Mt Gox meltdown

bowskill
By bowskill on Sat, Feb 8, 2014 - 7:00am

The bitcoin world has been rocked this week by the meltdown of Mt Gox - once the biggest bitcoin exchange in the world. In April last year it is said to have conducted 80% of all bitcoin exchange trade. Now it has ground to a complete halt.

I am a victim of it and became aware each day during last week that it was a rapidly escalating major story. By Friday morning I could not believe that it had not been covered in the media so I wrote to Coindesk. It is me they are quoting in this article.

The best detail I have seen so far is from another Australian who was so miffed as to fly to Tokyo and sit outside the Mt Gox office until he got answers. His story is here.

Other information gleaned from IRC channels and other chatter from ex employees reveals that the Mt Gox infrastructure is pretty flimsy. They are said to have no test environment for their code base. Changes go straight to production and that is one reason for many outages in the past. Their bitcoin implementation has forked from the standard meaning that they have custom code and it does not properly recognise newly mined bitcoins nor double spent bitcoins. They have a monstrous web of failed transactions to untangle if their clients are ever to get any of their bitcoin back.

This will be the first true bank run on a bitcoin exchange. It remains to be seen if Mt Gox is solvent and actually has a full reserve of bitcoin or if it has become a fractional reserve system. Next week is going to be interesting and I have reason to be anxious.

But personal stakes aside, this incident is a major event in the history of bitcoin. What lasting impact will it have?

Some predict that a complete failure to resolve this issue at Mt Gox will make such a dent in confidence in bitcoin that another technically superior alt-coin may emerge to replace it. We will have to wait and see how it pans out.

But it has revealed how immature this crucial piece of bitcoin infrastructure really is. Mt Gox emerged by complete fluke as a major bitcoin exchange totally unprepared for the ballooning massive transaction volume it would be asked to handle. The Bitcoin Foundation has also shown by its complete silence during this critical time that it is inept. There has been no one to keep people informed and maintain some semblance of confidence. There has been absolutely no leadership shown. This is a truly testing moment in bitcoin history. Is it yet up to the task we hoped for?

It could turn out to be a massive buying opportunity. If Monday comes and Mt Gox returns everybodys bitcoin it will likely rebound hugely. If not ... it will continue to tank.

 

6 Comments

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2391
Breaking Bitcoin News from Bowskill!

It's very cool of you to post this here - I read lots of alt. media and although I knew MtGox was having problems last week, I saw nothing that dug beneath the surface like your article above.  Although it's not a futures market, a failure of MtGox would be somewhat akin to a failure of the Comex for Gold, since MtGox is both an exchange, and one of the leading platforms where price discovery happens.  Please keep us informed as you learn more - and I wish you all the best in recovering any BTC that you had stored in account at MtGox.

Here is what MtGox has posted right now;

   Statement Regarding BTC Withdrawal Delays

Tokyo - JAPAN - February 07, 2014

Dear MtGox Customers,

In our efforts to resolve the issue being encountered by various bitcoin withdrawals, it was determined that the increase in the flow of withdrawal requests has hindered our efforts on a technical level. To understand the issue thoroughly, the system needs to be in a static state.

In order for our team to resolve the withdrawal issue it is necessary for a temporarily pause on all withdrawal requests to obtain a clear technical view of the current processes.

We apologize for the sudden short notice. All bitcoin withdrawal requests will be on pause, and the withdrawals in the system will be returned to your MtGox wallet and can be reinitiated once the issue is resolved. The trading platform will perform as usual for the needs of our customers. 



Our team will resolve this problem as soon as possible and will provide an update on Monday, February 10, 2014 (JST).



We deeply apologize for the inconvenience caused, and thank you for your kind support and considerations. 


Sincerely,

The MtGox Team

Not very confidence inspiring, to say the least.  As bad as this is, it should be stated that this is not a failure of Bitcoin itself.  It is yet another reminder that we must always mind the counter party risk that exists in so many transactions involving a middle man.... and that is ultimately what MtGox is.  I owe a response to Raven and Robbieboy on a separate thread that Raven started elsewhere on PP.com regarding Ripple... but I have not had time to do it justice yet...  since the Ripple concept involves creation of a network of counter parties (Gateways in Ripple speak) the concept of counter party risk will surely play a role in my response......          

 

bowskill's picture
bowskill
Status: Bronze Member (Offline)
Joined: Mar 16 2012
Posts: 78
Counter party risk

It is yet another reminder that we must always mind the counter party risk that exists in so many transactions involving a middle man.... and that is ultimately what MtGox is.

 

Thanks Jim. Yeh I know. I should have been more wise to the counter-party risk. Actually I was expecting to get a roasting from someone here along those lines. Probably anyone who read the post had that thought. Thanks all for holding back :)

It is an important story though and worth sharing here for anyone following the evolution of bitcoin. I will read your post in the Ripple thread with interest. Sounds like the lesson I am learning will add weight to your point.

One minor development that gives me a glimmer of hope is that my support tickets have actually been answered. So somebody is home at Mt Gox.

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2391
Competing Bitcoin Exchanges

I read something last night from Michael Krieger that suggests I was wrong to characterize the importance of MtGox in Bitcoin price discovery as being similar to that of the Comex for Gold... based on his chart below, one can see that, while this was true one year ago, it is not anymore based on a look at the comparative trading volumes on three exchanges;

http://libertyblitzkrieg.com/2014/02/08/my-thoughts-on-mt-gox/

BTCvolumechart

I do hope that MtGox can get their shit together.  

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5683
bitcoin: live by the sword

So the great thing about bitcoin is there are no pesky governmental restrictions on who does what with whom.  It's peer to peer, doncha know, what could possibly go wrong with that?

Then again, the (assumed) complete lack of oversight by any sort of auditor resulted in what is basically a bitcoin bank defaulting on its customers because it was either a scam or it was run by a bunch of incompetents.  Or both, take your pick.  Holding assets in trust for others requires a certain standard of care which, it seems, wasn't used here.

Its not like managing accounts and executing trades is a brand-spanking-new concept.  Banking software has been around since COBOL and punched cards.  But, leave it to engineers to reinvent the wheel wherever possible.  Best case, its rank incompetence.  Worst case, they (illegally) used money held in trust for their customers to fund their operations.  They wouldn't be the first company to do this.

Of course, this sort of thing is not unknown in the non-bitcoin world too...MF Global comes to mind...

mrees999's picture
mrees999
Status: Gold Member (Offline)
Joined: Aug 16 2013
Posts: 431
Mt.Gox Meltdown.

Hi Bowskill.

Sorry to hear about the Mt.Gox problems. I actually started writing a piece on this subject for Bitcoin Magazine a few days ago. www.bitcoinmagazine.com It isn't quite released yet but it will be three-part series on exchanges...and how to pick the right one.

Those of us inside the bitcoin community haven't touched Mt.Gox since last summer. The April 2013 crash was essential a bank run. They haven't allowed US bank withdraw for many months and recently EU also had banking troubles as well. The best was to get out of Mt. Gox was transferring BTC through wallets to your own storage wallet or another more trustworthy exchange. That was why the price was so high on Mt.Gox as everybody realized it was a dead end street and was trying to turn their cash  back into bitcoin to move it out. With so much demand for bitcoins- It created a bubble - which is why the prices was so much higher there.

The short answer is to not trust any exchange. Don't leave money there. There have been many exchanges close down and a few taking the wallets with them. The GBL scam in China was one example. Bitfloor, Tradehill -are a couple of others.

My suggestion is to store your bitcoin on blockchain.info as soon as you can. That's what I suggest for everybody. It is password protected even from that organization as they wrote the client to use JAVA right on your own pc so they would not have any record of it themselves. When you first set up a wallet, you're instructed to print a paper version of it - before it's even funded. It's easy to do. Then move your bitcoins into that account and destroy your email and the PDF attachment that you've printed. Put your paper wallet in a safe...or safe place. It has QR codes for your public key and your private key. That way - you've got it off the grid and into "cold storage". If your nervous about it, print two copies and keep them in separate places. They also allow you to download a small electronic backup you can load on a USB drive to take off the grid as well.

The much more reliable exchange is in the UK - Bitstamp.net.  There are a few fully regulated ones planned by major respectable financial companies coming into the US very soon. That will take it out of the wild west.

http://www.coindesk.com/secondmarket-takes-first-step-to-becoming-us-exc...

 

If it's any consolation - it is a good time to buy as Wall Street is getting in the game heavy, hense the need to fund the new exchanges. Conspiracy talk indicates the timing of the Arrest of Charlie Sherm, the actions against banking connections in the US might be a Wall Street and Justice department coordination to tank the price so the new exchanges can pick up BTC on the cheap to fund the exchanges.

Here's a great tutorial video on cold storage and paper wallets;

 

Good luck!

 

 

 

 

 

bowskill's picture
bowskill
Status: Bronze Member (Offline)
Joined: Mar 16 2012
Posts: 78
Trust
mrees999 wrote:

The short answer is to not trust any exchange. Don't leave money there.

Too true.

 

davefairtex wrote:

Then again, the (assumed) complete lack of oversight by any sort of auditor resulted in what is basically a bitcoin bank defaulting on its customers because it was either a scam or it was run by a bunch of incompetents.  Or both, take your pick.  Holding assets in trust for others requires a certain standard of care which, it seems, wasn't used here.

 

I believe that it is incompetence. There was an article somewhere that made sense to me. It explained that late last year bitcoin really entered a new phase. Phase I was innovated by enthusiasts and geeks. Outages, stumbling blocks and other failures were all part of the game. Trial and error was more or less acceptable for a while because everyone understood they were on a frontier - and that's just how things go. Now bitcoin is in phase II. It has risen to a new level (especially since the US Senate Committee hearings) and needs a much higher level of robustness of services. Mt Gox is a relic of the old days. This is why it is dawning on people that regardless of whether they solve the current issue and whether or not they have lost money or bitcoin, their time is over. You cannot run a currency exchange on kiddy code.

I agree with mrees that now is a buying opportunity. But not for the feint hearted.

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