikipedia.org/wiki/Barings_Bank http://en.wikipedia.org/wiki/Barings_Bank
kaa2102 13y ago
He who spends what isn't his'n, must buy it back or go to prison.
testacular 13y ago
No. They did not become a fractional reserve, they became insolvent. A large portion of the BTC community grossly abuse the term 'fractional reserve', and it's flatly wrong. Fractional reserves refer to liqudity, not solvency. If I run a financial institution and I owe depositors $100, but have $10 cash and am owed $100 on top of that, I'm running a fractional reserve. If on the other hand, I'm MtGox, and I owe depositors $100, but have $10 of cash and am owed nothing on top of that, I'm insolvent. Bankrupt. And if I keep operating, I am a fraud. This is an incredibly important distinction.
- etanazir 13y ago
  fraud or a fiat
- hencq 13y ago
  Yeah, I'm still constantly surprised how so many in the BTC community seem to lack even the most basic of accounting knowledge, yet have strong opinions on how international banking and currencies should work.
  - Loughla 13y ago
    Welcome to the internet; if is is supremely easy to form an opinion, it will happen. If it is harder to actually educate yourself, that original opinion will always win. It's why sites like reddit and slashdot (and to a lesser extent here) have comments that steadily degrade over time. I read your comment that forms my opinion. Now I feel less obligated to actually research it myself. Apply circlejerk, rinse, repeat. Then you get something similar to the vocal members of the BTC community.
- oleganza 13y ago
  The important side effect of such cash loans is that once on the market, they are indistinguishable from any other cash. So the bank essentially increased amount of cash in circulation. While technically they didn't "print money", for all practical purposes, they did. And since this cash slowly propagates throughout economy, it increases the total supply which leads to raising prices. Prices raise first where this newly loaned cash is being applied. Since 2000s it is stock market. It grows in total sync with Fed's "bonds buying".
jpmattia 13y ago
> One theory is that Mt. Gox became fractional reserve some time in the past, either by losing bitcoins or by spending them. Maybe pedantic, but many people have been using fractional reserve wrt Mt Gox lately. The usual meaning of that term: A bank will loan out deposits, reserving a fraction for withdrawals. However, a key point is that the bank holds collateral against the loan, and that collateral has a fair-market value, so the balance sheet is still positive. (A major problem in the housing meltdown was that the value of the collateral dropped, making many banks technically insolvent.) What Mt Gox did is take money from depositors and either lose or spend them. That's just either bad business (if they lost them) or fraud (if they spent them). Calling it "fractional reserve" gives it an air of legitimacy that they really do not deserve. Edit: I did not intend to start a discussion on the finer points of bank accounting. The major point is: To my knowledge, Gox wasn't trying to make loans with money that deposited with them, which is what a fractional reserve business is.
- smacktoward 13y ago
  Or, put alternately, it taints actual fractional reserve banking (which has worked pretty well for hundreds of years) with a sense of being the same kind of shady business practice as this. (Which may be the point of the comparison, given the ideological bent of many Bitcoin advocates.)
  - danmaz74 13y ago
    AFAIK, fractional reserve is the bete noir for many believers in bitcoin.
    - jpmattia 13y ago
      > AFAIK, fractional reserve is the bete noir for many believers in bitcoin. Then they're hosed, because as soon as somebody somewhere makes a loan using bitcoin, then bitcoin becomes a fractional reserve currency. Edit: It seems that some cryptocurrency folks have confused "fractional reserve" with "fiat". Those are two very different monetary concepts.
evan_ 13y ago
> The reason I tend to believe this scenario is because it's completely consistent with their behavior. I watched them very closely, and there seemed to be no rhyme or reason for their behavior. That is, unless they were missing everyone's bitcoin for some reason. Then their behavior made perfect sense. Feel free to give examples of these behaviors...
brianpgordon 13y ago
> Then they were unable to replenish their supply They didn't actually need to replenish their supply of good bitcoin; they only needed to buy up all of the bad goxcoin. For example, by halting withdrawals for 2 weeks in order to drive down the price.

philwelch 13y ago

That's not how fractional reserve works; that's just fraud. With fractional reserve, a bank holds maybe 1/8 of account balances in cash and the other 7/8 in loans due to the bank. So if eight people each deposit $100,000, the bank holds $100,000 in cash and can make three mortgages for $200,000 each plus ten $10,000 car loans. Either way they hold sufficient assets to cover their deposits, just not all of those assets are fluid. (The bank earns enough interest on the mortgages and car loans that they can pay interest to their depositors and take some profit off the top.)

wpietri 13y ago
Exactly. And for those unfamiliar I'll add that banks face a classic problem: their loans have long terms, but their deposits can be withdrawn at any time. That is normally not a problem, but there are issues and edge cases that we handle with things like bank capital standards, deposit insurance, and swift government takeover and resolution in the case of bank failures. For those interested in this, I strongly recommend Sheila Bair's "Bull by the Horns". She was the head of the FDIC up to and during the 2008 financial crisis, and this is her memoir. She's a fiscally conservative Republican, but one who strongly believes in the value of regulation as a way to create a sound economy so that all citizens can thrive. The book was fun to read, and it gave me a much better understanding of the forces at play and why good regulation of banks is immensely valuable to us all.
- defen 13y ago
  > banks face a classic problem: their loans have long terms, but their deposits can be withdrawn at any time. Borrow short and lend long - great work if you can get it. Of course, this practice is fundamentally unsound (it provides nasty game-theoretic incentives to participants), but it tends to work "well enough" in practice that no one really cares, especially when there is a lender of last resort who is able to print money at will.
  - gibybo 13y ago
    What are some of the nasty game-theoretic incentives it provides to participants?
    - defen 13y ago
      If you think a bank run is going to happen, you want to withdraw your money ASAP, before it's all gone. Everyone else does the same - so you can get a self-fulfilling prophecy, even if everything would have been fine if everyone had stayed calm. For personal banking, this is largely mitigated by FDIC insurance, because the Fed can print enough money to cover small bank failures without anyone noticing or caring. However, if you're fucking around with collateralized debt obligations (CDOs)...2008 happens.
      - GFK_of_xmaspast 13y ago
        I don't think the majority of bank failures work that way.
        wpietri 13y ago
        Now they don't. But bank runs were common in the past: http://en.wikipedia.org/wiki/List_of_banking_crises http://en.wikipedia.org/wiki/List_of_banking_crises
        GFK_of_xmaspast 13y ago
sopooneo 13y ago
I was under that impression they could make loans of 72/8 of their account balances. I may very well have misunderstood, but I had thought banks could loan out a given dollar multiple times at once. No?
- stormbrew 13y ago
  No. The reason there's a multiplier effect that gets talked about a lot is because the money you borrow from the bank then ends up in another bank account (of the person you were borrowing money to pay). The bank it's deposited in there can then lend out against that deposit. But each bank loan is balanced, to the reserve ratio that bank operates at, to a corresponding deposit.

Tuna-Fish 13y ago

I've been saying this for a while now, including on HN. > The reason I tend to believe this scenario is because it's completely consistent with their behavior. Another reason to believe this is that it is something that has happened often in the past before modern banking regulations. Seriously, read history of banking in Netherlands or England, the idea: "Oops, I just lost my customer deposits. I'm probably going to get lynched now. But hey, if I just hide this until I make the loss back from fees/reckless trading, I'll be able to pay my customers back and avoid being lynched. It's a win-win." Is something that at least hundreds, if not thousands of bankers have had over the course of history. As far as we know, it never works.

HockeyPlayer 13y ago
> As far as we know, it never works. Only because when it does work, you never find out.
- OnyeaboAduba 13y ago
  Im not sure about banking but its worked for a couple local bookies I know
a-priori 13y ago
As far as we know, it never works. There's no way to know how often this sort of thing has happened in the past. We only find out about the cases where a bank is not able to earn back it's loss and runs out of cash. At that point they have to admit they're insolvent. If the bank was able to earn back the money and become solvent again, then no one outside the bank would know it happened and the bank would have every reason to cover it up to save its reputation.
- etanazir 13y ago
  As far as we know, fractional reserve works within some range of standard deviation.
Scuds 13y ago
> As far as we know, it never works See also, the fate of Barings Bank http://en.wikipedia.org/wiki/Barings_Bank http://en.wikipedia.org/wiki/Barings_Bank

kaa2102 13y ago

He who spends what isn't his'n, must buy it back or go to prison.

testacular 13y ago

No. They did not become a fractional reserve, they became insolvent. A large portion of the BTC community grossly abuse the term 'fractional reserve', and it's flatly wrong. Fractional reserves refer to liqudity, not solvency. If I run a financial institution and I owe depositors $100, but have $10 cash and am owed $100 on top of that, I'm running a fractional reserve. If on the other hand, I'm MtGox, and I owe depositors $100, but have $10 of cash and am owed nothing on top of that, I'm insolvent. Bankrupt. And if I keep operating, I am a fraud. This is an incredibly important distinction.

etanazir 13y ago
fraud or a fiat
hencq 13y ago
Yeah, I'm still constantly surprised how so many in the BTC community seem to lack even the most basic of accounting knowledge, yet have strong opinions on how international banking and currencies should work.
- Loughla 13y ago
  Welcome to the internet; if is is supremely easy to form an opinion, it will happen. If it is harder to actually educate yourself, that original opinion will always win. It's why sites like reddit and slashdot (and to a lesser extent here) have comments that steadily degrade over time. I read your comment that forms my opinion. Now I feel less obligated to actually research it myself. Apply circlejerk, rinse, repeat. Then you get something similar to the vocal members of the BTC community.
oleganza 13y ago
The important side effect of such cash loans is that once on the market, they are indistinguishable from any other cash. So the bank essentially increased amount of cash in circulation. While technically they didn't "print money", for all practical purposes, they did. And since this cash slowly propagates throughout economy, it increases the total supply which leads to raising prices. Prices raise first where this newly loaned cash is being applied. Since 2000s it is stock market. It grows in total sync with Fed's "bonds buying".

jpmattia 13y ago

> One theory is that Mt. Gox became fractional reserve some time in the past, either by losing bitcoins or by spending them. Maybe pedantic, but many people have been using fractional reserve wrt Mt Gox lately. The usual meaning of that term: A bank will loan out deposits, reserving a fraction for withdrawals. However, a key point is that the bank holds collateral against the loan, and that collateral has a fair-market value, so the balance sheet is still positive. (A major problem in the housing meltdown was that the value of the collateral dropped, making many banks technically insolvent.) What Mt Gox did is take money from depositors and either lose or spend them. That's just either bad business (if they lost them) or fraud (if they spent them). Calling it "fractional reserve" gives it an air of legitimacy that they really do not deserve. Edit: I did not intend to start a discussion on the finer points of bank accounting. The major point is: To my knowledge, Gox wasn't trying to make loans with money that deposited with them, which is what a fractional reserve business is.

smacktoward 13y ago
Or, put alternately, it taints actual fractional reserve banking (which has worked pretty well for hundreds of years) with a sense of being the same kind of shady business practice as this. (Which may be the point of the comparison, given the ideological bent of many Bitcoin advocates.)
- danmaz74 13y ago
  AFAIK, fractional reserve is the bete noir for many believers in bitcoin.
  - jpmattia 13y ago
    > AFAIK, fractional reserve is the bete noir for many believers in bitcoin. Then they're hosed, because as soon as somebody somewhere makes a loan using bitcoin, then bitcoin becomes a fractional reserve currency. Edit: It seems that some cryptocurrency folks have confused "fractional reserve" with "fiat". Those are two very different monetary concepts.

evan_ 13y ago

> The reason I tend to believe this scenario is because it's completely consistent with their behavior. I watched them very closely, and there seemed to be no rhyme or reason for their behavior. That is, unless they were missing everyone's bitcoin for some reason. Then their behavior made perfect sense. Feel free to give examples of these behaviors...

brianpgordon 13y ago

> Then they were unable to replenish their supply They didn't actually need to replenish their supply of good bitcoin; they only needed to buy up all of the bad goxcoin. For example, by halting withdrawals for 2 weeks in order to drive down the price.