The Bitcoin crash

The Bitcoin community faced another crisis on Sunday afternoon as the price of the currency on the most popular exchange, Mt.Gox, fell from $17 to pennies in a matter of minutes. Trading was quickly suspended and visitors to the home page were redirected to a statement blaming the crash on a compromised user account. Mt.Gox’s Mark Karpeles said that the exchange would be taken offline to give administrators time to roll back the suspect transactions.

The article is here, a video is here, more articles here, with general background on Bitcoin volatility here.  The pointer comes from Ken Haskell.

File under Prophets of the Marginal Revolution.


They'll bring it back to $17 in a few days. But why am I thinking of BCCI?

the vast majority of trades weren't realized.

Currently the exchange rate is back to ฿1 = $17.5.

If only other currency crises were over so fast.

Only because the exchange has said they are going to reset the price back to $17.5

If only currency controllers could arbitrarily declare the currency value that the market should be trading at.

If the price is fake are the volumes tiny?

This sounds really suspect. How in the world can this one exchange just "reset" the price? Please give some data here.

They can't. What they're doing is reversing trades until before the compromised account was used to crash the exchange. At that time bitcoin was trading at $17.50, but anyone still using the exchange when it starts up can enter orders at whatever price they choose.

This is a failure of a specific market website, not the currency itself, and it could happen to any asset exchange site of any kind (although this site was probably a lot less secure than, say, Paypal).

Bitcoin is silly in many ways (although it may have a niche in illicit transactions), but surely Marginal Revolution does not object to private and unregulated asset trading websites?

They say that it will return to 17.5, but what happens when trading resumes? It will be interesting to watch when the market opens... gotta believe there will be some panic selling.

Tradehill was around 13 before it was also shut down. I think that was people thinking they could arbitrage 1 cent coins for 13 bucks.

Fortunately the maximum cash out allowed in a day is $1000 or 80 BTC.

If this is all that can happen when someone gains control of what seems to be the largest mtgox account in existence, it seems pretty tame. I know if I got the passwords for Goldman Sachs there would be quite a bit more havoc to be had.

A genuine crash or a compromised user account: does it really matter? Either possibility seems fatal to the system.

Well, that's the question. Bitcoin had never faced a really serious confidence crisis. Now it has. This might end it, or it might show resilience.

This doesn't sound like a confidence crisis. This sounds like one trader blowing through the book with a single trade.

I guess the same thing would happen if someone got Bill Gates's E-Trade password and tried to sell all of his MSFT stock at once.

PS. His password is 123456.

"got the passwords for Goldman Sachs there would be quite a bit more havoc to be had"

Except most (all?) of their brokerage accounts go through the kind of exchanges where transactions can be unwound when illegal activity is detected. Your best way to make money from that kind of hack would be to short unrelated stuff and profit from the general market dip that would be caused by the revelation of the hack.

(I'm suprised this hasn't happened already; probably it already has and in the absence of an annoucement by the hackers has been effectively kept secret)

Sounds like a technical issue rather than a fundamental market flaw.

If a technical issue can cause such a drastic collapse of the market, is not this itself a fundamental market flaw?

Dan nails it.

Dan nails it? So your argument was confused from the beginning? (See the other replies for the explanation you dearly need.)

I wouldn't say that size of the market is a fundamental market flaw. It is a parameter, but not a fixed parameter. Size can change, and when it does, then individual exchanges might lack this type of power (Bitcoin: to big to fail?)

But the market as a whole didn't collapse, it was just one exchange. The other exchanges and over the counter dealers didn't start dumping their bitcoin for a penny each.

According to Wikipedia, during the 2010 flash crash of US equity markets in 2010 "...The stocks of eight major companies in the S&P 500 fell to one cent per share for a short time, including Accenture, CenterPoint Energy and Exelon; while other stocks, including Sotheby's, Apple, and Hewlett-Packard, increased in value to over $100,000 in price..."

The flash crash in 2010 lead to some additional circuit breakers. From what I understand, Mt. Gox will be instituting circuit breakers as well.

Again, still not sure if Bitcoin has any staying power, but a Bitcoin (or digital currency) optimist would file this under growing pains.

Comparisons between this incident and the 2010 flash crash miss one critical point - US equities, even blue-chip stocks, are not a currency. The market can tolerate wide swings in stock price, because e.g. nobody is taking home a salary denominated in "shares of Hewlett-Packard" and wondering whether that will cover the rent that is due this Friday. A currency has to be a reasonably stable store of value, or it will fail. And for all the criticism of the fiat-money US dollar and the greedy incompetent bankers who administer it, the number of dollars required to rent an apartment or buy a meal hasn't changed by more than a factor of two or so over the past business cycle.

A larger Bitcoin economy would presumably be less susceptible to this sort of manipulation, but it's going to take a lot of growth to get from here (losing 99.9+% of bitcoin value in a flash) to there (stable to within a factor of two), and the volatility here and now will tend to scare off the customers necessary for that growth. The Bitcoin model seems to be based on the assumption that Bitcoins will be the default currency for a sizeable economy, such that demand for bitcoins will be equal to demand for money. In the transitional period where bitcoins coexist with another currency, and especially in the early transitional period where bitcoins are the minority currency, bitcoin demand will be highly volatile and, I suspect, ultimately unstable.

If that is the case, hackers exploiting weak security will just crash the bitcoin economy a little bit sooner than legitimate currency speculators would have.


"US Equities are not a currency"? You mean, you've chosen to label them as not a currency? Can I get around this argument by calling bitcoin "not a currency"? How about you look at the substance, rather than the symbols. Bitcoin *and* stocks are used (infrequently) to buy things: yes, people sometimes trade stocks directly for some good, like labor.

"nobody is taking home a salary denominated in 'shares of Hewlett-Packard'"

Nobody is paid in stock or stock options?

"A currency has to be a reasonably stable store of value, or it will fail. "

But not the immediate wake of its release -- they have to get past the chicken and egg problem. Gold was probably very volatile before it became a currency. So are most niche currencies before they gain broader acceptance.

My point was not about bitcoin's viability as a currency. As I've mentioned elsewhere, and where I explicitly agree with Tyler, bitcoin is behaving as an asset. My point was 1) even a large mature robust market like US equities is proven to be vulnerable to a flash crash and 2) that if you're going to call the Mt Gox-hack-induced flash crash a market failure, then it would seem fair to call the flash crash of US Equities a market failure. Maybe Dan and Tyler would indeed call the 2010 flash crash a market failure. I don't know.


Stocks have a fundamental claim on the equity of a company. Currencies have no such fundamental claim, at least fiat currencies don't. Even if you consider dollars worthless, Accenture's stock still had confidence after the flash crash because the stocks were fundamental claims on the dollars from their future earnings. It was fundamentally worth much more than one cent.

What is bitcoin fundamentally worth? Without venders accepting it, it's worth nothing. The same's true for the dollar, but the dollar also has a pretty big headstart.

While I agree Bitcoin is not a stable currency right now, I think that saying "...nobody is taking home a salary denominated in “shares of Hewlett-Packard” and wondering whether that will cover the rent that is due this Friday ..." is a poor analogy because people are in fact compensated via stock. Employees at Bear Stearns, Lehman, Enron, etc may not have missed their next month's rent, but their financial situation was most certainly affected by the volatility of their compensation medium.

Follwoing up, yes bitcoin is not a stable currency. It is not really an equity either, as it has no legal claim on another tangible asset. It's also not like a tulip, because it's not pretty to look at (although opinions may vary on this one). Is it sui generis? I won't go that far, but it sure is fun to watch!

Also, your point, John, about currency manipulators is well taken. If bitcoin could outgrow the hackers, it will face another formidable obstacle in Wall Street. Will we see the day where Goldman is selling Bitcoin derivatives? How will the "fanboys" react when the most cunning finance minds start screwing with them? And what about the people who will say "I remember when Bitcoin used to be cool, now my f-ing grandma uses them".



My point was that your argument shouldn't depend on whether you call something "a currency" or not, but the argument I replied to was. How is your comment responsive to that specific point?

Did you know?...

Something can be be both "a claim on a company", and used as currency!

Try to make your replies relevant so they don't waste my time.

And can I please take my emoticon back. I now feel shame for having used it.


Yes, people can get paid in stocks. They could also use tulips, barrels of oil or pants. Cigarettes recently fell out of favor to Sardines as the prevailing jailhouse stock.

In any case, my point was that comparing the Bitcoin crash to the flash crash was not comparing Apples to Oranges. Accenture employees may get paid sometimes in Accenture stock, but the stock also has a claim on the company. Barrels of oil have intrinsic value as being useful.

Neither bitcoins or dollars have fundamental value backing them. They're both basically Ponzi schemes which fail when others do not place value. You can hold Accenture stock forever and receive dividends. If you hold bitcoins forever, they'll earn nothing of value just sitting there. Currencies are only useful as a store of value and due to inherent currency risks of businesses having to take two currencies, there is a extremely strong advantage to the incumbent.


You'll look kind of silly simultaneously labeling these things as "coins" and "not a currency", but have at it. A currency, by definition, is a generally accepted medium of exchange - infrequent uses and irregular transactions don't count. Neither stocks nor bitcoins are presently currencies, but bitcoins clearly want to be when they grow up. And if they don't grow up to be a currency, it's hard to see a point (or a source of enduring demand, to prop up the value).

And yes, currencies do have to be reasonably stable even in the immediate wake of their release, or they fail. Gold and silver became currencies in large part of their preexisting stable value, due to stable supply and demand in the decorative goods market, not the other way around. I'm not sure what "niche currencies" you are referring to, but I can't think of any currency that has suffered even one order of magnitude inflation or deflation in its first few years and endured.

Most successful new currencies, in fact, get their start by pegging their value to a preexisting currency or commodity with enduring stable value, and piggyback on that stability until they gain broader acceptance. The United States Dollar, for example, was defined as 24.1 grams of pure silver from the outset. Figuring out how to do something like that, with a completely decentralized digital currency, will be a neat trick.

I stopped reading when it was clear you were going to base the substance of your argument on definitions of words. Not productive.

By the way, here is their understanding of what happened:

"One account with a lot of coins was compromised and whoever stole it (using a HK based IP to login) first sold all the coins in there, to buy those again just after, and then tried to withdraw the coins."

Seems to me that, other than the hacking of the account itself, these were perfectly valid transactions. And yet, the actions of this one account completely destroyed the market.

Forgot the link:

Burying the corpse is difficult in any market.

Yup, just went down the tiny bid side of the order book like I thought. When was the last time somebody hacked a PayPal account, converted all the accounts dollars to Yen, and forced the dollar to lose 99% of it's value?

I give Bitcoin a week before it goes down it's bid order book for good and the currencies worthless.

Ready to bet real money on that, or were those just words?

They're just words, because speculating on when bubbles pop is tough to impossible. Why did the Tech bubble last until 2000? Why not 1998 or 1999? That's when the last bit of dumb money went into Tech stocks. Predicting the last bit of dumb money is very tough.

Like tech stocks in 1998, bitcoins are fundamentally doomed to fail eventually. Currencies are a natural monopoly because retailers do not want to continually set two prices.

In a real market too, the crash In bitcoins would have happened already. It doesn't matter if the large sell order was due to a hacked account. Fact is just one large sell order went down the entire bid side of the order book. That tells me the dumb money won't last much longer, maybe a week, maybe a couple of months, but bitcoins will crash.

So you're not actually confident Bitcoin will be gone in a week, you were just posturing. I wish you would have made that clear sooner, but then, why would anyone read your posts?

Hmm. If the currency is capable of flash crashes with some authority nullifying trades - even if just on a particular site and because of unscrupulous activity - Bitcoin does seem to lose some of its gleam, doesn't it? I wonder if part of the problem is that the very nature of Bitcoin gives it a selective bias toward attracting users who are hackers or given to those kinds of unscrupulous activity...

selective bias? I guess you could call it that. Because it is inherently a technological project (among other things), it is going to be on the radar of the tech savvy first. Those with nefarious intent and technical skill are understandably attracted to a young technology that drives a (at present) $100+ million market. There was also a Bitcoin stealing trojan malware found in the wild a week ago. I get the sense that these attacks are the proverbial low-hanging fruit of cyber crime right now.

Bitcoins just suffered a very large sell order. Nothing more than that made the crash happen.

In real currency markets, if somebody suddenly sells a lot of dollars for Yen, the markets are liquid enough to take the sell order without reducing the price of dollars too much. If the hacked account really wanted to sell his entire collection of bitcoins though, the market did not have nearly enough liquidity. Why would any retailer in their right mind take an illiquid currency over a liquid currency? They won't and bitcoins will be worthless for just that reason.

No, moron, bitcoin just suffered the compromise of the biggest exchange. The hacker(s), since they don't own the account, tried to sell it all off, and then the market had to shut down to control and stop the attack.

And yes, more mature markets are more resistant to large sell orders. So, any new currency must be instantly mature or you dismiss it entirely? Huh?

Assuming this is the result of the reported theft-via-hack of ~$500K worth of bitcoins, it's not surprising that the exchange rate would crash in response to someone trying to unload them all at once. I think the response is ham-handed... seems like they should have let the price recover normally and allow those who bought at pennies to enjoy their windfall (if that's what it turns out to be). It's not even like the low price was outside the historical range of bitcoin versus dollar exchange rates.
It's funny that someone clever enough to hack an account would be clumsy enough to try to extract the value so suddenly. But I suppose that hacking an account may have more to do with opportunity than smarts, and anyway they might have felt that drawing out the process would allow them to be tracked down.

It’s funny that someone clever enough to hack an account would be clumsy enough to try to extract the value so suddenly.It’s funny that someone clever enough to hack an account would be clumsy enough to try to extract the value so suddenly.

Perhaps their intention was to discredit bitcoins.

To limit damage from breaches, the site limits withdrawals to $1k USD per day or $10k USD per month sum total in either USD or bitcoin unless users opt out. Details are sketchy and there are incentives to lie. But here is the story: Account had 280k bitcoin valued at a spot price of 17.5 USD per coin or ~5 million USD. Hacker needs to find a way to remove the money without exceeding the withdrawal limit. Hacker hopes that the bitcoin withdrawal limit is set based on the bitcoin spot price. Accordingly, hacker uses a portion of the money to engineer the flash crash and withdraws the other portion in bitcoin. Unresolved question: Was the limit based on the spot price or was the limit based on a weighted average of prices?

Limit was based on 24 hour average. So the technique was fairly smart, but didn't appear to work. Perhaps. Given the sophistication I would have expected them to try this first.

But if it didn't work, it appeared they spend $2500 to buy the 2.5 million coins, but only got out with $1000.

So what happened is that they swamped the site with sell orders from their hacked accounts which they cleaned up with buy orders also presumably from hacked accounts, until the price was at $0.01 and then bought the 2.5 million coins with their $2500 of real money. But they couldn't get out fast enough.

So basically this hack looks like a failure at this point.

So basically this hack looks like a failure at this point.

It failed if their intention was to make a lot of money.

It may have succeeded if the intention was to discredit bitcoins. They didn't pay a whole lot of money to make a great big media splash with a whole lot of people happy to try to make bitcoins look bad.

So someone lost $1500 to make bitcoins look bad??

That's quite a grudge...

Must be George Soros right?

That's chump change for, say, the DEA. Or the FBI.

Anybody who has an interest in getting rid of anonymous money that doesn't require face-to-face, who's on somebody else's budget.

Rule #2 of internet arguments: When in doubt, go to the unfalsifiable "blame the CIA" claim.

JK, agreed it's unfalsifiable.

So far we have two hypotheses. Maybe it was thieves who hoped to make a lot of money but instead presumably lost.

Or maybe it was somebody who wanted to discredit bitcoins, and who found a very cheap way to do so.

I haven't heard a third option. I want to make sure the first two possibilities are both considered. In the absence of evidence, both seem plausible to me.

"The Bitcoin system is robustly designed to continue past the collapse of the US dollar and the world economy, as the Internet, fast computers and reliable electricity are all expected to be readily available when barbarian hordes are wandering the burnt-out post-apocalyptic remnants of civilization."

Some days, it's almost as if all my knowledge of economics and game theory didn't apply to real life.

Wow, another uninformed comment. To the extent that you were making a serious point, it's wrong. You can still transfer and accept bitcoins. You can still exchange bitcons for money. You just can't do it through the highest volume exchange.

Again, which tenet of economics and game theory did bitcoin just get flat-footedly smacked upside the head with?

The coverage of this event has generally been wildly irresponsible, with this blog unfortunately being no exception.

I'm more than a bit torn on this. My instinct was to say, "okay, I was wrong, the whole thing sucks". But we had a flash crash in the Dow last year, too.

It now appears that Mt Gox security is significantly below PayPal. In and of itself, that is not a huge thing. But when combined with the fact essentially every issuer of fiat currency is motivated to discredit the idea of a voluntary currency, and that the amount of motivation is directly relative to how poorly the fiat currency is managed multiplied by the size of the voluntary currency market, we have serious, serious issues.

To go a step further, I seem to remember voluntary currencies being discussed on the cypherpunks mailserve. After the first proof of concepts, the anonymizing remailers were designed to withstand the concerted attack of a major government. It seems to me idiotic that a voluntary currency would not be similarly designed.

@ladderFF why would this blog be an exception? Tyler has kicked into full spin mode.

Sorry fanboys, the analogy that any other currency has its ups and downs is getting weaker, unless the Zibabwean dollar is what you are striving toward. Curious to see if MTGOX has enough capital and liquidity to cover such a large call. They certainly won't open their books any time soon. But in the true anarcho-libertarian fashion the community will police itself right? Bitcoin, the linux of the currency market!

markets are up and trading again: mtgox will return tomorrow with account re-verification procedures. this does nothing to threaten bitcoins viability as a currency and has only led to strengthened security all around.

I guess the suckers think its a good time to buy now. Oh, I forgot, the exchange was centrally reset.

Fun fact: Until recently, MtGox stood for "Magic the Gathering online exchange."

Would this approach work better if a government with a government's resources issued bitcoins?

There's nothing preventing a government from doing that, if they chose to.

I can see that governments would in general not be interested in money that could be exchanged anonymously, but could there be some other advantage to a government from this sort of currency?

I'm sorry, Tyler, which specific prediction of yours came true?

It seems a lot of charlatans are claiming vindication from this, despite not really understanding what happened. This is a bitcoin *dealer* that was compromised, not the bitcoin protocol. The arguments are like saying, "I was totally right that buying stuff online is infeasible, because ebay was compromised in '98." Um, no.

New ventures, currencies, stocks, etc. are volatile until more widely accepted and traded. Big surprise.

Maybe Tyler should offer to short Bitcoins. Sign a contract to accept $100 in exchange for 100 Bitcoins on January 1st, 2015.

Sounds like free money. Bryan Caplan would approve.

If anyone is interested in such a wager, I'd be willing to bet in favor of Bitcoin as well. There's been too much BS and nice cheap words here... if you're so certain Bitcoin is a ponzi/bubble/whatever, put your money where your mouth is. Email me if interested.

One of the major criticisms of the Bitcoins is that they are too volatile to function as a store of value. Asking someone to short Bitcoins is asking them to bet against volatility as well. Naked shorting is risky in almost any commodity.

True. I wouldn't take either side of the bet. But I'm not saying they're gonna take over the world or languish into a predictable doom, either.

You may purchase the BTC with which to pay me at any time during the bet. Surely the volatility will offer you a great bargain by then. Any fair bet is risky.

With a solid base of believers, what will stop another exchange from saying, "hey, not fair!" and press the reset button again? So if an exchange is powerful enough, they can dictate the rate? Sounds familiar to me...

@Vik: They can only dictate the opening rate. Soon after opening, MtGox will offer similar prices to the other exchanges. MtGox is reimbursing everyone who was hacked, so their ability to manipulate the market is limited by how much money they're willing to lose.

Vik seriously doesn't understand what's going on, despite multiple people explaining it to him. He thinks Mt Gox runs Bitcoin.

Now, they probably did have far too much of the market going through their books, and people have complained about that before, but not enough to start up other exchanges. That's probably gonna change now.

The issue is nobody will take that bet if the upside is limited at 100 dollars, with unlimited downside if somehow the bubble keeps going on. A lot of shortsellers were wiped out during the tech boom from margin calls and short squeezes.

Now, if it was possible in BTC to buy put options, structure a bear spread or cover shorts with calls, I would love a 100 of those bets with out-of-the-money calls covering. That's the whole issue with the BTC market though: lack of liquidity.

No, you're just posturing again. You'll rescind once anyone makes such an offer.

That assumes a seventeenfold drop, an absurd margin to expect from a call option.

How about this: you lend me 100 Bitcoins today in exchange for my paying you 110 Bitcoins on July 1, 2012?

I'd really just like a falsifiable prediction.

Saying "it's gonna all collapse . . . some day" isn't very edifying. There's also folks who think that the USD is gonna become worthless any day now.

How do you think Tyler can sit on his ass all day and eat out everyday?

He's a rent-seeker, remember. He doesn't have to actually do anything and test himself against reality. He can just pontificate from his protected position of authority.


Tyler = Tool

I think I'm starting to understand the logic . . .

When hackers broke into the European Exchange for Carbon Credits they should have realized the whole thing was a fundamentally unsound idea and shut it down.

When Sony's servers crashed they should have pulled all PlayStations permanently - just a bad idea from the get go.

When the Social Security computers "blinked" and started re-issuing check previously printed someone smarter than us should have stepped in and said, "told you it was a bad idea - shut her down".

Took me awhile, but now I'm in total agreement. If it has a glitch, throw it in the ditch.

This is culture clash between cs and econo types.

very edifying.

Economist: This idea is inherently flawed. It can't work.
CS: So is Wikipedia. Keep adding kluges until it's good enough!

1. Steal bitcoins
2. Sell bitcoins in such volume to crash the market
3. Buy bitcoins on open market at depressed levels and therefore maintain anon
4. Sell bitcoins once they bounce back

And then fall out of your chair when the exchange rolls everything back.

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