Why Mt Gox Scandal is Comparable to Online Poker’s Black Friday

The result is, in our view, that Full Tilt does not appear to have been a Ponzi scheme, as defined. ~http://www.kordamentha.com/docs/for-publications/issue-12-02-online-poker.pdf?Status=Master

We want to look at the relationship between MtGox and Full Tilt, to see the similarities between two very valuable business models that seem to be increasing in value exponentially over time. Both models eventually started operating (apparently) like a ponzi scheme, in which the equity (or whatever we might call it) was secretly and methodically being withdrawn. For poker it was the players money they left on the sites and didn’t withdrawal on a daily basis, and for mtgox it was the bitcoin not withdrawn on a daily averaged basis.

So then somebody (or people, perhaps the owners of each) realized they could pull out this equity and to use it in a more favorable way. Since this could be done without the customers knowledge it could be done without effecting any of them in any observable or knowable way. In each case it seems likely at first the money was meant to actually be put back in the long run. We can notice that may very well be how a common man becomes a common criminal by telling themselves that in the long run they won’t actually be stealing, since they intend on putting the money back after using it.

This should be of interest because we have seemingly very intelligent individuals and seemingly very intelligent groups of people, such as lawyers, accountants, and businessman with many years of experience and knowledge. The only possible explanation seems to be problems with the coherence of the individuals in regards to the groups they belonged to.

Both stories are interesting because in both pyramids schemes things seemed to be going fine and both seemed sustainable. So it seems then like it’s greed that brought about the criminal and immoral behaviour. One thing we know about crime, is that greed and criminals attract more greedy criminals.

So what happened in both these unfortunate events is that eventually the pools ran dry. Transactions were happening but there was a growing disparity between the finalization of transactions. And it has always seemed to be that it happened in an unnatural way as if a third party (or invisible hand) accelerated the process by which the ponzi’s schemes would be dried up.

These seemingly intelligent ‘crooks’ had ample opportunity to keep their ponzi schemes going and had no reason to bleed the golden goose dry.

Then what happened? In the poker world the DOJ came and ‘rescued’ the players. Their money was ceased for an unforeseen amount of time, and the online poker industry came to a halt. There was a lot of CONFUSION over this time. And very little communication between those that knew what was going on (whether they be the owners, the DOJ, and any parties around them) and the players community.

When the lights turned back on the DOJ explained they had rescued the players money, stopped a giant ponzi scheme and that the proper people will be held accountable for the crimes they committed.

As a result Poker Stars head Isai Scheinberg was forced to stepped down, and stars was forced to buy Full Tilt for around 500 million dollars (+200 or so million to the players most of which would get raked back to either stars or full tilt no doubt), and in doing so acquired a monopoly. We know poker stars and full tilt were becoming the coke and pepsi of the industry and we know full tilt with a proper brand image or a proper backing such as a giant site that ‘rescued’ the players, would be an immediately profitable business. So this cost stars nothing in the long and was in fact incredibly +ev.

We cannot just look at those numbers alone, we have to look at what happened in the entire market for poker stars or for the Isle of Man when they did this. And we might of what kind of incentives the doj (and others combined) had to set this up.

In regards to the Mt. Gox story, IF there was a 3rd party invisible hand creating a disparity in the transactions until it became completely obvious that was happening we might wonder what the motivation for taking down Mt. Gox would be and who might have this motivation.

Looking at the poker economy before and after Black Friday, it is completely observable that poker was a booming industry with a great reputation and an exciting time for players. It was also a profitable time for players that brought many new players to the game in hopes of a big score and some entertainment. Some new players were professional but many new players were recreational,just looking for a good time because they saw on TV how exiting it is to play.

After black friday all of this went away.

Poker inherited a bad reputation. A giant amount of the recreational player pool was instantly cut out of the market, and so the game got relatively and significantly harder. And that means the breakeveness went up. So ‘effectively’ the game was being raked at an accelerated rake. When you create a more breakeven environment players start to pass money around while the rake bleeds the game dry.

What we don’t have is any numbers to this effect, but what we do have is the ability to notice that we don’t have these numbers. Without proper tracking sites (which we do not have), players are unable to show the profitability of the game in a year or two span, comparing pre and post Black Friday. The reason is the variance of the game vs the games players play is too high to determine. For the game in which it might be possible (ie cash games), it can be shown the average skill level on Stars has gone up dramatically pre and post Black Friday.

http://en.wikipedia.org/wiki/Mt._Gox
http://en.wikipedia.org/wiki/United_States_v._Scheinberg
http://en.wikipedia.org/wiki/Full_Tilt_Poker
http://www.onlinepokerreport.com/6067/ferguson-vs-lederer-doj-settlements/
http://www.kordamentha.com/docs/for-publications/issue-12-02-online-poker.pdf?Status=Master
http://www.justice.gov/usao/nys/pressreleases/April11/scheinbergetalindictmentpr.pdf

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