A new market will allow Mt. Gox customers to trade funds in their exchange accounts for bitcoin, effectively allowing bitcoin withdrawals despite an official freeze.
The service, Bitcoin Builder, has also created an arbitrage opportunity for traders who wish to exploit the growing spread between the price of bitcoin on Mt. Gox and other major exchanges.
According to the market's founder Josh Jones, some 14,500 BTC (about $8.1m) worth of trades have been executed since it was set up on 11th Feb.
A widening spread
Bitcoin Builder works by taking advantage of the widening spread between the price of bitcoin on Mt. Gox and other exchanges. The spread has grown as Mt. Gox's withdrawal freeze stretches on. At the time of writing, for example, 1 BTC was trading for $123.56 on Mt. Gox compared to $566.20 on BitStamp.
Traders on Bitcoin Builder can sell bitcoins in their Mt. Gox accounts on the Bitcoin Builder market at the prevailing price. One bitcoin in a Mt. Gox account was trading for 0.38 BTC on Bitcoin Builder at the time of writing.
If the same bitcoin from Mt. Gox could theoretically be traded on another exchange, like BitStamp, it would be worth just 0.22 BTC. In other words, selling Mt. Gox bitcoins on Bitcoin Builder yields a 73% premium over the theoretical open market rate. Jones said:
"I was in the withdrawal queue for Mt. Gox when all this happened. I was basically a user who wanted an exchange like this to exist myself."
Bitcoin Builder works because Mt. Gox is still allowing transfers between accounts on the exchange. To sell bitcoin, users must therefore send coins to Bitcoin Builder's Mt. Gox account. They will then receive bitcoin in a wallet of their choice.
Only users with 'verified' or 'trusted' accounts at Mt. Gox can make transfers to another account on the exchange. The new exchange charges 2% for each transaction.
Bitcoin Builder also allows traders to buy the discounted Mt. Gox bitcoins. These traders must deposit coins with Bitcoin Builder and then receive Mt. Gox bitcoins that are held in Bitcoin Builder's account on the exchange.
Traders on Bitcoin Builder must also submit identity documents before they can start making transactions.
The Gox question
Trades on Bitcoin Builder hinge on Mt. Gox's future. Customers who are selling their Mt. Gox bitcoins on Bitcoin Builder are taking a 78% discount on the price of their coins in exchange for the certainty of holding funds that are not subject to Mt. Gox's withdrawal restrictions.
Although the exchange has said the withdrawal freeze is due to technical problems and that it will be lifted soon, customers appear to be losing their confidence that the exchange will do as it says. This is reflected in the plummeting price of bitcoin to US dollars on Mt. Gox.
Then there are the arbitrageurs who are able to exploit the spread between prices at Mt. Gox and other exchanges so long as the withdrawal freeze stays in place.
These traders may be depositing fiat into a Mt. Gox account in order to buy more discounted bitcoins and then offloading them on Bitcoin Builder. With bitcoins in hand, they can then make a profit selling on another major exchange.
However, if Mt. Gox were to announce more serious problems -- such as insolvency, for example -- then Bitcoin Builder's trading volume would vanish. Jones said:
"If Mt. Gox really is insolvent, or if they somehow freeze Bitcoin Builder's account, or if they say that some of these bitcoins turned out to be fake because of transaction malleability, then there's going to be a lot of angry people [on Bitcoin Builder]."
Jones himself is betting that Mt. Gox is solvent and that it is indeed suffering from the technical problems it claims it is experiencing.
"There is a saying, 'never attribute to malice that which can adequately explained by incompetence'. Mt Gox is not Google or Apple. But they are a real company and Karpeles has made loads of money over the last few years. So he's not just going to shut it down," Jones said.
About Josh Jones
Jones claims he knows a thing or two about running a high-growth technology company with an inexperienced team - which is what Mark Karpeles is being accused of at Mt. Gox.
Jones is one of four co-founders of Dreamhost, a web hosting company that was formed when the group were computer science majors at Harvey Mudd College in California.
The company was founded in 1997 and now has revenues of $45m, according to Jones. Like Mt. Gox, the firm did not raise funds from professional investors.
"I just think [Karpeles] is just really bad at PR. At Dreamhost I've had PR disasters myself. We made a billing error and we over-billed people millions of dollars, and we weren't as apologetic as we should have been. Immediately, it was like, oh, that didn't go down well!"
Jones stepped away from operational duties at Dreamhost in March 2010. He said he sold his shares in the company in November, but he uses his track record with the web-hosting firm to prove that Bitcoin Builder should be trusted by its customers.
"That's why I put my LinkedIn profile and my real identity on the Bitcoin Builders site. I started the LA Bitcoin meet up, I ran Dreamhost. People were already trading on forums, and I was like, man - people are just trusting some dude on a forum. So people are trusting me," he said.
Jones said he did not know Karpeles personally, except for an email exchange two years ago when Bitcoin Builder was initially launched as a tool to allow automated bitcoin buying on Mt. Gox.
He said Karpeles had emailed him suggesting ways they could make the tool more efficient and split the revenue. Jones then proposed investing in the then-nascent exchange, but Karpeles never responded.
Trust has to be abundant when trading on Bitcoin Builder. For example, customers selling their Mt. Gox bitcoin must transfer their coins to the Bitcoin Builder account with no guarantee that they will receive coins in return.
Bitcoin Builder processes withdrawals daily, at 11pm Pacific Standard Time. Customers selling bitcoin therefore potentially have to wait for an anxiety-laden 24 hours before their wallets outside Mt. Gox are credited.
One Bitcoin Builder trader, who runs a 'bitcoin hedge fund' in New York City, says he was reassured by Jones' transparency about his identity. The trader, who wished to remain anonymous, said:
"[Jones] is a public person with a reputation and a career -- so I am willing to believe that he is not a scammer. Like anything, you make sure everything works first with a small amount."
The trader said he had purchased more than 300 Mt. Gox bitcoins through Bitcoin Builder.
Jones is running Bitcoin Builder by himself at the moment, having written all the software that the site runs on. He is considering adding more features, like leverage and automated withdrawals.
In the meantime, the exchange is doing booming business, and providing a valuable opportunity for Mt. Gox customers to get their funds out.
Bitcoin image via Shutterstock