So Mt Gox has gone bust then, eh?

It’s all over the interwebs, the Mt. Gox bitcoin exchange appears to have gone bust. This will be an interesting test of whether I was wrong about bitcoin or simply wrong too early.

Worth pointing out the real problem that bitcoin solved. Which was how do you make sure that someone doesn’t spend a digital currency twice? That blockchain and the calculation of it was that method. Unfortunately, there seems to have been an error in there and it was possible to spoof the exchange (certainly Mt. Gox and possibly others) so that said bitcoins could indeed be spent twice. No, leave the technical details aside, that is really what happened.

As a result there’s a hole of 700,000 bitcoins or so inside Mt. Gox and this is something like 6% of all bitcoin in existence.

OK, break the bench and start over.

But this is where I think it all gets interesting. Some are saying that this will knock the confidence out of bitcoin and thus the grand experiment is all over. Unless, of course, confidence is quickly restored. There’s at least one document floating around suggesting that large holders of bitcoin should chuck a few into the pot in order to fill the hole. Which seems fair enough: if confidence is lost then the price falls: better perhaps to have 94% of your holding at a $500 valuation than 100% of it at a $1 one.

Could be, could be. But as I say I think this is where it all becomes interesting. I’ve long been of the view (whether because I’m wrong or because I was right too early) that it’s all going to end in tears. And the crucial point is, I think, about whether it is indeed confidence alone that is supporting bitcoin.

To make a digression: fractional reserve banking is a very silly system in many ways. Certainly there are innumerable people who have abused said system over the centuries. And vast numbers who have gone bust by doing so: others who have gone bust not by abusing it but purely through the bank runs that the system is liable to.

However, every time the system crashes and burns it is rebuilt. For despite its logical silliness it’s an incredibly useful thing for people to use. So much so that despite those repeated crashes and burnings we keep shoring it up again and starting the whole process over again.

And that, I think, is going to be the interesting test for bitcoin. Does this knock in confidence kill the whole thing? Or is it indeed such a useful tool that we gloss over the failure as part of the experimental process and thus full speed ahead anyway?

16 thoughts on “So Mt Gox has gone bust then, eh?”

  1. The question surely is whether fractional reserve banking as we know it would or could have been rebuilt without State support.

  2. do bitcoins really exist? And if they don’t really exist, then does it matter that they don’t really exist? You could say the same for the atom, but it is impossible to spoof an atom. I say, if you can make them appear and disappear at will then it is no more than a magic trick! A device to part a fool from his money.

  3. The other point being that as Frances Coppola has pointed out a lot, what we have isn’t canonically fractional reserve banking anyway; that’s just the label for a quite different system these days.

    So I would argue that in a true free market, we would indeed have fractional reserve. But the reserves would have to be actual reserves of real money (whatever that may be; gold, bitcoins, cowrie shells) held in vaults and the fraction would be quite high. Not having the real market to look at, it is hard to estimate, but may be, say, a fractional reserve of 20% of your cowrie shells.

  4. I think the analogy with FRB is false. FRB is an extremely powerful method of credit creation with a money creation side effect. If banks could not lend out their reserves then depositors would have to become investors and demand a higher risk premium. And the credit creation process would be much slower. So the higher cost of financing would hold back growth. It therefore brings a massive benefit.

    Bitcoin is a clever trust-free p2p money spending system that seems to have some problems. It is appealing as a nice idea but does not necessarily do anything that anyone really wants unless you are paranoid about QE and governments.

  5. Bitcoin is a SHADOW banking system. And like all shadow banking systems it is open to all manner of shady dealing. Spoofing Mt Gox was bound to happen. What worries me about the fall of Mt. Gox is the message it gives about the fragility of central clearing houses – which are being touted as the solution to the fragility of OTC derivatives. Hmm.

  6. “If banks could not lend out their reserves then depositors would have to become investors and demand a higher risk premium.”

    So what’s not to like?

    The risk in either case is the same. If it’s lower under FRB,, who’s carrying the balance? My guess it would be muggins. Again.

  7. SHADOW banking = not controlled by the scum of the state.
    Shadow banks=”shady” dealing–as if the murdering, thieving political and bureaucratic filth aren’t “shady”.

    I look at lots of blogs so I’m not sure where I saw it but I am sure the Federal Tyranny have been having a go at Mt Gox–and that was in the open–who knows what the bastards have been up to in private. Bitcoin attacks the scums monopoly on creating /controlling (or trying to ) money with all the benefits that brings them.

  8. On a point of detail:
    From what I see of the story, it’s the MtGox software that’s been compromised, not BitCoin’s.
    Would an analogy be a ForX company have been hacked, a quantity of currency has been transferred from it to persons unknown? So now there’s a hole in the companies books. if this was $’s to £’s, this wouldn’t imply said dollars had been spent twice. The company would now be short the dollars

  9. Frances – I agree wholeheartedly on your point about centralised clearing.
    Quite apart from the cost of all users needing to post upfront collateral (which only hedge funds & other less creditworthy counterparties used to need to post), the concentration of risk is huge.
    Even in the immediate aftermath of the Lehman failure, trading & managing the replacement of OTC swaps was not that difficult. Doing the same when a “Regulator Approved” clearinghouse fails will be a far far worse.

  10. As the deposits that form the basis of the FRB pyramid are guaranteed by the State (quick run upstairs and hide under the bed) and the State props up the banks when they actually fail in the business of making money out of nothing, then the question is why the banks are in the private sector at all.There might have been some excuse for the enormous confidence trick of private FRB when it was working, but now it has fucked up completely and managed to misdirect QE money into housing and stock market bubbles without doing anything to equalise demand with supply then it a matter of declaring: not fit for purpose.

  11. Also Bitcoin is not a shadow banking system. It is a payment system. There is no credit involved, at least not yet.

    The shadow banking system is securitisation vehicles, repo and other in which banks get disintermediated in the provision of credit.

    What this has to do with Mt Gox I cannot tell.

  12. You can see here quite dramatically the difference between Bitcoin prices on Mt Gox and other non-hacked Bitcoin exchanges:

    http://markets.blockchain.info/

    What is surprising — and gratifying for Bitcoin holders — is just how little effect the Mt Gox crash has had on prices elsewhere.

  13. Unfortunately, there seems to have been an error in there and it was possible to spoof the exchange (certainly Mt. Gox and possibly others) so that said bitcoins could indeed be spent twice.

    Nope. Not double-spent. Not even close. Bitcoin the protocol (the important thing) remains untouched. They may have been simply stolen – which is just a bank-heist. Happens to ordinary banks too, now and again.

    There’s a lot more heat than light being generated, but one theory gaining traction right now is that the notoriously fumbledick Gox management have simply lost the keys to their cold wallet. Half a billion dollars, and they lost the Post-it.

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