Topic: Reason why MtGox can go to 0 - without arbirage opportunity with Bitstamp (Read 5640 times)

just follow the market. market never lies... now all mtgox action is in bitcoinbuilder.

I would think that there is a lot more than 4.7M$ on the accounts. Some of those unrealistic buy offers have been there for ages. Similarly I would also imagine that forgotten accounts with only BTC balances exist. Personally I would never "paint the book"to catch some trades, as you always catch them in the wrong direction and if you are loaded, makes yourself a target.

The real amount might be ten times higher, but thank your for the effort, I was wondering how much was down there.

I have no particular insight or knowledge of MtGox operations.

However, it appears simple to create a scheme by which a large exchange short btc and without sufficient cash assets to cover their btc liability could come out on top and probably without anyone being the wiser (aside from a freeze of customer payouts, such as with MtGox currently).

This is a hypothetical, so let us call our large exchange BigExchange

The key is that customer btc in BigExchange accounts is held by BigExchange, not the customers. What the customers have is just a number on a (BitExchange) server and the sum of these is not public. Similar for dollar amounts held by customers in BigExchange accounts.

Perhaps easier to see with numbers:

Assume BigExchange initially holds 3 btc and 3000 usd to cover their three customers, each of whom have 1 btc and 1000 usd.

BigExchange is hacked and loses 1 btc. Their liabilities are still 3 btc and 3000 usd, but they only have assets of 2 btc and 3000 usd, making them technically insolvent.

BigExchange halts payouts.

Intra-customer trades don't change BigExchange's liabilities or assets, since the three customers would still hold 3 btc and 3000 usd among them (just redistributed).

Now BigExchange creates a user on their system with 1000 usd in his account (this changes nothing in terms of liabilities or assets).

However, this user then buys up 1.5 btc at an exchange rate of 200, resulting in shift of liabilities from 3 btc and 3000 usd to 1.5 btc and 3300 usd.

BigExchange now sells 0.5 btc (of the 2 they had after being scammed) on an external exchange at an exchange rate of 600. They now hold 1.5 btc and 3300 usd, exactly matching their liabilities, and resume normal operations.

really weird that goxBTC is going up on bitcoinbuilder, but gox discount to bitstamp is dropping..

Just an FYI on the OP's comment of "MtGox can go to 0".  I have been curiously looking at the full MtGox order book.  There are orders so deep, and so many people with orders of Bitcoin from current price down to .00001 USD.  The full order book for bids is currently almost 34,000,000 BTC deep and I think the complete order book has what looks like a value of around $4.7 million USD.  Only tradingview and RTBTC allow you to magnify out to see the complete order book view.  I think I am correct by assuming since you can't place a bid unless you have fiat in your MtGox account, that means there is at least $4.7 Million USD tied up in MtGox right now, and that would only represent the fiat that is associated with trades.

This is RTBTC:
http://imgur.com/PCKEGOv

Compare that to Bitstamp's full order book, which is only 130,000 BTC deep in bids right now.
http://imgur.com/hKVgbha

or is https://www.bitcoinbuilder.com/ , making muppets out of nobs?

The price difference will cease to exist if people are confident in mtgox.   More likely the other exchanges get a bump due to increased confidence in bitcoin in general.  If they do drop there's no reason to think it'll be a major one like you suggest.   People who end up having bought cheap coin on gox will do whatever they rationally see fit to do with it at that point, which won't necessarily be selling it on another exchange.   They can no longer buy cheap coin on gox so the price difference you speak of won't exist anymore.  

Because most of the international customers who bought cheap at gox will try to sell high on other exchanges. Price difference is big enough to cover the costs/risks of arbitrage.

Why does Gox allowing withdrawals create a massive price drop on the external exchanges?  If anything I would expect them to trade up on such an event, not down, but in any case the vast majority of the equalising price changes would take place on Gox, not on the external exchange. 

Well, please read what I wrote again. Gox and external price should find equilibrium somehow with a positive or negative offset after gox enabling withdrawals. Much or less that's what I said. A good news is a good news for all but the existing trend will be reversed. After the good news gox will increase and the other markets will just decrease. Then it's all about what's unknown in the story and the look to the general reception of bitcoin will determine the market price at gox and elsewhere.

Sorry, I'm not not that fluent in English. Could not grasp what you say exactly.

If not for a theft, possibilities are :

1. They are doing the golden shot. Dump all for good where they can securely get the fiat money. Not much probable...
2. They have the knowledge of very good news that could relieve bitcoin from this mess and drive really high. So they deliberately make it crumble before it. Not much probable...
3. Incompetence, bad direction. Most possibly

Again I'm talking about possibilities here. These are not even my actual estimations. Maybe it's actually theft, maybe they are just incompetent. But that doesn't necessarily rule out the other possibilities given we don't know if there is a theft and the relative amount to market at gox if there is. Real suspicious thing is how slow gox reacting to events. They have somewhat good news  yet it takes them just 1 whole week to deliver which took other exchanges just mere days: that is enabling withdrawals. They could just work this issue out behind the scenes and while working for the fix manually check suspicious withdrawals.

Sorry, but you haven't given any valid mechanism that's going to equalise the market on gox and the external markets without gox reinstatating their withdrawals or otherwise regaining the public confidence.  Gox has dropped much further than the other markets over the same day, so your final observation doesn't support your point at all. 

Price drop then would not be necessarily just from the Gox or ones that bought in Gox cheap selling... Other people will follow selling... actually it's happening right now... 8.87 price decrease in one day... that's not Gox price on coinmarketcap.com

why would they do this, if not for a theft? they are making bank.

I don't, that isn't what I'm saying.  Gox can obviously directly manipulate their own market if they want to, but for them to bring down the price on another market to $400 (for a non-insignificant amount of time) they would have to sell more coin than they actually have ... i.e. they can't. 

How do you differentiate between regular guy and mtgox in the external market? The actual market doesn't exactly know **who** sells **where** at **what** price. Even if you know the answer of "who" as mtgox, the others doesn't seem obvious.



Read it up, in my scenario they end up going up in BTC and equalise in Fiat. This is all conspiracy yet it shows the statement in OP may not always be the case.
Mtgox didn't spell the word theft yet so it's not the obvious Market based explanation of the discount. Closing of withdrawals and the FUD around it and/or market manipulation is responsible for the price drop. It's essentially a closed market now at mtgox. In my aforementioned scenario caveat is mtgox had the chance to take the btc deposits outside. customers? no for the past week. This way, they are not compensating actually, customer who bought at $1000 now sells at $250 because of FUD. The only way they can compensate is to actually keep selling the extra btc they get cheaper at mtgox after FUD starts to disappear. That's if any ripped off customer actually buys it at that price.

All this is conspiracy though and yes we are certain about the mtgox's fall.

unless the order book is completely fake, (we know its not, because we see our orders in the book), then why would rational traders sell 500 BTCs all the way down to $250?


so MtGox is already short customer BTC, and is actively stealing more customer BTC, transferring it to [bitstamp], and selling it? thus generating more fiat? their issue is lack of BTCs not lack of fiat.

If its all a complete fraud then price analysis is useless. I believe MtGox is honest but incompetent. If what your saying is true, then everyone should be buying goxBTC, there should be no reason for a $350 discount to Bitstamp.

At the end of the day, the only market based explanation for the discount, is that customer BTC were stolen, and there is not enough BTCs to cover customer BTC deposits.

if MtGox is actively buying up goxBTC, and goxBTC is not real BTC, then they are in effect using their fiat to compensate their customers at .50 BTC for each BTC, which is exactly what would happen to all BTC deposits in an event of court ordered liquidation and insolvency.

i think we can all agree that this does not end well for MtGox.  




 

Gox don't have an unlimited supply of actual BTC.   No way they can "sell" enough elsewhere to equalise the markets without the public perception of Gox's liquidity changing. 

Shortage of BTC may not  affect Mtgox if current low prices are directly manipulated by Mtgox itself... which may seem to be the case now.

- Say half of the btc deposited to Mtgox is actually stolen. Assuming 1000 BTC deposit before theft.

- After the theft only 750 BTC is left.

- Through market manipulation with press releases & exchanges & closing withdraws say Mtgox acquires 500 BTC with average cost of $250 each.

- Mtgox sells these cheap BTC's in the external market for $600 each. Totalling $300000.

- Flow of cheap btc starts to decrease the btc value of external market... Through arbitrage  prices in Mtgox increases and settles above Mtgox's average cost of btc buy. (Caveat : Mtgox should not / cannot make customers withdraw more than 250 BTC)

- Prices find equilibrium and Mtgox purchase BTC in the external market for average $400 each... 750 BTC that is ...Deposits this back to itself...

Now, mtgox initially paid $125000 for 500 BTC. After all it got 250 + 750 BTC. Mtgox leaves 750 BTC as customer's funds. Sell remaining BTC with the increased prices. Say $500 each. That is $125000 which initially mtgox paid in fiat.

No losses in fiat... Prices at mtgox decrease again with the sale of extra BTC that Mtgox got...

And then say the thinking of a theft is just a bullshit of our conspiring minds then the thief is Mtgox itself if it's indeed manipulating the market.

Let's see how it rolls out in the coming days... And hope it's just the incompetent devs of Mtgox...

ps: Prices and other figures are just coarse estimations or say examples, relative differences / ratios should be taken into account.

yes. correct. cant go to 0, can go to .0001... many people never understood why there was a gox premium over bitstamp in the first place. so many q's about arbitrage.. reason for post was simple basic explanation of gox discount to bitstamp.

http://en.wikipedia.org/wiki/Fundamental_theorem_of_asset_pricing
http://en.wikipedia.org/wiki/No_free_lunch_with_vanishing_risk
http://www.realworldrobotics.com/readings/financial-engineering/principle-of-no-arbitrage
http://www.investopedia.com/terms/a/arbitrage.asp

Time will tell. All I was trying to explain was that exchange rate going down is helping Gox.

exactly, and how low must goxBTC drop for gox to cover their short? can this be done before the exchange gets shut down? if yes, then buy goxBTC! if no then sell! game of chicken.. kinda like merger arbitrage, post announcement.

Again we're (mostly) in agreement.  I think there's just confusion caused by your somewhat ambiguous OP wrt "Reason why MtGox can go to 0 - without arbirage opportunity with Bitstamp" and 
Perhaps you were just aiming to explain why the BTC price was dropping on Gox, which isn't quite the same as it going to zero (zero as in no activity on the exchange?  zero as in they enter liquidation and end up paying out a percentage of the fiat debts but zero on the BTC?)  I also don't know what the "no arbitrage theory" is.

In either case, I would have expected there to have been other threads explaining the price on Gox for those that require it.  It's been going on for days. 

maybe im wrong regarding "more BTCs will be bought/withdrawn". but if gox is short BTCs, you would rather own goxUSD, but there will be some low price were youd rather hold the goxBTC then sell for huge USD loss. this is what the market is currently doing, price discovery, at what price would you rather hold.

that depends on how many btcs were stolen.

Very unlikely, Japan has no specific legislation regarding cryptos. So legally there's notthing that can be done.

they have millions of dollars in customer money... but that money is a liability. as soon as the have less money then is needed to cover all deposits, they are technically insolvent , and can be ordered to return all the millions of customer deposits.. 

Liquidation of what?  

There has to be some assets of value in order to liquidate and return even a token amount back to customers. Unless you're talking about a very large company with a complicated structure, buildings, land, contracts, patents, etc then just getting to that stage normally indicates there is very little left.

What do you mean by "there are not enough real BTC on their own exchange"? Worst case, they have to come up with BTC equal to the sum of all BTC balances of their customers accounts. They can reduce these BTC balances by using their fiat on their exchange to buy BTC.

Well, obviously we're in agreement there because it's almost exactly what I put in my post.  I also agree that people clearly currently want to be in GoxFiat rather than GoxBTC

So what are we not agreeing about?


They won't be withdrawn though, as the only people who can currently "withdraw" BTC from MtGox are MtGox themselves.  Gox actually opening up BTC withdrawals again should see a large price jump on their exchange. 

I'm not saying that Gox can get out of any position by using an external exchange.  I'm saying that if Gox purchase 1 GoxBTC on their own exchange then they now owe $200 instead of 1BTC, so they've clearly reduced their overall debt (assuming a you consider BTC and fiat liabilities to be equally important, certainly debatable)

So everyone at MtGox is basically buying credits, for which they will never be able to exchange. Good point, so what exactly is MtGox selling at the moment then? 

Japanese bankruptcy courts?

if they would be able to do this, prices would not be so low... because of arbitrage. you can buy low on gox, but are not able to transfer then to bitstamp and sell high.

Interesting ... under which court? even better ... under which legislation?

If people are buying from MtGox at a very low price compared to the market average and then selling them back into the open market for tremendous profit (via another exchange), then that calls into question the other "legitimate" exchanges because it does not fit the economics 101 of supply and demand. If the market is being flooded with cheap bitcoins via MtGox, then the price must go down unless the other exchanges are artificially inflating the value to avoid losing money on their side.

That would call into question more than just MtGox honoring trades, but every other exchange out there for price fixing.

rephrase: in case of court ordered liquidation.

but there are not enough real BTCs on their own exchanges. doesn't matter how low the price drops, if they don't have enough BTCs to cover the total clients BTC deposits, they will have to buy externally. nobody is depositing BTCs into gox to sell at 250. the only way they get more BTCs is to buy externally.  

This just isn't true. If insolvent, then the money is gone. Gone.

the assumption was that goxBTC is fungible with BTC, otherwise its just paperBTC. In fact, before this incident goxBTC was $100 above bitstampBTC, because goxUSD was impossible to withdraw and worth less than bitstampUSD.

back in the day I used to sell goxUSD for $1.05, because everyone wanted BTCs and it took time to deposit into gox. so they were paying 5% for the time. used to do this on bitcoin_otc irc,using goxUSD codes. 

until now, mtgox traded as if they had enough BTCs to cover. this time is difference.   

Ok, I will elaborate. Right now the sum of all fiat deposits and BTC deposits is fixed. With each trade a fraction of both becomes the possession of MtGox (trading fees, currency conversion fees; their profit). They must use their exchange to trade one into the other.

Now comes the hack, which reduces their profits on the BTC side, likely going negative. Now they have to balance this by exchanging their fiat profits for BTC on their own exchange.

sure rat. 20 years trading experience, series 3,series 7, coded HFT strategies for multiple hedge funds, and wrote the matching engine for a bitcoin exchange.

I have my doubts they will bounce back. They may still be good for people trading in Japan, which I have no idea how much market share that is compared to the world. I think after this only heavy risk takers will trade on Mt Gox.

It was always GoxBTC you were buying on Gox, rather than real BTC.  You were paying with GoxUSD too, for that matter.  For a while previous to this current incident, GoxBTC has been valued at close to what other exchange's BTC was worth, while GoxUSD was worth less than USD on other exchanges.

If they can buy GoxBTC on their own exchange for less than they can sell it for elsewhere then they can reduce their BTC liability (i.e. they now "owe" the customer that sold them the GoxBTC fiat instead of BTC, and in fact they owe them less in fiat than what the BTC was "worth". 

no - you cannot use $250, must use Bitstamp quotes. see how the low prices hurt them? Again, this is all assuming MtGox is shutdown and goes into liquidation. If these low prices do in fact attract more deposits, then yes, low prices help and it is in fact a ponzi scheme.. like MfGlobal. 

you are naively assuming that everything in the trading world is legit. (mfglobal, jpmorgan silver short, CMOs, Enron, etc.. )

Gox is starting to look more and more like a ponzi scheme to me... Especially if what you wrote is true.

You are assuming that someone stole more BTC than MtGox total profits divided by $250 (see how a low number here helps MtGox?).

And even if this is still the case, like I said, they could borrow against the fiat they are holding for their customers.

this time market is betting on a court ordered bankruptcy / liquidation.

no, if MtGox exchange is short BTCs, the low price of BTC on mtgox is FAKE. there are no BTCs to be bought at $250.  The price of $250 is probably
( (Actual number of BTCs on mtgox) * Bitstamp price ) / (Number of BTCs that mtgox is representing they have)

during a liquidation, if mtgox is out of coins, they will need to use their own fiat.

prediction: as soon as mtgox is shutdown/liquidates. BTCs prices will go to the moon, on the assumption that mtgox is short. typical short squeeze. "buy the rumor, sell the news"

everyone needs to realize that this is all "normal" market actions.. BTC trading is not special, or even very volatile. trading is trading. difference is that many BTC traders are newbies to the wonderful "war" of trading.

This is flawed logic. The amount of fiat at Mt.Gox is fixed as people cannot withdraw significant amounts.

Assuming you are correct and Mt.Gox is short BTC then a low BTC price is ideal for them because they can replace their losses for less fiat money.

If nothing else, they can borrow against all the fiat noone can withdraw anytime soon.

don't follow the question. mtgox gets coins from their depositors.

I've been trading on MtGox since $2 BTC. Just want to give a layman explanation on how/why MtGox is trading at $250 while Bitstamp is still obove $600, and why the "no arbitrage theory" is not broken.

• Assumption is that MtGox lost some BTCs due to the malleability hack. If we assume that Silk Road 2.0 did in fact lose the BTCs due to a hack rather than fraud, its makes sense that MtGox also lost a fair amount of BTCs. Also, im sure a thorough analysis of blockchain can confirm how many BTCs were "stolen" from MtGox.
• So, if everyone withdraws all their BTCs at once from MtGox, there would not be enough BTCs for everyone.
• Big deal? MtGox can just use its own money to cover the difference, and everyone would be whole.
• So only real risk is that MtGox runs out of all BTCs and all fiat and is insolvent!
• As MtGox BTCs price drops relative to Bitstamp BTC, more BTCs will be bought/withdrawn on MtGox, and the cost to MtGox to make customers whole also goes up
• Its a vicious cycle, a snowball effect, and a game of chicken. Once prices started diverging, smart traders would "rather be in fiat, in case of insolvency". Also they can always buy even more BTCs with the same amount of fiat at a later date.
• Hence the "bank run" on MtGox BTC. End game is: MtGox shuts down and liquidates, and is short BTCs.

jaybny