The Fall Of Mt. Gox — How It Changed The World Of Cryptocurrency Forever
Over the years the cryptocurrency market has seen it all. Success, failure, scandal, and surprise seem to be around every turn, with investors that haven’t been afraid to “hodl” experiencing a wild ride. For all the shocks that the market has been able to throw up, there is one incident in particular that stands head and shoulders above everything else. Mt. Gox wasn’t just the biggest cryptocurrency exchange of its day, but it was the cornerstone of what Bitcoin represented — representing a step towards an era of free-flowing decentralized currency.
Seven years on since its closure, Mt. Gox sadly isn’t remembered for how it helped lay the foundations for the crypto market we see today. Instead, it’s the fall of Mt. Gox that lives long on in the memory, along with how it changed the world of cryptocurrency forever.
Crumbling and Tumbling
It’s fair to describe Mt. Gox as infamous, largely as it unleashed a saga that taught the world some truly harsh lessons regarding cryptocurrency security. Seven years ago, Mt. Gox was an exchange in total free fall, with the once big-time operation crumbling in the wake of scandal and bankruptcy procedures.
During February 2014, Mt. Gox revealed that approximately ₿850,000 — ₿100,000 Mt. Gox owned, ₿750,000 customer owned — had been stolen. The amount lost through the theft equaled a staggering $473 million, with 7% of the bitcoin supply vanishing in an instant.
Mt. Gox met a sorry end, but it did raise many questions regarding how Bitcoin should be handled as a commodity. It took years for Bitcoin to bounce back after Mt. Gox’s demise, with the stolen coins still making headlines to this very day.
The Strain of Being the World’s Biggest Crypto Exchange
Mt. Gox might be viewed with disdain by many, but it should be noted that its legacy stands for more than just scandal. Founded back in 2010 by Jed McCaleb — a noted US programmer who would eventually go to launch Ripple — the exchange would be acquired by Bitcoin enthusiast and French developer Mark Karpelès just 12 months later. Busting a myth, while it’s commonly reported that Mt. Gox stands for “Mount Gox”, it actually doesn’t.
The true term behind the name is in fact “Magic the Gathering Online eXchange.” Yes, we were just as bemused as you to find that out, as it doesn’t exactly say a lot about Mt. Gox as a crypto exchange.
During its early years, Mt. Gox had the foundations in place for success, with the road to riches paved in gold — or should we say digital gold. Speaking on his involvement and what the rise and fall of Mt. Gox meant to him, Karpelès said, “It felt like, when you fall from a building and you see the ground getting closer, and you feel like you are about to die. Mt. Gox went from an interesting project to being a daily nightmare of dealing with banks and governments.” At one point, Mt. Gox handled 80% of all Bitcoin transactions, which tells you the sheer scale of the exchange.
Karpelès wasn’t shy about Mt. Gox and his part in its downfall. He even went as far to issue an apology for the role he played, “I am very sorry that when I was in charge things happened the way they did.” For most people, this apology isn’t enough, so whether his remorse is legitimate or not is certainly up for debate.
The First Cut is the Deepest
It’s an old cliché, but the first cut really is the deepest. Back in 2011, Mt. Gox reputation took an initial knock when it was hacked for the first time. The situation came about when a Mt. Gox auditor’s computer was compromised, but thankfully it wouldn’t be a financially disastrous incident. During the hack, untoward parties were able to drive the then nominal price of Bitcoin down to a single cent. From there they transferred approximately 2,000 Bitcoins from customer accounts registered to the exchange. It was a small-time hack in many ways, but it showed that Mt. Gox could be breached.
Building Back Up
Mt. Gox was able to restore customer faith through unrelenting market dominance. Expanding rapidly year on year, by 2013 Mt. Gox was far and away the biggest crypto exchange in the world. But, with success comes great pressure, as behind the scenes cracks were beginning to show. Coinlab, a prior business partner of Mt. Gox, filed a lawsuit against the exchange for $75 million. The claim related to a supposed contract breach regarding Mt. Gox “handing over” American customers to Coinlabs, which never actually occurred.
Problems mounted further when the Department of Homeland Security discovered that Mt. Gox was dealing with customers in the US without the appropriate license. Declared an illegal money transmitter, the investigation saw $5 million seized from the company’s bank account. These issues proved that Mt. Gox wasn’t being run properly, with there being huge holes in the operation.
The Hack Heard Around the World
The walls of Mt. Gox would come tumbling down during early 2014. Still representing a confusing chain of events, February 2014 is a month that would change the course of Bitcoin history. Here is what we officially know about the hack that brought Mt. Gox to its knees:
Feb 7th, 2014 — Mt. Gox stops all withdrawals, citing transaction malleability as the reason why. An official statement is issued, “A bug in the Bitcoin software makes it possible for someone to use the Bitcoin network to alter transaction details to make it seem like a sending of Bitcoins to a Bitcoin wallet did not occur when in fact it did occur.”
Feb 17th, 2014 — Bitcoin withdrawals fail to restart as expected. Mt. Gox discusses the steps needed to fix ongoing security and safety issues.
Feb 23rd, 2014 — Mt. Gox CEO Mark Karpelès walks away from the Bitcoin Foundation under a cloud. Following that, all tweets are deleted from the Bitcoin Foundation’s official Twitter page.
Feb 24th, 2014 — Mt. Gox suspends all crypto trading and the website goes offline. The same day a document is leaked that reveals that Mt. Gox was not only insolvent, but it had lost around ₿850,000 in an undocumented and undeclared theft.
Feb 25th, 2014 — The exchange reports that the decision was made to close all transactions for “the time being”. It cites, “recent news reports and the potential repercussions on Mt Gox’s operations” as the reason behind the decision.
Feb 28th, 2014 — Just days after Mt. Gox announced that it was taking a short break, it filed a court order for bankruptcy protection in Japan — with the same occurring in the US on March 9th.
In just 11 days, the cryptocurrency sphere was turned on its head in a way that nobody ever thought possible. Mt. Gox had been destroyed by scandal, leaving thousands short-changed, losing an amount of Bitcoin that would be worth a fortune just a few years later. The demise of Mt. Gox caused Bitcoin’s value to plummet by 36%, with the shockwaves being huge.
Under a Black Cloud
The end of Mt. Gox as an exchange wasn’t the end of the Mt. Gox story — far from it in fact. A year after it closed its doors, Karpelès was arrested on charges of embezzlement and fraud. During the investigation, Karpelès would admit that some ₿250,000 belonging to the exchange had been found in cold storage under his own name. This opened the door to further private investigation within the cryptocurrency community, who found that Karpelès had spent a large amount of the embezzled funds on prostitutes.
During spring 2017, Karpelès faced a Japanese court to respond to data manipulation and embezzlement charges. It was here where he admitted to running a Willy Bot, which artificially raised Bitcoin’s price. In March 2019 Karpelès was found not guilty, much to the cryptocurrency world’s surprise.
It was around the time of the court proceedings where the waters related to the Mt. Gox would become even murkier, if that was even possible, when Russian exchange BTC-e and its founders were accused of receiving and laundering some of the stolen bitcoin. BTC-e founder Alexander Vinnik — a Russian national — was detained in Greece by US authorities, before being revealed as one of the key names involved in laundering Bitcoin from Mt. Gox.
BTC-e was also raided, which forced the exchange offline, with the customer information seized during the raid helping to identify, among others, an FBI agent who stole bitcoin from the Silk Road site while being part of the task force assigned to close it down.
This raid and Vinnik’s arrest marked the very first time that a foreign-based cryptocurrency exchange had been closed by US authorities, it proved to be a historic moment for all the wrong reasons.
A Wizsec investigation into Vinnik had revealed ownership of several wallets where the stolen Mt. Gox bitcoin resurfaced. These wallets then funded the sale of bitcoin via BTC-e. Representing a complex operation, it appears that Mt. Gox was brought down by a mixture of ignorance and out-and-out criminal activity. Vinnik himself was the subject of a three-way tug of war to extradite him from Greece, with French authorities winning out and finding him guilty of money laundering in December 2019.
Still Making Headlines
Even though the Mt. Gox criminal investigation may be all but over, those involved have been far from quiet. Karpelès even attempted to “relaunch” Mt. Gox via an ill-fated ICO attempt in 2017, asking for a total of $245 million in investment. In yet another twist to the tale, an unofficial investigation has revealed that a UK-based “shell” firm was directly linked to the Mt. Gox money laundering process. Always Efficient LLP apparently processed upwards of ₿650,000 from the Mt. Gox hack.
As for the money that remains to reimburse customers and creditors, a battle between who should get what and in what format has been raging ever since the bankruptcy case was first filed on February 28, 2014. The court appointed trustee Nobuaki Kobayashi has spent the years since trying to negotiate a settlement that will see the remaining Bitcoin (and Bitcoin Cash) allocated fairly, which amounts to some 200,000 of each. An attempt to liquidate the stash was aborted after it proves impractical, and continually crashed the Bitcoin price.
Don’t Forget the Fall of Mt. Gox!
The fall of Mt. Gox was nothing short of a bloodbath. Costing traders hundreds of thousands of dollars, harming the cryptocurrency market as a whole, and diminishing public interest, Mt. Gox represents a truly dark period of crypto history. But from the darkness there are lessons to be learned. Those involved with Bitcoin have become much more streetwise, with current day exchanges being more scrutinized than ever before.
Mt. Gox is a story that is still being played out and represents a pivotal time in Bitcoin history. In its own way it has helped shape the cryptocurrency market we see today, with it acting as a serious warning to exchanges that serious changes were needed to support the growth of the ecosystem, lessons which are still being implemented today.
Originally published at https://fullycrypto.com on April 5, 2021.