The long-defunct cryptocurrency exchange Mt. Gox is in the final process of paying back some of its creditors – the victims of a notorious 2014 hack that nearly brought the Bitcoin community to its knees – and market reactions have been jittery so far, with fears that a huge dump of BTC from the settlements could impact markets.
In total, around 140,000 Bitcoin are set to be returned to their owners, a number far short of the 650,000 to 850,000 BTC that disappeared eight years ago. Nevertheless, the sum is big enough to spark fears of a cashout by creditors that could cause the price of the world’s original cryptocurrency to tumble.
In a scary “coincidence”, a Bitcoin whale sent 10,000 BTC worth over $200 million, which have been flagged as assets stolen during the 2011 Mt. Gox hack. The 2 accounts used were created in 2013 and hadn’t been used since.
This beggars the question: Are Mt. Gox fears overblown FUD or enough of a concern to start playing Green Day’s “Wake Me Up When September Ends” on loop ?
While the answer is complicated, in all likelihood, the former should play out rather than the latter, with the biggest spanner in the works in September for once being Ethereum, not Bitcoin, due to the long-awaited ETH Merge. In short, the value of the BTC to be released will only represent a fraction of Bitcoin’s total market cap today and is going to be gradually released. Let’s take a closer look at the recovery process for the stolen Bitcoin and the custodial lessons to learn from the Mt. Gox saga.
Mt. Gox: A Brief History
In the earliest days of crypto, all roads lead to Mt. Gox (which stands for Magic: The Gathering Online Exchange), the nexus for BTC trading. Between 2010 and 2014, the Tokyo-based Mt. Gox exchange had an outsized influence over the world of Bitcoin, accounting for 70% of all BTC transactions during its peak. The exchange was so powerful that in 2013, it even suspended trading for several days to give the market a chance to cool down. Ultimately, Mt. Gox fell victim to two significant hacks, the second of which led to its downfall. The events are a case study in why secure custody solution providers like CYBAVO are essential.
2011 Mt. Gox Hack
Back in June 2011, only a couple of years after the creation of Bitcoin, hackers managed to breach Mt. Gox and steal 25,000 Bitcoins. Then, a few days later, the site’s user database was leaked, and hackers managed to change the price of the cryptocurrency to one cent. This allowed them to drain another 2,000 Bitcoins. Investigators believe that this is when the Mt. Gox private key was snatched. As a result, the hackers were able to drain more BTC over the following years, with the exchange mistaking this for transfers.
2014 Mt. Gox Hack
In the run-up to the February 2014 hack that would shutter the exchange, Mt. Gox customers had been having trouble withdrawing their funds. The company struggled with the technical details of its business and had a hard time verifying transactions. The man running Mt. Gox, Mark Karpeles, reportedly had to sign off on even minor changes to the source code, creating operational bottlenecks.
In early February of that year, the exchange claimed to have found suspicious transactions, leading it to freeze all withdrawals. Mt. Gox then revealed that it had “lost” several hundred thousand Bitcoins. Estimates vary on the total but range up to 850,000 BTC (worth $16.8B today). While about 200,000 BTC was later recovered, the hack caused Mt. Gox to file for bankruptcy in Japan. Eventually, the recovered Bitcoins ended up in a trust administered by Mt. Gox trustee Nobuaki Kobayashi, who has been heading the effort to restore it to the creditors.
When and How Will Mt. Gox Creditors Be Repaid?
The Mt. Gox creditor repayment process is set to commence in “due course,” per a notice put out by Kobayashi. In all, creditors are owed about 141,000 Bitcoin, 142,000 Bitcoin Cash, and 70B Japanese yen. All parties were given a September 15 deadline, which happened to coincide with the Ethereum Merge, to file or transfer creditor claims. The funds will be released both in the form of cash from liquidated Bitcoin as well as in the cryptocurrency itself.
All of the creditors will receive an initial sum, followed by another once all the proceedings have been settled. However, it’s possible to opt for a second payment up front rather than wait for the legal process to unwind. According to crypto influencer Danny Devan, the second payment will be larger for those who wait.
How Will the Mt. Gox Repayments Impact Bitcoin?
Due to the large amount of Bitcoin that will be released to the Mt. Gox creditors, fears have been voiced about looming sell pressure on the cryptocurrency.
BTC released in tranches
According to former Arcane Assets Chief Investment Officer Eric Wall, one of the Mt. Gox creditors, these fears are greatly overblown. Wall took to Twitter to explain that the BTC would be released in tranches, not in one fell swoop – presumably helping to stagger the sell pressure. He added that creditors had not even been asked yet to provide a wallet address for the funds. Besides, Wall said, he personally didn’t even plan to sell immediately since Bitcoin prices are in a slump.
https://twitter.com/ercwl/status/1563595089083248642?s=20&t=Nkze4Ot1wyhYdoXTATPV7A
Affected Bitcoin worth “only” $2.3 Billion
Blockroots.com co-founder Josh Rager emphasized that given the scale of the Mt. Gox funds compared to the daily trading volume of Bitcoin, the impact on markets will certainly not be cataclysmic. BTC’s daily trading volume, he explained, stands between $20B to $30B. Meanwhile, the 140K BTC only amounts to $2.3 billion at the time of writing. Moreover, these Bitcoins will not be released, let alone sold, all at once.
Indeed, in late August, around 10,000 BTC that were determined to be connected to Mt. Gox began moving out of wallets that had been dormant for nearly nine years. Then, the following week in early September, around 5,000 BTC also connected to Mt. Gox did the same. In both cases, the impact on the Bitcoin charts appeared to be negligible. A blockchain researcher who goes by the pseudonym Taisia from the Telegram forum “GFISchannel” speculated the BTC movements may have been related to law enforcement actions.
Closing Thoughts
In the years since this devastating incident for crypto, exchanges have become a great deal more professionalized, and the risks of holding your crypto in exchanges are nowhere near what they were for Mt. Gox customers nearly a decade ago. Still, the new decade has generated record bounties for bad actors, not only on centralized exchanges, but especially across the newest crypto sectors. Indeed, hacks and scams are very much on the rise, as users suffer the consequences of DeFi rug pulls, NFT blind signing exploitation, Web 3 phishing attacks, to name only a few of the latest security concerns.
For institutions in need of first-class custody solutions, look no further than CYBAVO and its experienced team of cybersecurity experts. Recently acquired by Circle, CYBAVO offers a complete solution to facilitate secure digital asset custody and operations management, from CYBAVO VAULT, an institutional-grade wallet and asset management platform for enterprises, to CYBAVO Wallet SDK, a secure and white-labeled wallet app for iOS/Android that uses our NIST-certified cryptographic algorithms.