Thursday, February 20, 2014

Why Mt. Gox May Be Headed for Bankruptcy

By Ezra Galston

Ezra Galston is currently a venture capitalist at Chicago Ventures and the former director of marketing for CardRunners Gaming. [Note: The problems Galsto discusses here fall in line with my earlier analysis of the likely problems at Mt. Gox.:Did the Government Force Mt. Gox Into a Bit of a Ponzi Scheme-Type Dancing?-RW]

It has been a tough week for bitcoin: a freeze on withdrawals at Mt. Gox due to transaction malleability, multiple DDoS attacks across the exchanges, and a consequent plunge in price.

In my view, however, Gox should be everyone’s biggest focus. While their price spreads and cash-out delays have plagued the site for more than six months, I believe their current situation and recent statements belie transparency and suggest insolvency. Namely, that their business model and recent past raise a number of red flags that make comparing the company to now-bankrupt online gambling operators highly relevant.

Three weeks ago, I took to Re/code to describe how the evolution of online poker is likely to be correlated and instructive to bitcoin’s development. In it, I wrote: “I believe we could see a major exchange go under, especially if regulations and wire transfers become more complex, or if the cost of acquiring customers becomes more competitive.”

I have seen this story play out nearly a dozen times before during my tenure as an executive in the online poker world and, in this article, I want to set out why I think Mt. Gox is in big trouble.

Fund seizures

Mt. Gox had nearly $5 million in funds seized from its bank accounts in 2013. It’s unclear whether these were operating funds or customer deposits. This is highly reminiscent of seizures in the online gambling world, which deeply affected operators’ solvency.

These fund seizures, such as $115 Million from Full Tilt Poker, or $33 Million in a 2009 DOJ Seizure, were initially smoothed over by their operators. Players were typically reimbursed and withdrawals were honored.

What outsiders hadn’t realized at the time was the strain this placed on individual operators. In order to keep the business running, operators had to remove the ring-fence that protected customer deposits and borrow from customer balances to support operations.

Read the rest here.


  1. "May" be headed? LOL

    And while you are right about BTC, I'm hoping you will come to your senses on HFT.

    1. Waaaaay too early to say Wenzel was right about anything when it comes to Bitcoin. It is still the best investment year over year and hasn't been stopped by governments yet. So what was he right about?

  2. MTGOX is insolvent, but not for much longer. Pay careful attention.

    1. MTGOX blocks withdrawals, blames technical issues
    2. MTGOX waits while uncertainly causes BTC values on MTGOX to plummet
    3. Significant arbitrage opportunity appears when BTC value on MTGOX is several times lower than on other exchanges.
    4. MTGOX purchases the cheap BTC from their customers, and slowly begins to sell them on other exchanges.
    5. This takes time because they have to be careful not to crash the BTC values on the other exchanges.
    6. Given time MTGOX would have acquired enough cash and BTC to cover their liabilities through this arbitrage... the arbitrage opportunity that they created themselves by crashing the value of BTC on MTGOX.
    7. Reveal a fix for the 'technical problems' and use the cash and BTC that they gained from the arbitrage opportunity to resume normal business.

    Note that ANY cryptocurrency exchange could do exactly the same thing and make enormous profits.