How and why Mt.Gox should walk away
Mt.Gox is under some serious stress. At the time of writing, prices were as low as $250 USD/BTC (and at time of publication more than $100 lower), in stark contrast to to Coinbase which was at $630 USD/BTC (current $560) and in even starker contrast to the Mt.Gox of a few weeks ago which sat around $1000 USD/BTC. What sane market has such a pronounced spread across exchanges? Mt.Gox is, of course, at fault for the crash.
A glitch in Mt.Gox’s internal implementation of the Bitcoin protocol called “Transaction Malleability” would have allowed for some pretty nasty hacking and theft of Bitcoin (effectively making it appear like Bitcoin had never been sent when they had been). This threat was met (appropriately) with an immediate freeze on Bitcoin withdrawal. However, this freeze came amidst a period of low fiat liquidity, which was already driving Mt. Gox’s prices higher than any other exchange. Now that Mt. Gox has no liquidity whatsoever, the prices have been forced artificially low by panicked sellers.
I have no faith that Mt.Gox will be able to recover it’s business by repairing this glitch. As soon as Bitcoin withdrawals resume, people will pull their funds out (except for the sorry few who are in fiat and unable to withdraw — they may want to wait until prices normalize with respect to other exchanges to buy and transfer, depending on how much they distrust Mt.Gox at this point).
Simply put, the Mt.Gox trusted name brand is ruined — as it should be. Although Mt.Gox was one of the first to the table, there are new players around, whose exchanges weren’t built to trade Magic Cards, but to quickly and accurately trade crypto and fiat currencies. At this point it would be foolish to trust Mt.Gox’s tech stack. I might also expect a high proportion of Mt.Gox users to opt for the old fashioned way — encrypted personal wallets until the dust settles.
Mt.Gox does still have one large egg in their basket, which is their Bitcoin. Whatever fiat they hold is likely less valuable, because Bitcoin are much more scarce & thus any attempt to acquire an amount on the scale they own would skyrocket prices.
Unless rumors (or rather, wild speculations) of a large theft of their wallets are true, they
still have massive Bitcoin assets. This is Mt.Gox’s remaining leverage. Even though prior to this event Mt.Gox was naturally on a decline, their competitors are still hungry to eat whatever share of the market they can. Inevitably, Mt.Gox will die. However, because they still hold the Bitcoin, they wield the power to choose their own death.
Rather than allow the competitors to win in a free market scenario by flipping the switch on withdrawals, Mt.Gox should tap a successor to which it will transfer all holdings. This successor exchange will face many tough problems in figuring out how to manage a sudden massive influx of users and transaction, but this is a good problem to have. The sudden increase in users and transaction could drive them to be the top Bitcoin exchange.
So how does Mt.Gox tap this successor? Compare protocols & select the most robust?
No.
In order to save their skins and walk away with something in pocket, Mt.Gox should perform the world’s first* Bitcoin Exchange merger.
To ensure that their current users will actually be able to use & withdraw their Bitcoin, bidding must be open only to exchanges which meet certain technical and legal qualifications.**
Mt.Gox should run their merger one of three ways to select their successor:
1) Sell their holdings for a fixed sum to the highest bidder
2) Auction a contract to the highest bidder for a percentage of their future trades
3) Some combination of 1) and 2)
By running it this way, they restore confidence in their users that none of their rotten code is protecting their financial assets.
If Mt.Gox fails to follow a path similar to what I have described, they will leave their fate to the crowd and disintegrate. The strategy outlined above provides a graceful exit from Mt.Gox’s technical misconduct.
* If my research is correct
**If there exists a blockage in the terms of service, it could be made an opt-out to normal wallet pattern to avoid the legal mess.
