Ten years after its collapse, cryptocurrency exchange Mt. Gox has finally started paying off its creditors. What’s behind this decade-long process?
Let’s take a deep dive into the timeline of events associated with the fall of one of the largest cryptocurrency exchanges at one point.
Mount Gox appears
Mt. Gox’s history dates back to the early days of the crypto industry. It all started in 2010 when developer Jed McCaleb founded the Mt. Gox platform for Magic: The Gathering, and then turned it into a Bitcoin exchange.
A year later, he sold the platform to developer Mark Karpeles. After the change in management, Mt. Gox quickly became one of the most popular BTC platforms.
As a result, the first major hacker attack occurred in June 2011. At the time of the attack, hackers stole at least 25,000 bitcoins, or about $400,000. The price of bitcoin on Mt. Gox then collapsed from $17 to almost zero.
After the attack, Mt. Gox continued to grow, and in 2013, it processed 70% of all Bitcoin transactions worldwide. However, the exchange faced technical issues that led to a significant increase in transaction processing time.
Internal Difficulties and Mt. Gox Hack
Despite the external success, the exchange faced significant internal difficulties. In particular, Mt. Gox had no control over the quality and security of the code. In addition, the project lacked a financial accounting system and control over balances and reserves. Simply put, no one monitored the flow of funds and cryptocurrencies.
In February 2014, Mt. Gox suddenly stopped Bitcoin withdrawals. The exchange team reported a flaw in the Bitcoin code that made it possible to double-spend coins, which the attackers used in connection with the exchange’s blockchain address. After that, the exchange finally stopped all withdrawals.
By the end of the month, the price of Bitcoin on the Mt. Gox platform was only 20% of the average market price, which was a clear indication of investors’ confidence that the project would not be able to solve the problems that had arisen. On February 24, 2014, all trading on the platform was suspended, and a few hours later, its website went offline.
Later, the exchange team discovered that about 750 thousand bitcoins had been stolen from users, which went unnoticed for many years. As a result, Mt. Gox went bankrupt – on February 28, 2014, it declared bankruptcy and closed down.
The extent of the hack and the mystery of the missing bitcoins
Hackers attacked the Mt. Gox exchange and stole 744,408 bitcoins from its customers and 100,000 bitcoins from the company. This financial disaster led to the exchange declaring bankruptcy. Later sources indicated that Mt. Gox had already leaked around 80,000 bitcoins before Karpeles bought it in 2011.
There have been many theories about the hack. One popular theory suggests that Mt. Gox did not actually own as many bitcoins as it claimed to and that Karpeles may have manipulated the data to create the illusion of a larger number of bitcoins.
As for how the hackers were able to access the system, some speculate that an internal staff member may have gained access to the system. Conversely, others suggest that the bitcoins from cold storage were gradually moved to the Mt. Gox system as the hot wallet was depleted. The lack of proper controls allowed the hackers to withdraw the assets undetected.
protracted litigation
From 2014 to 2020, civil rehabilitation and litigation processes took place. This civil rehabilitation process typically takes three to five years but provides a more just and efficient solution to returning assets to aggrieved creditors.
Meanwhile, the Kraken cryptocurrency exchange did not complete the collection and analysis of creditor claims until May 2016. 24,750 users had filed claims for payments.
As a result, the court did not approve the compensation plan until early 2021. The exchange’s trustees then repeatedly delayed paying out compensation to creditors, sometimes for as long as a year, citing technical and administrative delays, including finding the missing bitcoin and organizing the process of assessing and satisfying creditors’ claims.
Compensation and the impact of the collapse of Mount Gox
The collapse of Mt. Gox was one of the most significant attacks in the cryptocurrency industry. The event demonstrated the importance of protecting cryptocurrency platforms and became the starting point for shaping legal standards for the entire industry.
On July 5, the exchange’s trustees officially confirmed that they had begun paying out compensation in Bitcoin and Bitcoin Cash, totaling about $9 billion.
The Bitcoin payouts are distributed through Kraken, Bitstamp, BitGo, and Japan’s Bitbank exchanges. According to the terms of the agreement, they will have several weeks on average to transfer the funds to customers. However, when the first batch of coins was transferred to Bitbank, its customers started reporting that they received the funds on the same day.
Cryptocurrency market participants are concerned about the size of the total compensation and the potential selling pressure on the Bitcoin price. It is assumed that customers will sell a large portion of the coins after the compensation in the open market.
On the back of this news, Bitcoin fell below $54,000 in early July, its lowest price since February 2024. However, by the time of writing, Bitcoin had regained its position, having settled at $65,000.
Could the story of Mount Gox be repeated?
The crypto industry needs to develop new solutions that combine the security of decentralized technologies with the efficiency and convenience of centralized platforms. However, a repeat of the Mt. Gox saga is not guaranteed.
On the other hand, major cryptocurrency exchanges are relatively transparent, offer insured deposits, and are backed by influential venture capitalists. However, many smaller, lesser-known exchanges operate with little transparency.