Over the years, the cryptocurrency industry has seen it all. Many who dared to "hodl" have been exposed to a roller coaster of success, failure, scandal, and surprise. One case in particular stands out among the market's shocks. Mt. Gox was not only the largest cryptocurrency exchange at the time; it was also the epicenter of what Bitcoin represented: a step toward a decentralized, free-flowing currency.
Mt. Gox is unfortunately no longer remembered for its role in laying the groundwork for the crypto industry we see today, seven years after its closure. Instead, the crash of Mt. Gox, as well as how it forever changed the landscape of cryptocurrencies, will live long in the memory.
Mt. Gox is well-known, owing to the fact that it sparked a global saga that taught the world some harsh lessons about cryptocurrency protection. Mt. Gox was in free fall seven years ago, with the once-famous exchange collapsing in the face of controversy and bankruptcy proceedings.
Mt. Gox announced in February 2014 that approximately 850,000 bitcoins had been stolen, with 100,000 belonging to Mt. Gox and 750,000 to customers. The robbery resulted in a shocking loss of $473 million, with 7% of the bitcoin supply disappearing in an instant.
Mt. Gox was a disaster, but it raised a lot of concerns about how Bitcoin could be treated as a currency. After Mt. Gox's collapse, Bitcoin took years to recover, and the stolen coins continue to make headlines to this day.
Many people despise Mt. Gox, but it's important to remember that its history encompasses more than just scandal. The exchange was founded in 2010 by Jed McCaleb, a well-known US programmer who would later go on to found Ripple, and was purchased by Bitcoin enthusiast and French developer Mark Karpelès only a year later. Although it is widely assumed that Mt. Gox stands for "Mount Gox," this is not the case.
“Magic the Gathering Online eXchange” is the true name behind the name. Yes, we were as surprised as you were to learn that, as it doesn't say anything about Mt. Gox as a crypto exchange.
Mt. Gox had the foundations for success in its early years, with the path to riches paved in gold – or should we say digital gold? “It felt like when you fall from a building and you see the ground getting closer, and you feel like you're going to die,” Karpelès said of his involvement and what the rise and fall of Mt. Gox meant to him. Mt. Gox morphed from a fascinating project to a constant nightmare of dealing with banks and governments.” Mt. Gox processed 80% of all Bitcoin transactions at one point, demonstrating the exchange's massive size.
Mt. Gox and Karpelès' role in its demise were not hidden from him. He even went so far as to express regret for his part, saying, "I am very sorry that things happened the way they did when I was in charge." Most people would find this apology insufficient, but whether or not his regret is genuine is debatable.
It's an old cliche, but the first cut is the most severe. Mt. Gox's image was first tarnished in 2011 when it was hacked for the first time. The situation arose when a computer belonging to a Mt. Gox auditor was hacked, but it was luckily not a financially catastrophic event. Unauthorized parties were able to lower the nominal price of Bitcoin to a single cent during the hack. They then transferred around 2,000 Bitcoins from the exchange's registered customer accounts. In several ways, it was a minor violation, but it demonstrated that Mt. Gox could be hacked.
Through unwavering market domination, Mt. Gox was able to regain consumer confidence. Mt. Gox grew exponentially year after year until it was by far the largest cryptocurrency exchange in the world by 2013. However, success comes with a lot of pressure, and behind-the-scenes cracks were starting to emerge. Coinlab, a former Mt. Gox business associate, has filed a $75 million lawsuit against the exchange. The allegation was based on a fictitious contract violation in which Mt. Gox was expected to “hand over” American customers to Coinlabs, but this never happened.
When the Department of Homeland Security learned that Mt. Gox was working with consumers in the United States without the proper authorization, the situation became much worse. The company's bank account was frozen for $5 million after it was declared an illegal money transmitter. These problems demonstrated that Mt. Gox was not being run properly, with significant flaws in the system.
Mt. Gox's walls will come crashing down in early 2014. February 2014 is a month that will alter the direction of Bitcoin history, despite the fact that it still represents a confusing sequence of events. Here's what we know for sure about the hack that took Mt. Gox down:
7th of February, 2014 – Mt. Gox has halted all withdrawals, citing the malleability of transactions as the reason. “A flaw in the Bitcoin program allows it possible for anyone to use the Bitcoin network to change transaction data to make it appear as though a sending of Bitcoins to a Bitcoin wallet did not occur when it did occur,” according to an official statement.
17th of February, 2014 – Withdrawals of bitcoin do not resume as anticipated. Mt. Gox talks about the measures that need to be taken to address current security and safety concerns.
23rd of February, 2014 – Under a cloud, Mt. Gox CEO Mark Karpelès walks away from the Bitcoin Foundation. Both messages from the Bitcoin Foundation's official Twitter page are then removed.
Mt. Gox suspends all crypto trading and goes offline on February 24th, 2014. On the same day, a document shows that Mt. Gox was not only bankrupt, but that it had also lost about $850,000 in an undocumented and undeclared robbery.
25th of February, 2014 – According to the exchange, all transactions have been halted for "the time being." The decision was based on "recent news reports and the possible effects on Mt Gox's operations," according to the statement.
28th of February, 2014 – Mt. Gox filed for bankruptcy protection in Japan just days after announcing a temporary hiatus, and the same happened in the United States on March 9th.
In just 11 days, the cryptocurrency world was turned upside down in ways that no one could have predicted. Mt. Gox has been demolished by scandal, leaving thousands of people out of pocket and losing a large sum of Bitcoin that would be worth a lot in just a few years. Mt. Gox's downfall caused Bitcoin's value to plunge by 36%, sending shockwaves across the world.
The end of Mt. Gox as an exchange didn't mean the tale of Mt. Gox was over – far from it. Karpelès was arrested on charges of embezzlement and bribery a year after the company closed its doors. During the investigation, Karpelès admitted that he had found a total of $250,000 belonging to the exchange in cold storage in his own name. This prompted a private investigation by members of the cryptocurrency group, who discovered that Karpelès had invested a significant portion of the embezzled funds on prostitutes.
Karpelès appeared in a Japanese court in spring 2017 to answer allegations of data theft and embezzlement. It was here that he confessed to using a Willy Bot to falsely inflate the price of Bitcoin. Karpelès was found not guilty in March 2019, much to the surprise of the cryptocurrency community.
As Russian exchange BTC-e and its owners were suspected of collecting and laundering some of the stolen bitcoin, it was around the time of the court proceedings that the waters surrounding Mt. Gox would get even murkier, if that was even possible. BTC-e founder Alexander Vinnik, a Russian national, was detained by US authorities in Greece before being identified as one of the key figures involved in the Mt. Gox Bitcoin laundering scheme.
BTC-e was also raided, forcing the exchange to go offline, with customer details confiscated during the raid assisting in the identification of, among others, an FBI agent who stole bitcoin from the Silk Road site while working on the task force assigned to shut it down.
This raid and Vinnik's arrest marked the first time that US authorities shut down a foreign-based cryptocurrency exchange, and it turned out to be a historic moment for all the wrong reasons.
Vinnik was found to be the owner of multiple wallets where the stolen Mt. Gox bitcoin resurfaced, according to a Wizsec investigation. These wallets were then used to finance the BTC-e bitcoin sale. Mt. Gox seems to have been brought down by a combination of incompetence and outright illegal behavior, indicating that it was a complicated operation. Vinnik was the target of a three-way tug of war to extradite him from Greece, with French authorities triumphing in December 2019 and finding him guilty of money laundering.
Even though the criminal investigation into Mt. Gox is nearly complete, those involved have been anything but quiet. Karpelès also attempted to “relaunch” Mt. Gox in an ill-fated initial coin offering (ICO) in 2017, calling for $245 million in funding. An unofficial investigation has confirmed that a UK-based "shell" firm was directly connected to the Mt. Gox money laundering process, adding yet another twist to the story. Often Efficient LLP is said to have handled over $650,000 from the Mt. Gox hack.
Since the bankruptcy case was first filed on February 28, 2014, a dispute about who should get what and under what format has raged over the money that remains to repay consumers and creditors. Nobuaki Kobayashi, the court-appointed trustee, has spent the years since seeking to reach an agreement that will see the remaining Bitcoin (and Bitcoin Cash) distributed equally, amounting to around 200,000 of each. An effort to liquidate the stash was abandoned after it became impractical, and the Bitcoin price continued to plummet.
