Clearing $123, prices of bitcoins on MtGox are at their highest level since June 4th, and have rebounded from a low of nearly $65 on July 5th. During August itself, MtGox prices are over $20 above their $101 lows from less than two weeks ago.
On the surface, it appears that bitcoin is experiencing another period of demand, as prices are moving steadily higher. Taking a closer look, the action at MtGox isn’t nearly being mimicked at rival exchanges. Although the entire market has recovered from July’s swoon, prices have more or less been range bound during August. As seen below, current prices at Bitstamp are currently at the top end of the range. They have moved higher the last few days, but still nothing like at MtGox.
As of writing time, your bitcoins are worth $121 at MtGox but only $103 at Bitstamp, or even $100 at BTC-E. So what’s driving the $20 or so spread? (for an aggregated spread, take a look at Bitcoin Analytics)
As written about in the past, MtGox is currently struggling to process USD withdrawals. While never known for its lightning quick support, issues have begun to unravel over the past few months. First was news that CoinLab, its US partner was suing for breach of contract. Next came word that their US based account that was linked with Dwolla had been seized by the Department of Homeland Security (DHS), thus locking them out of the easiest option for US account holders to transfer dollars to and from MtGox. The company then followed this with an announcement that it was temporarily halting USD withdrawals. Since then, they have stated that account holders can withdraw dollars, but delays exist.
Will all the issues taking place, its no surprise that there has been a rise of MtGox account holders with dollars at the company, seeking to withdraw. At this point, customers have two options; file a withdrawal request and wait, or exchange their dollars for bitcoins and transfer them out. Once transferred, bitcoin holders can freely exchange them for dollars at other exchanges with more efficient withdrawal practices.
With spreads hitting all time highs between the price of bitcoins on MtGox and rival exchanges, it appears that customers are electing to choose the latter option. As such, the current state of affairs is that MtGox clients are willing to pay a sharp premium to buy bitcoins on the exchange, just to get their money out of their.
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On the other side, bitcoin owners, or traders at other exchanges have the opportunity to open MtGox accounts and transfer their bitcoins to the exchange and sell them for over $121. With the ability to buy for $103 and sell at $121, this has created a 17.5% arbitrage oppurtunity. Assuming even a one month waiting period for withdrawals, this calculates to over a 200% annual yield. In essence, bitcoin owners willing to provide liquidity into MtGox are being paid (and paid well) to wait. (Not taken into account, but critical to executing this trade are the waiting periods between transferring bitcoins to MtGox and their entry into customer accounts)
Outsized borrowing costs aren’t rare in bitcoins. Bitfinex, operators of the first bitcoin leveraged trading platform provide traders the ability to buy on margin or short bitcoins. Such trades involve account holders borrowing bitcoins from other customers that become lenders. Effective APRs are routinely above 50% for such loans. However, the sharp rise of spreads at MtGox, has taken it to another level.
Adding to concerns among MtGox are liquidity worries as court documents of the DHS seizure show $2.9 million was being held in that account. As mentioned above, the seizure was later met by the company halting withdrawals. Based on the reaction of the market, customers paying $20 premiums for bitcoin on MtGox are in essence relaying that they aren’t taking any chances with firm anymore. Similar to distressed bonds, where yields fly higher on worries that a company can’t pay back its debts, such panic appears to be clearly affecting MtGox.
Is MtGox really being hit with a cash drain, and are customers at risk of losing funds? Probably not.
Reports about them are that they have strong relationships with their Japanese banking partners as well as access to capital. In addition, being the dominant bitcoin exchange during the first half of 2013 has allowed them to capitalize on surging prices and volumes as they collected fees on these trades. However, at this point, they are also increasing staff to handle support and account flow as well as dealing with judicial expenses from being sued by CoinLab and working with the DHS.
Time will tell whether the current arbitrage situation is the ‘Trade of the Year’ or the beginning of the end for MtGox.