mtgox keeps all of its bitcoins in its wallet and not tied to any particular users. It maintains user account balances in its database. It has been hacked before and I suspect lost a portion of its assets while maintaining user account balances. It also may have had occasional theft, accounting errors, and perhaps some investment spending using bitcoins. So if user account balances total 1000 bitcoins, it is totally possible that mtgox only has some fraction of those bitcoins (and USD) available to pay out. I suspect that many new investors in bitcoins don't even have a wallet outside of mtgox as they are just in the speculation game, so it makes it even easier for mtgox to maintain a only a fraction of the balances of the accounts in its reserves.

Now, this doesn't mean that they are really doing this, but I have no reason to believe that they are not, and they are not the bastion of transparency. Heck, if they sold off 50% of their stockpile into cash right now, they would have a lot of fiat to work with, and it would be likely that users would never be the wiser. Maybe they could play even riskier and keep only 10% of the bitcoins.

What makes this possible scenario interesting is that this actually inflates the money supply. If there were only 1000 bitcoins in existence, and 500 were in gox balances, and gox spent 400 of them keeping 100 in reserve, there would be in effect 1400 bitcoins in circulation, even though there are only 1000 real bitcoins.

As someone on the sidelines I eagerly wait until there is a run on mtgox and keep a stockpile of popcorn on hand. Only then will we see what is going on in their backrooms.>


That is not FRB, if something got stolen from mtgox, and they are able to cover the losses that's only keeping their business afloat. They could only cover such loss if they owned more bitcoins by themselves (their own reserves), possible earned from their business.
(If somebody steals portion of you money, and you still pay your rent, that is not FRB.)
Every business and individual have to take care of protection of their assets, doesn't matter of what kind, if they were stolen that's not FRB, the stealing doesn't increase the total number of assets in the economy.

On the other hand FRB is based on a fraud, which would happen if mtgox used the bitcoins of the users for their investing activities, trying to make profit on that, and at the same time claiming all deposits are available for users.
I am sure if they tried to go that path, they would not last long.

All I am saying the FRB on bitcoins is possible, but can't work in long run, because of no lender-of-last-resort who would save insolvent institution.