LED ZEPPELIN
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Bitcoin bankrupcy
- Thread starter LED ZEPPELIN
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EnDash
Jōnin Strategist 🧠
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money in general should be a no-no. how many banks have gone bankrupt and all their costumer's money gone? how many thefts made large sums of money disappear?
it seems crazy that some bits on a hard drive is worth real world money and you can buy stuff with it. but then again a paper with some pictures on it that weigh less then a gram is apperently worth 100 dollars.
every person that invests more money then he can spare on bitcoins is stupid, but we all give all of our money to banks for them to do whatever the hell they want with it. go to your bank and tell them to give you a 100% of your accounts money, and then tell me bitcoins are too dangerous.
so i guess russia isn't going to destory the world now?
the good thing about bitcoin is, there is no major economy that relies on them right now. there is no export or import buisness that depends on the value of bitcoin. the affects of a bitcoin collapse will start and end with people who invested in bitcoins.
Aim64C
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It's actually not a weakness in bitcoin, itself.
Mt. Gox was trading in ways that it knew bitcoin was never designed to trade:
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The thing is that every transaction made within bitcoin is logged within the encryption block:
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To quote:
"Two bitsleuths at letstalkbitcoin.com, Adam B. Levine and Napoleon Cole, have picked up the trail in 2011, when Mt. Gox chief executive Mark Karpeles apparently moved a large sum of bitcoins from one address to another in a public attempt to demonstrate that Mt. Gox had a lot.
Another source of addresses is Mt. Gox customers themselves: People who deposit bitcoins with the exchange would know the address to which they sent coins; likewise, customers who were able to withdraw from Mt. Gox would be able to see where coins came from. Friday, bitcoiners were swapping addresses in forums like online comment shop Reddit."
Honestly - if a business wishes to exchange bitcoins with you - they should have a public bitcoin wallet address. If they don't - you need a very good explanation as to why, and should be very cautious in doing business with any other bitcoin wallet address.
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What we are seeing is a classic case of a "run on the bank."
Whatever Mt. Gox was doing with their bitcoins - it's apparent they do not have enough bitcoins to cover the stated account balance of each individual. Which is no different than what happens under a Fractional Reserve Banking system.
The thing is that Bitcoin isn't a centralized bank. There is no authority that can print more. "Mining" is paid for out of transaction fees within each bitcoin transaction (which are quite small). After some time in 2050, there will be absolutely no more bitcoins generated by the algorithm.
So, when a bank doesn't have the reserves to cover its withdraws - it goes bankrupt. As every single FDIC bank should have long ago, because your money isn't really there.
Rather than banks going bankrupt as they do under private systems, banks under centralized systems collapse entire economies once the bank can no longer support the value of its currency by absorbing a greater portion of the economic activity (the more people have to exchange their goods for a central bank's currency, the more value that currency has... which means that a currency that is inherently inflationary must expand its influence at a geometric rate to experience deflation).
Honestly, the general public's ignorance on this issue is going to turn into a huge investment opportunity. If bitcoin absorbs just 2% of the world's GDP (purchasing power equivalent) in economic transactions - each bitcoin will have roughly $44,000 of purchasing power. Any scenario where bitcoin gains substantial use as a monetary standard of exchange has its value literally explode to the point where it's not: "How many dollars is a bitcoin worth?" but a case of "how many cars is a bitcoin worth?" Bitcoin would literally replace fiat currencies as the standard next to gold.
There will only ever be 21,000,000 bitcoins to go around (though each bitcoin can be sub-divided down to micro-bitcoin transactions and nodes can be updated to support even greater divisibility) - no matter how long the system lasts.
It's a brilliant system, honestly.
Though it is unlikely that it will be the 'every day' transaction standard. It will likely become popular on wallstreet as a replacement for government bonds (which are currently the standard of stock trades - you don't trade in literal dollars, you trade in bond shares). Money-orders and 'bank wires' would probably utilize bitcoin, as well.
Your every day banking would likely end up being backed by gold and silver certificates that will be less vulnerable to excessive fractional reserve banking, but a bit more conventional as a currency where banks can support charge-backs and other systems (though, theoretically, they could do the same thing with bitcoin).
Aim64C
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Bitcoin didn't fail.
Mt. Gox did.
Mt. Gox was a bitcoin exchange that was behaving irresponsibly. Most of the people invested in bitcoin were already suspecting Mt. Gox of poor practices long ago. It was roughly a year ago when I started looking into bitcoin, and already people in those communities were warning each other away from Mt. Gox. Mt. Gox was one of the first bitcoin exchange services - but it is far from the only, and its share in bitcoin holdings declined, considerably.
Bitcoin value has stabilized around $500/btc for about the past two weeks, now.
It is amusing to see how people who know nothing about how bitcoin works proclaim that all of the people who have invested in it were retards and that it was destined to fail.
[video=youtube;Lx9zgZCMqXE]http://www.youtube.com/watch?v=Lx9zgZCMqXE[/video]
The only question about whether bitcoin will or will not 'succeed' is how many people will adopt its use.
Bitcoin, itself, is a very solid platform.
You can see, through the explanation of how bitcoin works, that Mount Gox had to be horribly negligent to lose the bitcoins that it did. I would suspect that Mt. Gox did something else, entirely, with the bitcoins, and that they were not actually stolen.
Hacking bitcoin is not mathematically -impossible- but a record exists of every transaction. Not only that, but the network's hash statistics are publicly monitored. The only groups with the hash rate to even begin to try a double-spend attack against Mt. Gox are pools... and this is the network hash distribution:
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The creator of each block is known - which means that any group with the opportunity to create a double-spend attack is also known.
Mt. Gox was quite possibly worse than negligent by being downright fraudulent.
Aim64C
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It's a young system, in many ways.
First, the share of network hash rate is still very immature. That will likely change in the coming years as businesses invest in batteries of specialized hardware for mining. No one will be able to overtake substantial portions of the network hash individually (and any large businesses trying to soak up the hash rate will be met with competition very quickly by other businesses doing the same) - but rather than BTC guild having, say, 20% of the network hash rate, they will have 5%, and almost no single group will have more than about 8% of the network hash rate.
That will make the network much more secure than it is now (and it's pretty damned secure).
Second - Bitcoin's place as a currency is still young. Its dynamics are actually closer to that of a precious metal. Silver and Gold are not readily exchanged, directly - just as bitcoin is not readily exchanged, directly. Though the time is upon us when stock contracts will be negotiated in gold shares. Currently - stocks are exchanged in reserve currencies - basically the debt a treasury owes to bond holders. When countries like the U.S. issue a treasury bond, it is bought by banks who use it on the stock market to broker trades (rather than actually doing business in dollars). Recently, a few stocks have been negotiated in gold shares.
But gold shares are promises to turn gold over to whoever presents the share. Thus, these are effectively "Gold Exchanges." You give a gold exchange currency (or a bond for currency) and the exchange gives you a promise that you have gold.
This comes back into play, later, when we talk about Mt. Gox.
Bitcoin has the advantage of being a digital currency. You can send the literal object of value over 'the wire.' So, rather than promising someone: "I will give you x bitcoins" - you can actually send them bitcoins in exchange for stocks, bonds, etc - and the transaction can be considered solidified within about an hour. They now have the literal bitcoin, just as if you had teleported an amount of gold, silver, platinum, etc to them.
You just have to trust that they will follow through on their end of the deal - but that is part of any system of exchange. The more accepted bitcoin becomes - the easier it will become to tell the legitimate from the illegitimate and also the easier it will be to mediate contract disputes.
But the nature of bitcoin means that I doubt it will be utilized much for individual purchasing. I believe it will be utilized more as a 'reserve currency' - basically replacing treasury bonds as a means of brokering large stock trades. Some places will likely allow trading of bitcoins directly for service and the like - but I think most of the bitcoins will end up being absorbed into a 'reserve currency' system.
Now - Mt. Gox was a bitcoin exchange. You give them dollars, yen, waka-waka-doloos - whatever, they then gave you a nice little account that had a balance with the number of bitcoins you supposedly had.
But you didn't really have bitcoins. You had the promise of bitcoins. This is how banks used to work, back when they had to issue their own bank notes.
Why would you do this? Well - bitcoin exchanges allow you to do business with others and exchange bitcoins for service... and then do a charge-back if there was an issue (something the bitcoin network, itself, doesn't allow). It also allowed you to do business without having to personally utilize a wallet program.
The problem was two fold. First - people took for granted that Mt. Gox was 'on the up and up' in the business world. Banks are regulated by governments and there will not be a time where you write a check and the bank can't service that check because they are out of money (in that case - the federal reserve simply prints money... so it does happen - everyone just pays for it through the effects of inflation). So people get used to the idea that banks (currency exchanges) are all virtuous in their account holdings.
But bitcoin has no centralized issuing authority. No one can print new bitcoins for Mt. Gox's sake (or, rather, their customers' sake). When you hand money to a bitcoin exchange, it is like handing money to a gold or silver exchange - do they actually have enough silver/gold/bitcoins to cover the amounts they have promised everyone? That's the correct question to be asking before you buy from an exchange.
This is why, when I purchased silver a few months ago, I purchased rounds and ingots that were shipped to me. I didn't purchase certificates. I also turned down the offer for that company to store it in a vault for me (and there are several different options there). If they were local - that might not be such a bad offer... but if poo hits the fan (which is what I bought it for) - I'm not driving all the way to Oklahoma to get my silver or trusting them to send out armored cars with mercenary escorts to deliver silver to their customers across the country.
Call me crazy on both accounts.
Anyway - Mt. Gox was allowing people requesting bitcoins from Mt. Gox to claim that the transaction hadn't gone through and automatically re-bill Mt. Gox for those bitcoins.
Because of how the block chain works - there is plenty of reason for why someone who ordered bitcoins from Mt. Gox would not receive them (they got packaged into an invalidated chain and therefor not sent). So it makes sense for Mt. Gox to allow for an automated system of billing.
Except... you would probably want to have that automated system verify the transaction history in the nodes to make sure that it wasn't being double-billed before re-sending the bitcoin amounts.
Supposedly - Mt. Gox was not using such a system to prevent double-billing, and someone (or groups of someones) was multi-billing Mt. Gox for bitcoins.
You can think of it this way - Mt. Gox was like a bank with a debit card system. Without having to write checks or hand over cash -you could simply swipe your debit/credit card and a business would bill your account for the services. However, because transactions will sometimes not go through, Mt. Gox allows a business to double-bill automatically. Mt. Gox, goes ahead and sends the money twice, but only bills your account once. When it finally comes through that both transactions were confirmed - there is nothing Mt. Gox can do to reclaim that money.
You don't directly see the problem. It's only when Mt. Gox says: "We are no longer allowing you to withdraw your money" that the problems become apparent - because they no longer have enough bitcoins to cover the amount stated on your account balance (well, probably enough for you - but not everyone).
This is what is known as a "run on the bank" - where it becomes obvious that a bank does not have enough assets to cover its liabilities and there is a rush to be at the head of the line to get your money out before there is nothing left.
[video=youtube;KyDU4X8GSmE]http://www.youtube.com/watch?v=KyDU4X8GSmE[/video]
It is in regards to Fractional Reserve Banking - but it still applies to the concept of exchange notes. Like gold - Mt. Gox cannot magi-poof bitcoins into existence to cover its stated values.
Now... someone has to ask: "Uh... So ... why the hell would they not fix that problem... I mean... they HAD to see what was going on..."
That's a very good question.
My guess is that the double-spend was actually a minor issue with Mt. Gox. I imagine they were trying to apply modern banking theory on bitcoin and got caught with their hand in the cookie jar - because modern banking theory does not work without centralized banks to control currency supplies.
Hardly.
Bitcoin stabilized at around $550:
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Bitcoin bubble bursts have been far more destructive than the announcement of the Mt. Gox scandal, in terms of bitcoin value. The scandal announcement actually did little to bitcoin's value.
The real damage we see done was when Mt. Gox announced in early February that it would no longer allow people to withdraw bitcoins from their accounts. We saw a sharp drop with a more gradual decline. By time the announcement was made earlier this week, it had already bottomed out. Most anyone who was selling bitcoins has either sold them or is no longer selling. Buying will pick back up in the coming months - though I don't expect we'll see a return of the November bull market very soon.
Bitcoin is far from failed.
Mt. Gox had roughly 8% of the bitcoins in existence (or... if you add up what they -should- have had). While that is an enormous share - it's hardly damning to bitcoin as a whole.
In fact, I actually expect plenty of banks and exchanges to fail under bitcoin - since it is a currency that demands honesty from banking/exchange institutions. Those who can't handle that responsibility will fail, because bitcoin is unforgiving. No magical wizard is going to come along and grant bitcoins to Mt. Gox - or any other financial institution.
No law on the face of the planet, no army, and no government tax can protect businesses from their own banking practices under bitcoin.
A lot of financial institutions will fail as bitcoin's use expands, because the system is used to being able to obfuscate the dynamics of banking and delude people into trusting a fundamentally dishonest system.
I would argue that bitcoin isn't failing. It's simply exposing the failure of modern banking mentalities.