Written by Lipsa Das for Trust Machines
Mt. Gox, a Tokyo-based crypto exchange, quickly rose up the ranks to become the largest decentralized exchange for Bitcoin in 2013. At one point, it handled over 70% to 80% of Bitcoin’s trading volume.
However, this success was short-lived — in February 2014, a Mt. Gox hacking caused it to file for bankruptcy. This hack affected over 850,000 bitcoins belonging to the company and its creditors, worth $460 million at the time.
Attempts to revive the exchange proved unsuccessful, and on April 16, 2016, the exchange gave up on itself — marking the start of a years-long saga that still stings today.
Let’s explore the reasons behind the Mt. Gox collapse, Mt. Gox’s settlement efforts in 2022, and the impact on the Bitcoin community.
What Was Mt. Gox?
Mt. Gox was the world’s largest Bitcoin exchange, launched by developer Jed McCaleb on July 18, 2010, in Tokyo, Japan. It was one of the world’s earliest crypto exchanges that traders could use to buy and sell Bitcoin apart from peer-to-peer markets and forums.
Mt. Gox’s History, Collapse, and Ongoing Drama
Mt. Gox’s troubles began as early as June 2011, 3 months after McCaleb sold Mt. Gox’s website to French developer Mark Karpelès. Within one week, the exchange’s user database was leaked, and reports of users’ accounts mysteriously drained of their Bitcoin began to rise.
Mt Gox’s Bitcoin transaction volumes hit record highs by April 2013, but customers began encountering USD withdrawal issues in the following months. Mt. Gox’s Mizuho Bank branch pressured the exchange to close its account with the company.
Meanwhile, Mt. Gox revealed in August 2013 that it had incurred “significant losses” due to previously crediting customer accounts with deposited funds before they had actually cleared.
On February 7 2014, Mt. Gox officially suspended all exchange withdrawals, issuing multiple statements relating to ‘security issues’ over the next two weeks. By February 23, the company had scrubbed all posts from its Twitter account.
The Bitcoin Mt Gox price traded 20% below other exchanges during this time as customers weren’t sure if withdrawals would ever start again. Still, there was faith.
But, on February 24, the exchange suspended all trading, with its site going dark hours later. Mt Gox bankruptcy filing news came at the end of the month. It claimed to have lost 750,000 of their customers’ Bitcoin, and another 100,000 of its own Bitcoin to Mt Gox hackers.
Shortly after filing for bankruptcy, Mt. Gox announced that it had located about 200,000 Bitcoin in an old digital wallet used prior to 2011, bringing its lost holdings down from 850,000 to 650,000.
Nevertheless, the Tokyo District Court recognized that rebuilding the firm would be very difficult, and dismissed its application for civil rehabilitation on April 16. And that’s how the downfall of the largest bitcoin exchange played out.
The aftermath saw CEO Karpelès buried in a pile of lawsuits regarding his actions in managing the exchange and potentially defrauding his customers. He was found guilty of having falsified Mt. Gox’s data to inflate its asset holdings by over $33 million in March 2019.
9 Years Later: Mt. Gox Bankruptcy Repayments and Bitcoin
After a long-drawn-out case and 9 long years, Mt. Gox’s creditors are now finally getting compensated for their losses, at least partly. Nobuaki Kobayashi, the bankruptcy Trustee for Mt. Gox had asked creditors to provide their payment details by April 6th, 2023.
Eligible former customers could choose between various payment methods, such as bank transfer or crypto, during this Mt. Gox bitcoin release schedule.
They could also choose an earlier payment schedule — which means that instead of waiting for 3-5 years to receive their entire payout, Gox customers could simply accept a partial amount to forego more litigation. Basically, they are now “settling” for 15-20% of what they had originally locked with the exchange. However, Bitcoin’s price appreciation has also helped with most of the fund recovery.
The exchange’s two largest creditors, Bitcoinica and MtGox Investment Funds, have already opted to receive an early 90% payout entirely in BTC. The Mt. Gox payout date to distribute the lump sum amount funds to these Gox customers is now October 31, 2023.
Speculations regarding Bitcoin’s Price: Will these Mt. Gox Bankruptcy Repayments Affect the Market?
Some analysts expect creditors to quickly dump their recovered BTC on the market once it’s unlocked. After all, BTC price has appreciated over 30 times since when it was locked over a decade ago — it’s only natural for people to want to lock in some of their gains.
If this is the case, the Bitcoin market could have massive sell pressure. A similar event occurred in May 2022, when the Luna Foundation Guard sold over 80,000 BTC in a failed attempt to defend Terra’s UST stablecoin peg.
However, analysis from Bloomberg suggests that the Mt. Gox repayments won’t cause a market dump. For instance, the exchange’s largest creditor – the Mt Gox Investment Fund – has confirmed that it plans to keep its recovered Bitcoin.
What Has the BTC Community Learned After Mt. Gox?
The Mt. Gox hack and the cryptocurrency exchange's subsequent demise is a valuable reminder of the dangers of holding your digital assets with CEXs. If anything, the Mt. Gox case is one of the biggest events that has led to the increasing interest in trustless technologies over the years to ensure that asset owners have full control over their funds, especially should an event as catastrophic as Mt. Gox occur.
However, centralized exchanges still play a crucial role in today's cryptocurrency economy. They still serve as some of the most common and intuitive trading bridges between crypto and fiat.
Instead, exchanges should learn from the downfall of the now defunct Mt. Gox and take thorough security precautions to protect themselves against external hackers or nefarious actors within the exchange.