DEFINITION of Mt. Gox
Mt. Gox was a Tokyo-based cryptocurrency exchange that operated between 2010 and 2014. Mt. Gox, or Mtgox, was responsible for more than 70% of bitcoin transactions at its peak.
BREAKING DOWN Mt. Gox
The website that became the Mt. Gox exchange was created by Jed McCaleb as a way for enthusiasts of the card game "Magic: The Gathering" to trade cards online.
The name Mt. Gox was created as an acronym for “Magic: The Gathering Online Exchange.” The site was transferred to Mark Karpeles in 2011, in exchange for six months worth of revenue. Karpeles became the largest shareholder and CEO.
At its peak, Mt. Gox was considered the world’s largest bitcoin exchange: handling 70% to 80% of trading volume. Handling so many transactions gave Mt. Gox an outsized role in determining the fate of bitcoin. In 2013, for example, it suspended trading for several days in order to cool down the market.
Its prominence also made it a target for hackers, and Mt. Gox experienced security problems several times during its years of operation. In 2011, hackers used stolen credentials to transfer bitcoins. That same year, deficiencies in network protocols resulted in several thousand bitcoins being “lost.”
In the months leading up to February 2014, customers expressed increasing frustration with problems withdrawing funds. Technical bugs prevented the company from having a firm grasp on transaction details, including uncertainty relating to whether bitcoins had been transferred to customers’ digital wallets. This issue was the result of a bug in the bitcoin software that allowed users to alter transaction IDs, sometimes referred to as “transaction malleability.”
The exchanged suffered a fatal blow in February 2014. In early February 2014, the exchange suspended withdrawals after claiming to have discovered suspicious activity in its digital wallets. The news of the suspension resulted in the price of bitcoin plunging by 20%. The company discovered that it had “lost” more than 850,000 bitcoins, which, at the time, represented over 6% of all the bitcoins in circulation.
While it later was able to locate 200,000 bitcoins, the missing 650,000 bitcoins had a highly destabilizing effect on the market. The value of the bitcoins was estimated at over $450 million, with the loss pushing Mt. Gox into insolvency. It filed for bankruptcy in the Tokyo District Court, and was ordered to liquidate in April 2014.
Because cryptocurrencies were novel investments, and because trading involved businesses and customers spread across the globe, the Mt. Gox bankruptcy became increasingly complex. Japanese bankruptcy laws may have added to the frustration. The estate that Mt. Gox’s assets were placed in owned more than 200,000 of both bitcoins, valued at $3.5 billion at bitcoin’s peak in December 2017. This has resulted in a protracted legal battle over the distribution of these assets.
Companies that had signed agreements with Mt. Gox, such as CoinLab, sued for breach of contract. Creditors sued for outstanding payments. More than 24,000 customers lost access to their cash and bitcoins, and many of them had filed claims.
To the wider public, the collapse of Mt. Gox may have served to increase awareness of bitcoin and other cryptocurrencies. The size of the losses – in the hundreds of millions of dollars – caught many by surprise, as cryptocurrencies were highly technical and thus fairly obscure to the average investor.