The cryptocurrency market is a diverse and remarkably competitive environment where all layers of the community fight in every waking moment. Developers compete with their projects, traders with their TA skills, and exchanges with their liquidity.
The industry was not always like this, especially when it came to exchanges. There were indeed a few notable companies that attempted to establish a strong position, but none of them have managed to dominate in their field at the time.
At its early phase, the crypto sector only had one entity that achieved this feat of absolute dominance: Mt. Gox.
Mt. Gox processed over 70% of all global Bitcoin transactions at its height. After years of neglect and inadequate leadership, the platform broke down, and thousands of investors have lost their coins. Since 2015, the Tokyo-based exchange is part of a court case that did not yet meet its end, but there is hope that the victims will soon end their hardships.
In this article, we will cover the rise and fall of Mt. Gox and provide an extensive overview of how the formerly largest crypto exchange met its demise during Bitcoin’s most exciting phase.
American programmer and entrepreneur Jed McCaleb worked on a website for Magic: The Gathering Online, a fantasy card game. His project began in 2006, and a year later, McCaleb bought the ‘mtgox.com’ domain which stood for “Magic: The Gathering Online eXchange.”
The website was live for a short period of time, but it went defunct after its creator moved onto other projects. After discovering Bitcoin and blockchain technology in 2010, Jed McCaleb decided to use his previous website and convert it into an exchange for trading and converting Bitcoin. In July of the same year, Mt. Gox finally launched and served crypto holders all around the globe.
A year later, Mt.Gox was sold to Mark Karpelés, a french programmer who was also interested in cryptocurrencies. McCaleb noted in an announcement that he ‘passed the torch’ to someone more capable than him who has the potential to take the exchange to the next level.
Three months into the new management Mt. Gox faced its first serious security threat. An anonymous individual stole 25,000 Bitcoin, worth $400,000, from around 478 accounts. Subsequently, another user stole the exchange’s user database and attempted to sell it.
An increasing number of hacks occurred during June, with more and more users reporting unknown losses. In some cases, malicious actors would even gain credentials to important administrative accounts and use them to manipulate the market.
Despite facing numerous security issues, Mt. Gox turned into the largest cryptocurrency exchange by 2013, handling over 70% of all Bitcoin transactions. Bitcoin has at the same time massively increased in price and has entered its first bubble, which was caused by the Cypriot financial crisis.
The bull run had many controversies and even more safety problems. Mt. Gox even faced regulatory issues resulting from working together with a payment processor named Dwolla, which was not licensed by the U.S. Financial Crimes Enforcement Network (FinCEN).
Mt. Gox's first devastating attack occurred in February 2014 after losing the equivalent of $460 million in user funds. Hackers stole a total of 740,000 BTC within a day, which forced Mark Karpelés to disable withdrawals for all users.
Refusing to disclose the hack, Karpelés initially claimed that he stopped the withdrawal process to obtain a clear technical view on currency processes. Three days later, the narrative was shifted. The owner claimed that Bitcoin faced a bug similar to the double-spending problem where users could alter transactions to make them look like they have transferred Bitcoin without actually moving any coins.
On February 17, Mt. Gox published a press release claiming to be addressing security issues. The exchange’s users grew increasingly worrisome, and many began to raise concerns over what was happening with crypto’s dominant trading platform.
Following a small protest held by two Mt. Gox customers outside the company’s offices in Tokyo, Karpelés decided to move the company's operations to Shibuya due to security concerns.
Rising uncertainty resulted in Bitcoin dropping 20% of its value in a short time span, reflecting the chaos caused by Mt. Gox’s refusal to enlighten the community about what was truly happening.
On February 24, the Mt. Gox website went offline, leaving only a blank page. Trading and all other operations halted at that point. Soon enough, users discovered a leaked document claiming that Mt. Gox was no longer solvent after losing around 744,408 BTC in total over the course of three years.
After shutting down, Mt.Gox filed a bankruptcy protection claim to the Court of Tokyo. At the same time, the exchange faced legal pressure from its American customers, an action that prompted Karpeles to also file for bankruptcy protection in the U.S.
In March 2014, Karpeles discovered an old exchange wallet dating to 2011 that held 200,000 BTC. The funds were used to reimburse customers and alleviate at least a portion of the financial pressure stemming from the hack. However, it was not enough.
One month later, Karpeles decided to give up on rebuilding Mt. Gox and requested from the Tokyo court to be liquidated. The event resulted in a protracted legal battle between Mt. Gox and its victims, which lasts until this very day.
From 2014 to 2021, Mt. Gox was a part of Japan’s Civil Rehabilitation process, which sought to create a reimbursement plan for the victims. The plan was, in some cases, postponed several times during a single year. It was only on December 15 that the exchange’s trustee filed a draft rehabilitation plan, which was accepted by the court in February 2021.
According to the court, creditors have until October 2021 to vote and reach a consensus. If approved, Mt. Gox’s ex-customers will finally receive their coins after six long years. If rejected, the trustee will have to submit another plan.
Mt. Gox is a cautionary tale of how revolutionary technology, accessible by everyone, can pose serious security risks at its early stages. Crypto exchanges in Bitcoin’s first five years were not mature enough, just like the cryptocurrency itself, to function with massive demand and zero experience.
History blames Karpeles for what happened to Mt. Gox, stating that his incompetence has led to the hacks. Apart from not ensuring good enough security measures, the executive also failed in detecting coins being stolen in the first place.
If anything, the disastrous event has at least offered a lesson to trading platforms and investors alike. After the bankruptcy, several crypto exchanges took a share of Mt. Gox's market and went on to establish themselves as viable alternatives. We can also conclude that even if the largest cryptocurrency exchange of our time declared bankruptcy, Bitcoin would still be able to recover years later.