Mt. Gox Repayment Plan — A “Black Swan” in Bitcoin’s history or just FUD?
Mt. Gox was a Bitcoin exchange based in Tokyo, Japan. At its peak, it was handling over 70% of all Bitcoin (BTC) transactions worldwide. In 2014, it declared bankruptcy, suspended trading, and closed its website.
Ever since then, Mt Gox has continued to be the subject of lawsuits and speculations with not much action available for victims, who lost hundreds and thousands of Bitcoin combined… until recently, when they (the victims) were provided with a correspondence from Mt Gox.
In this correspondence, which was dated on the 6th of July, Mt Gox creditors were given an option for compensation in different ways, mainly: Bitcoin itself, cash, or Bitcoin Cash. This repayment plan could potentially see approximately 150,000 Bitcoins turn liquid — around 3B worth of Bitcoins in USD at $20,000 per Bitcoin — and it is dependent on what currency the victims decide to receive their compensation with.
But of course, the first question you have right now probably would be this.
What is Mt. Gox, and what exactly happened in 2014?
The History of Mt. Gox
Early days of Mt. Gox
Mt. Gox was originally registered in 2007 by Jeb McCaleb, initially to host a trading site for a popular card game at that time, called Magic: The Gathering, which also explains the name, MTGOX.
McCaleb never followed through on that idea but he started to develop an interest in Bitcoin, and after spotting a gap in the market at that time (since there was no way for users to exchange $BTC at that time), he decided to repurpose the Mt. Gox website to officially launch a Bitcoin exchange.
The idea was simple: To repurpose the Mt. Gox website to provide a single place to connect Bitcoin buyers and sellers.
That he did, and Mt. Gox went live on 18 July 2010.
The rise of Mt. Gox
Shortly after, McCaleb was getting wires for tens of thousands of dollars and this made him realize he was in over his head.
After around 8 months, in March 2011, he decided to sell the exchange to Mark Karpeles — who was a French developer living in Japan and went by the alias called Magicaltux in online forums— for a valuation of 6 months’ revenue.
Karpeles then set about rewriting the site’s back-end software to handle an increased volume of Bitcoin transactions and buy and sell orders, eventually turning it into the world’s most popular bitcoin exchange.
But of course, it wasn’t all smooth sailing, especially in the coming months after Karpeles took over Mt. Gox.
On 13th June 2011, Mt. Gox reported about 25,000 BTC (around USD $400,000 at the time) stolen from 478 accounts. Reportedly, the theft of Bitcoins from Mt. Gox continued repeatedly throughout the day.
Then the 17th of June, a message offering the Mt. Gox database for sale was published to Pastebin, signed by ~cRazIeStinGeR~ and tied to auto36299386@hushmail.com.
A few days later, on the 19th of June, an attacker then used artificial trading activity to cause the price to plummet from $17 to $0.01, with the largest trade observed being 261k BTC executed for $0.01, which sponged most of the exchange’s order book.
This saga then caused Mt. Gox to go offline until the 26th of June 2011.
However, unlike other Bitcoin companies that were hacked at that time and ended up folding, Karpeles and Mt. Gox did not.
They (Karpeles and Mt. Gox) eventually made good on their obligations and thus earned a reputation as honest players in the Bitcoin community, which was something rare at that point in time, when the whole crypto scene was truly the wild west.
And… the start of the fall of Mt. Gox
In the next few years, Mt. Gox started to have more controversies that came their way, such as (and more): (1) Receiving a lawsuit of $75 million by CoinLab for breaching the terms of the contract, (2) Getting their U.S subsidiary account seized by the US Department of Homeland Security (DHS), and (3) multiple instances of them halting trades, such as the instance during April 11 to 12 which caused the price of Bitcoin to plummet -50%.
Despite all of that, Mt. Gox was still handling most of the world’s Bitcoin trades as it was one of the only trusted Bitcoin intermediaries and the leading Bitcoin exchanges at that point in time.
Well, that was until the February of 2014, when there were numerous users who were complaining on the Bitcoin Talk Forum about huge delays trying to withdraw their Bitcoins from the platform.
And on the 7th of February, Mt. Gox halted all withdrawals, saying that they needed to “obtain a clear technical view of the currency processes”.
Then a few days later, on the 10th of February, Mt. Gox issued a press release stating that the issue was due to “a bug in the Bitcoin software”, known as “transaction malleability”, which essentially allowed altering of transaction details (ie. making a transaction that was resent to any other wallet marked as invalid, thus giving the notion that the Bitcoin was never transferred, when in fact, it was).
Ultimately, Mt. Gox removed all of its Twitter posts and took down its website on the 23rd and 24th of February 2014 respectively. On the day the Twitter posts were removed, Mt. Gox’s CEO Mark Karpeles resigned from the board of the Bitcoin Foundation.
And they officially filed for bankruptcy a few days later.
Around the same time, an internal Mt. Gox document was then leaked, called the Crisis Strategy Draft, which went into detail about how big of a hole Mt. Gox has landed itself in. The said document indicated that over 744,000 Bitcoins were stolen, worth about $35 million at that point.
The Recovery Plan for Mt. Gox
Shortly after everything happened, Mt. Gox reportedly found 200,000 Bitcoins in an old-format digital wallet that the company had been using before June 2011 and promised to disburse these Bitcoins back to the victims of the hack.
Since Mt. Gox has been under bankruptcy protection, these Bitcoins have been held in the trust of creditors. But due to the lengthy legal proceedings and investigations, the situation has stagnated over the past few years.
Rehabilitation Plan
It was all quiet until November 2021, when Mr. Kobayashi, the trustee for Mt. Gox published an announcement that Japanese courts and Mt. Gox creditors has reached an agreement on the Mt. Gox rehabilitation plan, which establishes a registration and compensation plan based on phases for different creditors.
And fast forward to 6th July 2022, where Mt Gox creditors were given an option for compensation in different ways, mainly: Bitcoin itself, cash, or Bitcoin Cash. This repayment plan could potentially see approximately 150,000 Bitcoins turn liquid and it is dependent on what the victims decide to receive their compensation with.
Now that you’re caught up with what happened with Mt. Gox, and what it is, I know the next question you’re asking…
How will this affect Bitcoin’s price?
150,000 Bitcoins potentially liquid — Is it worrying?
The amount of Bitcoin that is held under custody to be returned to the creditors is worth around $2.75B at current prices.
Now, while this is dependent on what the creditors decide to receive their compensation with and might seem worrying at first, there are a few factors we need to take in when considering if this will really affect Bitcoin’s price, or is purely FUD.
Selling of claims
In March of 2021 and earlier, some of the creditors have sold their claims to crypto funds, such as Fortress investment which bought the claims for as little to $600 per Bitcoin to $1,300 per Bitcoin.
While it is unknown how many claims were sold, one thing to take note of here is that having most of the Bitcoins under crypto funds as compared to retail creditors would definitely soften the impact of the major sale of Bitcoins, if any.
Recent Major Events
But let’s say there was to be a huge sell off of BTC, how would it really impact the liquidity of the markets? Well, meet the Luna Foundation Guard (LFG) saga, where LFG sold off 2.6B worth of Bitcoins (at prices during the selloff) in an effort to save the UST peg.
As seen from the chart above, the price of BTC was at $33,987 before the sell-off, and after LFG started swapping BTC in an effort to save the peg of UST, the price of Bitcoin merely dropped to only $31,000, which was an 8% drop.
More recently, following the 3AC saga alongside bad market conditions, Bitcoin has made a further drop and is now ranging from around $19,000 to $22,000 which indicates a weakness in sell pressure, and investors who would have wanted to sell, have already sold off their positions.
Essentially, what this means is this: Assuming that there were to be a huge sell-off due to the release of Mt. Gox funds via BTC, the max pain for that would be at around 8% sell-off, and we will most likely not see a capitulation event (ie. More sell-off apart from Mt. Gox creditors) due to the fact that there isn’t much strength as of writing in the sell-side for BTC.
Conclusion
And that wraps it all up.
Now you’re informed about Mt. Gox, and whether you should be worried about the potential sell-off for the release of BTC to creditors.
Personally, I’m not too worried about the BTC price, and my theory is that most of the creditors would be holding these BTC instead of selling, as most of them would have already adjusted their portfolio and written off their BTC bought from Mt. Gox a long time ago.
8 years isn’t a short period of time.
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