When You Buy Bitcoins, Make Certain They’re Genuine
While this author is VERY dedicated to the success of Bitcoin and the benefits it will bring, there is a very real risk invovled in using MtGox.com.
In short, while you may think you are buying Bitcoins on MtGox – and that once you’ve made your purchase you are then the owner of the Bitcoins you’ve just bought – this is an incorrect assumption.
Just because you’ve “bought” some Bitcoins using the exchange at Mtgox.com, does not mean that you own any Bitcoins at all.
This author queried Mtgox.com regarding this issue using the support desk provided by MtGox.com. All of the evidence of the above claims have been provided by Mtgox itself, in the form of answers to questions submitted to the MtGox support desk.
Before I explain my questions and the responses from MtGox, it is important to define exactly what a genuine Bitcoin is.
A genuine Bitcoin is a digital, encrypted unit of currency that has been issued by the Bitcoin network, collectively verified as genuine by the network, and the record of such is part of the network’s ledger. The ledger, which is also called the block chain, “is a shared public transaction log on which the entire Bitcoin network relies.”
Bitcoins are stored in wallets, which themselves are part of the network.
When you “buy” any amount of Bitcoin, you are involved in a “transaction,” which “is a transfer of value between Bitcoin addresses that gets included in the block chain.”
To summarize some basic points (there are many other points regarding Bitcoin that are not included here in order to simply focus on the “buying” of Bitcoins on MtGox.com):
1. A genuine Bitcoin will have been created by the Bitcoin network.
2. A genuine Bitcoin is part of the verified and accepted Bitcoin ledger (the block chain).
3. A person takes ownership of a genuine Bitcoin when a genuine Bitcoin, that has been verified and is part of the block chain, is transferred into a wallet owned by said person.
It is the opinion of this author that a promise to send you Bitcoins is not at all the same as having genuine Bitcoins in your wallet.
When you buy a car from a dealer, new or used, the title of that vehicle will be transferred to you. The title is the “proof of ownership” document that establishes you as the owner. It is difficult to imagine that a person would go to a used car dealer, buy an automobile, pay for it by giving the money to the dealer, and then leave the title of the vehicle in the dealer’s name with the understanding that if the person wants the title transferred to them at any point in the future, the car dealer will do so typically within a 24 hour period.
When you buy a vehicle and pay for it, you want ownership of it at the time you pay for it. You want to be listed as the legal owner of that vehicle from the time you bought it. It would be foolish to leave the ownership of “your” vehicle with the dealer, in effect leaving the dealer as the legal owner of the car. (Remember, if you leave the dealer as the owner, he can sell that car to another person!)
According to MtGox itself, that’s EXACTLY what you are doing when you are “buying” Bitcoins at MtGox.
Let me now focus on the questions that were submitted to the MtGox support desk.
I initially asked two questions:
1. Why do I not have a static wallet address?
2. When I deposit bitcoins into my “wallet” at mtgox, do those bitcoins go into an actual wallet that is my own, or do those bitcoins get deposited into an account that is controlled by mtgox?
Here are the answers I received:
1 – Please note that the bitcoin address will be changed from time to time, however the old address will be still linked to the account and it can be used for the transactions.
2 – Once you send the bitcoins to MT Gox account they will be stored under your account wallet. We will not have direct access over your account and only you will be able to make transactions in them.
The answers that I received prompted a follow-up response from me:
Your answer to my first question, “Please note that the bitcoin address will be changed from time to time, however the old address will be still linked to the account and it can be used for the transactions” DOES NOT answer my question. I know that it changes from time to time, that is the reason for my question. My question is WHY DOES IT CHANGE?
Regarding your answer to my second question, you stated that “they will be stored under your account wallet.” I have a question regarding that portion of the answer:
Is my “account wallet” at mtgox part of the blockchain, or is my “account wallet” at mtgox an internal system to mtgox that holds my Bitcoins?
And this was the response that I received from MtGox:
It is the internal MT Gox system that holds the bitcoins and MT Gox deposit will keep changing as this is how the bitcoin system is designed.
I must admit that i was very disappointed by the answer that I received.
What this means is that when you “buy” any Bitcoin from Mtgox, you are not actually buying genuine Bitcoins. What you are “buying” is a promise by MtGox to send you genuine “Bitcoins” in the event that you ever decide to request them.
This is VERY IMPORTANT.
A genuine Bitcoin is Bitcoin that has been created by the Bitcoin network, and is part of the Bitcoin ledger (verified by the network). If you want to buy and become the owner of genuine Bitcoin, then the third requirement, in addition to these two, would be that the genuine Bitcoin has been transferred into a wallet that you own.
MtGox has admitted that when you “buy” Bitcoin on their system, whatever it is that you’ve just bought gets held in the “internal MT Gox system that holds the bitcoins.” It is very important to understand that the “internal MT Gox system” is not part of the Bitcoin Network.
MtGox may have its own genuine Bitcoin Wallet. When you “buy” Bitcoin on the MtGox exchange, MtGox may hold the equivalent amount of genuine Bitcoin in its wallet on your behalf. HOWEVER, those Bitcoins are not in YOUR wallet, and you are not the owner of those Bitcoins because those Bitcoins are not in your wallet. You are relying on MtGox sending genuine Bitcoins to YOUR wallet upon request.
If something happens to MtGox, you are simply an unsecured creditor, without your Bitcoins.
Let me repeat, at the time that you “buy” Bitcoins on MtGox, you have NOT bought Bitcoins. What you have bought is a promise from MtGox to send you genuine Bitcoins in the event you ask for them. MtGox may or may not have allocated genuine Bitcoins on your behalf. But that is not the point. The point is that you do not have any genuine Bitcoins as long as MtGox is “holding” them on your behalf.
I really don’t like the fact that MtGox makes is seem as though “your Bitcoins” are in a genuine wallet that is part of the Bitcoin network by using the phrase, “they will be stored under your account wallet.”
They use the same term “wallet,” which can lead most people to assume that “account wallet” and “Bitcoin wallet” are identical. That is a completely false assumption.
An “account wallet” is a term used for the accounting of transactions within the internal MtGox system. It is completely and totally separate from a “Bitcoin wallet” which is part of the Bitcoin network and verified by thousands and thousands of computers running the Bitcoin software.
When you “buy” Bitcoins on MtGox and leave them there, it is like buying a car from a used car dealer and allowing the dealer to keep the title to that vehicle in his name.
That exposes you to a great deal of risk.
If you do choose to do business at MtGox, for goodness sake, take delivery of those Bitcoins into a genuine Bitcoin wallet that is yours and is part of the block chain. I think it is far more prudent than leaving those “Bitcoins” under the ownership of MtGox.
On another topic, it is now clear to this author that genuine Bitcoins are not what are being bought and sold on MtGox, but merely promises to deliver genuine Bitcoins upon request. This is very similar to the paper trading of gold and silver. Traders or investors can buy and sell paper promises to deliver genuine gold and/or silver. This opens door to the possibility of price manipulation on MtGox in the same manner that is claimed of the Comex.
This will be covered in a future article.