Since the early days of bitcoin MtGox has been THE exchange to buy bitcoins with your grubby little bits of fiat US dollars. So dominant has MtGox been that many people have been happily using the MtGox price as a proxy for the bitcoin market in general. This includes me, for the charts on this blog, although it is getting harder to justify doing that lately due to price discrepancy between MtGox and other exchanges.
As I don’t use MtGox myself, I didn’t pay too much attention really but this does affect a lot of ‘bitcoiners’, so today I will attempt to describe the issues around MtGox as I understand it. Please jump in and correct me in the comments if I get it wrong.
In a nutshell what has happened is that people have had the ability to withdraw US dollars removed. Not sure offhand the exact reasons how this situation has arisen but I do remember when dwolla was clamped down on and presumably the US ‘authorities’ or banks are making life difficult for the exchange. As a way to clamp down on bitcoin and keep the fiat game rolling!
In order to remove fiat funds people have had to take another route to get their money out, a typical scenario is to purchase bitcoins with the US dollars that are trapped in MTGox which they then send those bitcoins to another exchange in order to then sell them there and withdraw the fiat money on the other exchange. Bitstamp seems to have become the default other exchange to use and is enjoying a huge rise in number of users.
The result of this is that many people who wanted to withdraw dollars on MtGox have actually had to buy bitcoins or hold instead, which has caused the price on MtGox to rise higher than that on other exchanges and higher than it would have been. Its not really an arbitrage opportunity though, as you can’t take the profit of a higher MtGox price by selling on MtGox.
and heres the same time period for bitstamp
Notice the Mtgox price is over $10 dollars higher at the moment.
Presumably to some degree the converse is true aswell that a number of bitstamp users only joined in order to sell their bitcoins and release fiat funds which had been locked up on MtGox causing more selling pressure on that exchange than there otherwise would have been and a lower price on that exchange.
There are people who claim this rally we’re on has been caused by MtGox pushing up prices, however I see it more like the market goes up and down due to its normal fundamentals and MtGox adds a cost on top for having to buy in order to sell on a different exchange.
Ultimately MtGox losing users to other exchanges is a healthy development in my view, in the spirit of decentralised money, a single powerful exchange is not good. Previous crashes in bitcoin market can be attributed to MtGox infrastructure issues for example.