Ezra Galston is currently a venture capitalist at Chicago Ventures and the former director of marketing for CardRunners Gaming.

It has been a tough week for bitcoin: a freeze on withdrawals at Mt. Gox due to transaction malleability, multiple DDoS attacks across the exchanges, and a consequent plunge in price.

In my view, however, Gox should be everyone’s biggest focus. While their price spreads and cash-out delays have plagued the site for more than six months, I believe their current situation and recent statements belie transparency and suggest insolvency. Namely, that their business model and recent past raise a number of red flags that make comparing the company to now-bankrupt online gambling operators highly relevant.

Three weeks ago, I took to Re/code to describe how the evolution of online poker is likely to be correlated and instructive to bitcoin’s development. In it, I wrote: “I believe we could see a major exchange go under, especially if regulations and wire transfers become more complex, or if the cost of acquiring customers becomes more competitive.”

I have seen this story play out nearly a dozen times before during my tenure as an executive in the online poker world and, in this article, I want to set out why I think Mt. Gox is in big trouble.

Mt. Gox had nearly $5 million in funds seized from its bank accounts in 2013. It’s unclear whether these were operating funds or customer deposits. This is highly reminiscent of seizures in the online gambling world, which deeply affected operators’ solvency.

These fund seizures, such as $115 Million from Full Tilt Poker, or $33 Million in a 2009 DOJ Seizure, were initially smoothed over by their operators. Players were typically reimbursed and withdrawals were honored.

What outsiders hadn’t realized at the time was the strain this placed on individual operators. In order to keep the business running, operators had to remove the ring-fence that protected customer deposits and borrow from customer balances to support operations.

While everyone believed that the poker sites were making billions, their overheads due to staffing and marketing was significant. More importantly, each new seizure forced the operators to move downstream to less and less reputable transaction processors and banks. These processors charged heavier fees because of the heightened risk, and often absconded with deposits, because, well, they could.

We see this with Mt. Gox as well: the company lost its relationship with reputable processors, such as Dwolla, and has never managed to integrate with Skrill or Neteller.

It appears that Mt. Gox has long known of, and suffered from, transaction malleability. As explained in this Coindesk post, if a user claimed not to have received their bitcoin (either truthfully or maliciously), Gox was likely to have re-sent the funds to avoid negative press as a result.

This process of fronting money – either in the hopes of recovering the initial transactions or to maintain positive perceptions – is a vicious cycle that depends on deposits outpacing withdrawals to be sustainable. Once that balance reverts, it’s an effective bank run, and the operator will eventually not have enough deposits to cover user balances.

It is highly analogous to the working capital model that caused the insolvency of Full Tilt Poker, once a billion-dollar industry leader. In their case, the black market ACH (automated clearing house) processors they had contracted to transfer player funds from bank account to virtual wallet struggled to convince banks to process those transactions.

Full Tilt, wanting to maintain a dominant image and not lose player liquidity to competitors, chose to credit attempted(but failed) withdrawals to player accounts, hoping to recoup those transactions as their processors improved. This backlog of ‘phantom’ deposits ultimately reached $130 million. Executives later admitted that it started small and spiraled out of control.

Although I have not seen any indication as to the scale of Gox’s equivalent phantom transactions, the ramifications are considerable – especially if malicious customers exploited the issue to their advantage.

Mt. Gox’s public statements have been only partially accurate, initially blaming bank/processor delays in June 2013, and now admitting a systemic technical issue. This evolution of excuses mirrors those of gambling operators who were quick to blame a difficultly in transaction processing before admitting internal issues.

Eurolinx was a popular poker site from 2006 to 2008. However, in 2009, withdrawals began slowing considerably. Initially, it claimed:

Weeks later they admitted: “Most of the delays occurred due to payment processor issues we experienced in May and June. The problem has now been fixed, however, we have some withdrawal backlog to deal with.” And, months later, they filed for bankruptcy – leaving players millions of dollars the poorer – and ultimately admitting that they gambled player deposits in the stock market and lost, big time.

FullTiltPoker enjoyed market dominance from late 2006 until their DOJ indictment in April 2011. Soon after being banned from servicing US players, the DOJ gave them permission to repay all depositors, but they failed to do so.

On May 15th, FTP claimed: “Full Tilt Poker faced numerous challenges and hurdles to ensuring the smooth operation of its international business and the orderly return of US player funds. We are absolutely committed to making sure that US players are refunded as soon as possible. We apologize for the delay and the fact that we underestimated the time it would take to work through these issues.”

On May 30th, they repeated:

However, at this point, they admitted solvency issues for the first time, saying: “We are raising capital to ensure that the US players are paid out in full as quickly as possible.” The company admitted total insolvency three months later, on August 31st.

In these cases and more, the operators cited seemingly legitimate reasons for process delays. All were rooted in industry truths – difficulty of bank processing or technical complications of implementing a mass refund – but were ultimately covers for deeper issues.

Most worrisome is that in the weeks prior to nearly every major online poker bankruptcy, the operators marketed deposit bonuses and perks – a last attempt to buy solvency and time.

This was true in the case of Full Tilt Poker and Eurolinx, as well as Ultimate Bet, Absolute Poker, GoalWin Poker, Poker in Venice and more. Mt. Gox did the same – offering discounted trading fees as recently as December 19th – a curious move for an operator clearly aware they were facing transactional hurdles.

I am hopeful, along with the wider Bitcoin community, that Mt. Gox can overcome its difficulties and rebuild consumer confidence.

As Mt. Gox has struggled with both bitcoin and fiat withdrawals, it should be noted that, in a public ledger cryptocurrency, it is possible to certify the solvency of reserves with digital signatures showing the location of all deposits – although no exchange currently utilizes this feature of bitcoin.

While that would solve questions surrounding bitcoin solvency, it would leave fiat concerns unresolved. That said, my experience over the past decade has shown that insolvency tends to follow a pattern, that Mt. Gox clearly fits, and I feel the company is likely to fail unless outside capital comes to the rescue.

Roulette wheel image via Shutterstock