Mt. Gox was one of the earliest and largest crypto exchanges. In February 2014, it announced losing around 850,000 Bitcoins worth around $400 million at the time. The exchange declared bankruptcy and shut down. Later, the CEO Mark Karpelès announced finding 200,000 coins in an old wallet.
At the end of May 2024, the Mt. Gox trustee wallets transferred over 140,000 Bitcoins to a new wallet, possibly as part of a repayment plan to creditors.
Over ten years after the Mt. Gox bankruptcy, news related to it still has an impact on the market. As the repayment will bring a large number of Bitcoins back into circulation, it may affect prices, especially if the creditors decide to sell. In this article, we discuss Mt. Gox's collapse, highlighting the reasons behind it.
Mt. Gox had been facing glitches and hacks throughout its existence. In June 2011, the exchange experienced its first major hack. Attackers were able to gain unauthorized access to Mt. Gox and change the Bitcoin price from $17 to 1 cent. Later, they bought about 2,000 Bitcoins at the artificial price. The compromised Mt. Gox computer server included information about users, their deposited bitcoins, and hashed passwords. Hackers leaked information about thousands of users in online forums, after which the exchange’s CEO Mark Karpelès announced the breach, recommending that users who used the same password for Mt. Gox and other platforms should change it. As a result of the hack, Mt. Gox stopped operations for a week, then returned with improved security measures. Users recovered their accounts and created new passwords. Everything seemed to be back on track for a while, despite the platform continuing to experience operational challenges and delays from time to time.
Withdrawal delays were getting worse. Customers needed to wait from days to months for their orders to be completed. In February 2014, Mt. Gox suspended withdrawals saying it was addressing a technical issue. Later in the month, the website went blank for a reason that came as a massive shock. Mt. Gox announced it lost 750,000 customers’ bitcoins and 100,000 of its own. Having to pay about $64 million in debts and unable to continue operations, the exchange filed for bankruptcy.
Investigations found that Mt. Gox had a vulnerability that allowed hackers to perform transaction malability attacks. This type of attack involves making alterations to the system so that it looks like the sending of bitcoins to a wallet did not occur when in fact it did occur. As a result, the hackers were able to fraudulently request additional withdrawals, causing the system to send bitcoins to their wallets while making the original transactions seem unsuccessful.
In March 2014, the defunct Mt. Gox announced it found 200,000 Bitcoins in an old wallet. Mark Karpeles said in a statement the wallet was thought to be empty. Afterward, the discovered coins were moved to offline wallets. With the discovery, the number of lost Bitcoins in the Mt. Gox hack totaled 650,000.
In later events, CoinLab increased the demanded amount from Mt. Gox to $16 bln, saying it’s the value the cancelled partnership cost the company. The dramatic shutdown of Mt.Gox left thousands of depositors waiting for possible repayment, at the same time starting massive bankruptcy protection, civil rehabilitation, and investigation processes. Mt.Gox’s shutdown had a big impact on the crypto market, causing Bitcoin’s price decline and raising concerns about the trustworthiness of cryptocurrencies.
Over ten years after the Mt. Gox bankruptcy, news related to it still has an impact on the market. As the repayment will bring a large number of Bitcoins back into circulation, it may affect prices, especially if the creditors decide to sell. In this article, we discuss Mt. Gox's collapse, highlighting the reasons behind it.
What Happened to Mt. Gox?
Mt. Gox was founded in 2010 when Bitcoin wasn’t widely known to the public yet. It was one of the most popular exchanges handling around 70% of bitcoin transactions by 2013. Mt. Gox was based in Tokyo, Japan. Initially, the Mt. Gox website was created as a platform for trading card games, and the name was short for “Magic: The Gathering Online Exchange." Its owner was programmer Jed McCaleb, who later co-founded Ripple and Stellar. In 2010, McCaleb turned the platform into a Bitcoin exchange and in March 2011, he transferred the ownership to Mark Karpelès.
Mt. Gox had been facing glitches and hacks throughout its existence. In June 2011, the exchange experienced its first major hack. Attackers were able to gain unauthorized access to Mt. Gox and change the Bitcoin price from $17 to 1 cent. Later, they bought about 2,000 Bitcoins at the artificial price. The compromised Mt. Gox computer server included information about users, their deposited bitcoins, and hashed passwords. Hackers leaked information about thousands of users in online forums, after which the exchange’s CEO Mark Karpelès announced the breach, recommending that users who used the same password for Mt. Gox and other platforms should change it. As a result of the hack, Mt. Gox stopped operations for a week, then returned with improved security measures. Users recovered their accounts and created new passwords. Everything seemed to be back on track for a while, despite the platform continuing to experience operational challenges and delays from time to time.
In 2013 US-based Bitcoin exchange Coinlab sued Mt. Gox for $75 M over violating their agreement. According to the contract, Mt. Gox was to handle its North American transactions to Coinlab but failed to do that. In June 2013, Mt. Gox announced suspending US dollar withdrawals for two weeks, as a reason for mentioning large volumes of transactions. Users were losing confidence in the exchange, and it was no longer able to keep the leading position among Bitcoin trading platforms. Mt. Gox’s trading volumes were decreasing, while regulatory scrutiny around it was growing. The US government issued a warrant against Mt. Gox, saying it’s operating as an unregistered money services provider. On June 29, Mt. Gox gained a license from the US Financial Crimes Enforcement Network (FinCEN), but the platform’s problems only got bigger.
Withdrawal delays were getting worse. Customers needed to wait from days to months for their orders to be completed. In February 2014, Mt. Gox suspended withdrawals saying it was addressing a technical issue. Later in the month, the website went blank for a reason that came as a massive shock. Mt. Gox announced it lost 750,000 customers’ bitcoins and 100,000 of its own. Having to pay about $64 million in debts and unable to continue operations, the exchange filed for bankruptcy.
According to an article by Wall Street Journal, in a news conference, Mt. Gox CEO Mark Karpeles said:
We had weaknesses in our system, and our bitcoins vanished. We've caused trouble and inconvenience to many people, and I feel deeply sorry for what has happened.
As revealed by a leaked document and later confirmed by the company, Mt. Gox’s funds were gradually depleted through a series of hacks starting in 2011.
Investigations found that Mt. Gox had a vulnerability that allowed hackers to perform transaction malability attacks. This type of attack involves making alterations to the system so that it looks like the sending of bitcoins to a wallet did not occur when in fact it did occur. As a result, the hackers were able to fraudulently request additional withdrawals, causing the system to send bitcoins to their wallets while making the original transactions seem unsuccessful.
In March 2014, the defunct Mt. Gox announced it found 200,000 Bitcoins in an old wallet. Mark Karpeles said in a statement the wallet was thought to be empty. Afterward, the discovered coins were moved to offline wallets. With the discovery, the number of lost Bitcoins in the Mt. Gox hack totaled 650,000.
In later events, CoinLab increased the demanded amount from Mt. Gox to $16 bln, saying it’s the value the cancelled partnership cost the company. The dramatic shutdown of Mt.Gox left thousands of depositors waiting for possible repayment, at the same time starting massive bankruptcy protection, civil rehabilitation, and investigation processes. Mt.Gox’s shutdown had a big impact on the crypto market, causing Bitcoin’s price decline and raising concerns about the trustworthiness of cryptocurrencies.
Who Was Behind the Mt. Gox Collapse?
One of the main theories related to Mt. Gox's failure was that the CEO Mark Karpelès falsified data and mismanaged user funds. In 2015, he was arrested by the Japanese police. Karpelès was accused of a series of charges but denied doing anything illegal. Prosecutors alleged Karpelès transferred customer funds to his personal account and sought a 10-year prison sentence. Eventually, the Tokyo District Court found Karpelès not guilty of user funds embezzlement. However, Mt. Gox CEO was found guilty of manipulating electronic records and incorrectly increasing the company’s holdings by $33.5 million. The court sentenced Karpelès to two years and six months in prison but later suspended it for a probation period of four years. Based on the decision, Karpelès wouldn’t need to serve jail time unless he committed a crime in the following four years.
Meanwhile, in July 2017, the US authorities arrested Russian national Alexander Vinnik in Greece, indicting him for laundering $4 billion in bitcoin, including funds from the Mt. Gox hack. According to the US Department of Justice, Vinnik was the owner and one of the operators of the BTC-e crypto exchange, which was founded in 2011 and was one of the world’s largest exchanges. BTC-e was allegedly used for money laundering. DoJ alleged that Vinnik committed and facilitated a wide range of crimes, including identity theft, drug trafficking, and hacking.
The Mt. Gox case gained clarity in 2023 when the US Department of Justice unsealed charges against Russian nationals Alexey Bilyuchenko and Aleksandr Verner. According to a DOJ release, Bilyuchenko and Verner were charged with laundering around 647,000 bitcoins stolen from the Mt. Gox hack. Alexey Bilyuchenko was also charged with partnering with Alexander Vinnik to operate BTC-e from 2011 to 2017. The press release said:
Based on the announcement, all the payments are supposed to be done by October 31. As prior documents reveal, Mt. Gox also held Bitcoin Cash (BCH) and fiat currencies. Therefore, creditors’ payments will be made in Bitcoin, Bitcoin Cash, and fiat money. In late 2023, some creditors posted on social media forums that they had received payments to their PayPal accounts.
The Mt. Gox case gained clarity in 2023 when the US Department of Justice unsealed charges against Russian nationals Alexey Bilyuchenko and Aleksandr Verner. According to a DOJ release, Bilyuchenko and Verner were charged with laundering around 647,000 bitcoins stolen from the Mt. Gox hack. Alexey Bilyuchenko was also charged with partnering with Alexander Vinnik to operate BTC-e from 2011 to 2017. The press release said:
Bilyuchenko, Verner, and their co-conspirators allegedly used their unauthorized access to Mt. Gox’s server to fraudulently cause bitcoin to be transferred from Mt. Gox’s wallets to bitcoin addresses controlled by Bilyuchenko, Verner, and their co-conspirators. From September 2011 through at least May 2014, Bilyuchenko, Verner, and their co-conspirators allegedly caused the theft of at least approximately 647,000 bitcoins from Mt. Gox, representing the vast majority of the bitcoins belonging to Mt. Gox’s customers. Bilyuchenko, Verner, and their co-conspirators allegedly laundered the bulk of the bitcoins stolen through Mt. Gox principally through bitcoin addresses associated with accounts Bilyuchenko, Verner, and their co-conspirators controlled at two other online bitcoin exchanges.
Will Mt. Gox Customers Get Their Money Back in 2024?
After the Mt. Gox collapse, depositors have been waiting for payouts for more than 10 years. In 2019, the Tokyo District Court approved its rehabilitation plan, after which creditors were compelled to file claims in order to get repayments. Initially, the deadline was set for October 2023. However, in September 2023, Mt. Gox Rehabilitation Trustee Nobuaki Kobayashi announced moving it to October 31, 2024. In a note, Kobayashi explained that the delay would give creditors more time to submit their claims, while the trustee could confirm information and engage in discussions. He also pointed out that the schedule may change based on circumstances.
Based on the announcement, all the payments are supposed to be done by October 31. As prior documents reveal, Mt. Gox also held Bitcoin Cash (BCH) and fiat currencies. Therefore, creditors’ payments will be made in Bitcoin, Bitcoin Cash, and fiat money. In late 2023, some creditors posted on social media forums that they had received payments to their PayPal accounts.
X (formerly Twitter) user posted about receiving repayment from Mt. Gox. Source: x.com
In May 2024, Mt. Gox Trustee wallets transferred over 140,000 BTC, worth around $9 billion to a new wallet. According to blockchain analytics platform Arkham, the amount represents almost half of Mt. Gox's holdings. As we mentioned, 200,000 Bitcoins that were considered lost were found in an old wallet of Mt. Gox. Plus, when Mt. Gox announced bankruptcy, users’ funds were stuck in the exchange during a legal rehabilitation process.
According to a rehabilitation trustee, Mt. Gox manages Bitcoin and Bitcoin Cash securely and has not sold any assets for repayments. A document released on June 24 states that Mt. Gox will start to distribute funds from the beginning of July 2024.
According to a rehabilitation trustee, Mt. Gox manages Bitcoin and Bitcoin Cash securely and has not sold any assets for repayments. A document released on June 24 states that Mt. Gox will start to distribute funds from the beginning of July 2024.
How Mt. Gox’s Bitcoin Distributions May Impact the Market
The long-awaited repayment of Mt. Gox Bitcoins may stir the market as a large number of Bitcoins will reenter circulation. According to an analysis by NYDIG (New York Digital Investment Group), Mt. Gox distributions may be less drastic than initially feared. The company suggests that the fear of the potential sell-off may be worse than the event itself. NYDIG achieved the conclusion by conducting surveys among Mt. Gox creditors asking if they prefer to hold or sell the coins. Although reality may differ from assumptions, it is predicted that $1.5 billion worth of bitcoins may enter the market as a result of distributions. NYDIG assumes that $1.5 billion worth of bitcoins may not have as large of an impact on the market, considering the daily trading volume of Bitcoin.
Anahit Avetisyan
Author
Web3 writer and crypto HODLer with a keen interest in market trends and recent technologies.
