Bitcoin Forum

It is obvious MtGox has a virtual monopoly on bitcoin vs fiat currency trading.

I am not saying this must be a bad thing, but I think people who trade in MtGox should be aware of some obvious facts.

MtGox can see how much money is floating in their client accounts, even if this money is not put to order. So say if they see a lot of their customers with dollars ready to buy but not actually putting any orders, they can see that the price will probably rise. Likewise in the reverse, if there are a lot of bitcoins ready to be sold, even if not placed in order, they can see the price is likely to go down.

They can take advantage of this inside knowledge in basically two opposing ways:

1. Stabilize the price of bitcoin. This is the best scenario if they are really interested in the long term future of bitcoin. I am very hopeful this is their objective.
2. Rip naive investors off, in a gradual way. The worst scenario and likely very bad for the future of bitcoin.

Ways to combat this insider trade information in MtGox:

1. Do not put much money, fiat or bitcoin, in MtGox. Withdraw bitcoins if you want the pressure for prices rise. Withdraw cash if you want the pressure to fall.
2. Play and pledge much more capital in competing exchanges.

I can be completely wrong and I wish to discuss this frankly.

i think this is more true for bitcoinia

Of course,  they can do whatever InvestmentBank can.

it would be just as illegal to frontrun an order for an investment bank as it would be for a bitcoin exchange: http://en.wikipedia.org/wiki/Front_running

I think it's not.

Now what?  :P

/me assesses disagreement

Its illegal but really unenforceble. Thats where trust in your broker, bank or MtGox, comes into play.

Vive le Laissez-faire!

Given the small size of the Bitcoin market; it would be easy to detect front running I think.  Every time a big order went in, we'd see a smaller (but still big) order get executed first.

At the very least, the big mover would find that they were always paying more for their coins than the orderbook suggested at the time the press the button.

Perhaps I'm not thinking in a devious enough way though.

This statement is correct, would anyone like to fill in the details for why this is the case before I do?

Please enlighten us. Im dying to know.

We don't get to see the order book.

Bitcoinia is dealing with leveraged players; it therefore knows exactly where the price has to go to squeeze them out. And if it doesn't fully hedge their position, that's moolah for bitcoinia above and beyond the spread.

You don't have to thank me.

Firstly I would like to say that I am making this statement as an individual, and it is by no means the opinion of or in anyway connected to GLBSE or Intersango.

You're all aware of the recent loss of BTC by bitcoinica, and to be fair to them they have said that the losses will come out of their own pockets and not their customers.

What this means is that the loss to bitcoinica is over 80k BTC(the actual loss, and what they said they would cover). That is a shitonne of money, which made me wonder, how in such a short period of time have they made this much profit.

I can tell you that major exchanges combined (and multiplied a couple of times) do not bring in that amount of profit anywhere near that timescale(less than 9 months from launch).

This is very suspicious. I'm all for successful projects but is this not a case of too good to be true?

How can they do it?

As has already been mentioned he can look at the books, but it's more than simply this.

It's being able to look at the books see which way bitcoinica's users (the ones leveraged to the hilt) have bet, and then take the massive amount of bitcoin available to bitcoinica (their users funds) and push the market in the other direction, even just a little bit.

This results in said leveraged users becoming illiquid, losing all their coins as they have to settle, and bitcoinica taking the win(perhaps they even make bets in the opposite direction, who knows).

I wondered why did bitcoinica have a "hot wallet" (of over 40K BTC, bit fat for a hot wallet don't you think) when they had stated before that they keep everything in MtGox and don't actually touch BTC.

Haven't you also wondered who this mystery market mover is? Clearly someone with a lot of bitcoin available to them, not necessarily their own.

This is just my own opinion, but then what do I know.

arabianights is the winner

Maybe Zhoutong is not using Bitcoinica profits at all to cover the losses. He could have capital from elsewhere. Given his young age it is unlikely it would come from other succesful ventures. But who knows, perhaps his family is rich.

Just another possibility in addition to the one you mention.

I obviously have no more of an answer than you do, but are you aware that MtGox is running at a loss? This is probably because they have external private investors who are willing to foot the bill, making short-term losses in exchange for the promise of market supremacy when/if things take off.

The same is probably true of bitcoinica. I don't know who has invested in it, but zhoutong has made references to speaking to investors at various points, so it doesn't seem unlikely that wealthy backers would just decide to cover the cost in exchange for a larger stake in one of the most successful bitcoin ventures yet. The loss may have wiped out bitcoinica's profit, but I wouldn't necessarily assume that just just because they are willing to cover their losses out of pocket that they necessarily made all that money through their own business activities.

Another consideration is that large purchases of bitcoins (such as a wealthy external investor covering bitcoinica's losses) won't necessarily happen on mtgox or anywhere observable to us. I know of several large over-the-counter transactions that occur regularly.

http://en.wikipedia.org/wiki/Zhou_Tong_%28archer%29

Zhou Tong could well be an alias. Is he really 18 years old? Is he chinese? Who knows.

http://www.youtube.com/watch?v=WGcO9BB87kE (http://www.youtube.com/watch?v=WGcO9BB87kE)
This video is just perfect for the theme. I must say - I shot this video but posted on the youtube - not me. When I understood (see) that he wants to do this "manipulator" - I dashed to buy "for all 10x to bitcoinica" I made (earned) this a very large sum .. It was too easy ..

EDIT Note that not all sites show the "depth of the market" correctly!

Who would ever use an alias to start a service?  ::)

1. Zhou stated that he has a rule that he does not do any personal trading of bitcoin for something like 24-48 hours after seeing any privileged information in the database.

2. Nefario, where did you get 80k?  I heard 43k.  This is probably roughly on the scale of his profits, but like copumpkin said, I wouldn't be surprised if a backer is eating some of this loss.

3.  There is no evidence that Zhou is doing any insider trading or betting against his customers, and he has repeatedly asserted that he does not and never will do this.  Does he have the power to lie and steal from his customers? Of course, but until there is more evidence than just opportunity, I don't think its fair to be making accusations.

4.  I don't think "The Manipulator(s)" is Zhou, but I am pretty sure whoever they are- they use Bitcoinica (leverage makes manipulation easier).

Does it hurt Gox customers? Will they care enough to go to another exchange?

What if Gox or someone else said that this is what they do and offered lower, 0 or negative fees since they could make money that way. Would it be a problem?

1. Zhou also stated that all biticoin for bitcoinica is kept in MtGox and that they didn't actually touch the coins. What happened there? 43K went missing.

2. 43K is the actual loss from the heist, and another 43K that he's giving back to his customers, he takes a double hit.

3. There is no evidence of anything, I'm just after reading that bitcoinica's not even incorporated(on reddit, but is that true?).

What? he doesn't need to reimburse lost profits out of pocket. If I lent you $10 and someone mugs you and steals those $10, you still owe me $10, and you don't have $10, but I wouldn't say you lost $20.

Either way, I think it's very shaky reasoning to assume that just because he can afford to cover 43k lost customer coins, that he made that much in profit, and is thus trading against his customers.

Regarding his incorporation, he's said he'll announce details about it soon. I still believe that there's probably at least one fairly large investor behind all of this.

Well it only becomes an issue if customers start to withdraw, which would mean we get into fractional reserve territory.

But point taken on the rest of your comment.

where do you get the information that mtgox is operating at a loss?  is that a paper loss for tax reasons, or EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization)

All I have is this (rather informal) report they released a month or so ago: https://mtgox.com/press_release_20120201.html

ok, just had a look at that.  where are you inferring a loss?

5 million yen monthly operating costs = $60k a month to operate. Their yearly revenue was $337k. Yes, they also have coins, but they can't sell them easily.

In revenue & operational costs (page 16) I'm seeing USD revenue of $337,000 over a year, 52,400 of BTC in a year ($277,720 at the current rate), and then ~5,000,000 yen in monthly costs, or ~$60,000 at current rates. That would mean revenues of 614,720 and costs of $720,000. That's ~15% loss, but its hard to tell considering there are 3 different currencies being used and two time scales, this is a very very informal report indeed.

Yeah, exactly. The bitcoins in particular are pretty illiquid from the point of view of paying employees and rent, too. But my basic point was that even if they aren't making a clear loss, they certainly aren't rolling in money, and there is a very real possibility of making a loss month-to-month, which someone would have to cover. I'd bet that someone is a private investor, or a few. And I'd be willing to bet that bitcoinica is in a similar situation.

Have there been any loss taken by Bitcoinica?
Have anyone found that 43K transaction (set of transactions)?
Why would they use VPS for storing such amount?
Isn't it much safer to rent/setup physical server?
Couldn't it be easier to declare huge loss for promotion?

Are you still sure there was any actual loss?

I wish luck to Zhou but I have more questions than answers on this situation.

we don't know what the numbers represent.  its not a full accounting disclosure, so i don't think we can't draw any profitability information from what they have supplied.  we can draw the conclusions they are obviously trying to have drawn, but they mean nothing.

and the idea that 52k bitcoin a year is not easily liquidated is in my opinion, extremely incorrect.  you don't think they could move 1k bitcoin a week with ease?  seriously?  1k a day would still be easily exchanged to fiat.

You're right; it is hard to draw profitability conclusions, but for now it'd appear that they aren't raking in huge amounts of cash, which would suggest that for any future expansion of the business, they'd need external investors.

Regarding getting rid of the bitcoins, I don't doubt that it can be done, but it'd be questionable for them to trade on their own exchange, and doing large OTC transactions is possible, but you're less likely to get a good rate for them.

why would it be questionable for them to trade on their own exchange?  if they receive fees in BTC, i can't think of any reason for them not to liquidate on their own exchange as long as they were selling at market, and not using large amounts of bitcoin to try and manipulate the market.

don't they currently use bots to trade?  i may have misunderstood something i read on the bots though.

Initially Zhou stated this, but I believe he had to add a separate wallet to accommodate BTC deposits and withdrawals to get around MtGox withdrawal limits. My guess is that is what was hacked on linode.

I have plenty of suspicions against bitcoinica, them scamming us being not one of them.

But that would derail the discussion.

To contribute something: The way capitalism works (or its at least supposed to but we should assume bitcoin gets to the ideal form as close as it gets) it should be in the Brokers best interest not to intervene in the markets to not piss of their clients. Another factor is human nature or just social dynamics: Where there is betrail more follows, so chances some inside whistle-blower will reveal the fraud is very high.