Why the crypto community still worries about the Mt. Gox collapse

Ten years after its collapse, cryptocurrency exchange Mt. Gox has finally started paying creditors. What caused this decade-long process?

Let’s take an in-depth look at the chronology of events associated with the collapse of one of the once largest cryptocurrency exchanges.

The emergence of Mt. Gox

Mt. Gox’s history dates back to the early days of the crypto industry. It all started in 2010 when developer Jed McCaleb created the Mt. Gox platform for his game Magic: The Gathering, but later turned it into a Bitcoin exchange.

A year later, he sold the platform to developer Mark Karpeles. After the change in management, Mt. Gox quickly became one of the most popular BTC platforms.

As a result, the first major hacker attack occurred in June 2011. Hackers stole at least 25,000 BTC, or about $400,000, during the attack. After that, the price of Bitcoin on Mt. Gox dropped from $17 to almost zero.

Historical Price of Bitcoin During Mt. Gox Attack in 2014. Source: ResearchGate

After the attack, Mt. Gox continued to thrive and processed 70% of all Bitcoin transactions worldwide in 2013. However, the exchange encountered technical issues that led to a significant increase in transaction processing time.

Mt. Gox’s internal challenges and hack

Despite external success, the exchange experienced major internal challenges. In particular, Mt. Gox had no control over the quality and security of the code. In addition, the project had no financial accounting system and no control over balances and reserves. Simply put, no one was monitoring the flow of money and cryptocurrencies.

In February 2014, Mt. Gox suddenly stopped making Bitcoin withdrawals. The platform team reported that a bug in the Bitcoin code allowed attackers to effectively double-spend the coins they were using with the exchange’s blockchain address. After that, the platform eventually stopped all withdrawals.

Source: Chainalysis

By the end of the month, the price of Bitcoin on Mt. Gox was only 20% of the average market price, a clear indication of investors’ confidence that the project would not be able to solve the problems that arose. On February 24, 2014, all trading on the platform was suspended, and a few hours later the website crashed.

Later, the exchange team discovered that about 750,000 BTC had been stolen from users, which had gone unnoticed for several years. As a result, Mt. Gox went bankrupt – it declared bankruptcy and closed on February 28, 2014.

The extent of the attack and the mystery of the missing Bitcoins

Hackers attacked Mt. Gox and stole 744,408 BTC from customers and 100,000 BTC from the company. This financial disaster led to the exchange being declared bankrupt. Later sources stated that Mt. Gox had leaked about 80,000 Bitcoins before Karpeles bought it in 2011.

Many theories have emerged around the attack. One popular theory suggests that Mt. Gox never had the amount of coins it claimed and that Karpeles may have manipulated data to create the illusion of more bitcoin than he actually had.

As for how the hackers were able to gain access, some speculate that an internal staff member may have gained access. Conversely, others suggest that the BTC in cold storage was gradually transferred to the Mt. Gox system as the hot wallet was depleted. The lack of proper controls allowed the hackers to embezzle assets without being detected.

Long-running cases

Litigation and civil rehabilitation occurred from 2014 to 2020. This civil rehabilitation process typically takes three to five years but provides affected creditors with a fairer and more efficient solution for the return of assets.

At the same time, the Kraken cryptocurrency exchange did not complete the process of collecting and analyzing creditor claims until May 2016. 24,750 users submitted payment requests.

As a result, the court approved the compensation plan only in early 2021. Subsequently, the exchange’s board of trustees repeatedly postponed paying compensation to creditors, sometimes for a year. They cited technical and administrative delays, including finding the missing BTC and organizing the process of assessing and satisfying creditors’ claims.

Compensation and the impact of the Mt. Gox collapse

The collapse of Mt. Gox was one of the most significant attacks in the crypto industry. The incident demonstrated the importance of protecting cryptocurrency platforms and became the starting point for creating legal norms for the entire industry.

The exchange’s board of trustees confirmed on July 5 that they had officially begun paying out around $9 billion in compensation in Bitcoin and Bitcoin Cash.

The bitcoin compensation is distributed through Kraken, Bitstamp, BitGo, and Japanese Bitbank exchanges. Under the terms of the deal, they will have an average of a few weeks to transfer funds to customers. However, once the first batch of coins moved to Bitbank, customers began reporting that they received funds the same day.

Crypto market participants are concerned about the size of the total compensation and the possible selling pressure on the Bitcoin price. It is assumed that customers will be able to sell a significant portion of their coins on the open market after the compensation.

Against the backdrop of the news, the Bitcoin rate fell below $54,000 in early July – the lowest rate since February 2024. However, by the time of writing, BTC had regained its position, consolidating at $65,000.

Could the Mt. Gox story be repeated?

The crypto industry needs to develop new solutions that combine the efficiency and convenience of centralized platforms with the security of decentralized technologies. However, there is no guarantee that the Mt. Gox saga will repeat itself.

On one hand, major crypto exchanges are relatively transparent, offer insured deposits, and are backed by influential venture capitalists. However, many smaller and lesser-known exchanges operate with little transparency.