Author: Matías Andrade & Tanay Ved Source: Coin Metrics Translation: Shan Ouba, Golden Finance
Key Takeaways:
Mt. Gox’s creditors are finally getting paid, with approximately $9 billion worth of Bitcoin set to be distributed in July.
The reimbursement process appears to be gradual and controlled, spread across multiple exchanges (including Kraken, Bitstamp, and Bitbank), reducing the likelihood of major market disruptions in the short term.
Market liquidity has improved significantly since the collapse of Mt. Gox in 2014, potentially making the uptake of distributed funds smoother.
In the history of cryptocurrency, few events have left such an indelible mark as the collapse of Mt. Gox. Nearly a decade after its spectacular collapse, the defunct Bitcoin exchange is making headlines again as creditors finally begin to receive their long-awaited funds. With approximately $9 billion worth of Bitcoin set to be distributed, and 50,000 BTC seized from sales by Germany’s Federal Criminal Police (BKA), the resolution of the Mt. Gox affair represents a pivotal moment in the maturation of the cryptocurrency ecosystem. In this week’s Coin Metrics State of the Network, we discuss the significance of Mt. Gox, its tumultuous history, and the far-reaching impact its collapse and subsequent payout had on the broader crypto market.
Mt. Gox Background
Mt. Gox, short for Magic Online Exchange, started out as a far cry from the world of cryptocurrency. Founded in 2006 by programmer Jed McCaleb, the platform was originally designed as an exchange for trading cards for the popular game Magic: The Gathering. In 2010, as Bitcoin began to gain traction, McCaleb converted the site into a Bitcoin exchange.
Mt. Gox exchange interface
The timing couldn’t have been better. As one of the first bitcoin exchanges, Mt. Gox quickly became the go-to platform for those who wanted to buy and sell the nascent digital currency. In March 2011, McCaleb sold the platform to Mark Karpelès, a French programmer living in Japan who oversaw the exchange during its meteoric rise and disastrous fall.
Under Karpelès’ leadership, Mt. Gox experienced explosive growth. By 2013, it had become the world’s largest Bitcoin exchange, processing approximately 70% of all Bitcoin transactions. This dominance gave Mt. Gox a huge influence on the Bitcoin ecosystem, effectively making it a core pillar of the early cryptocurrency market.
Despite its apparent success, Mt. Gox was plagued by security issues and operational challenges. The first major blow came in June 2011 when the exchange suffered a major hack that resulted in the loss of 2,609 Bitcoins that were accidentally sent to an empty address. Mt. Gox made a critical mistake by using the wrong script in some of its transactions.
Instead of including the correct Bitcoin address (160-bit hash) in the scriptPubKey, they mistakenly used byte 0 (OP_0). This created a script that could never be satisfied, effectively causing Bitcoin sent to this "address" to be permanently lost.
On February 7, the exchange suspended all Bitcoin withdrawals, citing technical issues related to transaction malleability. As the issues went on for days without being resolved, users began to panic. The situation came to a head on February 28, 2014, when Mt. Gox filed for bankruptcy protection in Tokyo. In the filing, the company announced the shocking news that it had lost 850,000 Bitcoins, worth about $468.5 million at the time. Of these, 750,000 belonged to customers and 100,000 were the company’s own assets.
The news shocked the cryptocurrency community and the community at large. Mt. Gox was once a giant in Bitcoin trading, but it collapsed under the weight of years of mismanagement and security vulnerabilities. The following chart summarizes the events that took place between 2010 and 2015 and their impact on BTC price action.
Mt. Gox repayment status
Fast forward to today, 10 years after the exchange collapsed: Nobuaki Kobayashi, the Japanese rehabilitation trustee representing Mt. Gox, issued a notice on June 24 that repayments to creditors in Bitcoin and Bitcoin Cash would begin in July. While this marks a long-awaited resolution for creditors, the prospect of asset distribution has caused unease among market participants, who are concerned about potential supply pressures.
Visualization of capital flows
Ultimately, Mt. Gox lost over 750,000 BTC in user funds, and approximately 100,000 BTC of its own assets. About 16% of these assets were recovered, and approximately 140,000 BTC are eligible for redistribution. To understand the current state of affairs prior to reimbursement, we can utilize Coin Metrics’ ATLAS, a blockchain search tool that sheds light on the flow of funds between relevant stakeholders and wallets.
On-chain data shows that wallets associated with Mt. Gox hold a total of about 139K BTC today (worth about $9 billion based on the BTC market price on July 15th. This amount was recorded in a series of transfers on May 28th, seemingly consolidating balances into a single wallet. Looking at the movement of funds in the associated accounts, we can see that 47.2K BTC (worth about $3 billion) flowed to 3 different wallets on the same day.
Since then, there have been several internal flows of funds in Mt. Gox wallets, indicating that small-scale repayments have begun. Of the three accounts captured above, wallet (HoV68) transferred 47.2K BTC to a wallet ending in (D5J6onk), which sent 2701 BTC back to the target account (LAPs6) that originally received the recovered Bitcoin. Subsequently, on July 5, 1544 BTC (about $90 million) was transferred to a hot wallet associated with Bitbank, one of the exchanges involved in the repayment process.
As of now, a large portion of the recovered funds remain in Mt. Gox wallets, suggesting that large-scale repayments have not yet begun. Importantly, repayments will be made through multiple exchanges such as Kraken, Bitstamp, Bitbank, etc., thereby reducing the possibility of excessive market impact. Current data shows that there has been no substantial increase in deposits on these exchanges, a metric that may help measure repayment progress. The lack of large deposit activity suggests that the repayment process is still in its early stages and may be proceeding gradually.
Explore market impact
In order to assess the potential impact of the repayment process on the market, it is also useful to study the liquidity situation of Bitcoin. It is estimated that out of the 140,000 BTC, approximately 65,000 BTC will be distributed to individual creditors.
In the coming weeks, it will be critical to examine market liquidity as it is likely that Mt. Gox funds will be liquidated. Using Coin Metrics’ comprehensive coverage of exchange liquidity, we can analyze the market’s ability to absorb potential sales.
The chart below shows the market depth of BTC (±1%) against USD and other stablecoin pairs (USDC, USDT, BUSD, FDUSD) from January to July 2024. Sell depth (red) is typically between $50 million and $100 million, with limit orders within 1% of the current price.
Given this market depth, and an average daily trading volume of around $15 billion for BTC alone, a distribution of around 65,000 BTC (worth around $1.95 billion at current prices) could likely be absorbed by the market in a few weeks without causing major disruptions, assuming liquidations were gradual and involved multiple exchanges. However, these findings only demonstrate the depth and maturity of the BTC market, but should alleviate concerns about liquidity shortages in the short term.
in conclusion
The resolution of the Mt. Gox incident is a major milestone in the history of cryptocurrency. Nearly a decade after the collapse of Mt. Gox, creditors are beginning to be repaid, marking both the maturity of the cryptocurrency ecosystem and the often lengthy process required to resolve complex financial issues in the space. Market participants are likely to watch the situation closely as these wallets are likely to liquidate their holdings in the coming weeks.
