A couple of readers were appropriately critical about what I had to say about MtGox in my review of available exchanges. What I wrote was:
Summary: Until they suddenly become transparent and provide any reasonable explanation and solution for their current withdrawal issues, MtGox is MtVesuvius.
I can certainly understand why someone would dislike that claim–especially since I didn’t provide a lot of information on that page. I did promise an explanation was forthcoming, and I’m here to deliver on that promise. To begin with, here’s what I am claiming:
- Fiat withdrawals from MtGox (with the possible exception of JPY) are indefinitely delayed with little explanation and a lot of copy/paste responses. In the few cases they are processed, it is in very small (<$1000) amounts. Withdrawals over a year old are still waiting in some situations. See this BitcoinTalk thread for details.
- You can withdraw BTC, generally speaking.
- These two things resulted in a price desynchronization: if you have MtGox dollars and want real dollars, you must buy BTC, transfer it, and sell it. This pushes the price of BTC on MtGox past the market. Currently, a MtGox dollar is worth about 85% of a Bitstamp dollar.
- That number (85%) has been decreasing, and the rate at which it is decreasing has increased rapidly recently.
- This will result in what equates to a bank run unless MtGox can sort it out–and soon.
And here’s the data, in three charts. I tried to keep it as simple and short an explanation as possible. First, this chart shows the price difference as a percentage over the past six months, calculated every 2 hours, between MtGox and Bitstamp, MtGox and BTC-e, and BTC-e and Bitstamp:
Looking at the chart, there are a couple important points to make. In bullet form:
- The price difference crept up prior to July, but it isn’t particularly relevant to us when it began.
- The price difference is consistent until the November crash. MtGox/BTC-e rarely strays outside of the 10-15% range, and MtGox/Bitstamp is 2-3% behind.
- The Bitstamp/BTC-e price differential is steady at 0-5% during the same time frame.
- Prior to the November crash, the price difference appears to follow the Bitstamp/BTC-e price difference quite closely. The patterns are very similar in most situations, and frequently identical.
Conclusion: Prior to the November crash, the MtGox price differential is a result of the withdrawal issues, but people had enough confidence in MtGox that the exchange rate for MtGox dollars to other exchange dollars never passed 85c except on rare occasions. The price was most commonly around 90c/$1. An 85c/$1 exchange rate is equivalent to an 18% price differential.
In November, the market went berserk. This threw off the cross-exchange price differential, in addition to other things. As we came out of it, some new trends emerged:
- The Bitstamp/BTC-e differential headed towards neutral.
- The MtGox/BTC-e and MtGox/Bitstamp differentials were temporarily neutral but quickly desynchronized.
- Prior to the November crash, the price differentials moved symmetrically. During the crash, they mostly moved symmetrically. Right after the crash, they moved oppositionally–as Bitstamp/BTC-e moved down to 0%, MtGox is moving up. This indicates that people are buying Bitcoin on MtGox, moving it to either BTC-e or Bitstamp (whichever is higher) and selling it. This has the same effect as arbitrage between BTC-e and Bitstamp: reduced price differential, and the inverse effect on MtGox/BTC-e or MtGox/Bitstamp: increased price differential.
I’m certain plenty of people will counter by pointing out that so far it has only really returned to what it was before November. First, that’s not true–it’s actually higher. Second, even if that were true, that would still be really, really bad. To claim that quickly returning to a 15% price differential was fine would be like claiming that losing 15% of Bitcoin’s value would be fine–because if your money is on MtGox that is exactly what happened following the crash.
Moving on. That chart demonstrates what I consider the most important piece of evidence. Past that, I have two more. The first is a chart of price in USD over time for the three exchanges:
This chart shows pretty much the same story as the first one, except the de-synchronization going on after the November crash is much more subtle, and harder to notice. If you look carefully, I’m sure you can see it quite well now that it has been pointed out in the price differential. The gap is increasing. There are two ways a gap like this can increase: one can go down and the other up, or one can go up and the other more up. This is the former, and that is a huge problem.
Finally, this is a chart of volume by week for those three exchanges, as percentages of the pool of only their volume:
A couple things are clear in this chart. First, MtGox’s volume has decreased over time relative only to BTC-e and Bitstamp, relatively steadily, but very swiftly. This is pretty solid evidence for the claims I’ve made–MtGox volume is decreasing, and you can only withdraw Bitcoin. Therefore, either people are trading less at a consistent rate while keeping the same amount of money on the exchange–which is total nonsense–or people are withdrawing BTC and driving the price up in doing so.
I think that last one is most likely.
To leave you with a closing thought: The price difference between MtGox and BTC-e/Bitstamp was 5% at the end of the November crash. At 23:25 UTC on 1/24/14, the minute I published this, it’s 18% on Bitstamp and 19% on BTC-e. That only took 2 months. Through all of July through November, the price differential increased from 8-12% to 12-15%. It is higher than it has ever been outside of times it has spiked, and it got there faster than it ever has before.
We might see $1000 coins soon, but anyone who has money on MtGox certainly should not be happy about it.
Until the situation changes, I consider MtGox to be an active volcano.
EDIT: A reader asked for a step-by-step of how this affects the market. Here it is:
- MtGox price continues to rise regardless of other market movement.
- People with fiat on MtGox realise this.
- People with fiat on MtGox do the sensible thing, and buy BTC on Gox and transfer it out.
- MtGox price continues to rise regardless of other market movement.
- Eventually this cycle will repeat enough that the Gox price will be wildly desynchronized (I think this will happen when Gox breaks 1k and other exchanges are at ~800), people will lose what little faith remains in Gox.
The meltdown occurs if Gox reverse crashing leads to a crash in BTC price. I think it will at least to some extent, because I think the current exchange rate is partially propped up by people who expect us to catch up to Gox. Which we won’t.
Beyond that point–that the Gox price is propping up other exchanges–if something bad happens to Gox, we’re likely to see dramatic negative news, especially from the mainstream media. Gox is considered by those on the outside of the BTC world to be the center of the BTC world. The mainstream news media hasn’t yet figured out that this is going on, and it will be some wild bad press when they do.
Even BTC-centric news sources haven’t all figured it out. Coindesk uses Gox as part of their BTC price-getting algorithm still, for instance.