This demonstrates perhaps the largest real threat to the bitcoin ecosystem right now: the exchange markets are heavily concentrated. Confidence in the system is, right now, heavily based on the perception that Bitcoins can be traded readily for something (pizza, drugs, dollars, quatloos...). Anything that alters that perception will, of course, have a big effect on the price.
In fact, exchange risk could lead to something akin to a bank run - the exchanges only keep a small reserve of national currencies and Bitcoins to handle orders and are essentially acting as market makers. But a big swing in the demand for either Bitcoin or real currencies could push the exchanges into a tight spot. If they don't have enough Bitcoin, obviously, the price rises until the demand for Bitcoin subsides. But if they don't have enough (say) dollars, then the price must fall. And there's a natural death spiral: as the price falls, particularly after such a big run up as has happened recently, people might suddenly decide that it's time to get out. But that only increases the demand for (scarce) dollars. And so the value collapses.
Here's the real Bitcoin security question: can someone precipitate this situation? Maybe someone who benefits from a collapse of the Bitcoin price (say a law enforcement agency that wants to affect the Silk Road business or, if you don't like that, then say any entity with a significant short position on Bitcoin exchange markets). This is not a question I've seen previously addressed in Bitcoin literature or even musings on the various Bitcoin forums. It's a security economics question. I'm interested in the answer.
By the way, my current favorite term for such a situation is the "Goldfinger attack" on the theory that while Goldfinger wanted to steal the gold from Ft. Knox (in the novel version), such an adversary wants to invalidate the coins in Mt. Gox.
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This demonstrates perhaps the largest real threat to the bitcoin ecosystem right now: the exchange markets are heavily concentrated. Confidence in the system is, right now, heavily based on the perception that Bitcoins can be traded readily for something (pizza, drugs, dollars, quatloos...). Anything that alters that perception will, of course, have a big effect on the price.
In fact, exchange risk could lead to something akin to a bank run - the exchanges only keep a small reserve of national currencies and Bitcoins to handle orders and are essentially acting as market makers. But a big swing in the demand for either Bitcoin or real currencies could push the exchanges into a tight spot. If they don't have enough Bitcoin, obviously, the price rises until the demand for Bitcoin subsides. But if they don't have enough (say) dollars, then the price must fall. And there's a natural death spiral: as the price falls, particularly after such a big run up as has happened recently, people might suddenly decide that it's time to get out. But that only increases the demand for (scarce) dollars. And so the value collapses.
Here's the real Bitcoin security question: can someone precipitate this situation? Maybe someone who benefits from a collapse of the Bitcoin price (say a law enforcement agency that wants to affect the Silk Road business or, if you don't like that, then say any entity with a significant short position on Bitcoin exchange markets). This is not a question I've seen previously addressed in Bitcoin literature or even musings on the various Bitcoin forums. It's a security economics question. I'm interested in the answer.
By the way, my current favorite term for such a situation is the "Goldfinger attack" on the theory that while Goldfinger wanted to steal the gold from Ft. Knox (in the novel version), such an adversary wants to invalidate the coins in Mt. Gox.
AFAIK MtGox is NOT a market maker but merely an order book.