Reason why MtGox can go to 0 - without arbirage opportunity with Bitstamp

[jaybny]

If people are buying from MtGox at a very low price compared to the market average and then selling them back into the open market for tremendous profit (via another exchange), then that calls into question the other "legitimate" exchanges because it does not fit the economics 101 of supply and demand. If the market is being flooded with cheap bitcoins via MtGox, then the price must go down unless the other exchanges are artificially inflating the value to avoid losing money on their side.

That would call into question more than just MtGox honoring trades, but every other exchange out there for price fixing.

if they would be able to do this, prices would not be so low... because of arbitrage. you can buy low on gox, but are not able to transfer then to bitstamp and sell high.

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[jaybny]

Once prices started diverging, smart traders would "rather be in fiat, in case of insolvency".    

This just isn't true. If insolvent, then the money is gone. Gone.

rephrase: in case of court ordered liquidation.

Interesting ... under which court? even better ... under which legislation?

Japanese bankruptcy courts?

[knightmb]

If people are buying from MtGox at a very low price compared to the market average and then selling them back into the open market for tremendous profit (via another exchange), then that calls into question the other "legitimate" exchanges because it does not fit the economics 101 of supply and demand. If the market is being flooded with cheap bitcoins via MtGox, then the price must go down unless the other exchanges are artificially inflating the value to avoid losing money on their side.

That would call into question more than just MtGox honoring trades, but every other exchange out there for price fixing.

if they would be able to do this, prices would not be so low... because of arbitrage. you can buy low on gox, but are not able to transfer then to bitstamp and sell high.

So everyone at MtGox is basically buying credits, for which they will never be able to exchange. Good point, so what exactly is MtGox selling at the moment then? 

[Calavera]

the assumption was that goxBTC is fungible with BTC, otherwise its just paperBTC. In fact, before this incident goxBTC was $100 above bitstampBTC, because goxUSD was impossible to withdraw and worth less than bitstampUSD.

Well, obviously we're in agreement there because it's almost exactly what I put in my post.  I also agree that people clearly currently want to be in GoxFiat rather than GoxBTC

So what are we not agreeing about?

• As MtGox BTCs price drops relative to Bitstamp BTC, more BTCs will be bought/withdrawn on MtGox, and the cost to MtGox to make customers whole also goes up

They won't be withdrawn though, as the only people who can currently "withdraw" BTC from MtGox are MtGox themselves.  Gox actually opening up BTC withdrawals again should see a large price jump on their exchange. 

I'm not saying that Gox can get out of any position by using an external exchange.  I'm saying that if Gox purchase 1 GoxBTC on their own exchange then they now owe $200 instead of 1BTC, so they've clearly reduced their overall debt (assuming a you consider BTC and fiat liabilities to be equally important, certainly debatable)

[Barek]

but there are not enough real BTCs on their own exchanges. doesn't matter how low the price drops, if they don't have enough BTCs to cover the total clients BTC deposits, they will have to buy externally. nobody is depositing BTCs into gox to sell at 250. the only way they get more BTCs is to buy externally.  

What do you mean by "there are not enough real BTC on their own exchange"? Worst case, they have to come up with BTC equal to the sum of all BTC balances of their customers accounts. They can reduce these BTC balances by using their fiat on their exchange to buy BTC.

[btbrae]

rephrase: in case of court ordered liquidation.

Liquidation of what?  

There has to be some assets of value in order to liquidate and return even a token amount back to customers. Unless you're talking about a very large company with a complicated structure, buildings, land, contracts, patents, etc then just getting to that stage normally indicates there is very little left.

[jaybny]

rephrase: in case of court ordered liquidation.

Liquidation of what?  

There has to be some assets of value in order to liquidate and return even a token amount back to customers. Unless you're talking about a very large company with a complicated structure, buildings, land, contracts, patents, etc then just getting to that stage normally indicates there is very little left.

they have millions of dollars in customer money... but that money is a liability. as soon as the have less money then is needed to cover all deposits, they are technically insolvent , and can be ordered to return all the millions of customer deposits.. 

[CiaIgle]

Once prices started diverging, smart traders would "rather be in fiat, in case of insolvency".    

This just isn't true. If insolvent, then the money is gone. Gone.

rephrase: in case of court ordered liquidation.

Interesting ... under which court? even better ... under which legislation?

Japanese bankruptcy courts?

Very unlikely, Japan has no specific legislation regarding cryptos. So legally there's notthing that can be done.

[jaybny]

the assumption was that goxBTC is fungible with BTC, otherwise its just paperBTC. In fact, before this incident goxBTC was $100 above bitstampBTC, because goxUSD was impossible to withdraw and worth less than bitstampUSD.

Well, obviously we're in agreement there because it's almost exactly what I put in my post.  I also agree that people clearly currently want to be in GoxFiat rather than GoxBTC

So what are we not agreeing about?

• As MtGox BTCs price drops relative to Bitstamp BTC, more BTCs will be bought/withdrawn on MtGox, and the cost to MtGox to make customers whole also goes up

They won't be withdrawn though, as the only people who can currently "withdraw" BTC from MtGox are MtGox themselves.  Gox actually opening up BTC withdrawals again should see a large price jump on their exchange.  

I'm not saying that Gox can get out of any position by using an external exchange.  I'm saying that if Gox purchase 1 GoxBTC on their own exchange then they now owe $200 instead of 1BTC, so they've clearly reduced their overall debt (assuming a you consider BTC and fiat liabilities to be equally important, certainly debatable)

maybe im wrong regarding "more BTCs will be bought/withdrawn". but if gox is short BTCs, you would rather own goxUSD, but there will be some low price were youd rather hold the goxBTC then sell for huge USD loss. this is what the market is currently doing, price discovery, at what price would you rather hold.

that depends on how many btcs were stolen.

[Calavera]

the assumption was that goxBTC is fungible with BTC, otherwise its just paperBTC. In fact, before this incident goxBTC was $100 above bitstampBTC, because goxUSD was impossible to withdraw and worth less than bitstampUSD.

Well, obviously we're in agreement there because it's almost exactly what I put in my post.  I also agree that people clearly currently want to be in GoxFiat rather than GoxBTC

So what are we not agreeing about?

• As MtGox BTCs price drops relative to Bitstamp BTC, more BTCs will be bought/withdrawn on MtGox, and the cost to MtGox to make customers whole also goes up

They won't be withdrawn though, as the only people who can currently "withdraw" BTC from MtGox are MtGox themselves.  Gox actually opening up BTC withdrawals again should see a large price jump on their exchange. 

I'm not saying that Gox can get out of any position by using an external exchange.  I'm saying that if Gox purchase 1 GoxBTC on their own exchange then they now owe $200 instead of 1BTC, so they've clearly reduced their overall debt (assuming a you consider BTC and fiat liabilities to be equally important, certainly debatable)

maybe im wrong regarding "more BTCs will be bought/withdrawn". but if gox is short BTCs, you would rather own goxUSD, but there will be some low were youd rather hold the goxBTC then sell for huge USD loss. this is what the market is currently doing, price discovery, at what price would you rather hold.

that depends on how many btcs were stolen.

Again we're (mostly) in agreement.  I think there's just confusion caused by your somewhat ambiguous OP wrt "Reason why MtGox can go to 0 - without arbirage opportunity with Bitstamp" and 

why the "no arbitrage theory" is not broken

Perhaps you were just aiming to explain why the BTC price was dropping on Gox, which isn't quite the same as it going to zero (zero as in no activity on the exchange?  zero as in they enter liquidation and end up paying out a percentage of the fiat debts but zero on the BTC?)  I also don't know what the "no arbitrage theory" is.

In either case, I would have expected there to have been other threads explaining the price on Gox for those that require it.  It's been going on for days. 

[jaybny]

but there are not enough real BTCs on their own exchanges. doesn't matter how low the price drops, if they don't have enough BTCs to cover the total clients BTC deposits, they will have to buy externally. nobody is depositing BTCs into gox to sell at 250. the only way they get more BTCs is to buy externally.  

What do you mean by "there are not enough real BTC on their own exchange"? Worst case, they have to come up with BTC equal to the sum of all BTC balances of their customers accounts. They can reduce these BTC balances by using their fiat on their exchange to buy BTC.

exactly, and how low must goxBTC drop for gox to cover their short? can this be done before the exchange gets shut down? if yes, then buy goxBTC! if no then sell! game of chicken.. kinda like merger arbitrage, post announcement.

[Barek]

exactly, and how low must goxBTC drop for gox to cover their short? can this be done before the exchange gets shut down? if yes, then buy goxBTC! if no then sell! game of chicken.. kinda like merger arbitrage, post announcement.

Time will tell. All I was trying to explain was that exchange rate going down is helping Gox.

[jaybny]

the assumption was that goxBTC is fungible with BTC, otherwise its just paperBTC. In fact, before this incident goxBTC was $100 above bitstampBTC, because goxUSD was impossible to withdraw and worth less than bitstampUSD.

Well, obviously we're in agreement there because it's almost exactly what I put in my post.  I also agree that people clearly currently want to be in GoxFiat rather than GoxBTC

So what are we not agreeing about?

• As MtGox BTCs price drops relative to Bitstamp BTC, more BTCs will be bought/withdrawn on MtGox, and the cost to MtGox to make customers whole also goes up

They won't be withdrawn though, as the only people who can currently "withdraw" BTC from MtGox are MtGox themselves.  Gox actually opening up BTC withdrawals again should see a large price jump on their exchange. 

I'm not saying that Gox can get out of any position by using an external exchange.  I'm saying that if Gox purchase 1 GoxBTC on their own exchange then they now owe $200 instead of 1BTC, so they've clearly reduced their overall debt (assuming a you consider BTC and fiat liabilities to be equally important, certainly debatable)

maybe im wrong regarding "more BTCs will be bought/withdrawn". but if gox is short BTCs, you would rather own goxUSD, but there will be some low were youd rather hold the goxBTC then sell for huge USD loss. this is what the market is currently doing, price discovery, at what price would you rather hold.

that depends on how many btcs were stolen.

Again we're (mostly) in agreement.  I think there's just confusion caused by your somewhat ambiguous OP wrt "Reason why MtGox can go to 0 - without arbirage opportunity with Bitstamp" and 

why the "no arbitrage theory" is not broken

Perhaps you were just aiming to explain why the BTC price was dropping on Gox, which isn't quite the same as it going to zero (zero as in no activity on the exchange?  zero as in they enter liquidation and end up paying out a percentage of the fiat debts but zero on the BTC?)  I also don't know what the "no arbitrage theory" is.

In either case, I would have expected there to have been other threads explaining the price on Gox for those that require it.  It's been going on for days. 

yes. correct. cant go to 0, can go to .0001... many people never understood why there was a gox premium over bitstamp in the first place. so many q's about arbitrage.. reason for post was simple basic explanation of gox discount to bitstamp.

http://en.wikipedia.org/wiki/Fundamental_theorem_of_asset_pricing
http://en.wikipedia.org/wiki/No_free_lunch_with_vanishing_risk
http://www.realworldrobotics.com/readings/financial-engineering/principle-of-no-arbitrage
http://www.investopedia.com/terms/a/arbitrage.asp

[nejat76]

Shortage of BTC may not  affect Mtgox if current low prices are directly manipulated by Mtgox itself... which may seem to be the case now.

- Say half of the btc deposited to Mtgox is actually stolen. Assuming 1000 BTC deposit before theft.

- After the theft only 750 BTC is left.

- Through market manipulation with press releases & exchanges & closing withdraws say Mtgox acquires 500 BTC with average cost of $250 each.

- Mtgox sells these cheap BTC's in the external market for $600 each. Totalling $300000.

- Flow of cheap btc starts to decrease the btc value of external market... Through arbitrage  prices in Mtgox increases and settles above Mtgox's average cost of btc buy. (Caveat : Mtgox should not / cannot make customers withdraw more than 250 BTC)

- Prices find equilibrium and Mtgox purchase BTC in the external market for average $400 each... 750 BTC that is ...Deposits this back to itself...

Now, mtgox initially paid $125000 for 500 BTC. After all it got 250 + 750 BTC. Mtgox leaves 750 BTC as customer's funds. Sell remaining BTC with the increased prices. Say $500 each. That is $125000 which initially mtgox paid in fiat.

No losses in fiat... Prices at mtgox decrease again with the sale of extra BTC that Mtgox got...

And then say the thinking of a theft is just a bullshit of our conspiring minds then the thief is Mtgox itself if it's indeed manipulating the market.

Let's see how it rolls out in the coming days... And hope it's just the incompetent devs of Mtgox...

ps: Prices and other figures are just coarse estimations or say examples, relative differences / ratios should be taken into account.

[Calavera]

- Flow of cheap btc starts to decrease the btc value of external market... Through arbitrage  prices in Mtgox increases and settles above Mtgox's average cost of btc buy. (Caveat : Mtgox should not / cannot make customers withdraw more than 250 BTC)

- Prices find equilibrium and Mtgox purchase BTC in the external market for average $400 each... 750 BTC that is ...Deposits this back to itself...

Gox don't have an unlimited supply of actual BTC.   No way they can "sell" enough elsewhere to equalise the markets without the public perception of Gox's liquidity changing. 

[jaybny]

- Through market manipulation with press releases & exchanges & closing withdraws say Mtgox acquires 500 BTC with average cost of $250 each.

unless the order book is completely fake, (we know its not, because we see our orders in the book), then why would rational traders sell 500 BTCs all the way down to $250?

- Mtgox sells these cheap BTC's in the external market for $600 each. Totalling $300000.

so MtGox is already short customer BTC, and is actively stealing more customer BTC, transferring it to [bitstamp], and selling it? thus generating more fiat? their issue is lack of BTCs not lack of fiat.

If its all a complete fraud then price analysis is useless. I believe MtGox is honest but incompetent. If what your saying is true, then everyone should be buying goxBTC, there should be no reason for a $350 discount to Bitstamp.

At the end of the day, the only market based explanation for the discount, is that customer BTC were stolen, and there is not enough BTCs to cover customer BTC deposits.

if MtGox is actively buying up goxBTC, and goxBTC is not real BTC, then they are in effect using their fiat to compensate their customers at .50 BTC for each BTC, which is exactly what would happen to all BTC deposits in an event of court ordered liquidation and insolvency.

i think we can all agree that this does not end well for MtGox.  




 

[nejat76]

- Flow of cheap btc starts to decrease the btc value of external market... Through arbitrage  prices in Mtgox increases and settles above Mtgox's average cost of btc buy. (Caveat : Mtgox should not / cannot make customers withdraw more than 250 BTC)

- Prices find equilibrium and Mtgox purchase BTC in the external market for average $400 each... 750 BTC that is ...Deposits this back to itself...

Gox don't have an unlimited supply of actual BTC.   No way they can "sell" enough elsewhere to equalise the markets without the public perception of Gox's liquidity changing. 

How do you differentiate between regular guy and mtgox in the external market? The actual market doesn't exactly know **who** sells **where** at **what** price. Even if you know the answer of "who" as mtgox, the others doesn't seem obvious.

- Through market manipulation with press releases & exchanges & closing withdraws say Mtgox acquires 500 BTC with average cost of $250 each.

unless the order book is completely fake, (we know its not, because we see our orders in the book), then why would rational traders sell 500 BTCs all the way down to $250?

- Mtgox sells these cheap BTC's in the external market for $600 each. Totalling $300000.

so MtGox is already short customer BTC, and is actively stealing more customer BTC, transferring it to [bitstamp], and selling it? thus generating more fiat? their issue is lack of BTCs not lack of fiat.

If its all a complete fraud then price analysis is useless. I believe MtGox is honest but incompetent. If what your saying is true, then everyone should be buying goxBTC, there should be no reason for a $350 discount to Bitstamp.

At the end of the day, the only market based explanation for the discount, is that customer BTC were stolen, and there is not enough BTCs to cover customer BTC deposits.

if MtGox is actively buying up goxBTC, and goxBTC is not real BTC, then they are in effect using their fiat to compensate their customers at .50 BTC for each BTC, which is exactly what would happen to all BTC deposits in an event of court ordered liquidation and insolvency.

i think we can all agree that this does not end well for MtGox. 

Read it up, in my scenario they end up going up in BTC and equalise in Fiat. This is all conspiracy yet it shows the statement in OP may not always be the case.
Mtgox didn't spell the word theft yet so it's not the obvious Market based explanation of the discount. Closing of withdrawals and the FUD around it and/or market manipulation is responsible for the price drop. It's essentially a closed market now at mtgox. In my aforementioned scenario caveat is mtgox had the chance to take the btc deposits outside. customers? no for the past week. This way, they are not compensating actually, customer who bought at $1000 now sells at $250 because of FUD. The only way they can compensate is to actually keep selling the extra btc they get cheaper at mtgox after FUD starts to disappear. That's if any ripped off customer actually buys it at that price.

All this is conspiracy though and yes we are certain about the mtgox's fall.

[Calavera]

- Flow of cheap btc starts to decrease the btc value of external market... Through arbitrage  prices in Mtgox increases and settles above Mtgox's average cost of btc buy. (Caveat : Mtgox should not / cannot make customers withdraw more than 250 BTC)

- Prices find equilibrium and Mtgox purchase BTC in the external market for average $400 each... 750 BTC that is ...Deposits this back to itself...

Gox don't have an unlimited supply of actual BTC.   No way they can "sell" enough elsewhere to equalise the markets without the public perception of Gox's liquidity changing. 

How do you differentiate between regular guy and mtgox in the external market? The actual market doesn't exactly know **who** sells **where** at **what** price. Even if you know the answer of "who" as mtgox, the others doesn't seem obvious.

I don't, that isn't what I'm saying.  Gox can obviously directly manipulate their own market if they want to, but for them to bring down the price on another market to $400 (for a non-insignificant amount of time) they would have to sell more coin than they actually have ... i.e. they can't. 

[jaybny]

All this is conspiracy though and yes we are certain about the mtgox's fall.

why would they do this, if not for a theft? they are making bank.

[nejat76]

- Flow of cheap btc starts to decrease the btc value of external market... Through arbitrage  prices in Mtgox increases and settles above Mtgox's average cost of btc buy. (Caveat : Mtgox should not / cannot make customers withdraw more than 250 BTC)

- Prices find equilibrium and Mtgox purchase BTC in the external market for average $400 each... 750 BTC that is ...Deposits this back to itself...

Gox don't have an unlimited supply of actual BTC.   No way they can "sell" enough elsewhere to equalise the markets without the public perception of Gox's liquidity changing. 

How do you differentiate between regular guy and mtgox in the external market? The actual market doesn't exactly know **who** sells **where** at **what** price. Even if you know the answer of "who" as mtgox, the others doesn't seem obvious.

I don't, that isn't what I'm saying.  Gox can obviously directly manipulate their own market if they want to, but for them to bring down the price on another market to $400 (for a non-insignificant amount of time) they would have to sell more coin than they actually have ... i.e. they can't. 

Price drop then would not be necessarily just from the Gox or ones that bought in Gox cheap selling... Other people will follow selling... actually it's happening right now... 8.87 price decrease in one day... that's not Gox price on coinmarketcap.com