mt_gox_dead

Thanks to Blake Commagere it’s now possible to see those redacted financials from that Mt.Gox document that has been floating around. You can see it here.

This next statement is subject to the proviso that I’ve been wrong on everything else about Bitcoin but I would say that it’s now reasonable to declare the exchange truly dead and buried. Not because there’s no business there — there is — but because what business is there isn’t worth the amount of BTC that is said to have gone walkabout. Thus the net value of the rescue proposition is negative.

Here’s the proposition as they lay it out. Gox made (with rounding) some $300k last year in profit and they are forecasting that for the year ending this March they’ll make $2 million. I think we all agree that that won’t be happening but, assuming these are recent figures, that gives us an idea of the monthly income they were enjoying.

It’s worth noting that net sales were up nearly 10x over the two years which is a good indication of the way that the market has expanded. Except, actually, it isn’t. For, as we know, the price of what was being sold (BTC) soared over this period. And yes, Mt. Gox fees were based on a percentage of the total transaction (usually 0.6%).

So, as BTC went from spit to $1,000, that 0.6% went from being near nothing to $6 on every single BTC being traded. Which is a pretty cute margin increase really — but it’s not, from the information we’ve got right here, evidence that trading activity was rising strongly. In fact, given the price rise  we might actually assume that the volume of trading was falling even as the price was going up.

However, the important point I would make about these numbers is that sales went up 10x and expenses went up 7x. It’s the gap between these two the allows profits to rise as reported. Which brings us to their prediction for the two future years: that net sales will go up another 7x and yet costs will only go up a further 2x. It’s this that has them forecasting $40 million of profits in a couple of years.

Sure, $40 million is nice money but I’d be terribly hesitant to believe forecasts like that. Of course we all know that there are things like fixed costs and that once those are met the marginal costs of a new customer in an exchange can be trivial. But I’d still be extremely wary of someone telling me that expenses just aren’t going to blow out in the future as they have done in the past. Especially when we consider the point in the above paragraph: that the revenue numbers don’t seem to be telling us that there has been some great increase in trading, only that the percentage commission on the massive rise in value of what is being traded has.

One more point to be made here. We don’t know the details of how they’ve created these figures but my guess would be a simple straight line projection. If trade goes up this much, the price does that and we keep our current commission structure then here’s our revenue. But sadly that’s not what happens in markets that are becoming more liquid. And we do have to consider what happens in a more liquid market for they are doing so explicitly by telling us that trading volumes are going to rise into the future.

What actually happens is that the more liquid the market, the lower the margins that everyone can charge in them. For the obvious competitive reason that there’s more people around that one can trade with.

Within an exchange this means that the bid/offer spread narrows: for example, in the USD/EUR exchange rate that spread is around 1 basis point these days. 0.01%. And, if that’s the sort of spread that there is, no one at all is then going to pay 0.6% either side for the privilege of trading. So Mt.Gox margins would fall as trading rises precisely and particularly because trading is rising.

So, my very rough and ready analysis of this very short set of numbers is that I don’t believe, assuming anyone tries to rescue this dog, that margins will hold up thus making their predictions of future profitability, umm, unlikely in the degree they forecast.

Which leaves us with just one last point. There’s also a $350 million hole of missing Bitcoins. We might, if we thought we could make more than that by running the exchange, try to figure out a way to cover that hole. An “investment” if you wish. But that hole is a decade’s worth of the highly speculative profits that are predicted to arrive two years out: that’s not a deal that is going to have prospective resuscitators of the site rubbing their hands with glee.

I admit that I’ve been wrong before about Bitcoin but at this point I think it’s about time to purchase the wreath for Mt.Gox and wave it a tearful farewell.

[Image adapted from Shutterstock]