Bitcoin exchange Mt. Gox files for bankruptcy, claims it lost $473 million

The saga of the Mt. Gox Bitcoin exchange went to a new level today as the Japanese-based company announced it's filing for bankruptcy protection. The news comes a few days after the Mt. Gox website shut down operations.

The Wall Street Journal reports that in its filing today, Mt. Gox claims it has "lost" 750,000 Bitcoins from its customers, along with 100,000 of its own. Together, that means $473 million worth of Bitcoins, under their current exchange pricing, is now missing.

In a press conference in Japan, Mt. Gox owner and CEO Mark Karpelès put the blame on technical issues in the website that allowed unknown people or groups to make false withdrawals from the exchange. He said, "There was some weakness in the system, and the bitcoins have disappeared. I apologize for causing trouble."

It's likely that the owners of the Bitcoins that were put into Mt. Gox will never see them again. Many of them are questioning just how their money was lost. The story quotes Australian William Banks, who had 100 Bitcoins in the exchange, saying he felt it was "impossible" for Mt. Gox to just have that much of the currency disappear, adding, "It's just such an astronomical amount of coins to lose."

Mt. Gox, which launched in 2009 as a website for trading Magic: The Gathering cards, switched to Bitcoin trading later on and quickly became the largest exchange for the online-only currency. It's downfall has raised new and serious questions about the legitimacy of Bitcoin as a whole.

Source: WSJ | Image via Mt. Gox

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It's hard to draw the line between "real money" and Bitcoin. The majority of the world's currency has no real value - it's fiat money. There is little inherent value in a piece of paper that says "One dollar", nor is there any real use to a piece of gold. Maybe with the former, you could keep a fire going for an extra five seconds. But anyway, come the zombie apocalypse, virtually all of the world's money will be useless since it has no intrinsic value **.

So why fiat money? It's just a promise, really, that you hold something of value. And there is real value in being able to transfer promises. A barter system breaks down if you happen to have an Xbox One and the guy you're trading with really needs 36 hens - neither of you benefits since you don't have what the other guy needs. Enter fiat money: you can trade quantized value in a form that's easy to carry and manipulate. You can transfer the value of one Xbox One for the value of 36 hens, and both parties get what they want *.

Why the essay then? Well, Bitcoin is no different than a promise, which can be made or broken base on trust, just like essentially all the currency in the world. It's a convenient means of transaction but holds no inherent value, so as far as 99% of the world is concerned, it might as well be real money.

* I have no idea how many hens are equivalent to the value of an Xbox One, nor do I care to look it up.
** Can you eat it OR eviscerate a zombie with it? If not, it's fiat money.

zhangm said,
It's hard to draw the line between "real money" and Bitcoin.

Not really. USD, for example, are backed by the faith and credit of the US Government. There is, therefore, an entity that guarantees the exchange via the law and, in extreme cases, the military.

Bitcoin is not backed by, well, anything at all. When someone "steals" some of it, nothing is lost, no crime has been committed, there's no legal authority behind the currency to support it.

In that regard, it's basically the same as video game currency, except with an algorithm that con men claim is secure. If anyone is dumb enough to buy into this pyramid scheme, from either end, they deserve what they get.

trojan_market said,
bitcoin exchange was a shady business since start.official currency of drug dealers and pirates, no surprise.

So is normal legal tender?
/facepalm

trojan_market said,

people's tax money in form of USD is going to pay for the bitcoin loss for this bankruptcy filing.

I don't think that's how bankruptcy works... is it?

rfirth said,

I don't think that's how bankruptcy works... is it?


well when you file the bankruptcy you are saying you're broke. all the legal cost has to be paid somehow.

trojan_market said,

well when you file the bankruptcy you are saying you're broke. all the legal cost has to be paid somehow.

Legal costs, sure. But that's nothing compared to their actual full losses of $473 million. And that's eaten by their creditors, not the government.

rfirth said,

Legal costs, sure. But that's nothing compared to their actual full losses of $473 million. And that's eaten by their creditors, not the government.


well bad for people who bought bitcoins. I am positive there is no bitcoin insurance

I feel sorry for the suckers who must have bought bitcoins on Mt. Gox recently because the price was so low...

When someone tries to dump the "missing" bitcoins and the price crashes yet again, lots of people will buy back in because the price can only go UP UP UP! Non-stop fun.

Mined a ton of LTC, will be putting it into BTC shortly.

Recently tried mining the new Panda (not the pre-mined one, but the other version). Looks promising.

What I don't get about BitCoin is what value does it really bring to the table? Arguably, the biggest problem with Fiat currencies that power the majority of the world's transactions are the fiat nature. The fact they aren't backed on more than a promise of said governments to be good stewards of the trust engendered to them. BitCoin is marketed as a counter to this reality, but it also is itself a fiat currency. Except it lacks anything which can be appropriately trusted and held accountable.

I don't get what is pushing people down this path other than Tulip Mania like group think.

You simply don't get economics?

Bitcoin is a fiat currency and it is backed by the algorithm. No, one can change the rules for that algorithm. In that sense it is a money. Or rather, it has the potential to be all this if it gets widely adopted.

The idea with Bitcoin is to eliminate the need for third parties. And the algorithm allows for that. It's a self-running system run through a contract that can't be broken by any participant

Mt Gox didn't perform any magic. They simply acted as a bank (third party) when the ignorant users kept their money there. Mistake. They did put trust in Mt Gox as a third party. The users had given Gox their private keys and they kept them in a way that doesn't fit with the Bitcoin model. Due to Gox's faulty architecture, it was quite easy for hackers to attack and extract the keys. The problems go back years.

Mt Gox wasn't Bitcoin despite being big in it because of being the first.

First is seldom the best.

And no. Bitcoin can't be compared to tulips. No one can inflate the Bitcoin supply. The supply is self-regulated via the algorithm. Changes in value due to speculation is not inherently bad either.

Didn't even know there was a thing called "fiat currency". I thought this was a good read about it: http://dailyreckoning.com/fiat-currency/

I dont' get BitCoins or other "coins", either. Economics is one, but you can't make money out of thin air. To me, it's pulling "something" out of the air, selling it to people telling them it's a "thing". There is no tangible value.

They make money from running the Bitcoin financial system.
That's what the miners are paid for.

I don't hate Bitcoin, just wishing that it can become more stable and be a money to buy things, not investment tool that's popular because of the promise for bubbling price and dream of getting rich quick.

Robert Sundström said,
You simply don't get economics?

Bitcoin is a fiat currency and it is backed by the algorithm. No, one can change the rules for that algorithm. In that sense it is a money. Or rather, it has the potential to be all this if it gets widely adopted.

The idea with Bitcoin is to eliminate the need for third parties. And the algorithm allows for that. It's a self-running system run through a contract that can't be broken by any participant

Mt Gox didn't perform any magic. They simply acted as a bank (third party) when the ignorant users kept their money there. Mistake. They did put trust in Mt Gox as a third party. The users had given Gox their private keys and they kept them in a way that doesn't fit with the Bitcoin model. Due to Gox's faulty architecture, it was quite easy for hackers to attack and extract the keys. The problems go back years.

Mt Gox wasn't Bitcoin despite being big in it because of being the first.

First is seldom the best.

And no. Bitcoin can't be compared to tulips. No one can inflate the Bitcoin supply. The supply is self-regulated via the algorithm. Changes in value due to speculation is not inherently bad either.

I understand economics fairly well, but I don't see how BitCoin is a sufficient "medium of exchange"; at least this is how Economics places a useful value on currency. You need to convert BitCoin into a medium of exchange to have any real ability to transact, but lets skip this for a moment.

I understand the flaws of Mt Gox, but BitCoin in and of itself makes no real sense... Maybe you can explain this using solid economics to make it clear?

Tulip Mania wasn't a supply driven issue. It was a demand issue that was artificial in its making. Much like BitCoin. BitCoin supply is fixed creating an artificial valuation increase due to excessive demand. The demand is excessive as it isn't representative of any real economic activity. Instead it is mainly comprised of speculator investment activity. Higher demand is going to cause a higher valuation if supply can't be increased to compensate.

The reality is this "demand" for BitCoin has no real purpose. It is, like Tulip Mania, about people "investing" in it bidding it up with some misguided belief that it will continue to increase in value. Another segment is people who are naive enough to believe that BitCoin is a shield from inflation and current monetary policy. BitCoin is no more a safety net from currency inflation and monetary policy than Gold or other precious metals; except it has no intrinsic value...