In-Depth Analysis of the "Mt. Gox Incident" from 7 Years Ago: Could the Compensation Package be the Catalyst for a Major Bitcoin Sell-Off?

2021-12-01, 07:43

[TL; DR]

1. The notorious “Mt. Gox Incident” in the cryptocurrency industry is expected to come to an end on November 16, with the Tokyo District Court finally confirming Mt. Gox's compensation plan.
2. In this compensation, over 140,000 bitcoins will be released, bringing bitcoin under huge selling pressure and causing strong responses in the market.
3. In February 2014, Mt. Gox revealed that a total of 850,000 bitcoins accounting for 7% of the total bitcoin circulation at that time were stolen from its hot wallets.
4. Currently, Mt. Gox still has 140,000 BTC assets that can be used for liquidation. These assets will be used to compensate each investor according to the proportion of their currency holdings at the time of the incident.
5. How the market will respond in the future will ultimately depend on how these compensation recipients will dispose of their assets. Will they continue to hold or choose to sell them?

On November 16, Nobuaki Kobayashi, the lawyer appointed by Mt.Gox, announced that the compensation plan submitted to the Tokyo District Court in February was “Final and Binding”, which had finally removed the last major obstacle to users' compensation.

At the same time, over 140,000 bitcoins will be released in this compensation. Man users speculate that bitcoin will be under huge selling pressure and the market will respond strongly.

The Story of the Notorious Incident

Headquartered in Tokyo, Mt. Gox was formerly an online trading platform for buying and selling magic cards and then transformed into a bitcoin trading platform. Mt. Gox, with a partial tone of “Mentougou” in Chinese, is called "Mentougou Exchange" on the Chinese Internet. Being one of the early participants in the bitcoin trading field, Mt. Gox once accounted for 70% of the total global bitcoin trading volumes from the year 2011 to 2013.

However, a series of problems started haunting Mt.Gox since 2014. On February 7, 2014, Mt.Gox stopped offering withdrawal services to users on the grounds of fundamental flaws in bitcoin, triggering a market run. On February 24, Mark Karpeles, Mt. Gox’s CEO, announced his withdrawal from the bitcoin Foundation all of a sudden. At 11 A.M. Tokyo time the next day, the official website of Mt.Gox was suddenly inaccessible, and the content of the homepage was completely deleted.

At the end of February, Mt.Gox filed for bankruptcy protection in the Tokyo District Court and confirmed that the platform was indeed hacked, including a total of 850,000 bitcoins stolen out of which 750,000 bitcoins were owned by the users and 100,000 bitcoins were owned by the platform itself. The price of these bitcoins reached $473 million, which was about 7% of the total bitcoin circulation at that time. A lot of investors sighed at its bankruptcy papers caused by the theft as the exchange was considered to be highly trustable. In fact, this Mt. Gox incident is also known as the “biggest mystery in bitcoin history”.

Mt. Gox was hacked mainly due to the exchange’s delayed updates of its bitcoin operating system according to the analysis. There were many incidents where small-scale bitcoin thefts happened to Mt. Gox before. However, Mt.Gox didn’t learn lessons from those previous security incidents.

On December 1, 2013, the price of bitcoin reached an all-time high of $1,242, exceeding the price of an ounce of gold for the first time. However, the price had fallen all the way down to $400 soon after the the news of Mt. Cox incident came out.

However, rumors went viral on the Internet about this incident. Some analysts believed that the Mt. Gox officials continued to conceal the truth that it was hacked as early as 2011 and its bitcoin was gradually stolen until the incident was completely brought to light. Others believed that it was not that Mt.Gox was hacked, but that the exchange guards (people in charge of security) stole it. In 2015, Mark Karpeles was accused by Japanese prosecutors of fraud and embezzlement of public funds and was formally arrested in August. But he categorically denied that he had stolen bitcoin.

It was clear that over 20,000 investors who suffered losses could not accept such a huge loss. After the incident, they came from all over the world to protest and defend their rights at Mt.Gox's previous office and demanded compensation for their losses. In March of the same year, Mt.Gox announced that it had recovered 200,000 of the lost bitcoins and stored them in a cold wallet. In response to continued investor protests, the Tokyo District Court ruled that 142,000 of the above-mentioned recovered bitcoins should be handed over to the trust for compensation to investors in 2019. Meanwhile, Mt.Gox began to hold a creditor meeting and started to implement the repayment plan step by step. Whereas, the plan has yet to be carried out due to various reasons.

Source: New York Times (Protesters at the Mt.Gox Office Downstairs)

Until this year, a series of developments finally pushed the repayment plan into the substantive compensation stage. However, the imminent compensation has sent the market into panic again. How will the release of such a huge amount of bitcoin at a time affect the market?

Slump Panic Triggered by the Imminent Compensation

During these 7-odd years since the incident, the value of bitcoin has gone up hundreds of times. The asset custodian of Mt.Gox sold about 60,000 BTC and BCH from 2017 to 2018, which was also the main source of fiat currency assets on Mt.Gox's account. Presently, Mt. Gox still has 140,000 BTC assets that can be used for liquidation that comprises of BCH acquired by BTC fork, 68 billion yen in legal currency, and other forked assets. These assets will be used to compensate each investor according to the proportion of their currency holdings at the time of the incident.

With 140,000 bitcoins in hand, far less than the 750,000 lost by customers when the incident happened, Mt. Cox had to make compensation of at least $10,000 even if each customer had lost one bitcoin, the market price of each bitcoin when it was stolen from Mt. Gox was about 1,000 US dollars, and only 0.2 bitcoins was paid to each customer, taking the increase in the value of bitcoin into consideration.

This huge asset that will be used for compensation seems like a "time bomb" in the bitcoin market. When will this payment be settled? Will it be 2022? 2023? Or later? There are more than 20,000 investors who will receive compensation, among which how many will choose to sell their bitcoin, and how many have had their bitcoins "booked in advance" by other institutions? The recent slump in Bitcoin prices is partly believed to be related to the panic triggered by the compensation plan unlocked by Mt. Cox.

How the market will respond in the future will ultimately depend on how these compensation recipients dispose of their assets, whether they continue to hold or choose to sell them. At all events, the “grey rhino” will eventually come.

Author: Edward. H, Gate.io Researcher
* This article represents only the views of the researcher and does not constitute any investment suggestions.
*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all other cases, legal action will be taken due to copyright infringement.

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