[dragonwriter]

> Exchanges aren't investments; users aren't promised returns, they in fact expect that the chance of loss is high.

They expect the chance of trading losses is high, they don't expect that the loss of balances on account is high (in fact, they are generally promised that, except for specified transaction fees, such accounts will retain their value.)

There's a slight difference from what goes on in a traditional Ponzi scheme in that the former promises a positive return which is only met for as long as external funds come in to cover the returns (plus the funds being extracted by the fraudster) where the suggestion about Mt. Gox is that their Bitcoin accounts were promising a zero return, which could only be met for as long as external funds were coming in to cover the BTC being stolen. Which isn't strictly the same thing as a traditional Ponzi scheme, but is a very closely related form of fraud.

Note that I'm not saying this is what happened at Gox -- I have no way of knowing that. But what has been suggested is very much like a Ponzi scheme.

[gnaritas]

That's not a slight difference, that's a fundamental difference. Lacking a promise of a positive return and lacking a fake investment opportunity, no fraud can be classified as a Ponzi; it's simply fraud or theft. There's absolutely nothing Ponzi like about this Gox situation; nothing. Ponzi's require both of those elements, they are the definition of what a Ponzi is.

From Google:

Ponzi Scheme: a form of fraud in which belief in the success of a nonexistent enterprise (the definition) is fostered(i.e. the mechanism) by the payment of quick returns to the first investors from money invested by later investors.

Many valid things use the mechanism of new money paying out earlier investors; that alone is meaningless and not a defining trait of Ponzi's. All insurance also does this. A ponzi is literally "a form of fraud carried out by the belief in the success of a nonexistent enterprise"; that's it.

[Klinky]

MtGox was usually advertising the highest exchange value for Bitcoins, and it most recently was advertising fire sale level exchange rates on Bitcoins.

Once they severely restricted/shut off withdrawals, they were no longer an "exchange". People were no longer investing in Bitcoins facilitated through an exchange, they were investing in the exchange allowing withdrawals and making good on the promised high Bitcoin to USD values or low USD to Bitcoin values. All the time they were telling people it was a technical problem and they would make good on transactions. Given how insolvent they were, this had probably been going on for a significant amount of time or they just never had intentions of making good. Allowing deposits to continue despite the issues they faced was unscrupulous, and I believe it was likely a way for them to try to collect capital to make good on the "top of the line" and "bottom of the barrel" exchange rates that they had promised their customers, which they simply could never fulfill.

[gnaritas]

Yes, fraud is likely, no one is disputing that. Fraud != Ponzi scheme.

[Klinky]

MtGox was not a normal exchange. The MtGox Bitcoin was essentially a separate entity from a regular Bitcoin. The MtGox Bitcoin was offering higher than normal rates of return. This encouraged investors to pump in new capital, which was used to cover previous expenses MtGox had accrued. They then would pick and choose who they would allow to cashout at a high rate of return to keep the ruse going for an extended period of time, while making excuses to others. This worked until the Ponzi scheme imploded. I know you don't like that word for MtGox, but the fact that it may have been a legitimate exchange at one point does not prevent it from turning into a Ponzi scheme at a later date.

Perfect example of the mentality of a new investor at MtGox can be found on this reddit comment: http://www.reddit.com/r/Bitcoin/comments/1yw9vj/how_i_nearly...

I'll admit that not all the facts are known, and my conclusion above is essentially hypothetical based on the information known at this time. Perhaps when if we ever get access to internal communications within MtGox, we'll know the truth. Even pleading incompetence does not mean that the operators weren't unknowingly running a Ponzi scheme.