Ever heard the name “Mt Gox”? Know everything there is to know?
If not, let’s take a walk down memory lane and examine what has definitely been the most influential exchange in cryptocurrency history, for better or worse.
Mostly for worse.
Mt Gox launched as a Bitcoin exchange in 2010 in Japan, only two years after Bitcoin was even invented. The exchange got in so early that it was handling 70% of all Bitcoin transactions by laet 2013. Now, at the time, that wasn’t as much of a big deal as it is now – Bitcoin was a fraction of the value it is now, but it was gaining traction and Mt Gox got in on the ground floor, gaining power and influence. And Bitcoins.
So, in 2006 a programmer called Jeff McCaleb had the idea to make an exchange site for Magic- The Gathering players to use. Mt Gox = Magic The Gathering Online Exchange. He sold the site in 2011 to a French developer called Mark Karpelès, and a few months later the site suffered the first of several major security breaches. A hacker allegedly used auditor login dteails to manipulate the price of Bitcoin and manually set the asking price on the order books, which affected almost $10 million worth of Bitcoin. Mt Gox had to publicly transfer a large sum to demonstrate that they even had control over the coins at all, and things died down for a few years. Or so it seemed.
The First Crash
If you’ve only heard the name in passing, it was probably in reference to the 2014 Bitcoin crash that Mt Gox is now synonymous with.
Mt Gox ran into legal troubles throughout 2013/14 and ended up being sued in 2013 in a $75 million lawsuit filed by CoinLab (citing a breach of contract). Weeks later, the American Department of Homeland Security filed a warrant to seize funds from a Mt Gox subsidiary account with Dwolla payment processor. Following that, Mt Gox blocked users from withdrawing USD from the exchange. That’s always a great sign, right Bitgrail users?
Finally, citing unexpected (and unexplained) losses, Mt Gox did what any global assets exchange handling hundreds of millions of dollars would do in the face of crisis – it suspended trading, shut down the website, and filed for bankruptcy protection from creditors. You know, the nuclear option.
Immediately afterwards, it emerged that 850,000 Bitcoins had mysteriously disappeared, amounting to $450 million even back then. That included a huge amount of user funds, and while people were obviously very upset, they would have to wait for almost a year as rumors about theft, fraud, mismanagement, inside embezzlement made the rounds. The following year a Japanese security firm finally established that the funds were simply transferred directly from the Mt Gox hot wallet by someone with access, and had been taken slowly over time since 2011. Damn, that’s a lot of money to keep in a hot wallet!
It looked a lot like an inside job, and while 200,000 Bitcoins were recovered, the majority weren’t, and the ensuing FUD and scandal crashed Bitcoin so low that it took years to recover (back to around $450 – how far we’ve come since then!). So even as Mt Gox were publicly transferring funds in 2011 to demonstrate they were in control of the exchange, funds were being siphoned, meaning they either weren’t in control or they were and, well…
By 2017, it seemed Mt Gox had a solution. Those 200,000 Bitcoins? Don’t worry guys, they’re totally going to be redistributed in a massive, apologetic refund at the 2014 price of ~$500 per Bitcoin. Less, actually. With the bankruptcy trustee capable of paying out triple the amount, people were understandably outraged, but it didn’t matter, because even that wasn’t followed through with.
88% Mt Gox is owned by Tibanne, which in turn is owned by Mark Kapelés, the developer who went to jail for a year following the 2014 fiasco. He’s currently standing trial for embezzlement, to which he pled not guilty – time will hopefully tell, although $450 million probably buys a pretty good legal team.
The Crash (again)
Incredibly, Mt Gox is seemingly not quite done haphazardously stomping through the cryptocurrency landscape like an intoxicated Godzilla in a bad mood, and the 2014 crash is not the only crash atributed to Mt Gox. The exchange has been associated with a whopping 4 Bitcoin crashes in total, all of which are allegedly the result of the lawyer handling the ongoing proceedings selling off Bitcoin in large chunks to pay off settlement claimants. Ironically (or, of course, deliberately), selling off massive amounts of Bitcoin in one go crashes the price completely and allows Mt Gox to manipulate the entire market.
Wait, wouldn’t it be better to just transfer the actual Bitcoins to the claimants?
Sure, but where’s the fun in that?
In the end, the fact that the exchange gathered so much power and control has possibly been keeping Bitcoin in the dark ages from behind the scenes. Sure, the market s speculative and volatile, but four major crashes? Who knows how much further along we’d be without this small group of people (or even, one person) accumulating massive amounts and then throwing their weight around for years to follow?
It’s a difficult truth that while Bitcoin was specifically designed to avoid situations exactly like this one, it’s human nature to see a system and learn how to break it. Decentralization is still possible, but groups and individuals gathering massive amounts of resources and power are difficult obstacles to overcome in the journey to get there. Perhaps there will always be such incidents, but it’s important to keep the big picture in mind. The more we design systems of decentralization and implement them, the more incrementally fair and democratized those systems become. It won’t happen overnight, and there will always be compromises, but if anything, Mt Gox is a shining example of just exactly why we need to develop decentralized cryptocurrencies to ensure a better financial future for everyone.
PS: Screw you, Mt Gox!