A lot of people have wanted to know the answer to that exact question. I’m going to try and provide a lot of information in this post.
To begin with, my series of articles on MtGox:
I was nipping around the ankles of the problem for a long time. Their issues began when their cash withdrawals started having difficulty. Now we know why that was: they had literally lost so much money, and were so underwater, that they had to wait to earn money before they could send it to people. This loss wasn’t sudden, and it didn’t come quickly. This was the result of years of negligence. This halting or delaying of fiat withdrawals led to bad press, making their situation worse.
As time went on, the spread widened quickly. People began to panic, and the market started to crash upwards. But then it suddenly stopped. And it reverted direction. Why did that happen, and what caused it? What was really going on there? I argued that it resulted from insider trading. Some agreed, some disagreed, but regardless: things were strange, and getting stranger. Over the past few days, we’ve seen some very obvious insider trading. About 10,000 BTC was sold over the past two days out of nowhere on other exchanges.
Eventually, MtGox halted BTC withdrawals as well, and the price on the exchange crashed. The price of a BTC on MtGox dipped into the double digits as many feared that they might have to sue MtGox, and suing for USD sounded much cleaner than for BTC. MtGox BTC, at their lowest, were worth less than .1 of a real BTC, according to BitcoinBuilder.
Now we have the most major news: MtGox lost 750,000 Bitcoin to transaction malleability, over years. Their money is shadows on a tapestry. Mark Karpeles, CEO of MtGox, confirmed that the Crisis Response Strategy draft is “mostly legitimate.” Source on that is this FoxBusiness article citing an IRC conversation.
So what can we do with that information? If the Crisis draft is mostly legit, let’s pick it apart. I’m ignoring the business plan it provides and jumping straight to the balance sheet section. Here’s the image:
Hoooo boy I’m sure people are not happy to see that. So what’s the summary of that? It’s simple: MtGox is underwater. In fact, they drowned. Or maybe even got crushed by pressure from the immense amount of water they are under. If those numbers are accurate, they are underwater by about $150 million. If instead of using the MtGox Bitcoin price of 160, you use the “real” Bitcoin price (the free market acquisition cost for Bitcoin, since the MtGox price doesn’t indicate the price of an actual Bitcoin) then they’re actually underwater a little more than $400 million.
Let me repeat that: MtGox is underwater $400 million. That’s not chump change.
So what’s the summary of all of this? Here are the questions that need answers:
1. Who is at fault?
Easy one: MtGox. A lot of people have blamed Bitcoin for what is happening, but this is more like what happened with Silk Road recently. Blaming Bitcoin for what happened to MtGox is like blaming credit card design for the Target security breach. It’s misplaced. The root problem is not transaction malleability, a relatively minor issue in the Bitcoin protocol that has been known about for years. The root problem is shoddy workmanship and poor bookkeeping by MtGox. If they had done a good job programming their system, this never would have been able to happen. The blame for the problem absolutely, wholly, and completely lies with MtGox. What happened was akin to a bank letting you withdraw the same money from your account multiple times by not doing a thorough job checking if they’d already handed it over. That’s the fault of the person handing out the money–not the money itself.
2. What happened?
Approximately 750,000 Bitcoins, or about 6% of all that currently exist, were stolen and are now in the possession of hackers. 6%. That’s a catastrophic number. Will people ostracize their wallets after tracking them down? Is it really possible to track them down, or did the thieves do a very good job covering their tracks? Time will tell, but I’m certain that influential players in the Bitcoin space are investing into private investigation firms to determine just this.
A further question: will the thieves be selling? Have they been selling? Will they continue to sell? 750,000 is a huge amount. $400 million is live-your-dreams money.
3. What’s the fallout?
A lot of poor journalism that misplaces the blame. Here are some example headlines I expect to see, some accurate, some not:
- Bitcoin Bug Causes Largest Exchange to Lose Nearly $400 Million
- Bitcoin Hackers Make Off With $400 Million from Largest Exchange
- Largest Digital Theft in History: Hackers Exploit Bitcoin Bug to Steal $400 Million from MtGox
- Will MtGox Owners Face Criminal Charges?
- Is the MtGox Disaster the End of the Rise of Bitcoin?
And things along those lines. It’s easy for headlines to misplace the blame in an instance like this. Even if they get it mostly right, the Bitcoin protocol is going to suffer some peripheral blame. The price is going to suffer.
We’re also going to see tear-jerking human interest stories. Many people lost their shirts on this, if MtGox doesn’t repay creditors (which is relatively unlikely to happen, IMO). News outlets will want to interview those people preferentially, and their stories will become widespread. Plenty of otherwise ordinary people lost their life savings as a result of this.
4. What about the long-term?
Long-term, this changes little. The Bitcoin technology is solid, and it’s going to do all kinds of things. It will literally change the world. Disaster is as disaster does; technology always progresses. Where the price will go or how long it will be until it recovers are much more difficult questions to answer, but in 5 years, Bitcoin will almost undoubtedly be much stronger than it is now.