Did you know that MtGox Exchange once controlled 70% of Bitcoin transactions? How does an exchange go from that to bankruptcy?
Mt Gox is an acronym for Magic: The Gathering Online Exchange. It was once the leading exchange for Bitcoin transactions, but just four years after it began operations, it lost its footing and went up in smoke. For an exchange of that magnitude, the story is intriguing.
In this article, we’ll talk about the MtGox Exchange and why it collapsed.
Overview of MtGox: How it Started
MtGox was created in 2010 by Jed McCaleb as a platform for lovers of the Magic: The Gathering Online Exchange. Those who loved the game used the platform to exchange cards.
After a while, Mark Karpeles took over in 2011 as CEO while holding most of the shares. He had a deal with Jed to turn in the revenue for six months.
MtGox grew from 2011, with about 70%-80% of the Bitcoin trading volume in the crypto space taking place on the platform. This position made the platform prominent among others in the industry.
How MtGox was Invaded: Technical Issues and Breach of Security
As is usual with big companies or organizations, MtGox drew the attention of hackers with its growth and trading volume. In 2011, the exchange had issues with bugs and security. Hackers used that opportunity to steal Bitcoin from the platform using stolen private keys.
Reports from Coindesk state that the hackers’ names were revealed from an unsealed indictment report – Alexander Verney and Alexey Bilyuchenko. The Russian hackers got their hands on customers’ transaction history and MtGox’s private keys. According to the charges against them, these hackers transferred at least 647,000 Bitcoin from the MtGox wallet, part of which went into another closed-down exchange called BTC-e.
MtGox suffered many security breaches from 2011 and reportedly lost Bitcoins before they detected the loss. Users also bore the burden with the platform as withdrawals became a problem after a while. The platform’s systems couldn’t appropriately monitor transactions because of technical bugs.
Another effect of the technical bugs was that MtGox couldn’t track transactions with altered transaction IDs. Transaction malleability caused a huge problem in record-keeping for the exchange.
Source: The Japan Times
The Collapse of MtGox
MtGox finally collapsed in 2014. From 2011 to 2014, the exchange suffered massive losses from security breaches and hacks. The exchange suspended withdrawals because it noticed suspicious activities in its digital wallets.
CEO Mark Karpeles attempted to save the exchange and even got his hands dirty in the process. He was found guilty of falsification of data in 2019. He had doctored the numbers to reflect higher holdings than was true.
MtGox lost between 650,000 and 850,000 Bitcoins with an estimated 400 million dollars. Although it was able to recover 200,000 Bitcoins, the missing ones shook both the exchange and the market. Having tried and been unable to recover the lost Bitcoins, MtGox filed for bankruptcy in 2014 at the Tokyo District Court.
Creditors were not happy and battled the case legally till 2021. They settled with a rehabilitation plan where MtGox assets would be liquidated to pay their debts over a prolonged period.
What does the Future Hold for MtGox?
Currently, MtGox is shut down and out of operation. No one knows if it will attempt to resume operations. At this time, the exchange will pay its debts while the investigation continues.
The initial date for repayment of a lump sum was October 2023. However, Cointelegraph reports that the exchange’s trustee, Nobuaki Kobayashi, released a statement that the deadline for repayment has been shifted to October 2024.
Much information has surfaced since 2021 regarding the culprits behind the hacks and the theft. So far, three Russians have been charged with theft or assistance to the main characters. The crypto space will keep watching to see what becomes of MtGox after it settles debts.
The fall of any company is a pitiful story, but now you understand why MtGox collapsed and the events that led up to its folding.
The impact of the crash of the once prominent exchange on the Bitcoin community was great. Many users lost their entire life’s investments and were thrown into debt and poverty. The market also felt the loss of the Bitcoins as prices fluctuated heavily, and many investors took a break from Bitcoin.
The lesson to be learned here is to ensure you spread your investments across various vetted platforms. It’s also wise to use cold storage if you can. Cold wallets protect your holdings from hackers. For exchanges, the lesson is to enforce a very strict management and robust security protocol. Did you draw any other lesson from the MtGox story?