Why would you keep bitcoin in a "bank" like Mt. Gox?

Factual Questions
1

Quite apart from the dubiousness of allowing a third party that’s not regulated to hold your money for you, why is the reason why Mt. Gox is holding any amount of bitcoin at all?

Isn’t the point of bitcoin that you are not beholden to any third party to transact with any other person? As I understand it, you have a digital “wallet” that contains bitcoin, essentially a collection of code that is cryptographically secure and corresponds with a certain value of scarcity. You transact with another person by that other person verifying that you indeed have sufficient funds (according to your secret codes) and agreeing to provide you with goods and services in exchange for you adding a transaction to those codes (and to the global transaction list) that you transfer certain value to that other person.

So where does Mt. Gox come in to all of this? Why would someone allow Mt. Gox to hold their secret codes?

Is this like how some people let paypal hold balances, trusting that paypal won’t freeze their account or otherwise disappear without paying out? I could see it if Mt. Gox is essential in making a transaction (like how Paypal has to hold your money, if for a moment, while taking it from the other person and giving it to you), but bitcoin was designed not to need an intermediary, no?

2

Well keep in mind some of this may be rounding issues. If you deposit 10 BTC cause you want to withdraw X amount of money - I think they had delays for verifying accounts and such. At which time you may have had more money than you needed and left it there.

From what I’ve read Mt Gox had troubles for quite some time - and people had their money stuck in there while it was worth a LOT less. I mean we are talking less than $20 to around $800 in a year.

Also I think some people (more than some) - were speculating. I suspect that Mt Gox didn’t give you instant access to your coins - so people kept it in there for easy trading.

Also - you needed someone to BUY bitcoins from in the first place (unless you were selling something). And I KNOW that they had delays before they’d give you access to that. Then miraculously people started having problems getting their money out of Mt. Gox. They allowed transfers - so in some cases - just like in a Ponzi scheme - people weren’t alarmed. They’d transfer my BTC to your account if I wanted to buy something from you - but then you might have problems getting it out.

I’m not sure what percent fall under the guesses above.

3

Pretty much. MT Gox was a currency exchange - people weren’t using it for pure Bitcoin transactions, but to convert their Bitcoin to something else. Often there would be a delay between depositing Bitcoin and withdrawing the other currency. Sometimes I guess users would leave the balance there intentionally, though I’m not sure why.

4

It’s also a bit uncertain just how secure an individual’s wallet really is, whereas a large exchange presumably has better security. Hypothetically speaking, of course.

5

It’s possible to create a wallet entirely offline, in which case it is pretty much infinitely secure.* Brute forcing the code needed to withdraw money from a Bitcoin wallet is essentially impossible - the problem arises when coins are held in an online wallet that can be broken into. So there’s no way I would trust Mt Gox or any other online wallet or exchange with a large number of my Bitcoins - I would transfer them to an offline wallet.

*Secure from hackers. An offline wallet needs to be stored somewhere, such as a flash drive or piece of paper, and such items can be stolen, destroyed, or lost, in which case the coins are gone forever. The best suggestion I’ve seen is to put your long-term savings or investment offline wallet on a flash drive and put the flash drive in a safety deposit box. You can still deposit money into a wallet without having access to it with the deposit address, which you can make public without compromising your wallet - it can only be used to put Bitcoins in, not remove them.

6

Surely, the best suggestion would be to make copies of it and put them on multiple flash drives, CDs, and/or pieces of paper, stored in different physical locations.

7

If you want to, go ahead and have faith in something that started out as “Magic the Gathering Online Exchange”.
http://en.wikipedia.org/wiki/Mt._Gox

8

MT Gox never operated as a Magic the Gathering exchange, though that’s what the domain was originally intended for.

It was, however, hopelessly mismanaged.

9

Of course that means there are more copies laying around for someone to find or stumble onto or for you to lose.

10

Yea, “saving a number” doesn’t seem like that hard a problem to solve without having to resort to paying someone to do it for you. Is that really why people use Mt. Gox to store bitcoins?

11

Mt Gox was primarily a currency exchange. People stored Bitcoins there either for convenience (so they could sell them when they wanted without having to transfer them in first - speculators, of which there are many in the Bitcoin market, need to buy and sell constantly), or laziness (they bought them on Mt Gox and never bothered to transfer them out/assumed Mt Gox was safe enough).

Creating a wallet, especially a secure offline wallet, is also a little technical and a lot of casual Bitcoin investors probably don’t want to bother, though of course this doesn’t excuse the people who lost hundreds of coins or more in the Mt Gox collapse.

12

I think it actually makes a lot of sense to keep bitcoin in such an institution in many ways. It turned out not to make sense to keep it in Mt. Gox because they were at best incompetent and possibly thieves, but it’s much easier to see that in hindsight.

I had some bitcoin at Mt. Gox that I assume is gone forever (though it’s not impossible that I’ll get some fraction of it back out of the bankruptcy proceedings).

I could have kept it in a wallet on my computer, but there’s a real risk that I’d screw up my backups, or that I’d lose the key, or that someone would hack my computer to get to it. Those risks exist with 3rd parties like Mt. Gox as well, but the same risks exist for all sorts of internet services. I don’t run my own email server or write my own backup software either. I rely on companies who presumably have much more expertise in those areas. It may have been foolhardy to assume that for such a young company, but, again, much easier to know that in hindsight.

I could have made a paper wallet, printed it out, and put it in a safe place. But how many hours would it have taken me to figure out how to do that, and to confirm to myself that it was actually working, and I basically have to trust that whoever wrote the software that generated it was honest. Yes, I could pull out the source and try to convince myself that it’s secure (not that that would likely do anything. I’m not a cryptographer) and compile it myself and so on, but again, that’s a huge investment of time and it’s not clear I’d be any better off.

For a currency based on lack of trust, bitcoin requires trusting quite a lot of people.

I knew that withdrawals had been problematic with Mt. Gox, but I interpreted that as the fraud-control growing pains of bitcoin. I assumed that it was an issue between Mt. Gox and banks, and since I wasn’t engaged in fraud and I didn’t really care about being able to withdraw money from Mt. Gox, that didn’t dissuade me from using them.

Apparently I should have been reading random bitcoin fora and known that there were many suspicions about Mt. Gox, but honestly, I don’t have the time to devote to that. I think that bitcoin is a cool and interesting new technological and social experiment, and I liked being a part of it, but I only have so many hours to go around. If I spent all that time checking into various bitcoin exchanges (which sounds really boring to me, and I don’t have any good way to determine that I’ve actually done a good job), I wouldn’t have as much time to spend on message boards.

Ultimately, I didn’t risk more than I could afford to lose, so the loss doesn’t have a major effect on me. I knew going into this that there was a very high chance that I would end up taking a complete loss.

13

You know how sometimes someone posts a naive question on some esoteric topic that makes people who have some knowledge about it go :smack: and think ‘fighting this ignorance is going to take a looong time’?

This OP makes me have the exact OPPOSITE reaction. It’s a ‘naive question’ that cuts straight to the heart of the matter and shows that the OP ‘gets it’ in a way that most other people don’t.

You’re quite correct. Bitcoin IS all about storing your money yourself and not trusting a third party to take care of it for you. And everyone who kept money with MtGox for extended periods of time forgot that. And now they’ve been brutally reminded of it.

Now, looking after your own bitcoins DOES require a bit of computer savvyness, and if you don’t know what you’re doing you can destroy your own bitcoins. So one might decide to entrust a third party with them. But we’ve just seen how unsmart that is. It’s basically a question of using the right tool for the right job. Bitcoin is a currency, but there’s more to it than that. It’s a currency that you’re MEANT to take care of yourself. If you store it online, you’re doing it rong.

14

Walrus, I’m sorry to hear of your misfortune, and I didn’t mean to make light of your experience. For what it’s worth, you were and are on my radar as one of the bitcoin posters who knows what they’re talking about. I hope it wasn’t a lot of money.

As for taking the time to learn more stuff: well, there’s only one bitcoin forum I know of, bitcointalk.org. Go join it, read voraciously (if you want to have anything more to do with bitcoins). There’s jerks, trolls and tinfoilers galore, but you soon learn to tune them out.

For storing bitcoins safely and securely, I’ve been using Electrum and am very happy with it. You can generate a 12-word passphrase and then ‘deseed’ the wallet, meaning the private keys (i.e. ability to spend the money) are only stored where that passphrase is stored… on a piece of paper, or even just inside your head! Of course you’d need to plan against having a stroke or somesuch.

15

It wasn’t, and I take no offense.

I’m still in the black on bitcoin as a whole, since I sold most of what I had around last Thanksgiving. What was in Mt. Gox was the remainder, and it really was only what I knew I could see vanish the next day and go “oh well”, since I always knew that it was an absurdly volatile and risky asset.

Fundamentally, I think that bitcoin has some very hard security problems to deal with, and they might end up outweighing some of the benefits. I still think it’s a cool technology with promise, and it will be interesting to see what happens. I’m slightly more bearish on it now than I was (but, then, so’s the rest of the market).

I don’t think I agree that storing it with a 3rd party is definitely wrong. For bitcoin to succeed as a currency, it needs to keep growing its network. Very few people are capable of the kind of security and technical understanding to store and handle bitcoin themselves. So how do you get more people to use bitcoin when they don’t have a trusted way to store it with a 3rd party and they’re not competent to store it themselves?

If your goal is to get some and sit on it until the value goes up, then sure, keep it offline. But the more people who do that, the less likely bitcoin succeeds.

16

This would be me, I started mining just screwing around a couple years back and at various points had as many as 12 bitcoins, and sold them off at $22 each way back when. I still had half a bitcoin laying around in the account from some stray mining client running in my shop. Transferred it to mtgox in late Nov, looked at price…said “holy cow” and sold the .5 coins. Had to authorize a new bank account, that took several weeks, requested a cashout Jan 6th and they were estimating 3-4 weeks to get to it. I was not in a hurry, so I figured when they get to it, they get to it.

Due to some transitions in my business there was alot of money shifting around my accounts, enough so that a $600 deposit might not be obvious, and I had not bothered to check on it. Then comes the news that MtGox was basically shut down…and I went looking, nope, no deposit from MtGox…FML