Print 80 comment(s) - last by EricMartello.. on Feb 15 at 3:36 PM

  (Source: Liberty Films)
Exchange is refusing to give customers their money, CEO is at large, and company faces "significant losses"

Early Friday morning Tokyo, Japan-based Bitcoin exchange Mt. Gox froze customers accounts, refusing to give customers their money back.  Customers were still allowed to trade the Bitcoins in their accounts for other currencies, Mt. Gox's primary function.
But this problem has been snowballing for nearly a year now.  And it’s amazing that no one has recognized this for what it is -- a digital age bank run.
I. The Building is Ablaze, Get Out Now
But reports are largely missing that Mt. Gox appears to be seeing the first major digital bank run and that nearly 1 million users are at risk.
In the last day, panicked customers carried out $32M USD of transactions on the site, nearly five times the normal daily volume.  And there are growing signs that customers may get only partial repayment if anything, as Mt. Gox has taken to largely refusing to give customers their money back unless they pay a withdrawal fee "to expedite the transaction".
The exchange, once the biggest converter of Bitcoins to USD and vice versa, blamed it all on a glitch in a press release.  It's previously tried to claim that its backing bank in Japan was limiting it to 10 wire exchanges a day, hence why it was taking weeks or even months to give customers their money. 
But it hasn't mentioned that claim in while.  It appears Mt. Gox is trying to use whatever excuses it can think up to disguise the serious problem -- it may not be able to pay back customers unless its current owner and CEO taps into his own fortune.

Bank Run Montreal
A drawing depicts a banker trying to offer reassurances to customers during a bank run in Montreal in 1872. [Image Source: Wikimedia Commons]

In a post it writes:

During our efforts to resolve the issue being encountered by some bitcoin withdrawals it was determined that the increase in withdrawal traffic is hindering our efforts on a technical level. As to get a better look at the process the system needs to be in a static state.

In order for our team to resolve the withdrawal issue it is necessary to temporarily pause all withdrawal traffic to obtain a clear technical view of the current processes.

We apologize for the extremely short notice, but as of now all bitcoin withdrawals will be paused, and withdrawals in the queue will returned to your MtGox wallet and can be re-intiated once the issue is resolved. Customers can still use the trading platform as usual.

Our team will be working hard through the weekend and will provide an update on Monday, February 10, 2014 (JST).

Again, we apologize for the inconvenience, and ask for your continued patience and support while we work to resolve this issue.

But that is a highly suspicious claim, given the run on withdrawals on the site and its serious monetary losses.
Anyone with a basic economics background will recognize the shutdown for what it is -- a desperate attempt to survive in the midst of a digital age bank run.  Banks typically keep only a small fraction of customer assets in liquid form, ready for withdrawals.  A bank run occurs when a large number of withdrawals overwhelm a bank's capacity to liquify its holdings. 
Even a relatively healthy and well-run bank can suffer a bank run in times of severe economic crisis.  But bank runs can also be triggered by problems with the bank itself -- monetary losses, reputation damage, and failing to operate transparently.  It appears that the Mt. Gox run falls under this category of individual run.
Some may be confused.  Isn't Mt. Gox a currency trader?  Indeed, it is.  But Mt. Gox also stores consumers' currency and thus is acting essentially as an online bank.  If anyone has doubts that a run of occurring they should read up on "suspension of convertibility"  -- which is precisely what Mt. Gox has been doing for almost a year now with increasing frequency and severity.  This tactic is a hallmark of a bank trying to disguise the dire crisis of a bank run.
In the U.S. banks are required to pay for insurance via the U.S. Federal Deposit Insurance Corporation (FDIC), which has largely prevented customers from losing the money they deposit.  By contrast, Mt. Gox -- as a registered foreign money trader -- carries no such insurance.  As this bank run worsened customers may be forced to turn to class action lawsuits and other mechanisms, but the reality is that Mt. Gox is likely to go under and its customers may lose a substantial part of their holdings.

Bank Run
A bank run in Berlin in 1931 draws a panicked crowd. [Image Source: Biln]

One thing is for sure: things appear to be going downhill fast for Mt. Gox, and its million or so serious customers may face millions in real-world USD losses as the digital bank-run and Mt. Gox's refusal to give customers back their money escalates.
II. "Where's My Money?"
There's widespread media reporting on the Mt. Gox withdrawal freeze announcement from this week, but what most are missing is that the exchange in the last two months has rejected most customer withdrawals silently.  This is not a new development; signs of Mt. Gox's insolvency have grown since last year.

Bitcoin hands off
"Nope, you can't have your money back." -- that's what Mt. Gox began to tell customers last year. [Image Source: eVoorhees]

Most serious Bitcoin veterans have already fled the exchange, but for those who are still hanging out at Mt. Gox, it's important to recognize that your assets are in extreme danger.
Users are left wondering whether this is simply minor technical glitch, the first hint at another security compromise, or signs that Mt. Gox may be treading dangerously close to insolvency.

Confidence in Mt. Gox was once strong.

Founded in 2010, Mt. Gox quickly grew to dominate a far greater portion of the overall Bitcoin trading volume than it does today.  Its troubles began shortly after its original owner Jed McCaleb sold the Tokyo, Japan based web portal to new owners in March 2011.
Just three months later, in June 2011, a profiteer exploited a vulnerability in the site's trading algorithm and (reportedly) stolen administrative credentials to purchase a large amount of Bitcoins at a very low price.  An estimated 8.75 million user accounts were affected in the breach.

Bitcoin drop
The 2011 hack of Mt. Gox triggered a plummet in trading prices. [Image Source:]

While some in the Bitcoin community pushed legitimacy as the cybercurrency grew in usage and values, Mt. Gox paid a steep price last year for stubbornly resisting such efforts.  In February it became embroiled in a feud with online payments firm Dwolla over Dwolla's new restrictions that cracked down on money laundering.
Then in April 2013 Mt. Gox announced the first of several "cool down" periods.  Trading shut down for at least a day in April, and during another shutdown buying (order placing) was halted.
III. Mt. Gox Has Admitted to "Significant [Financial] Losses"
In May 2013 Mt. Gox's financial troubles grew when CoinLab sued Mt. Gox.  Mt. Gox has previously partnered with the U.S. startup, which had allegedly promised it exclusive rights to run trade in the U.S. under the Mt. Gox brand.  But to CoinLab's chagrin, Mt. Gox continued to directly trade to U.S. buyers.  CoinLab sued it for $75M USD writing that the figure "likely underestimates the actual damages."
Meanwhile the damages to Mt. Gox were growing.  In May the U.S. Department of the Treasury seized an estimated $5M USD in accounts belonging to Mt. Gox's owners.  Some of these funds were reportedly returned by the Financial Crimes Enforcement Network (FinCEN) -- the enforcement arm of the Treasury -- after Mt. Gox registered in June 2013 as a money exchange, agreeing to file paperwork and finally crack down on overt money laundering.

Mt. Gox
Mt. Gox CEO Mark Karpeles holds up a commemorative Bitcoin medallion.

But its woes were growing.  Customers began complaining in forum posts that throughout mid-to-late 2013 Mt. Gox was denying their request to transfer their funds to other exchanges or back into their wallets.  Customers were greeted by messages such as "your withdrawal is yet to process. we will keep you posted once it is done."
Mt. Gox further stoked the flames when it introduced a 5 percent fee for "expedited" withdrawals (which are normally free).  Some users tried the service and declared it a scam, after seeing their withdrawals still languish for weeks unfilled.
In June Mt. Gox CEO Mark Karpeles -- the man who had purchased the company back in 2011 -- disappeared from popular Bitcoin forums and other online sites.  This was yet another troubling sign, given that previously he had been a very active participant in a number of online communities, evangelizing Mt. Gox.

Mark Karpeles
After accumulating a quarter-billion dollar fortune, Mt. Gox CEO has reportedly vanished from the digital doman. [Image Source: Reuters]

In Aug. 2013 Mt. Gox admitted it was in serious financial trouble, saying it had seen "significant losses" from unfulfilled transactions.  A release to customers at the in December 2013 noted the company had only a million current customers -- less than an eighth of the accounts that were registered with it in 2011.
That's not to say the company hasn't seen some gains, as well.  In April 2013, it was doing about $6M USD worth of trades a day, according to Bitcoin Charts.  In the past day it was average $7.8M USD in volume -- a modest growth in value driven by the rising value of the Bitcoin.
However, last April it was handling 76 percent of transactions, in the last month it handled only 19 percent of transactions.  It is currently the third biggest exchange behind BitStamp and btc-e -- the first and second place exchanges, respectively, in terms of volume in the last 30 days.
IV. Bitcoin, Other Cryptocurrencies, Must Adopt Insurance or Risk Losing Everything in Bank Runs
Bitcoin is the world's most popular cryptocurrency.  Bitcoin's basis is the SHA-256d hash; you "own" Bitcoins via proof of work.
Introduced in 2008 by a programmer or group of programmers using the pseudonym Satoshi Nakamoto, the Bitcoin was the first of its kind, turning the science fiction fantasy of a decentralized, encryption-based global currency into reality.
Despite recent largely overstated and misinformed controversy over illegal uses of the Bitcoin, the cryptocurrency is the foundation of a generally credible and secure global digital payment network.  While other cryptocurrencies have since emerged, Bitcoin remains the most prominent with a market value of over $10B USD.  Blockchain estimates Bitcoin has roughly 1.2 million users, working out to an average wallet value of around $10,000 USD.

Bitcoin w/ USD
Bitcoins are the world's most popular cryptocurrency, used by over a million people worldwide [Image Source: Bit-Square]

Bitcoins were riding high at around $850 USD/BTC earlier this week after U.S. regulators announced their intent to only lightly regulate the technology, which acts as a currency, a speculative investment, or a digital payment mechanism depending on who you ask.  But the fading exchange's announcement shook the market, introducing a sharp drop in prices down to the low $720 USD/BTC.
In this moment of need Mt. Gox CEO is oddly silent, with some sources saying he has disappeared.  He has good cause to want to escape the mess, as he has plenty to lose.  Fueled by Mt. Gox's fees (e.g. 10 percent for many exchanges) he amassed a fortune of $8M USD plus and 345,000 Bitcoins (at current rates: $250M USD).  Even with the FinCEN seizures, he likely has a quarter of billion dollars in assets.  It would not be surprising to see him disappear altogether if Mt. Gox sees a full collapse.
The good news is that a relatively small slice of the Bitcoin community will be affected by this run.
But ultimately, this somewhat unprecedented saga may affect the entire Bitcoin market. If Mt. Gox fails to pull off a miracle and show itself to indeed be soluble, the run will likely only worsen.  And if Mt. Gox defaults and goes under, that will cast a dark light on the entire cryptocurrency global phenomena, perhaps forcing cryptocurrency developers to band together to introduce some form of collective insurance.

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By aurareturn on 2/7/2014 1:20:53 PM , Rating: 5
On one hand, I think anybody investing in Bitcoins is insane. It's a giant ponzi scheme. On the other way, I think fiat money is just as insane. The Federal Reserve has printed over $5 trillion into the market since the 2008 crash, devaluing all of our money.

RE: Bitcoins
By MrBlastman on 2/7/2014 1:42:55 PM , Rating: 4
Well, that's the strange thing about money: Our currency should be devalued but on the exchanges, it hasn't. In fact, the Dollar has remained pretty strong despite all the stupid shenanigans in Washington.

That doesn't mean it will stay strong forever. If you dilute a system with enough overflow of anything... eventually it will fall in value once demand subsides. I suppose that's about the only thing going for the dollar at the moment: Demand.

In fact, an argument could be made that Quantitative Easing has been perpetuating the lack of currency implosion in the United States. By continuing this stupid practice of buying mortgage debt to keep long-term rates low, it has helped to bolster stock prices while giving the illusion that keeping short-term rates low is helping.

In reality, keeping short-term rates low is only HURTING most Americans because they are earning almost no interest on their savings (which have increased substatially... 1/3 market volume compared with six years ago is a nice indicator of this) or deposits! So, back to our dollar--demand is at an all-time high because Corporate spending hasn't kicked back in yet (the number one way to kick-start economy would be Corporate spending) since the people haven't enough in positive cash-flow to make them comfortable.

Hmm. What we have here is an elaborately-constructed house of cards. If Corporations do begin spending, they'll pump even more money into the system and demand will start to wane and viola... Dollar implosion and future, soaring interest rates. That is... if Yellen weren't such a chicken.

We're basically screwed. :)

RE: Bitcoins
By Flunk on 2/7/2014 2:02:40 PM , Rating: 2
Not really, you have to remember that every country in the world is tied in to the same system. If everyone is invested in something that big there is a certain level of security. If one goes down, we all go down. See Greece's economic crisis as an example.

RE: Bitcoins
By Samus on 2/8/2014 12:24:28 AM , Rating: 4
Aurareturn obviously flunked Microeconomics. We don't have a fiat currency. Just because it isn't backed by Gold doesn't mean it isn't backed. The United States is the wealthiest country in the world. Wealth is measured in more than Gold. Land, resources, ie, "Full Faith and Credit of the United States."

Gold is a ponzi scheme. Gold is only worth something because people want it to be worth something.

Personally I think titanium and neodymium are more valuable resources, but I am an engineer.

RE: Bitcoins
By Jeffk464 on 2/8/14, Rating: 0
RE: Bitcoins
By Jeffk464 on 2/8/2014 4:55:51 PM , Rating: 2
ahead of us cash wise

RE: Bitcoins
By EricMartello on 2/15/2014 3:23:54 PM , Rating: 2
I'd like to take this moment to say:


Add this to the long list of "Things Eric Says are Always Right".

The simple fact is that the math behind sh1tcoins does not work. The market cap far exceeded the cash reserves OF ALL PEOPLE INVOLVED, not to mention these pathetic "exchanges".

The US Dollar is backed by the US GDP and enforced by the US military...most importantly, the dollar represents the USA while bitcoin represents a bunch of dumb4ss liberals who decided that they're going to get mad about "the 1%" who have more money than they ever will.

Internet is really making people stupid and allowing toxic left-wing ideas and ideology to fester without opposition.

Bitcoin as a world currency? No.

Bitcoin as the most brilliant ponzi scheme ever hatched? Yes.

RE: Bitcoins
By hrrmph on 2/7/2014 2:46:57 PM , Rating: 3
I've traveled extensively since the 1990s and have seen the value of the US dollar become significantly weaker in the past 20 years.

The US dollar used to regularly trade for significant premiums over the Australian, Canadian, European, and Singaporean dollars. Three of those currencies now trade at significant premiums over the US dollar. The fourth one (the SGD) has strengthened, but not so much as to surpass the US dollar completely.

In real terms, it means we have less buying power and I now limit my travel to those areas, mostly because of the expense. I'm not saying I wouldn't go if I had a good reason. But, my US dollars don't go as far as they used to in those areas, and I have to be cautious about not getting stuck in a high cost area too long.

It is a classic sign of the effects of our country printing a lot of money / debt to buy our way out of the financial crisis of the mid to late 2000s. Our currency just isn't what it used to be.

The bailouts had to be paid for somehow, and Quantitative Easing (a euphemism for currency devaluation) was the tool of 'almost' last resort.

Default was the other option, so I don't disagree with it. But, it's sad to see us put ourselves in this position in the first place.

RE: Bitcoins
By Ammohunt on 2/7/2014 6:13:56 PM , Rating: 3
There is a side benefit though it makes our exports much much cheaper.

RE: Bitcoins
By SPOOFE on 2/8/2014 5:36:04 PM , Rating: 5
Isn't that a big part of the reason China tries to keep their currency devalued relative to the dollar?

RE: Bitcoins
By EricMartello on 2/15/2014 3:36:17 PM , Rating: 2
Inflation exists and obama's economic policies have certainly contributed to this phenomenon, but you also need to consider the fact that as the US economy expands more money is added into circulation to maintain price stability.

Maintaining price stability through intelligent monetary policy is one of the benefits of ending the gold for preserving your wealth, you either buy appreciating assets, invest in a business, buy bonds or get into the stock market. Short of doing any of those things you can expect to lose as sitting on cash is a bad move in any economy.

I do not agree with QE or keynesian economics in general - but one of the good things that QE did was lower the value of the debt held by china. Remember, QE was a bond-buyback program that basically made US govt-backed bonds worthless and that's what china has.

The better economic policy would have been to:

- Make the USA more competitive with manufacturing by lowering taxes across the board, especially for businesses.

- Promoting trade schools rather than the tired old "go to college or fail" message. A certified mechanic will be making high $50K to start and over $100K a year with some experience. Your typical college grad with a worthless 'liberal arts' degree is working at walmart for $20K per year paying off $100K of student loans while demanding minimum wage be raised to offset his bad decisions.

- Disbanding "big union", which have been irrelevant for decades and only exist because they help democrats get elected.

- Reducing the mountains of superfluous regulations that impede business in the USA.

These things would help rather than QE, which sought to stimulate the economy by increasing big banks' capital (expecting them to lend money since interest rates are almost zero). That will never work, proven in Japan since the 90s and now again in the USA.

RE: Bitcoins
By Cheesew1z69 on 2/7/2014 1:49:59 PM , Rating: 5
I really wished you dolts would actually LEARN what a ponzi scheme IS...

A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from existing capital or new capital paid by new investors, rather than from profit earned by the individual or organization running the operation. Operators of Ponzi schemes usually entice new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent. The perpetuation of the high returns requires an ever-increasing flow of money from new investors to sustain the scheme.[1]

RE: Bitcoins
By coburn_c on 2/7/2014 2:16:18 PM , Rating: 2
But that is an accurate description of Bitcoin investment.

RE: Bitcoins
By Cheesew1z69 on 2/7/14, Rating: 0
RE: Bitcoins
By drycrust3 on 2/7/2014 2:56:17 PM , Rating: 2
Well, I'm guessing that your favourite bank is propped up by loans it has made to people wanting money, e.g. people get mortgages for homes and businesses, people get overdraft facilities for their cheque accounts, etc. In addition, your bank could easily be charging you to use at least some of their services, e.g. a charge when making deposits, a charge when making withdrawls from another bank's ATM, etc. These charges are essential because they mean the services the bank provide you aren't being paid for from new investors, meaning that if there are no new investors then the bank will still make a profit.
One of the problems with Bitcoin is how do they make money? As far as I know they don't sell services like Bitcoin loans and Bitcoin mortgages. Is there a fee charged when you do a Bitcoin transaction? With a nation derived currency, e.g. American dollar, Euro, etc, that government taxes people, and part of those taxes pays for the use of that nations currency, so, in the case of Bitcoin, does it "tax" its users? No one has said they do, so again, the question has to be asked: How does Bitcoin make money? If there aren't ways to get money from current investors, then does that mean they only make money from new investors. The more you ask the more it sounds exactly like a Ponzi scheme.

RE: Bitcoins
By coburn_c on 2/7/2014 3:08:42 PM , Rating: 4
It's worse than all that. The bank is printing money in the back room, via a method that creates no value of any kind.

RE: Bitcoins
By ET on 2/7/2014 4:55:38 PM , Rating: 2
The question of how bitcoin makes money shows lack of understanding of the concept, but I feel that the charge of the ponzi scheme is not far off the mark. It's not that it's intended to be like this, but because bitcoin by itself is mostly useless, there's need for "real money", and that money comes into the system only from people who buy bitcoin with real money.

Real world currencies are different in that you can buy with them directly, in a certain part of the world, without needing to exchange them. If you could do that with bitcoin, it would be equivalent to a full currency, but there's no place where you can live your everyday life using bitcoin. A company can't survive even with billions of dollars-worth of profits in bitcoin.

And yes, cryptocurrency exchanges do charge for transactions, problem is, they charge with cryptocurrencies, so that doesn't help solvency in any way.

RE: Bitcoins
By coburn_c on 2/7/2014 5:06:10 PM , Rating: 2
It's more than just accepting it as a payment method. You couldn't pay an employ with BTC as it's not a legal tender. You couldn't pay your taxes with BTC, etc. There is no central bank to set interest rates for BTC. There is no value to a BTC, millions of dollars have passed through BTC, through, it holds no value if that real money stops changing hands. It isn't backed by a treasury that holds debts, bonds and collateral. It exactly fits the definition of a ponzi scam.

RE: Bitcoins
By ET on 2/8/2014 8:44:18 AM , Rating: 1
There's no need for a treasury, etc. All you need is to be able to buy with it directly, without conversion to any other currency.

A TF2 ref or key are real currency, for example. It's possible to purchase other TF2 items with them directly. They also have dollar value, but that's not what defines their value in the TF2 economy.

Bitcoin, on the other hand, can buy nothing directly (nothing that I'm aware of anyway), so it has no inherent value. There's not a single place that prices items in bitcoin. Every place which accepts bitcoin has prices in dollars and converts to bitcoin based on a current market value. This means that bitcoin by itself is not a currency.

RE: Bitcoins
By Cheesew1z69 on 2/8/2014 9:42:16 AM , Rating: 2
Bitcoin, on the other hand, can buy nothing directly (nothing that I'm aware of anyway), so it has no inherent value.,, are accepting BTC as payment, so that assertion is incorrect. As they are, others will start to accept them as well.

RE: Bitcoins
By ET on 2/8/2014 3:42:59 PM , Rating: 2
You must have missed some of my text. They accept bitcoin, but the prices are in dollars. The bitcoin price is dependent on the current rate. You can only buy in bitcoin because they can convert it to dollars.

The problem with bitcoin is that it can never be a fully fledged currency. You will never see a price set in bitcoin and be stable. Price will always be in another currency and converted to bitcoin.

RE: Bitcoins
By Mint on 2/8/2014 6:40:11 PM , Rating: 2
Precisely, and that is why Bitcoin is not a currency.

Until goods get priced stably in Bitcoins, and employees get paid in stable Bitcoin amounts, it's nothing but an empty commodity traded by people trying to rip each other off.

RE: Bitcoins
By ET on 2/7/2014 5:17:04 PM , Rating: 2
Thinking about it a bit more, it's still not a ponzi scheme. That's pretty well defined, and involves people getting a return on investment in order to put in more money which they get nothing from. Bitcoin trading isn't like that, it's a lot more messy and simply not backed by enough dollars to make it possible for all people to get their bitcoin worth, which is true for most banks.

RE: Bitcoins
By coburn_c on 2/7/2014 5:26:10 PM , Rating: 3
Bitcoins as a whole are a bubble employing the greater fool theory as another user pointed out. Mt Gox is a ponzi scheme as the owner publicized the huge profits from investment, payed off old investors with the new investments, pocketed the profits, and is now going insolvent leading to the collapse of the scam.

RE: Bitcoins
By JasonMick on 2/7/2014 2:40:35 PM , Rating: 3
But that is an accurate description of Bitcoin investment.
If you're going to paint in such broad strokes, you could describe the U.S. economy as one massive Ponzi scheme, given that early settlers accrued wealth, which had at least some residual effect for generations to come, while newcomers got the short end of the stick.

I'm not suggesting that's the case, just point out that a lot of things can be viewed as a Ponzi scheme if you're going to get creative.

I don't believe Bitcoins are a Ponzi scheme any more so than a stock. They can be liquified to USD (generally) at a user's convenience, bar cases like this of structural issues common to real-world financial institutions, as well.

I have no doubt there's plenty of Bitcoin fraud going on, in fact I'm sure of it, based on what I've reported on. But that's a common problem on digital payment services like Paypal. (A lot of Bitcoin and Paypal fraud is far less sophisticated -- simple spam phishing.)

This is a golden opportunity for Bitcoins' developers to develop an FDIC-like insurance guarantee that if a large institution goes under the community can unroll your transfers into that entity.

RE: Bitcoins
By bsd228 on 2/7/2014 2:57:18 PM , Rating: 3
I don't believe Bitcoins are a Ponzi scheme any more so than a stock. They can be liquified to USD (generally) at a user's convenience, bar cases like this of structural issues common to real-world financial institutions, as well.

The greater fool theory is the most applicable to describing the bitcoin market.

RE: Bitcoins
By coburn_c on 2/7/2014 3:06:34 PM , Rating: 2
Exactly. Bitcoin is not a legal tender, it's only worth what a fool will pay for it. Apparently Jason needs to keep some fools convinced.

RE: Bitcoins
By Nagorak on 2/7/2014 3:18:56 PM , Rating: 2
A stock is a share in a company. That company usually (although not always) produces something to earn a profit.

A bitcoin are a few bits. If you really want to stretch it, it's like holding a paper dollar bill. That bill earns nothing.

A bitcoin can easily go to zero. A stock generally even in the worst bear market will retain some value, provided the company doesn't go out of business.

There could not be a larger difference between a stock and a bitcoin. Bitcoins are nothing but a huge fad and that's all that, along with an old fashioned market bubble, is al that's keeping them afloat.

In ten year the only place they'll be talking about bitcoins is in an economics class.

RE: Bitcoins
By TSS on 2/7/14, Rating: 0
RE: Bitcoins
By TSS on 2/7/2014 7:47:29 PM , Rating: 2
Now let's review Bitcoin:

A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from existing capital or new capital paid by new investors, rather than from profit earned by the individual or organization running the operation.

What is the actual value of 1 bitcoin, other then the promise more people will think it's worth something in the future? The energy put into generating one? It's non-recoverable, you can't run a coalfurnace on a digital bitcoin. The usage? You cannot use bitcoin for anything other then payment. The Scarcity? Bitcoin isn't scarce, according to there's now 93 cryptocurrencies. What value does Bitcoin have VS dogecoin? Vs Litecoin? What advantage is there? It's economical fundamentals are not only the same, they're actually worse then other cryptocurrencies i've read about (bitcoin is highly deflationairy in nature).

The only value is in the >belief< it will become worth more as more people adopt it. It's demand and supply of faith, but not of intrinsic value. And you really need more then that to keep an economy running. As for the arguement that it's the same for fiat currencies, yes it is. That's why the US dollar is backed by the >US TAX PAYER<, who has intrinsic value. You can't move the entire US population somewhere else, regardless of what they pay with, they will pay. Bitcoin has no such backstop. That goes for credit by the way, not currency, which is why the dollar is still a ponzi scheme.

Operators of Ponzi schemes usually entice new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent.

Remember my safety issue? Also goes for bitcoin. The guarranteed part here comes from the decentralized nature, that "no government has any control over it". With faith in banks/nations at historical lows, this is seen as a virtual guarrantee more and more people will adopt bitcoin. Considering what happened in cyprus this isn't entirely untrue, either. Just because a nations bank is no longer safe doesn't mean bitcoin is either though.

As for returns, it's baked into the damn concept. Rewards of blocks half every so often and the difficulty is lower when less people mine the coins? If you mined bitcoin in 2009 and held onto it it's now worth thousands maybe even millions of percentages more then it was mined. Hows that for returns. Those bitcoins which cost almost no energy are now worth the same as a bitcoin that costs a $2500 PC half a year worth of elecricity to mine. Litteraly the only difference with a classic ponzi scheme is that the all the profit isn't centralized but spread amongst all participants, rather then a centralized person skimming some off the top.

The perpetuation of the high returns requires an ever-increasing flow of money from new investors to sustain the scheme.[1]

To raise 10 bitcoin from $1 to $1000 would cost $10,000, or somebody willing to pay $1,000 for each bitcoin, to give a 1000 fold return. To raise 10 bitcoin from $1000 to $10000 requires $100,000, or 10 bitcoin bought at $10,000 each, for a 10 fold return. Once return reaches below the amount investors will want to earn, it will be sold. The more losses incurred, the faster people bail out, leading to a run and a collapse of the scheme.

It. Is. A. Ponzi. Scheme. By all definitions, classic or otherwise. Both the dollar and bitcoin. If ya don't want to belive me it's fine. Just remember, i've warned in the past about these price collapses as well. Because bitcoin is decentralised there's no central bank to backstop it once the price cascades down. It's exactly like the 1929 stock market was, without all the protections such as circuit breakers or trade limits that where put into place *because* of the 1929 stock market (but it's not a stock either. There's no underlying company with performance, profits or revenue. A better definition would be "financial instrument". It's not even a derivative because it doesn't derive from anything. It's like an investment into a promise. It doesn't get more ponzi then this).

The only reason this article isn't about the dollar is because other countries still use it as the global reserve currency. All trade and all currencies are compared to the dollar for trade. This gives it intrinsic value beyond the US tax payer. Once this is no longer the case, it'll hyperinflate because nobody belives in the future credit of the united states anymore. There's just not a single currency plentifull enough to conduct trade in right now to replace it as it has to be readily available. The Euro won't cut it because of the EU debt load reducing supply while the chinese Yuan isn't fully convertable yet (though they're hard at work there).

Mark my words; the end is really fricking nigh. Remember everything that happens. We live in a historical time that will be written and studied for centuries to come. Start now, think hard and you may, just may, come up with the right thing to say when your grand kids ask you where it went wrong, hopefully allowing them to build a better future then the one *we* took away from them by allowing this insanity to continue. Bitcoin will go down in history as grasping at straws because we couldn't figure out what to do with the banks/government.

My awnser? Collective denial. Ignorance. Apathy. All in the face of overwhelming Fear. No matter how hard i tried to warn others, they simply did not listen or care. We humans are simple creatures. As long as our own island is fine, we do not notice it floats on a sea of shit, nor do we care when it's pointed out. The only times we care is when we have to toss somebody back in the sea when they attempted to crawl out; or when our island springs a leak and sinks with the rest.

We could've stopped it if we'd overthrown the government and the banks. Hang them in the streets, start anew, like the founding fathers would've done. It just didn't happen because nobody wanted to jump off their own little island and swim unknown distances across a ocean of shit, just to throw the bastards off their island.

I understand. Honestly i'm scared to death somebody's gonna drag me off in the night to gitmo simply for calling for revolution, even when i'm an ocean away from america, i can only guess at the fear of people living in the US. Maybe that's paranoid, but so was thinking the NSA spied on everybody at one point in history. Then it turned into reality. So rather then try the impossible i'd simply say; Remember. And hope the next generation is more brave then we were. In the end, there's always hope.

RE: Bitcoins
By coburn_c on 2/7/2014 8:32:51 PM , Rating: 3
Finally someone with a clue! How refreshing.

But there are many safeguards against a US collapse, and you articulated many of them. We built the global economy on our backs, America failing means the world fails. It also helps that our GDP is double that of the #2, China, which is completely dependent on us for profit. Trust me those that hold all the money won't give it up. Not just easily, never. Ever.

The system is not as fragile as it seems, it is precisely engineered in fact, the IMF and world banks are controlled by those with the most to lose, it just won't happen. These borrowing worries are manufactured. Crises like Greece ensure that the most destabilizing forces happen outside the bubble. America borrows from the Fed, not China, that's a law in fact. They can't call in our debt any more than we can pay it.

The difference between the USD and Bitcoin is we can keep the music going forever.

RE: Bitcoins
By BansheeX on 2/8/2014 4:24:43 PM , Rating: 2
Using GDP numbers to reflect reliance is disingenuous. We run massive trade deficits with China despite their currency peg. In other words, they produce most of the stuff, then loan us the money to buy it, and the only interest they earn on those loans is continuously recycled into treasury purchases. Tell me how China ENDLESSLY getting paper in exchange for products makes China reliant on us.

If China depegged and let its currency appreciate, their citizens could afford their own production instead of exporting them to indebted americans just to say "our exports are high". You don't debase and export just to say you have high exports, just like you don't dig ditches to say you have no unemployment. You need to be productive and be compensated, and that is the foolishness taking place right now in China.

RE: Bitcoins
By Jeffk464 on 2/8/2014 4:37:37 PM , Rating: 2
America doesn't have to fail it can just it can just become a smaller and smaller part of the global economy. Think of the English Empire it never really had a point where you could say it failed, England just became less and less important to the global economy. Shrinking economy, shrinking military, shrinking influence.

RE: Bitcoins
By superflex on 2/7/2014 3:26:46 PM , Rating: 2
Isn't that the definition of Obama's new savings plan My RA, or social security or Obamacare?

RE: Bitcoins
By coburn_c on 2/7/2014 3:41:38 PM , Rating: 2
Nope, those are government backed US savings bonds. The US government/dollar would have to collapse for those to be worthless. All it takes for bitcoin to be worthless is for people to stop paying for garbage data in the hope that someone else will pay more for it.

RE: Bitcoins
By superflex on 2/7/2014 3:35:46 PM , Rating: 2
I really wished you dolts would actually LEARN what a ponzi scheme IS...

You know the argument is lost when the name calling begins.

Like all fiat currencies, BTC will go to ZERO.

Good luck with that.

RE: Bitcoins
By Cheesew1z69 on 2/7/2014 3:39:09 PM , Rating: 1
Yes, because you can see the future! /s

RE: Bitcoins
By coburn_c on 2/7/2014 2:12:39 PM , Rating: 2
I've been explaining this to people since day one. Bitcoin is not a currency! Currencies are backed and manipulated by treasuries. Bitcoins are a commodity. A commodity with no intrinsic value besides washing money. With the increased scrutiny that is no longer possible and it has now become worthless. Big game of musical chairs played with actual currencies. Only a matter of time till the music stops.

RE: Bitcoins
By Cheesew1z69 on 2/7/14, Rating: -1
RE: Bitcoins
By coburn_c on 2/7/2014 3:02:07 PM , Rating: 2
Again it's clear that people who buy into Bitcoin have no understanding of economics past a dictionary.

RE: Bitcoins
By Cheesew1z69 on 2/7/14, Rating: -1
RE: Bitcoins
By Nagorak on 2/7/2014 3:22:56 PM , Rating: 2
That definition is extremely broad. By that token almost anything can be classified as a currency provided people barter it.

RE: Bitcoins
By superflex on 2/7/2014 3:30:55 PM , Rating: 2
Sea shells and tulips come to mind as other "currencies" which were a bubble.

RE: Bitcoins
By purerice on 2/7/2014 4:50:23 PM , Rating: 2
Sally shells sea sells by the she sore... aw cwap I keep getting it wrong.

RE: Bitcoins
By symbiosys on 2/7/2014 5:39:22 PM , Rating: 2
Sally shells sea sells by the she sore... aw cwap I keep getting it wrong.

Give this man a six...

RE: Bitcoins
By zephyrprime on 2/8/2014 4:07:29 AM , Rating: 1
YOU have no understand of economics that is even up to the level of a dictionary, lol.

RE: Bitcoins
By Cheesew1z69 on 2/8/2014 4:00:27 PM , Rating: 2
Rated down for facts, pathetic.

RE: Bitcoins
By SPOOFE on 2/8/2014 5:41:32 PM , Rating: 2
Facts are for people that lack conviction in their baseless beliefs!

RE: Bitcoins
By Cheesew1z69 on 2/8/2014 5:49:09 PM , Rating: 2
-_- lol

RE: Bitcoins
By zlandar on 2/7/2014 2:47:17 PM , Rating: 2
Who backs the value of the US Dollar? The US Government and the people who believe in that backing. Whether you believe the Feds have the ability to maintain the value of the dollar is debatable.

Who backs the value of bitcoin? Just the bitcoin speculators.

Not the same level of insanity.

RE: Bitcoins
By surt on 2/8/2014 11:37:09 AM , Rating: 2
What really lends the US Dollar value is the US Government's willingness to accept it as payment of taxes. Is that going away?

RE: Bitcoins
By inperfectdarkness on 2/8/2014 3:49:30 AM , Rating: 2
So don't invest in either. Find something with a more stable value (rare metals, etc).

CryptoCurrency is just as good as billfold money, eh? lol!

RE: Bitcoins
By jpeyton on 2/8/2014 10:54:22 PM , Rating: 2
Sure, the Federal Reserve is printing a ton of money. The reason it hasn't devalued our currency is because the GDP of the United States is roughly $17 trillion/year and rising.

It doesn't mean we can continually print and spend without control, but it does mean that our currency has the world's largest economy behind it.

RE: Bitcoins
By Kanji on 2/9/2014 7:04:45 PM , Rating: 2
The Federal Reserve has printed over $5 trillion into the market since the 2008 crash, devaluing all of our money.

By aurareturn on 2/7/2014 1:20:53 PM

Sure, the Federal Reserve is printing a ton of money. The reason it hasn't devalued our currency is because the GDP of the United States is roughly $17 trillion/year and rising.

By jpeyton on 2/8/2014 10:54:22 PM

Both of these quotes are only partially true.

The value of our money has remained about the same; inflation is low.

While the Federal Reserve has created some trillions of US dollars these are never going to be printed. This money is put into big banks' computers and written on "quarterly profit reports". The Federal Reserve is paying the banks a higher than normal rate of return to sit on this virtual money. Instead of investing this money as the bank normally would.

This is the solution to the deregulation of banks that allowed historically low minimum capital requirements which almost ended some big banks during the 2008 financial crisis and Great Recession both believed to have been created by the banks they nearly destroyed.

RE: Bitcoins
By gamerk2 on 2/10/2014 10:26:19 AM , Rating: 2
Yeah, the issue here is that despite putting $5 trillion into the economy, overall spending is basically flat. Hence the low inflation [which is simply a byproduct of economic growth]. The LACK of inflation is proof that people aren't spending money, hence our current SLOW recovery from the recession.

Hence why I was always yelling we needed a significantly larger stimulus package; you can't plug ~$3 Trillion of lost consumer spending with ~$800 Billion of increased Federal spending. The $800 Billion stopped the downward trend, but was simply not enough to trigger a turnaround. Hence, 4 years of slow recovery.

Point is, this is the result of constantly lowing capital requirements during the Bush years "so they can invest more and produce economic growth", and Glass/Steagall allowing banks and investment firms to mearge. The lessening of cash on hand, combined with greatly increased risk, tanked the entire system once the housing bubble blew a hole in the banks balance sheets.

And the worst part is it will happen again in a decade, since the underlying cause of the economic collapse [increased risk and lower capital requirements] was not changed by Congress.

Oh, and historically, we're due for a recession sometime late next year, keeping with the 7 to 9 year period between recessions in the post WWII era.

RE: Bitcoins
By MichalT on 2/10/2014 12:54:46 PM , Rating: 2
The majority of the money that the federal reserve has pumped into the economy has gone onto bank balance sheets as they were required to increase their reserves. That's why there's been no inflation as a result, and likely there won't be unless quantitive easing goes on for several more years.

RE: Bitcoins
By blinkxzero on 2/12/2014 6:25:02 PM , Rating: 2
Qoinpro is in beta and appears to give you free daily coins (bitcoin, litecoin, more altcoins - some of each are received each day) with a referral system.
Daily payout is low (for example BTC is .00000250), but withdrawal limits appear to be reachable within a few days. If anyone is interested in trying it out, link here:

If you do sign up, post your referral link and make a chain.

By p05esto on 2/7/14, Rating: 0
RE: Duh.
By extide on 2/7/2014 3:14:49 PM , Rating: 2
Nah, it will recover. Bitcoin is here to stay. Yes, this is a pretty big bump in the road. This whole thing is really nothing to do with bitcoin itself. It could happen with any currency/commodity being traded. This is due to (intentional?) mis-management of Mt Gox's assets, plain and simple.

RE: Duh.
By coburn_c on 2/7/2014 3:18:40 PM , Rating: 2
Nonsense. Currencies have the GDP of nations and legal status, commodities have economic value, all Bitcoin has is market price. Even a Dutch tulip has economic value, a Bitcoin is just garbage data without its fool.

RE: Duh.
By ebakke on 2/7/2014 5:56:33 PM , Rating: 2
Curious. Why are you so vehemently opposed to bitcoins? If two other people want to trade an item or service for the "garbage data", why does that upset you? It doesn't even impact you.

Also, you seem very focused on whether or not an item used as a common tool for trade is or isn't state-backed. I think we agree that bitcoins can be used as a form of money. You seem to be arguing over and over that it isn't "currency" because it isn't backed by a government (and the faith people have in it). It's a distinction only you seem to care about.

RE: Duh.
By coburn_c on 2/7/2014 6:05:07 PM , Rating: 1
Hey look man, people want to be stubbornly ignorant all around me then, like, I'm gonna stubbornly explain shit to them. You seem to want to twist it into a political or philosophical argument, to question my motives. That throws up flags about your motives, not mine.

RE: Duh.
By ebakke on 2/8/2014 12:31:42 AM , Rating: 1
I don't want to twist anything you're saying, and I'm not questioning your motives. I'm not sure what sort of nefarious motive could exist in this context. :-/

I'm simply asking you questions about your opinions/positions and I'm interested enough to ask twice.

RE: Duh.
By Cheesew1z69 on 2/8/2014 9:49:53 AM , Rating: 1
Like I said earlier, he is just now trolling. Best to just ignore it.

RE: Duh.
By purerice on 2/7/2014 4:57:40 PM , Rating: 2
You are half right. BC may survive but with enough attention to it now and all the problems it is having, politicians will see the opportunity to act and regulate BC. Sure BC may survive but if it does will just be another form of cash like debit cards or prepaid credit cards.

Already major investment banks are trying to find ways to control the exchange of their own crypto-currencies. BC as we know it now is already on its way out.

section 4 fundamentally incorrect
By surt on 2/7/2014 7:42:34 PM , Rating: 2
Insurance is only necessary against bank runs if you do loan amplification (loan out money you have promised to another customer). Banks do not have to operate this way, it's just more profitable to do so.

RE: section 4 fundamentally incorrect
By coburn_c on 2/7/2014 8:37:51 PM , Rating: 2
That's why FDR created the Credit Union

a credit union's revenues (from loans and investments) must exceed its operating expenses and dividends (interest paid on deposits) in order to maintain capital and solvency

Join one today!

RE: section 4 fundamentally incorrect
By The Von Matrices on 2/8/2014 1:31:57 AM , Rating: 2
What you just said has little to do with a bank run. Just because a bank (or credit union) has a positive cash flow doesn't make it immune to bank runs. Yes, a profitable bank (or credit union) is more likely to have a larger reserve of cash; however, what matters is its debt to equity ratio. As long as it is greater than 1, then there is a chance of a run.

By surt on 2/8/2014 11:43:08 AM , Rating: 2
Thanks, that's exactly my point. A bank can operate profitably with a d/e ratio below 1.

(And it can also be slightly more nuanced. The bank may carry debts that have contractual payment dates, penalties for early withdrawal, etc., which can complicate the calculation of their true d/e ratio.)

What exactly is at risk to Mt Gox users?
By DanNeely on 2/7/2014 3:29:10 PM , Rating: 2
Cash they've deposited to buy BTC at the exchange? BTC they've bought from Mt Gox, but not transferred to an external wallet? Both? Something else too?

By coburn_c on 2/7/2014 3:36:52 PM , Rating: 2
Completed transactions for both BTC and USD are frozen preventing withdrawal.

By Beavermatic on 2/8/2014 7:00:16 AM , Rating: 2
I do believe I read somewhere that even if the feds wanted to, there's nothing they could do to regulate trade or insure bitcoins as its in its own digital sovereignty of Internet no-mans-land. It's not tied to a single nation, and thus, a single nation cannot claim ownership of it or control its creation (even if they wanted to.)

They could impose restrictions of its use here, but control and regulate, probably not, no.

To even criminalize anything related to it would be pretty hard to accomplish because technically it's odd form of backing and creation spanning anyone from any nation willing to participate and not one generated by this country alone, nor affiliated with our government.

That's not saying you couldn't get 3rd party insurance, but don't expect the FDIC to offer safetynets anytime soon.

It's very wild west... the "EVE Online" of currency. You get those bitcoins, you better hide them well... no one's coming to help you if you lose them from your failure to properly secure them.

Of course, it's all based on hype and has nothing to back it other than someone somewhere thinking the data that produces the bitcoin is worth something because of the mining effort involved. Once it comes to realization that its basically a lengthy process of obtaining play money, nothing truly behind it worth much of anything, and too risky, it'll pop and be worthless again.

By chrnochime on 2/8/2014 12:42:02 PM , Rating: 2
It was always worth nothing, and thanks to it AMD video cards are kept artificially high, new or old. There are better ways to make real money than to waste electricity running a crapload of gpus to mine the coins. The day that this currency becomes just another form of payment method cannot come soon enough.

By zephyrprime on 2/8/2014 3:58:44 AM , Rating: 3
When a normal bank run occurs, it is only made possible by the fact that most of the money in a bank is gone because it is loaned out. However, mt gox doesn't make loans so in theory, all the money is supposed to be there. Of course, it's obvious that the money is gone but what happened to it? Did the owners of gox embezzle it? Was it spent on ordinary operations? Did the parent bank sell the funds and use it as reserves to expand it's loan portfolio? What happened to the money?

By Lord 666 on 2/7/2014 11:30:58 PM , Rating: 2

waiting for the next...
By milktea on 2/8/2014 12:52:20 AM , Rating: 2
I'm waiting for the next crash of BitStamp and btc-e.
Jason, be sure to let us know first thing, when those btc exchanges becomes insolvent. :)

old news
By chromal on 2/8/2014 11:45:35 AM , Rating: 2
People who bank with unregulated banks and currencies may pay a dear price indeed for their remedial history lessons.

geez really ??
By KOOLTIME on 2/14/2014 7:01:29 PM , Rating: 2
LOL sarcasm, of course its a scam. When will fools getting parted with their money learn.

online money systems no matter what any claims say, are unsafe.

Same reason gambling online is the stupidest thing to do in the world. May as well just flush your money down the drain.

Software is exactly as its stated software, means 24/7 a click of a mouse by someone can alter its current functions, there is no methodology to safeguard such actives in the large scale needed to insure safe usage.

The end user has no way to know the claimed safe server, is the one they are actually playing on. Marketing claims and false premises of security, are just that all propaganda.

new ownership
By KOOLTIME on 2/14/2014 7:06:16 PM , Rating: 2
They just sold it the new owner is Bernard Madoff.

"It's okay. The scenarios aren't that clear. But it's good looking. [Steve Jobs] does good design, and [the iPad] is absolutely a good example of that." -- Bill Gates on the Apple iPad

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