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What is happening with Bitcoin

It looks as if a large Bitcoin exchange, Mt.Gox, has disappeared, along with large numbers of customers’ Bitcoins. The sequence of events is described in one Reddit post, and the media reaction is predicted in another, along with some advice:

…the lesson is not that we ought to seek out “regulation” to save us from the evils and incompetence of man. For the regulators are men too, and wield the very same evil and incompetence, only enshrined in an authority from which it can wreck amplified and far more insidious destruction. Let us not retreat from our rising platform only to cower back underneath the deranged machinations of Leviathan.

In general, Reddit seems to be the best source of information.

There are people predicting that this is the end of Bitcoin, and others pointing out that Mt.Gox is just an exchange, and not a very well run one at that, so good riddance because Mt.Gox has been blamed for price fluctuations in the past. Of course, there will be no state bailout. We might be about to learn what happens to a free market currency in a big crisis.

43 comments to What is happening with Bitcoin

  • Paul Marks

    There has been a lot of talk about this matter – over the last few days.

    Max Keiser (historically the chief publicity man for Bitcoin) was on the defensive this morning – both saying there is nothing wrong (it is just this one exchange – Bitcoin is still wonderful…) and flogging an alternative to Bitcoin (“Maxcoin” – I wonder who that is named after…..).

    Actually (and this will seem odd coming from me), but I do not think these people have done anything wrong.

    After all they have always been very clear that are not offering money (a currency) they are offering a CRYPTO currency (the word “crypto” is important – and if people have not bothered to look up the word “crypto” well then “buyer beware”).

    They (the Bitcoin salesmen) have been very clear – Bit”coin” is air pies (the contents of an empty bag) just a string of numbers (nothing more).

    Therefore anyone who has bought these air pies (and is now upset) HAS NO CASE.

    “But we have not received it” – you have not received what? There is nothing solid to give you. There never was – you know that.

    After all the Bitcoin salesmen were up front with you all – right from the start.

    And (much though I dislike Putin’s boy Max Keiser) if you now go off and buy “Maxcoin” and later get upset about it. You also HAVE NO CASE.

    If you listen to Max Keiser carefully (ditto the other Bitcoin salesmen) they were selling you naught (air pies – the contents of an empty bag), they were always very clear on that point.

    I would be happy to give testimony in court (as a critic of this project in past) in DEFENCE of the Bitcoin salesmen.

    Besides…..

    The other exchanges are still in operation – you can play on them (for awhile).

  • Paul Marks

    And while we are here…..

    The gold and silver dealers who have been selling gold and silver they do not have……

    Well old Max Keiser (Putin’s boy) may be technically wrong when he calls what they are doing “fraud” (legally it may not be).

    But the organisations in (for example) the London gold market are heading towards bankruptcy (because the customers want PHYSICAL gold – and these dealers just do not have that).

    But bankruptcy is a civil matter – not a criminal one.

  • Rob Fisher (Surrey)

    I don’t know much about Max Keiser, but this is an interesting tweet of his:

    What’s happening to MtGox would have happened to JPM, GS, C, HSBC, RBS, BRK, in 2008 if we had free markets.
    This is Bitcoin’s finest hour

  • Mr Ed

    Perhaps that bloke searching a rubbish tip for his computer with the bitcoins on it can rest a bit.

    My airline lost my luggage on the way back from Italy the other week, I rang my legal helpline, and they told me that I had no case.

  • PersonFromPorlock

    I have never understood how bitcoins differ essentially from the bank-issued dollars of the Nineteenth Century.

  • I have never understood how bitcoins differ essentially from the bank-issued dollars of the Nineteenth Century.

    Pretty much the same thing really.

  • “But we have not received it” – you have not received what? There is nothing solid to give you. There never was – you know that.

    Sure but would you say the same to an insurance company? Or would you insist on a physical lump of insurance being delivered to you?

  • Mr Ed

    In some parts, you can get a physical lump of insurance, like a Colt 45.

  • Patrick Crozier

    For a while now I’ve thought Bitcoin looked like a bubble and would undergo a correction but I never saw anything like this. Can it be true that 6% of all the Bitcoins ever mined have simply disappeared?

  • Rob Fisher

    Patrick : they’ll be somewhere. Possibly a wallet to which no one knows the password, so irretrievable. But this is unlikely. If they were stolen or embezzled they can be traced, with difficulty dependent on the cleverness of the thief. I suspect there is more to this story, though.

  • Laird

    Opening caveat: I profess no great knowledge of Bitcoin. But my understanding is that when the US government shut down Mt Gox they seized its “inventory” (if that is the proper word) of bitcoins, including those belonging to its customers. The charges against its founder have something to do with money laundering, and even if there is some truth to that it certainly can’t be true for all of its customers, but they’re nonetheless out the money. Had they transferred their bitcoins to their own virtual wallets there would have been no problem (for them, anyway). So none of this is evidence of any sort of problem with Bitcoin per se, but merely with that particular exchange (there are others). I don’t see this as any more problematic than an individual bank being shut down by the regulators (except, of course, for the lack of deposit insurance!). The system is unaffected.

  • Bruce Hoult

    So much misinformation!!

    What has happened is that people who bought bitcoins on MtGox thought they owned them. They didn’t, according to the bitcoin system. MtGox did. MtGox kept their own records of who “owned” what. And MtGox were incompetent.

    Which should have been apparent from the start: MtGox learns bitcoin

    The proper way to use bitcoin is to keep your wallet of bitcoins on your own computer. And back it up. Several times. Print it on paper if you want — it’ll likely fit on one side of A4 in not very small print. Keep it secret. Keep it safe.

    It’s bearer certificates. If you lose your wallet or forget the password then those bitcoins are gone out of circulation forever.

    That’s not what happened with MtGox. They gave bitcoins that people thought they owned (but didn’t) to other, unauthorised, people. It’s theft. Just like a bank robbery. Those bitcoins still exist, just in other hands.

    This has absolutely no effect on people who keep their bitcoins on their own computer (or phone). There are the same number in circulation as before. Bitcoins still can’t be counterfeited or inflated.

    If you want/need to use a place similar to MtGox to turn normal money into bitcoins then DO NOT LEAVE THEM IN YOUR ONLINE WALLET THERE. Make yourself an identity and wallet on your own computer and make a payment from your account on the bitcoin exchange to your own identity. Then you are perfectly safe.

    Well, you are if you do your backups diligently.

    Or, if you want to turn normal cash into bitcoins, find someone who has bitcoins and wants cash, agree a price, have them do a transfer of bitcoins from their wallet to yours (using the actual bitcoin system, not an exchange), and hand them the cash.

    The recent problems are not with the bitcoin system, they are with finding trustworthy and competent “bank” or “escrow” services who will not lose or steal what they hold in trust for you.

  • Pollo

    Laird: Mt Gox wasn’t shut down by the US government. You’re thinking of Silk Road.

  • Bruce Hoult

    To amplify on the previous.

    Assume you want to use bitcoins to buy a used TV, and both you and the seller have bitcoin software and wallets on your own computers.

    You make a transfer from your bitcoin wallet to theirs, using the bitcoin software. You wait about 10 minutes for the next block of world-wide transactions to be created (mined). If you are paranoid you wait for another block to be created, pointing to the one with your transaction.

    At this point the transaction is recorded on thousand of computers all over the world. They all agree that bitcoins have been transferred from you to the seller. The transaction is irrevocable.

    Now you ask the seller to send you the TV.

    There is a risk that they will not send you the TV, even though they have the money.

    This is exactly the same situation as any online auction site, or newspaper classifieds or whatever.

    The solutions are the same.

    You can’t get your money back, but you can damage their reputation in whatever venue you used to arrange the deal.

    Or you can meet them in person and do both sides of the swap in person.

    Or you can use a trusted third party as escrow — you give them the money, and the seller gives them the goods, and when they have both they pass them on. The problem is to find a competent and trustworthy escrow service.

  • Rob Fisher

    Bruce is right. I used MtGox but am unaffected because I did not leave my Bitcoins there. People were leaving Bitcoins in their MtGox accounts for convenience, to do things like day trading.

    There were warning signs. MtGox suspended withdrawals recently, ciring software problems, but maybe it was that they had no money. I’m sure the same thing used to happen with goldsmiths.

  • […] I read on Samizdata this morning that Bitcoin has encountered it’s first truly serious issue. Control over a substantial […]

  • Many thanks to Bruce for explaining that.

  • Mr Ed

    What has happened is that people who bought bitcoins on MtGox thought they owned them. They didn’t, according to the bitcoin system.

    At least the Bitcoin system has arisen through voluntary exchange from a ‘clean’ start, and here people have put themselves voluntarily (perhaps naively, but that is their right) into a system where they don’t own their deposit, which is exactly like our current banking system in the UK, where you become a creditor of the bank on making a deposit. Whilst the banking system is voluntary, the practical difficulties of the current law (and the obstacles imposed by licensing and (credit creation) subsidies) mean that there is no practical alternative for many to the current banking system, or a viable money warehousing//transfer system.

    I suppose that the net effect of the loss of some bitcoins would in fact be a deflation of the ‘money’ supply.

    But isn’t the idea of a ‘crypto-currency’ a bit of an oxymoron? The phrase ‘This has currency’ can suggest that something is widely known and accepted, ‘crypto’ has a secondary suggestion of currency being hidden and obscure, but camouflage can aid survival when predators are around.

  • But isn’t the idea of a ‘crypto-currency’ a bit of an oxymoron?

    Not really. Indeed I have heard Hawala, which has been around since the 11th Century, described as a ‘crypto-exchange system’ long before anyone even imagined BitCoin.

  • Paul Marks

    Well first I must express my condolences over your lost luggage – surely you DO have a case (you paid them to transport the luggage – so they have a duty-of-care). Not a criminal case but a civil one – they are liable for your loss (if they can not pay they should go bankrupt).

    Bitcoin “much the same as bank issued Dollars in the 19th century”.

    What the f…

    Are people both blind and deaf?

    You have all been told (repeatedly) that Bit”coin” does not exist in any other form than a string of numbers – that is ALL IT IS.

    The whole point of banks in the 19th century that issued money is that they claimed to have the gold (or silver) that those notes represented.

    Sometimes (a lot of the time actually) the banks were lying – but the claim was there.

    THERE IS NO SUCH CLAIM FOR BITCOIN – you have no case, because Bitcoin is not “coin” – it is just a string of numbers, it does NOT claim to represent anything (no commodity at all).

    Why can people not understand this?

    How many times do they need to be told?

    It is nothing like bank money in the 19th century.

    There is no claim that Bitcoin represents gold.

    There is no claim that Bitcoin represents silver.

    There is no claim that Bicoin represents ANYTHING.

    It is air pies – the contents of an empty bag. It has no non monetary uses – because it does not physically exit.

    Understand now?

    As for the 19th century.

    The real “private money” was the gold and silver coins minted in the West of the United States (which were actually more common in the West than government coins).

    This Congress banned in the 1850s.

    But that (private coinage of full weight and purity gold and silver coins) was the real “private money”.

    Today ownership of gold or silver (or any other commodity money) can be transferred electronically (NOT the same thing as “electronic money”) so credit cards and so on are perfectly O.K. with commodity money.

    The “electronic payment” would be a TRANSFER OF OWNERSHIP of the physical commodity being used as money.

  • Mr Ed

    Paul,

    I think that selling bitcoin is a bit like a Lancaster bomber operator selling ‘propwash‘ from its aircraft. There is such a thing, and I suppose you could catch it by opening evacuated jars and sealing them whilst standing in the slipstream, but it is only another, slightly more glamorous, air pie, and the sort of thing that apprentices would be sent to fetch from the stores in an airbase.

    I know we shouldn’t hawk on this site, but I would like to swap my bitcoin for some Union Jack paint (he lied).

  • Rob Fisher (Surrey)

    Paul, I really do understand. I just do not care that there is nothing physical. If anything I can see a Bitcoin more easily than I can check that the gold I own really exists.

  • llamas

    Everything Paul Marks and Bruce Hoult said. +1

    And only to add – so Bitcoin is every bit as susceptible to debasement, theft, loss and confusion as every other form of value storage or transfer has been since the dawn of time? Colour ME all surprised and stuff.

    What the mind of man hath wrought, the mind of man can un-wrought. All the geeky hipsters pushing Bitcoin have been misled, or have misled themselves, into thinking that their great idea is somehow magically immune from the risks that attend every system of value storage and transfer. Because they wrote some clever code, or cloud-located it, or whatever the chic software fad-du-jour may be. But, as we see here, the cleverest system in the world is not proof against the fallibility of its users. Only a matter of time before one of these crypto-currencies amasses enough stored and recoverable value that it becomes worthwhile for a serious hack.

    Minted coins, and intaglio-printed banknotes, and suchlike, used to be essentially-immune to value loss or dilution because they could not be easily hacked. They were a hack-proof technology for value storage. But eventually, they were hacked. Only a fool would imagine that a crypto-currency will not be likewise hacked when the rewards are big and real enough.

    llater,

    llamas

  • Mr Ed

    Perry

    I have heard Hawala, which has been around since the 11th Century, described as a ‘crypto-exchange system’

    You put it better than I did Perry, thanks, a ‘crypto-exchange system’ seems to be a fair description of how Bitcoin is set up, it’s just that it seems all too susceptible to being ‘crypto’ and having no ‘currency’.

    My gold and silver do not depend on a Wifi connection.

  • Laird

    Pollo, you’re right, thanks. Mea culpa!

  • Rob Fisher (Surrey)

    “All the geeky hipsters pushing Bitcoin have been misled, or have misled themselves, into thinking that their great idea is somehow magically immune from the risks that attend every system of value storage and transfer.”

    Nobody thought this, apart from possibly some journalists.

  • Rob Fisher (Surrey)

    “Only a fool would imagine that a crypto-currency will not be likewise hacked when the rewards are big and real enough.”

    This story is not about the crypto-currency being hacked. It’s just humans doing it wrong. We don’t even know yet whether anything was stolen.

  • Paul Marks

    Rob – you still do not “get it” there is nothing to steal (Bit”coin” does not represent anything, it is just stings of numbers – YES banker crooks do that with real money also, but they pretend to have cash [notes and coins with legal tender laws and tax demands], Bit”coin” does not even make that claim). The honest thing about Bitcoin is that they make no claim at all – it represents nothing (air pies – the contents of an empty bag).

    As for what happened at Magic the Gathering (I trust you know that this is the real name of the Bitcoin exchange – it is really a children’s card game based on a Japanese cartoon series).

    During a period of maintaining work (standard on computer sites) the owners of the site had to leave the Bit”coin” “wallets” in an “on line” not “off line” state.

    At this point people claimed payment (for various things) in BC from various people – and then THEY CLAIMED IT AGAIN (claimed more BC for the same stuff they had already claimed payment for).

    Then they claimed it again (more BC), then again, then again………

    Can you see what was happening Rob?

    And the endless-payments-for-same-stuff raid happened exactly the time the BC was left in an “on line” state (by the work on maintaining the site) timed to-the-second.

    Now I am the least “techy” person on the planet.

    There are Bushmen in the desert who know more about computers than I do.

    So if I know all about the scam – how can the owners of the site (and the other BC people) claim that they do NOT know?

    Mr Ed – I like Union Jack paint, can I pay you in Bitcoin?

    That 300 million Dollars worth of Bitcoin (or 5 Dollars worth – it is hard to remember) just happens to have come to ………..

  • Rob Fisher (Surrey)

    Paul, there is some truth in there, but once you get into the details it falls apart.

    MtGox originally stood for Magic The Gathering Online Exchange. It’s a card game played by adults too (I play it) and it’s from America, not Japan. Anyway, the web site never operated for that purpose because the original owner got interested in Bitcoin instead. The current owners bought the site from him and are nothing to do with Magic the Gathering. Though they might as well be, because they seem incompetent.

    In Bitcoin, it is impossible to spend the same coin more than once. Devising a way to do that (the public ledger I described in my comment on the other thread) is the innovation that makes it work at all.

    What I think you are referring to (with “and then THEY CLAIMED IT AGAIN”) is the transaction malleability exploit. Without getting technical, there is a way to fool someone into thinking that you did not receive payment. But it only works for a limited time if that person does not take precautions. It seems MtGox were the only ones who ever suffered from it, by automatically re-paying. No-one else seems to have any trouble with this.

    MtGox are claiming this is how they lost the money, but it does not quite ring true for various reasons, not least that they really should have been able to see it happening before they lost as many 75,000 coins.

    What Bitcoin claims is that I have the ability to make certain modifications to the public ledger that no-one else can make. As long as other people are prepared to offer me goods and services as a result of those modifications, then Bitcoin is useful to me.

  • Mr Ed

    We will know Bitcoin is worth something when the fraudsters start sending emails saying ‘Hello I am somewhere in West Africa, I am an orphan and my Uncle died, and I have inherited x thousand Bitcoin, I just need someone to send me a few bitcoins to unlock my wallet as I have not got my Uncle’s password, and I will give you 10% if you do. ‘

    I would be delighted to sell you some of my paint Paul, I must just brush up on my IT skills to make the exchange. Do you accept base-12 bitcoins?

  • There is no such thing as intrinsic value – value is purely subjective, as demonstrated by the famous can-of-coke-in-the-desert parable which I cannot seem to find now. No commodity possesses any value on its own, its value is conditional on the willingness of people to use said commodity. This includes precious metals, food or any other item, either ‘real’ or ‘virtual’.

    Precious metals, specifically gold and silver, have historically had value in the eyes of most people for several different reasons, because these metals have several completely different uses – namely, in the case of gold just as an example (and sorry if I miss something): jewelery and other types of decoration, electronics, and money. In its function as money, gold has traditionally been seen as store of value (which also plays into its function as jewelery or other types of decoration), and as medium of exchange. It seems to me that if one notes the bolded part, one is left with only two major uses of gold: electronics and money. My understanding of its use in electronics is very limited, so would I be mistaken by saying that gold in electronics is not irreplaceable, and that its use there depends mostly on its current price? If that is correct (I’ll assume so tentatively), then we are left with the value of gold being chiefly in its physical properties which make it convenient to use as money.

    Consequently, and at the moment without going into the details of what those properties are, we can safely say that it is possible that some other commodity (either ‘real’ or ‘virtual’) may have similar or better properties which may make it just as monetarily useful as gold. My understanding of Bitcoin is not sufficient to go into those details, so I’ll leave it to others to discuss that point – although Rob already did mention one such quality (namely, the intrinsically limited supply of BC, which makes it resistant to artificial inflation).

    A side note to Paul’s point (i.e. ‘there’s nothing there, only strings of numbers’): there’s nothing there in gold either, only strings of atoms connected by nothing else but simple electromagnetic power. The fact that you can hold a piece of gold in your hand is nothing to sneeze at – it is one of those useful properties which I mentioned above. But, that on its own does not a money make: there are plenty of other things that we can hold in our hands, and yet we don’t consider them as valuable as gold. At the same time, there’s nothing to suggest that another commodity possessing all the right properties other than being a set of atoms connected by electromagnetic power, cannot serve as money just as gold can. Moreover, while the I-cannot-hold-it-in-my-hand property may well be a disadvantage, it may also be an advantage at the same time, depending on circumstances and purposes. Much like gold and silver having some different properties which make one more useful than the other and vice versa, depending on circumstances and purposes.

  • Paul Marks

    Rob – the man is in Japan (at least that is where the people hunting him say he is)

    If the game came from America first – I did not know that I am sorry.

    All I object to is people treating a game as if it was real life – I had the same problem with people who tried to use World of Warcraft “gold” in real life. And they did use it in real life – and they got very upset when it went wrong.

    Actually some of these people blamed ME (and I know nothing about computers).

    On the grounds that as I was the one banging on telling them it would go wrong I must “therefore” be the person who had made go wrong.

    Are MtGox telling the truth?

    You are right – they must likely are not, after all Bit”Coin” is a full of scammers and crooks (why did the name “Max Keiser” suddenly spring into my mind – I have no idea…..) so anyone involved in it must be treated with extreme caution.

    By the way I am NOT opposed to you (or anyone else) playing the game Magic the Gathering – and I apologise for the word “children” when I said children’s game (I did not mean to be hurtful).

  • Rob Fisher (Surrey)

    No offense taken, Paul, I was just getting carried away with correcting you. The most important point in that post is that Bitcoin can not be spent twice.

  • Paul Marks

    Alisa – it is indeed true that all economic value is subjective, it is possible that all the uses of gold and silver (and there are very many) would be considered of no economic value by someone somewhere (I do not deny it).

    However, Bit”coin” has no non monetary uses what-so-ever.

    Nor is it a fiat money – there are no legal tender laws or tax demands (Paul Krugman’s “men with guns”) behind it

    So Bit”coin” is NOT a commodity.

    And it is NOT a fiat currency either.

    It is neither.

    Although, I notice on several threads here, I am already getting the blame for something that was nothing to do with me.

    “That is why I do not read your comments after the first line”.

    The financial losses that other people are making are all my fault – they must punish me for them.

    I must be to blame (it is all my fault) – because I suggested that they should think twice before they “invested” in something that is NOT money and is NOT a good either.

    Mr Ed.

    If we used based 12 even I might be able to do mathematics – especially if pie was 3.

    Well we can not make pie 3 (alas), but base 12 well perhaps……

    By the way…..

    BC had (has?) its uses.

    It was (is?) a good way of moving money from one place to another without an easy trace (it is not true that it was totally untraceable).

    The mistake people made was not converting the BC back into money after they had done the drug deal (or whatever).

  • Paul Marks

    “Bitcoin can not be spent twice” – agreed Rob.

    That is why each time the people asked for payment they were given new Bit”coin” (I keep making the point that the coins do not actually exist).

    The defence is that the attack was timed for a time of maintaining work – when everything was “on line” not “off line”.

    However, a lot of people are suggesting it was an inside job.

    Remember one of the main selling point of BC is that it helps people dodge the police.

    And those nasty “friends of Paul Marks” GCHQ and NSA (I have never been to either place in my life), with their obsession with watching people via webcams even when the computer is turned of “Oh my God that man has got a belly almost as big as Paul – and it is disgustingly hairy”.

    Right so the scheme was set up (in part) to help people who really wanted to avoid the police and the NSA.

    “Yes Paul – the scheme was set up to help dedicated libertarians, not evil servants of the secret state like you”.

    Yes – fair enough, got that.

    But are there not other people (apart from dedicated libertarians) who might be desperate to avoid the police and the NSA?

    Is it entirely sensible to go into business with these people?

  • The financial losses that other people are making are all my fault – they must punish me for them.

    Financial losses? Not sure who you are talking about then Paul ;-)

  • MYOB

    But are there not other people (apart from dedicated libertarians) who might be desperate to avoid the police and the NSA?

    Is it entirely sensible to go into business with these people?

    Given the choice I prefer non-state backed as the people you deal with only might be criminals. You obviously feel safer with state backed ones who are guaranteed to be criminals.

  • Rob Fisher (Surrey)

    Paul, the stated purpose of Bitcoin was to solve the problem of sending money electronically without needing a central third party.

    It is not particularly good for avoiding the NSA or the police. All the transactions happen in public. The drug dealers were caught.

    That said, yes shady people are involved with it, and yes you should take care. But it is early days: free-market systems of making it safer are being developed. If it works out, such systems would be better than what we have now: state guarantees and regulation and such.

  • Paul, the main point of my post was to show that gold has very little by way of non-monetary use. Not ‘none whatsoever’, but very little. If/when its price rises high enough, I’m sure that ‘very little’ will approach ‘none whatsoever’ very quickly indeed.

  • That said, yes shady people are involved with it, and yes you should take care.

    Isn’t that the case with any other currency known to man?

  • Herbie

    A very interesting discusion:

    Youtube Link

    Stefan Molyneux and Andreas Antonopoulos discuss the fall of Mt. Gox, the greatly exaggerated death of Bitcoin, the joy of failure within the Bitcoin economy, the incredible opportunity Bitcoin provides those without access to the modern banking system, and the difference between Bitcoin and the Federal Reserve System and fiat currencies worldwide.

    Andreas Antonopoulos is the Chief Security Officer of Blockchain.info, a host on Let’s Talk Bitcoin and an expert on Information Security and Cryptography.