[dnautics]

1) unlikely, since cascading bank runs are usually a result of fractional reserve banking. Depositors in a collapsed bank are unable to pay off loans in another bank, causing collateral damage to this other bank.

2) do other exchanges have security issues? Yes. Are they vulnerable? Only time will tell. I would take Mandelbrot's modeling of insurers (banks are "insurers" of sorts) in "the (Mis)behaviour of markets[0]" to heed: Collapses are levy-distributed with fat tails (infinite variance) so they will happen more frequently than you think, especially if you are operating with a model that uses the normal distribution. Best practice is to diversify.

3) I doubt it. ADDENDUM: But in a rational world this incident (might take a bit of time for the market to realize this) should actually INCREASE confidence in BTC, since a large, irresponsible player was knocked out, and the rest of the players on the field have a net higher level of responsibility (for now).

[0]http://www.overstock.com/Books-Movies-Music-Games/The-Mis-Be...

(I'm linking it via overstock so you can buy it with BTC - which is, hilariously, what I did)

[ryanobjc]

Bitcoin exchanges will have a run - they resemble fractional reserve banking, because all exchanges dont have enough USD (or other currency) to cover every bitcoin that people might want to trade thru the exchanges (that could be every single bitcoin in existence).

This obviously results in the crash of the exchange rates, and probably a reduction in the usage of the currency as well. Getting paid in something that has little use of it's own doesn't help you.

Now, on #3, you said "in a rational world"... But this isn't a rational world, so the rest of this sentence doesn't apply.

The reality is like loss of confidence is very powerful, and it could, as the document noted, destroy BTC for the near and possibly medium term.

[plaguuuuuu]

I thought that the bids/asks were all from individual people

Unless the exchange is taking btc/money from users and investing it somewhere then every btc/$ should be totally within the system, yes?

so you can either withdraw your btc or your $ as the case may be.

[ryanobjc]

That's the problem with mtgox - there was a divorce of BTC and mtgoxBTC account values, and that divergence, due to poor accounting/theft/whatever ultimately lead to a situation where mtgox is now acting like a fractional reserve bank.

In theory everything at mtgox is fine, UNLESS everyone want their real BTC back now, aka bank run. As long as people just trade between mtgoxBTC or only withdraw in reasonable amounts, it might be ok.

But that won't happen, because of the expectation of full BTC convertibility, people are freaking out and wont cease to freak out.

There are so many parallels between the gold-backed currency and bank runs in that era. Just rumors, or facts of insolvency and inability to produce either specie or gold for deposit values could drive a run and that would be that.

All that annoying bank regulation is there for a reason. It's a good thing we don't have bank runs anymore. Right? RIGHT?

[dnautics]

1) agreed, but that run doesn't necessarily cascade to another exchange. If the value of btc collapses and people make a run on it, those other exchanges will likely be able to cover the bid/ask spread in any case because by and large they are merely mediating exchanges of $/btc that other people are holding.

3) the 'rational world' was meant to apply to the rate at which bitcoin recovers. In a rational world it would be instantaneous, we're not. It's certainly possible that bitcoin will go to zero as a result of this, but I treat that as a separate case. If you think that bitcoin will survive in the medium-term, my point is the resulting value should be higher than before Mt Gox. In a 'rational world' everyone would figure this out tomorrow, for certain values of irrationality it takes longer for this to suss out, and for extreme values, it goes to zero too fast.

[jamesaguilar]

An exchange shouldn't be able to have a run, unless their assets are less than their deposits. They don't give you BTC or USD at the spot price. You buy the one you want from another person, and then you withdraw it from the exchange.

[mcv]

Bitcoin and USD are not the same thing. Bitcoin exchanges need to have enough BTC to cover any accounts in BTC. They only need to have USD if they also have accounts in USD, which I suspect they don't.

If nobody wants to exchange your BTC for USD, then the value of the coin collapses, but not the exchange.

[dragonwriter]

> Bitcoin and USD are not the same thing. Bitcoin exchanges need to have enough BTC to cover any accounts in BTC. They only need to have USD if they also have accounts in USD, which I suspect they don't.

If they are going to function effectively as exchanges where BTC can be traded for dollars (which necessarily implies trading dollars for bitcoins), they have to maintain both BTC and USD denominated accounts (which is why, indepedently of the treatment of BTC under applicable laws, they generally are subject to whatever the local equivalent of money service/trasnmitter laws are, because they have to maintain and distribute funds from fiat currency accounts.)