Bitcoin Trading Alert: Mt. Gox Gone

By: Mike McAra | Tue, Feb 25, 2014
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Bitcoin Trading Alert originally published on Feb. 25, 2014, 10:42 AM


 

In short: in our opinion short positions are the way to go now.

There it is. Mt. Gox has disappeared. Quite literally when it comes to the exchanges website - all it features currently is an empty space. It seems to be the common understanding of the Bitcoin community that the exchanges accounts are similarly empty.

Time and time again, we've been writing not to commit any new capital to Mt. Gox. As much as we would like to have been overcautious, and see Mt. Gox resume withdrawals, it seems that we were not. At least, our opinion might have insulated our readers from losses.

Since the Mt. Gox website went down yesterday, new information has come to light. Tumbler user Two-Bit Idiot reported the existence of an unverified report supposedly coming from internal communication channels at Mt. Gox. The report claims that Mt. Gox has lost as much as 750,000 bitcoins, which with Bitcoin at around $480 (BitStamp) would mean $360 million (!!!) was stolen from the exchange over the course of several years.

The whole report can be accessed here. Here's the gist of it:

For several weeks MtGox customers have been affected by bitcoin withdrawal issues that compounded on themselves. Publicly, MtGox declared that "transaction malleability" caused the system to be subject to theft, and that something needed to be done by the core devs to fix it.

Gox's own workaround solution was criticized, and eventually a fix was provided by Blockchain.info. The truth, it turns out, is that the damage had already been done. At this point 744,408 BTC are missing due to malleability-related theft which went unnoticed for several years.

The cold storage has been wiped out due to a leak in the hot wallet. The reality is that MtGox can go bankrupt at any moment, and certainly deserves to as a company. However, with Bitcoin/crypto just recently gaining acceptance in the public eye, the likely damage in public perception to this class of technology could put it back 5~10 years, and cause governments to react swiftly and harshly.

At the risk of appearing hyperbolic, this could be the end of Bitcoin, at least for most of the public. We believe in the value of Bitcoin, its potential to change the world, and its principles of transparency. Most importantly we care about the customers of MtGox and other bitcoin-based businesses who will be affected. The likely consequences will be larger than this localized financial damage, and we believe that the benefits of keeping MtGox stable and running outweigh the risks. This isn't about saving MtGox anymore.

If this is even remotely true, there doesn't seem to be any possibility that the customers will receive any of their money any time soon. The report outlines a plan for rebranding of the exchange and an agenda for the next couple of months. Most of it feels extremely detached from reality:

To avoid a bank run from customers, the daily amount of bitcoin and cash withdrawals will be limited.

With the profit, a meticulous analysis will be made over the coming years to clean the bitcoin balance sheet while running the exchange and generating revenue to pay back stakeholders.

New offerings such as additional currencies, low trading fees, etc will give customers a reason to stay with MtGox.

The new branding is already complete, and new services such as the Bitpocket wallet are already developed and ready for deployment.

With a new image, team, and offering we believe that it will be a challenge, but is not impossible. The risks of not acting are incredibly large and unpredictable.

It doesn't seem to us that a "bank run" can be avoided if any of this is true. The report doesn't mention any sort of litigation, which we feel would be inevitable had $360 million been actually stolen.

Again, this report is unverified and we will have to wait and see if it gets confirmed but we feel that at this point, with Mt. Gox's erratic actions, you should know about its existence.

All of this is extremely important even if you don't have any money locked in at Mt. Gox. If such an amount of money is actually missing, it probably won't take long before the authorities get interested. The Mt. Gox situation might weigh in on the perception of Bitcoin among the wider investment audience. This is a serious possibility.

On the other hand, things might play out slightly differently. Just as bank crashes don't put the existence of fiat currencies into question, the fall of Mt. Gox, as serious and painful as it is, might not be an advent of "the end of Bitcoin."

The situation is serious, all the more since we still don't know if the report is factual. If it is, there's one more question: what happened with all the bitcoins stolen? If they're still lying around in wallets then, there's possibility of sell-offs on other exchanges. It might also be the case that the coins have already been liquidated.

All of this greatly contributes to the uncertainty in the Bitcoin market, well beyond what we've seen so far this year.

A quick look at the chart for Mt. Gox, possibly one of the last times we feature it in our alerts.

MTGOXUSD Bitcoin Mt. GOX (USD) Chart

Recent gains have been erased and Bitcoin dropped to $173.87 yesterday on relatively heavy volume. This way, the currency lost 43.9% of its value on Mt. Gox yesterday.

Today the action is down but the volume is significantly weaker (this is written at 9:50 a.m. EST). At this moment, the Mt. Gox chart is only an indication of how bad the things have been and if the investors believe there is even the slightest possibility of seeing their money back.

The case of Mt. Gox shows you why it's important to only use a small part of your overall portfolio for Bitcoin-related trades. We've stressed this so far and will do so in the future.

BITSTAMPUSD Bitcoin BitStamp (USD) Chart

BitStamp was 12.2% down yesterday on relatively strong volume. Today, the downside pressure persists with Bitcoin another 6.6% down. The most significant part is the increase in volume, which has doubled to over 90,000 bitcoins.

Right now, Bitcoin is below $530 (solid red line on the chart) and there is no telling if the move down following Mt. Gox's demise is already over. That makes the short-term situation bearish.

BTCEUSD Bitcoing BTC-e (USD) Chart

Bitcoin on BTC-e lost 7.1% yesterday on moderate volume and it has gone 11.7% down so far today on almost double the volume.

The currency is below $500 (solid red line on the chart) and the short-term situation at this time seems more bearish than not, especially taking Mt. Gox's fall into account.

Both BitStamp and BTC-e haven't taken a serious hit so far. This might mean that they are seen by the investors as having not much to do with Mt. Gox, but it is also possible that the uncertainty surrounding Mt. Gox will transpire to other exchanges as well in a more meaningful way.

Summing up, in our opinion short positions might be the way to go now.

Trading position (short-term, our opinion): short, stop-loss at $550 for both BitStamp and BTC-e. We're betting on Bitcoin going lower on both exchanges following the Mt. Gox fallout.

Regards,

 


 

Mike McAra

Author: Mike McAra

Mike McAra
Bitcoin Trading Strategist
Bitcoin Trading Alerts at SunshineProfits.com

Mike is a quantitative analyst focused on the economic reality, not theoretical models. His investment thinking is grounded on empirical evidence and common sense.

A holder of 2 master's degrees, in quantitative methods and finance, he researches economic uncertainty, portfolio management, and investor behavior.

Mike joined Sunshine Profits in 2009. He develops innovative investment tools, verifies usefulness of popular techniques, and provides thorough internal research. His quantitative and financial background, along with experience in the gold market and personal interest in bitcoin led to the launch of our Bitcoin Trading Alert service.

Mike passed the first CFA exam at the first attempt with the highest calculated percentage range in the following areas: Alternative Investments, Corporate Finance, Derivatives, Equity Investments, Ethical & Professional Standards, Financial Reporting & Analysis, Portfolio Management, Quantitative Methods.

Disclaimer: All essays, research and information found above represent analyses and opinions of Mike McAra and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Mike McAra and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. McAra is not a Registered Securities Advisor. By reading Mike McAra's reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Mike McAra, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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