Why is the disappearance of Mt Gox a problem?

I'm sorry if this is a stupid question, I'm not a bitcoin user and may lack important information. My understanding was that each bitcoin user has a wallet on his harddrive or wherever, where he stores his bitcoins with the transaction history proving that they are his. So the system is pretty decentralized. Then why is it such a problem that Mt. Gox disappears? Don't the people losing money have it in their own wallets, if so why?

Edit to add: In case the question was unclear, I was asking for why people lost money with Mt. Gox - not about the wider ramifications like potentially lost trust in *coin etc.

mart

Posted 2014-02-25T12:02:56.830

Reputation: 393

5http://bitcoin.stackexchange.com/questions/2743/pros-and-cons-of-using-mt-gox-as-an-e-wallet?rq=1 contains all I need to know, I think. – mart – 2014-02-25T12:04:39.463

an interesting related question, how could a trading entity like Mt Gox be built such that this type of failure can be mitigated or avoided, or is it possible? what types of safeguards are in place at other exchanges that are superior? – vzn – 2014-02-26T01:55:36.993

The other related question is why so much money rests in Mt Gox, when it's mostly needed as an intermediary. – mart – 2014-02-26T07:35:13.090

Answers

To actually try and answer your question, Mt Gox acted as a trusted middleman in btc trading, and thus had to have control over their users money.

Let's say dude A has a few btc he wants to sell, and dude B has a few dollars he wants to buy btc for. B doesn't want to pay until A sends him the btc, and A doesn't want to send his btc to B until B pays. Unless they trust each other, they can not do business.

By putting money and btc in the hands of a supposedly trustworthy middleman (Mt Gox), A and B can do business. As soon as they agree on the price, the middleman, who has access to both the btc wallet of dude A and the dollar wallet of B, can make sure that both transfers are made, so that each person gets what they agreed on.

So essentially, users had dollar accounts and a btc accounts at Mt Gox, and it is from these that things seem to have gone missing.

As has been pointed out below, it may be that accounts still show the right balance, but Mt Gox doesn't have that money anymore.

gibson

Posted 2014-02-25T12:02:56.830

Reputation: 346

3+1 for explaining why people stored their money with mt. gox – mart – 2014-02-25T20:21:01.287

Well, it's not that money/coins are missing from people's accounts, it's that they don't have access to those accounts. – svick – 2014-02-26T20:44:50.637

So it's roughly the equivalent of Google Wallet or Paypal shutting down? – Mooing Duck – 2014-02-26T21:16:49.993

@svick As I understand the various news stories, Mt Gox dealt with transaction malleability the wrong way (or rather, didn't deal with it at all) and so bitcoins are actually missing from some people's accounts... – Izkata – 2014-02-26T21:21:21.413

@Izkata The way I understand that issue, the coins are missing from the actual Mt. Gox's bitcoin wallet, but not from random people's accounts. That means everyone's account will show the right amount, but Mt. Gox wouldn't be able to pay everyone if they all asked for their coins at once. – svick – 2014-02-26T21:38:50.367

People had bitcoins loaded on Mt.Gox internal trading accounts (trading wallets). This goes both for fiat currency and bitcoins.

Bitcoin withdrawals were shut-down for a few weeks now, which created concepts like "goxbucks" or "goxcoins" as you could not get any Bitcoins out.

Now, the Mt.Gox is closed completely, so you cannot get either fiat currency or Bitcoins out at all. People speculate that they will never get their funds back, as MtGox would have lost these assets they manage for their customers.

Mikko Ohtamaa

Posted 2014-02-25T12:02:56.830

Reputation: 2 417

1"LOST"...hehehe. Pretty sure some guy is now really happy with all that money. And he got away clean, no traces, no nothing. Angry geeks won't assassinate him either. Seriously, best business in 2013-2014 is stealing bitcoin. Even a steal like this gets away. – Apache – 2014-02-27T13:30:47.963

It also shakes confidence in BTC both for the BTC community and the public in general. When I say BTC I am encompassing all other *coin. It is analogous to the failure of a large bank--except without any insurance.

zaph

Posted 2014-02-25T12:02:56.830

Reputation: 651

3Very similar situation happened to online poker when FullTilt Poker got shut down by the FBI and turned out to be insolvent. Players had hundreds of millions of dollars stuck in the site for years. Online poker has not recovered from the scandal to this day. – Emre Kenci – 2014-02-25T15:25:56.383

The short answer to the question is that it is NOT a problem. That is unless you are a Mt Gox customer that had deposits held by them on your behalf - then you probably do consider it a problem.

Mt. Gox in essence is like a bank holding bitcoins on people's behalf. Apparently many of those bitcoins have gone missing and Mt Gox is now insolvent and unable to honor all its liabilities. It is very much like a failing bank in the 1920's.

Assuming that Mt Gox really is done for is a set back for bitcoin and may slow its a adoption but just like the failure of banks in the 1920's did not destroy the dollar neither will this destroy bitcoin.

Shawn Nelson

Posted 2014-02-25T12:02:56.830

Reputation: 11

In answering the question related to a mass panic (for the financial concern: money might have been lost on the trading system if it wasn't stored off of it - same with currency), what was the reaction to US bank failures in 1929? Bitcoin doesn't have as many exchanges as there were banks in the United States in 1929 (to my knowledge), but the reaction to bank failures caused a massive panic and also ended up resulting in the FDIC system. MtGox, for a while, seemed to be leading the pack as far as its price (it was used a lot in places like Preev, for a time to calculate the price of bitcoin), so it would be like the largest bank in 1929 failing. That would scare some people.

Note that this isn't to say bitcoin is in trouble, just that it's a similar scenario to a bank failure and some people respond by abandoning the system.

Question3CPO

Posted 2014-02-25T12:02:56.830

Reputation: 101

5The bank failure of 1929 caused more government regulation and FDIC insurance (which is not free). Bank audits, reserve minimums, etc. But it seems that the Bitcoin community does not want government regulation, it want's to be free of it. It want's anonymity but that means you can't ask to be insured/reimbursed. You can't have both. – zaph – 2014-02-25T16:32:12.277

2@Zaph Agreed; and the hope of those users that want anonymity is that that users who may have lost don't try and ask politicians for help, which would still be limited considering what bitcoin is. – Question3CPO – 2014-02-25T20:24:06.470

The question of what this means has already been answered for the most part. People are dumping their Bitcoins now. This actually makes the US Dollar and other currencies worth slightly more, so if you don't have any crypto currency, don't worry :)

MMMorshu

Posted 2014-02-25T12:02:56.830

Reputation: 11