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Bitcoin Exchange Mt. Gox Is Gone; Now What?

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Since yesterday's news, Tumbler user 'Two-Bit Idiot' has claimed that an unverified report, supposedly from inside Mt. Gox, indicated that 750,000 bitcoins were lost.

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There it is. Mt. Gox has disappeared. Quite literally, when it comes to the exchange's website - all it is currently featuring is empty space. It seems to be the common understanding of the Bitcoin community that the exchange's accounts are similarly empty.

Time and time again, my firm has been advising against committing any new capital to Mt. Gox. As much as we would like to have been overcautious and see Mt. Gox resume withdrawals, it seems that we were not. At least our opinion might have insulated some of our readers from losses.

Since the Mt. Gox website went down yesterday, new information has come to light. Tumbler user Two-Bit Idiot reported the existence of an unverified report supposedly coming from internal communication channels at Mt. Gox. The report claims that Mt. Gox has lost as much as 750,000 bitcoins, which -- with Bitcoin at around $480 (BitStamp) -- would mean $360 million was stolen from the exchange over the course of several years.

The whole report can be accessed here. Here's the gist of it:

For several weeks, Mt. Gox customers have been affected by Bitcoin withdrawal issues that compounded on themselves. Publicly, Mt. Gox declared that "transaction malleability" caused the system to be subject to theft, and that something needed to be done by the core devs to fix it.

Gox's own workaround solution was criticized, and eventually a fix was provided by Blockchain.info. The truth, it turns out, is that the damage had already been done. At this point 744,408 BTC are missing due to malleability-related theft which went unnoticed for several years.

The cold storage has been wiped out due to a leak in the hot wallet. The reality is that Mt. Gox can go bankrupt at any moment, and certainly deserves to as a company. However, with Bitcoin/crypto just recently gaining acceptance in the public eye, the likely damage in public perception to this class of technology could put it back 5-10 years, and cause governments to react swiftly and harshly.

At the risk of appearing hyperbolic, this could be the end of Bitcoin, at least for most of the public. We believe in the value of Bitcoin, its potential to change the world, and its principles of transparency. Most importantly we care about the customers of Mt. Gox and other Bitcoin-based businesses [that] will be affected. The likely consequences will be larger than this localized financial damage, and we believe that the benefits of keeping Mt. Gox stable and running outweigh the risks. This isn't about saving Mt. Gox anymore.

If this is even remotely true, there doesn't seem to be any possibility that the customers will receive any of their money any time soon. The report outlines a plan for rebranding of the exchange and an agenda for the next couple of months. Most of it feels extremely detached from reality:

To avoid a bank run from customers, the daily amount of Bitcoin and cash withdrawals will be limited.

With the profit, a meticulous analysis will be made over the coming years to clean the Bitcoin balance sheet while running the exchange and generating revenue to pay back stakeholders.

New offerings such as additional currencies, low trading fees, etc. will give customers a reason to stay with Mt. Gox.

The new branding is already complete, and new services such as the Bitpocket wallet are already developed and ready for deployment.

With a new image, team, and offering, we believe that it will be a challenge, but is not impossible. The risks of not acting are incredibly large and unpredictable.

My firm doesn't think that a "bank run" can be avoided if any of this is true. The report doesn't mention any sort of litigation, which we feel would be inevitable had $360 million been actually stolen.

Again, this report is unverified -- and we will have to wait and see if it gets confirmed -- but my firm feels that at this point, with Mt. Gox's erratic actions, you should know about its existence.

All of this is extremely important even if you don't have any money locked in at Mt. Gox. If such an amount of money is actually missing, it probably won't take long before the authorities get interested. The Mt. Gox situation might weigh in on the perception of Bitcoin among the wider investment audience. This is a serious possibility.

On the other hand, things might play out slightly differently. Just as bank crashes don't put the existence of fiat currencies into question, the fall of Mt. Gox, as serious and painful as it is, might not be an advent of "the end of Bitcoin."

The situation is serious, all the more since we still don't know if the report is factual. If it is, there's one more question: What happened to all the Bitcoins that were stolen? If they're still lying around in wallets then, there's the possibility of selloffs on other exchanges. It might also be the case that the coins have already been liquidated.

All of this greatly contributes to the uncertainty in the Bitcoin market, well beyond what we've seen so far this year.

Here is a quick look at the chart for Mt. Gox, possibly one of the last times my firm will feature it in these alerts.



Recent gains have been erased, and Bitcoin dropped to $173.87 yesterday on relatively heavy volume. This way, the currency lost 43.9% of its value on Mt. Gox yesterday.

Today, the action is down but the volume is significantly weaker (this was written at 9:50 a.m. EST). At this moment, the Mt. Gox chart is only an indication of how bad things have been and if investors believe there is even the slightest possibility of seeing their money back.

The case of Mt. Gox shows you why it's important to only use a small part of your overall portfolio for Bitcoin-related trades. My firm has stressed this so far and will do so in the future.



BitStamp was 12.2% down yesterday on relatively strong volume. Today, the downside pressure persists with Bitcoin another 6.6% down. The most significant part is the increase in volume, which has doubled to over 90,000 Bitcoins.

Right now, Bitcoin is below $530 (solid red line on the chart), and there is no telling if the move down following Mt. Gox's demise is already over. That makes the short-term situation bearish.



Bitcoin on BTC-e lost 7.1% yesterday on moderate volume, and it has gone 11.7% down so far today on almost double the volume.

The currency is below $500 (solid red line on the chart), and the short-term situation at this time seems more bearish than not, especially taking Mt. Gox's fall into account.

Both BitStamp and BTC-e haven't taken a serious hit so far. This might mean that they are seen by the investors as having not much to do with Mt. Gox, but it is also possible that the uncertainty surrounding Mt. Gox will transfer to other exchanges as well in a more meaningful way.

Summing up, in my firm's opinion, short positions might be the way to go now.

For the full version of this essay and more, visit Sunshine Profits' website.

Mike is a quantitative analyst focused on economic reality, not theoretical models. His investment thinking is grounded in empirical evidence and common sense. A holder of two master's degrees in quantitative methods and finance, he researches economic uncertainty, portfolio management, and investor behavior. At SunshineProfits.com he develops innovative investment tools, and is the author of the Bitcoin Trading Alert service.
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