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It's conceivable that Mt Gox would re-use the outstanding balances (USD or otherwise) in other investments (BTC or otherwise).

  • How much liquidity does Mt Gox have in BTC and Fiat dollars in case a large group of users decides to withdraw their cash (outside of trading)?

I want to make sure that Mt Gox has sufficient liquidity to handle transfers in the event they (or one of their associates/banks) repurpose stored values (in wallets etc) into other investments.

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I think your question is based on the false assumption that there is some 100% safe way to store money that doesn't cost anything. Mt Gox can't stuff your money in their mattress, and even if they did someone could come along and steal the mattress. They have to sensibly balance risk and cost -- zero-risk is not a sensible or achievable goal and is not available for free.

There is always a chance that an exchange will not have sufficient liquidity to meet withdrawal demand. When that happens, they have to process withdrawals more slowly. But the alternatives are more expensive and would mean the exchange would have to charge higher commissions. Exchanges like Mt Gox have strong incentives to get this balance right -- a reputation for slow withdrawals will hurt their bottom line and, of course, high commissions drives away customers.

So you can tell how good a job they're doing by looking at how their customers rate their withdrawal experiences and what their commission rates are. If you think they're not balancing cost and risk right, use a different exchange.

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    Reading between the lines, you seem to say that Mt Gox does in fact use my BTC funds and fiat funds for other purposes, that may not be limited to acquiring more BTC (double leveraging) the accounts. I do agree that the private enterprise must manage costs, but this behind the scenes trading isn't disclosed or shared with outside investors and opens the door for Madoff style fraud. – goodguys_activate Apr 9 '13 at 22:07
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    @makerofthings7: I doubt they do anything with your BTC funds. It's way too risky because the price of BTC is volatile. They could lose their shirts. For fiat balances -- what else can they do? Do you expect them to stuff physical dollar bills in a safe and pay people to guard it? I think you're assuming some simple, obvious, safe, ideal solution that they could opt for that simply doesn't exist (except for BTC, of course). – David Schwartz Apr 9 '13 at 22:09
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    I agree with your logic, and that is why I'm asking the question. The thing that concerns me is that this risk is unregulated, un audited, and not transparent to the users of the service. – goodguys_activate Apr 9 '13 at 22:12
  • There's definitely a market failure aspect. Customers don't seem to particularly care what the risks are but just want deposits to be as cheap as possible, withdrawals to be as cheap as possible, no storage fees or account maintenance fees to be charged, and commissions to be as cheap as possible. That creates a market where the incentives to reduce risk in the holding of customer funds are not as strong as we would probably like them to be. Most likely, the exchange would prefer you didn't make them hold much of your money when you weren't actively trading. – David Schwartz Apr 9 '13 at 22:41
  • For the record Mt. Gox specifically said in a Reddit ama that they do not use customer balances for other purposes (that is, they maintain 100% reserves of customer balances in some form for both btc and fiat). – eMansipater Apr 16 '13 at 4:11

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