The Mt. Gox Timeline and What It Means for Today’s Trader
There are a lot of weak hands in the market right now. We are below $10,000 BTC, and a lot of people are playing with short term money. The SEC has announced exchange registrations and Japan has started suspending exchange activity for regulatory reasons. Both things will make weak hands dump. However, the fundamentals of each coin that you and I like have not changed. Ripple has come out with more news in the past two weeks than Kim Kardashian, and we have only seen negative performance. This is a waiting game. I feel like a broken record, but I cheer for low prices in events like these. Who cares what happens in March? You are going to be holding until December anyway. My only theory behind all this volatility is immaturity.
I have a lot of millennial friends who invested in cryptocurrency and complain about its drop, and say they should have never have gotten into it in the first place. This is the first time they have lost money, and they don’t know how to handle it. They want their money back, so they listen to YouTube videos, sell their large-cap coins for ICOs and dog coins, and eventually lose more money. I don’t know how to help these people, and I just wish they would leave. The U.S. stock market doesn’t act like this. They have mature people who hold onto strong businesses, and don’t have stop limits on every single thing they own.
Immaturity doesn’t stop on the buy side. Exchanges have been victims to hacking, fraud, and manipulation. What other industries can run a modest website where millions (billions) of dollars are transacted? No one is prepared for the type of security issues that can arise with this type of volume and complexity. This is purely a reactive environment on the exchange side, as the true geniuses of blockchain are constantly testing new holes in their offerings. Mt. Gox was the poster child of cryptocurrency immaturity. Not only was security lax, the ownership was constantly confronted with temptation for financial gain through an array of fraudulent channels.
I wanted to go through the timeline again, and see if this type of behavior is truly going to be extinct moving forward. Almost all pundits within the cryptocurrency community complain about regulations and centralization, while also wanting mainstream adoption. If there are no guard rails to prevent another Mt. Gox, then thinking someone would bring their retirement savings on to the blockchain is naive. Disclosure: I have taken 95% my coins off of all exchanges, and I instruct you to do the same.
Mt. Gox (Magic the Gathering Online Exchange) was started to trade Magic the Gathering Cards. Jed McCaleb (Ripple, Stellar) designed the exchange in 2006 in the belief that this would be an easy way to trade Magic Cards like stocks, instead of the traditional meet-up trades. Eventually Jed moved on from this project, only to return for a different reason in July 2010. He had read about bitcoin, and launched an exchange and price quotation system on the same domain as his former exchange: Mt. Gox.
March: Having it less than a year, McCaleb wanted out. He wanted to focus on other projects, and lacked the capital tomake it what it could eventually be. I believe this was an emotional decision for Jed. Clearly, this business could have made him wealthy beyond his wildest dreams with funding I’m sure he could have gotten. I think he wanted to build something instead of run something, and I am an investor in Stellar because of actions like this throughout Jed’s timeline.
McCaleb sold to a French developer living in Japan named Mark Karpeles. Before Mt. Gox, there is limited information other than he was a PHP developer who founded his own tech company in 2009. Jed received 12% of the newly incorporated company, and went on his way.
June: The first hack. Through an auditor’s computer, the hacker was able to change the value of bitcoin to a nominal value $.01, in which he sold them all to himself and transferred out. After the hack, there were first responders who had a financial interest in keeping this exchange up and running. The most notable two were Roger Ver (bitcoin cash) and Jesse Powell (Kraken exchange), who tried to work tirelessly to get the Tokyo-based exchange up and running again. Karpeles took time off the weekend following the hack, and even worked on non-relevant projects while people were trying to help his business succeed. These were the warning signs.
Winter/Spring: After the hack in June, Mt. Gox seemingly began to flourish. The price of bitcoin began to rise, and there were only two owners of the exchange – Karpeles at 88% and McCaleb at 12%. This manifested itself lavish spending in Mt.Gox’s Shibuya neighborhood office space, and egos that were growing a little too large. Mt.Gox controlled 80% of bitcoin trading volume, and were getting mainstream attention.
The tech problems were beginning to show, however. The website was bare bones for the amount of volume that it was handling. It just recently launched a test environment for the first time, when before the untested code was immediately launched live (a hacker’s paradise, I am sure). The source code could also only be changed by one person, Mark Karpeles. For even simple fixes, all of it had to go through him first, which would make lag time on security/operational projects grow exponentially.
Fall: This was the first time that Mt. Gox met the SEC. After a sour business deal with an American business partner CoinLab led to a $75 million lawsuit, the SEC began looking into what exactly Mt. Gox was. This will sound eerily similar to today- The SEC said it was an unlicensed money transmitter. A $5 million American-based company bank account was seized, and this was the end of anyone wanting to play in the American’s sandbox. We still see the remnants now. ICOs and exchanges try to limit their exposure to U.S. jurisdiction, as they watch Coinbase, Kraken, Gemini and the like deal with far more scrutiny than their neighbors. With U.S. investors complaining of delays and red tape, the darling of bitcoin exchanges fell to no. 3 from no. 1.
Karpeles has been focused on a solution to his problems. That solution was a bitcoin cafe. While his company was in major disarray from all fronts, he spent an estimated $1 million on a cafe in the Mt. Gox offices that would use a cash register that he “hacked” to accept bitcoins. It was rumored that he spent all of his time on things not related to the major problems, as a 29 year-old with little to no experience was running a failing multi-million dollar enterprise with too many problems to solve for one owner.
February: The exchange stopped paying out customers in bitcoin, citing flaws in the digital currency. This set off the usual suspicions that the company had become insolvent. On Feb. 24, 2014, the exchange went offline, and a document was leaked that outlined a years-long $450 million (Approx. 850,000 coins) hack of bitcoins that went completely undetected. By Feb. 28, the company had filed for bankruptcy protection in Tokyo and the United States.
Karpeles was arrested in August 2015 for embezzlement and manual manipulation of his own exchange. The trial of Mark Karpeles led to many new developments.
BTC-E: M0st of the stolen coins from the Mt. Gox exchange landed on a Russian-owned, Tokyo-based exchanged called BTC-E. The arrest of the exchange’s suspected owner was made by the FBI in Greece, and for the first time ever the U.S. had seized a foreign domiciled exchange. An investigative firm comprised of developers and Mt. Gox creditors released a report outlining that BTC-E acted as an exchange to launder the stolen Mt. Gox coins. The connections that the suspected BTC-E mastermind may have on his laundering clients, and the ones he’s willing to disclose, still remain unknown.
Willy Bot: During his trial, Karpeles admitted the existence of a “Willy Bot”, which was a trading bot that he said was built to stabilize the market. As it turned out, the Willy Bot may have been responsible for artificially increasing the bitcoin price, as it’s trading limits were beyond the scope of normal transaction volume in Bitcoin at the time.
The trial of Mark Karpeles goes on. Mt. Gox’s assets in bankruptcy were mainly focused on a”found” number of 200,000 bitcoins that were on a cold storage device. Under Japanese law, bitcoin is not a tangible thing to give to creditors in the event of a liquidation. After Japanese courts ruled against providing a former Mt. Gox customer his/her bitcoins instead of the cash value at the time insolvency, that meant that the customers would not receive the exponentially more valuable bitcoins at current market prices.
The trustee of the bankruptcy liquidation, Nobuaki Kobayashi was in charge of selling the bitcoins at current market prices to pay off creditors. The litigation was still ongoing, so Kobayashi was tasked with the challenge of when to sell the coins to protect creditors from losing their full principal, while also giving them a chance to fight for the rightful ownership of the coins rather than cash at bankruptcy valuations.
It was found the trustee “Panic-sold” $352,000,000 in BTC and $45,000,000 in BCH over December 2017 through February of 2018, with most sales being at the bottom. With only 17,000,000 in supply, selling such large portions during volatile periods hurt everyone.
The true benefactor of the entire Mt. Gox saga may end up being Mark Karpeles. Being the 88% owner of Mt. Gox, the sale of the 200,000 bitcoins would be more than enough to pay back all creditors and investors at current prices, and leave a substantial sum for himself.
I can’t seem to find a reason why this exact scenario couldn’t happen again. The SEC has just begun watching, and government watchdogs aren’t equipped to handle the deep technological behavior happening on decentralized exchanges. ICO regulation is the easy part. They can find a website and shut it down. But when most of the volume from coins is coming from exchanges that have unregulated owners, there is no telling what can happen. This is a product of decentralization. A completely free market will come with bad actors who have the means to harm others. We’ve seen it with Mt. Gox, Coincheck/NEM, countless ICOs, and the list will go on. This is the first time a truly free market exists for the entire internet. I don’t think there is much people can do about enforcing rules, especially right now.
My response to this research is instructing everyone to buy Ledger/Trezor, and go offline. Why did you buy all these coins? Was it for profit in two months? If so, I am the wrong person to be listening to. I own very few coins, and they are under my complete control (knock on wood). Mt. Gox will not be an isolated issue, and there are plenty of scams taking place that we will all find out about over time. There is a (99%) solution, so please use it.
This is not a recommendation to buy or sell cryptocurrencies, but is certainly a recommendation for cold storage. Be careful, and trade safe. Best of luck.