let's reduce the risk of another Goxian blow-up...
|Feb 25||Public post|| 2|
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Preventing Another Mt Gox blow up
I was walking my dog, Ollie, when I got the tip: Japanese bitcoin exchange giant Mt Gox was bankrupt.
It was late afternoon, sunny but cold, and Ollie and I were on the way back from throwing the ball around the local park in Cambridge, MA. Being able to take breaks to play with my dog multiple times every day was one of the major perks of being funemployed at the time (post startup #1). Other than playing fetch, my life basically consisted of researching bitcoin during the day, getting back into shape, and writing. I was doing a little freelancing for CoinDesk and a little entrepreneurial tinkering, but I was otherwise in full-time “learn” mode from my kitchen table office.
Yet somehow I had gotten my hands on the biggest story in bitcoin’s young history.
When Ollie and I got home, I opened my email and sure enough saw the full notes and strategy documents which showed (in broad strokes at least) just how the hell Mt Gox had been so incompetent.
The company was in dire straits, and there was *a lot* to parse in a very short amount of time as the exchange was planning to open back up for business the next morning. Tokyo time. Mere hours after I received the tip.
They were going to reopen despite the fact they were short some 750,000 BTC - about $400 million in customer deposits.
I immediately called the friend who gave me the tip. I gotta publish this since it’s so time sensitive, I said. How do I verify this document is authentic?
The answer: “Gox is looking for emergency funds. These docs are floating around bitcoin investor circles. It was sent directly to me. But you never got this from me.”
A few calls later, and I believed that the “Crisis Strategy Draft” I was reading was authentic. But since it was the middle of the night in Japan, and because I’d never had any interaction with Mt Gox or its affiliates, I wasn’t actually able to get in touch with any of the principals. I couldn’t confirm what was real, and what was merely part of a hastily written draft. I also didn’t have an editor to rely on, as I was a one-man show.
But with Gox due to open up the next morning, when they would essentially begin a fractional reserve, I had a choice to make: publish the 90% story, or wait until more damage was done.
Their initial goal had been to cover 50% of the liabilities before announcing the issues publicly, at which point CEO Mark Karpeles would resign, a transition advisory board would be announced, and a one month technical rehabilitation would begin prior to the exchange’s relaunch. Like Bitfinex would do years later, the Gox team also thought they could skate by if some of the customers (creditors) would exchange their lost BTC for Gox 2.0 equity.
On the other hand, one part of the strategy draft framed the dilemma plainly: “Immediately reduce liabilities as much as possible. With actual assets using arbitrage / injecting new coins to erase them from the books. The MtGox price is low, making it possible to erase a significant portion of the debt, but it needs to be done quickly.”
Left unchecked, Gox was going to “buy” coins on their platform - which didn’t actually exist, and were trading at a discount given the mounting concerns of insolvency - with cash, and immediately sell them at other exchanges for fair market value.
Bullshit. I drafted the post and hit publish.
You can probably guess what happened next.
Trip down memory lane: https://twitter.com/twobitidiot/status/1099672668016644096
Go ahead and read the comments. A lot of the backlash and “FUD!" shouting. Looks familiar doesn’t it?
In the intervening five years, there have been multiple exchange hacks and losses.
Poloniex was hit just a couple of weeks after Mt Gox, although the damage wasn’t catastrophic as they were just getting started. Bitstamp lost $5 million in a hack in 2015, at a time when exchanges couldn’t really afford the brand or financial hit. Bitfinex lost $72 million worth of bitcoin in the summer of 2016. And of course, Canadian exchange QuadrigaCX recently appears to have lost $190 million due to poor key management - the assets allegedly died with the founder.
And these are just the losses we know about.
We haven’t even begun to touch on all the other shady crypto exchange bullshit that’s been going on and normalized. The extortive listing processes, spoofed order books, wash trades, insider trade front running and all other sorts of stuff that makes this market look like an absolute joke relative to the existing financial industry.
At what point, I wonder, will users demand exchange audits exchanges? When will we actually get things like proofs of reserves, exchange ratings, clean order book data, and common sense terms of service from crypto’s biggest players?
I thought we’d certainly have it by now. But since we don’t, Messari will be rolling out our own exchange disclosures registry in the coming months.
This will serve as a complement to our token registry, which has now amassed 25 of the best crypto projects in the industry as participants. And it will have a similar goal:
Protect consumers, promote fair and efficient markets, and fix crypto’s pervasive reference data problem. Regardless of regulatory jurisdiction.
If you’re an exchange, and you’d like to help us work on a comprehensive disclosures framework that sets the global industry standard, then please contact us by email or submit the form on our registry page.
These aren’t hard problems to solve, but they’re hard initiatives to coordinate. We’re happy to play the role of shepherd in the process.
So people stop getting Goxxed.
Every. Single. Fucking. Year.
P.S. Want more intel on how the Gox saga went down? I’ll be doing an AMA later today at 6pm ET on Periscope. Stay tuned!
P.P.S. Share. Subscribe. Spread the (rational) crypto love. Tweet at me or Messari for requests, feedback, comments, or questions.
Best of the Rest - What We Missed Last Week
Every weekend, we dig through the past week’s posts from crypto’s other great sources of content to see what we missed in our own weekend reads.
Here’s us curating the curators:
Vivek Singh gives a summary of Gitcoin’s open-source funding experiment that recently wrapped up. The effort provided $25,000 in matching for Ethereum infrastructure projects including Prysmatic Labs, Moloch DAO, and Uniswap. Overall these projects raised a total of $38,242 including the matching fund provided by Gitcoin. In order to reward projects with multiple supporters Gitcoin offered a higher matching amount depending on how many contributors funded a project.
How to effectively value Bitcoin is a difficult question to answer, but Adamant Capital offers two new metrics to measure changes in Bitcoin’s saving behavior in an effort to build on valuation work dating back to 2011. Relative Unrealized Profit-Loss Ratio is a rough measure of investor sentiment. HODLer Position Change is a rough measure of insider buying and selling activity. To contextualize these measures, Adamant also provides a brief history of Bitcoin valuation research.
Crypto games attract a lot of excitement, but Tony Sheng questions if users’ and developers’ enthusiasm will match the eventual success of the crypto game market. A few early games like CryptoKitties deserve excitement and attention. But Sheng evaluates the crypto and mainstream gaming markets at a high level, questioning if crypto games have a viable market fit. In short, Sheng is also excited, but rationalizes his skepticism with a framework for understanding how successful products launch.
Did I miss something?
Send me the link, your twitter handle and your best imitation compression algorithm write up. If I like it, I’ll include your bit next issue (with attribution).