Mt. Gox As a Lesson in a New Kind of Inflation

January 8, 2015 12:01 UTC

Chris Odom of the Swiss firm Monetas recently wrote an article in the Montes blog about the rise of a new kind of inflation that has to be dealt with, and he used the case of Mt. Gox and what happened there as an example.

Read also: Japanese Police Suspect 99% of Mt. Gox Bitcoins Missing Due to Fraud, Not Transaction Malleability Hack

There were strong indications in the Willy report several months ago that the bots that increased the price of Bitcoin using money that did not exist were owned by someone at Mt. Gox itself. In the article, Odom insinuates that if this were the case, the reason was actually to make up for an earlier attack that did happen in 2011.

The inflation happened in part because the bots were able to trade with dollars that never existed, that were never deposited, but also because they were able to trade when no one else was, implying that they were actually installed on the server. This is part of why it is somewhat widely believed that Mt. Gox was indeed an inside job. As a recap, what basically happened at Mt. Gox was that a bot used dollars that never existed to purchase bitcoins and then withdrew those bitcoins but Mt. Gox would not actually have the money to cover the sales. Odom calls this “a new kind of inflation that occurs inside various computer software used for the server-side management of bitcoins, dollars, euros, and other major currencies.”

While it is currently unclear if anything even similar to what happened at Mt. Gox is what’s going on at Bitstamp, it is certainly possible although the amount reportedly lost is unimpressive by comparison. One would hope that large exchanges have a great deal of insurance to cover problems like these losses, but there is no guarantee of that, coupled with the problem that the insurance company might want more proof than is available before paying out. Then the exchange itself might find itself unable to employ enough people to stay operational.

Odom writes of the malfeasance of Mark Karpeles, who has resurfaced in recent months on social media, apparently not ashamed enough to simply disappear. The prospect of the missing bitcoins missing from Mt. Gox winding up in the hands of someone who worked there, someone with a great deal of security clearance at that, is odious and could shake trust in exchanges as a whole. Perhaps if everyone were to pull their coins off the markets and only do transactions in cryptocurrencies, the effect would be countering in that supply and demand might raise the price exponentially again. Odom writes:

MtGox CEO Mark Karpeles blamed the problem on a quirk of Bitcoin known as malleability, and claimed that hackers must have exploited it, but this theory was quickly dismissed by Bitcoin researchers. […] Interestingly, the bots were able to continue trading even during periods of network downtime, when all other users were cut off from trading. It’s possible that attackers had compromised the MtGox servers and installed the bots unbeknownst to the employees of MtGox. However, the Willy Report points out a great deal of evidence that the bots were controlled by MtGox itself. […] This makes clear the importance of protecting the system not just from outside attackers, but from the server operators themselves. For even the most honest and secure entities may still have malicious or desperate employees.

He then goes on to state that Monetas will be solving the problems outlined by Bitstamp and Mt. Gox with a new exchange it will be operating before long. Just suppose that Monetas went on to supercede Bitstamp as the new biggest exchange – what if a similar attack did eventually happen there nonetheless? Imagine if this same sort of thing happened this regularly with regular currency markets. People would be bartering within a week. These sorts of large undertakings need to be taken with the utmost care, and when these problems occur, they need to be dealt with quickly and in a way that makes everyone wronged happy.

Images from Mt.Gox and Shutterstock.

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P. H. Madore has written for CCN since 2014. Please send breaking news tips or requests for investigation to bitillionaire+phm@gmail.com. He lives in Maine, USA. A single father of four young children, he does not discourage financial donations, provided they do not come with strings attached.