From CoinShares Research Blog by Luke Nolan

Authors: Luke Nolan, James Butterfill

Executive Summary

Introduction

Mt. Gox was originally a website where enthusiasts of the card game “Magic: The Gathering Online” could buy and sell cards as if they were stocks. Founded in 2007 and based out of Tokyo, Japan, It was called “Magic: The Gathering Online eXchange“, or Mt Gox for short.

In July of 2010 it rebranded to a bitcoin exchange after the founder Jed McCaleb had read about a need for a trading service for bitcoin. Being one of the few places where you could trade bitcoin denominated in currency pairs in an open market, it grew quickly in popularity and by 2014, it accounted for over 70% of all bitcoin buys and sells.¹

An early screenshot of the Mt. Gox bitcoin exchange

A History of Hacks, Database Leaks and Invalid Addresses

As early as June of 2011, Mt. Gox started to face severe security issues. On the 13th of June 2011, the exchange reported that 25,000 BTC, worth US$400,000 at the time, had been stolen from over 450 users. 4 days later, the entire user database for Mt. Gox had been leaked and sold using pastebin.²

Throughout the rest of that week, numerous thefts of varying (and disputed) sizes occurred, including unauthorised access to the exchange’s backend using auditor credentials that resulted in a massive amount of bitcoin being illegally transferred and sold on the exchange, causing the price on Mt. Gox (only on Mt. Gox) to drop to as low as 1 cent on the 19th of June 2011. Within a few minutes, the price had re-stabilized to the correct value.

A fraudulent bitcoin transfer and resulting “sell at any price” order causing a massive cascade on Mt. Gox, 19th June 2011

After the situation had stabilised, Mt. Gox moved over 400,000 bitcoin from its cold storage address to a new address it had pre-announced, in order to prove it still held user funds.

Fast forward a couple of years, Mt. Gox was processing over 70% of all bitcoin buy/sell activity, and was the de facto bitcoin trading venue. Although 2013 was the peak of Mt. Gox popularity, it would also be the pivotal year where everything started going downhill.

After facing a number of issues with payment/clearing partners, including a US$75 million lawsuit from CoinLab, and a warrant from the Department of Homeland Security to seize funds from linked payment processor Dwolla, Mt. Gox suspended withdrawals on the 20th June 2013. Although this was resumed on the 4th of July, by September, very few withdrawals had actually taken place.

In August of 2013, Mt. Gox announced that it had suffered from “significant losses’’ due to issues with preemptively crediting user deposits whilst the funds had not actually been cleared yet. Following this, in November, users were complaining that they were facing weeks or even months delays to withdraw cash from their accounts.

By February 2014, customer complaints had become overwhelming, and on the 7th of February, Mt. Gox once again halted withdrawals. After a few weeks of no resumption of withdrawals, and numerous company statements that did not actually materially resolve the situation, a leaked internal document revealed on the 24th of February that the company was insolvent and had lost 744,408 bitcoin, in a “theft that had gone undetected for years”. The Mt. Gox website displayed a message on the 25h of February that they had decided to close all transactions for the time being. The exchange has not operated since then.

Current State of Play

Years of lengthy legal discussions, investigations and arrests have led to the moment where we are now. The bottom line is that Mt. Gox had lost over 700,000 bitcoin from its users, and around 100,000 of their own bitcoin.

As of the date of this article, the Japanese trustee acting on behalf of Mt. Gox, Nobuaki Kobayashi, holds approximately 142,000 bitcoin (and the same amount of Bitcoin Cash). To put this into perspective, at the time of shutting down, the bitcoin was approximately worth US$75 million, and has a current value of US$8,850,000,000 (US$8.85 billion). The Bitcoin Cash has a current value of US$55,250,000.

Creditors of Mt. Gox were able to select between:

The trustee held a surplus amount of cash which many creditors have already received. All creditors have or will receive some amount of cash, but there is data to suggest that most creditors have opted to receive the rest of their owed amounts in bitcoin (and bitcoin cash).

Market Impact

The announcement that in kind creditor repayment would begin in July has recently weighed on the bitcoin market (alongside the German Government beginning to move their own seized bitcoin), as the looming overhang has spooked investors.

But there is plenty of data to suggest that the Mt. Gox overhang may not be as brutal as expected. Firstly, creditors had until the 10th of March 2023 to decide if they would take an early lump sum (to be paid in July) of ~90% of the owed amount (in kind). The alternative would be to wait until the end of the civil litigation (which could be a long time to resolve).

It is estimated that around 75% of creditors took this deal.³ This means the supply to be distributed in July drops to around 95,000 bitcoin. We also know that roughly 1/5th of claims are owed to Bitcoinica and MtGox Investment Funds (“MGIF”), which also opted for the 10% discount to their claims early last year. This amounts to roughly 30,000 bitcoin to those two entities (10,000 to Bitcoinica and 20,000 to MGIF).⁴

There are many people who had their account information deleted from Bitcoinica in a hack in 2012⁵, but there are people who hold claims to be paid out. It is very hard to estimate how many of those bitcoin will be distributed to individuals, and subsequently how much of it is likely to hit the market, so we will keep it in the count.

However, MGIF has already publicly reiterated that it does not plan to sell its bitcoin holdings.⁶ So from the 95,000 we can reduce the potential market impact to 75,000 bitcoin.

Of the 75,000, removing Bitcoinica, 65,000 is assumed to be owed to individual creditors, who have been waiting more than a decade to recover their bitcoin.

If we adjust to the fact that creditors will receive around 15% of the bitcoin they held at the time, given bitcoin’s meteoric rise since then, they are up roughly 13,600%. For many, this will be an exorbitant tax event if they decide to sell immediately, and it is very likely that a large number of creditors will either choose to only sell a small portion of their holdings, or hold for the time being.

This is further supported by the fact that over the last 12 years, creditors have faced numerous offers from claims buyers (that would result in a USD payout). If a USD payout would have been compelling, many creditors would have already taken this.The bottom line is that there is no precise estimate to how many coins will be sold in the market following distribution.

The distributions will occur on a number of exchanges (Bitstamp, Kraken, Bitbank, BitGo, SBI VC Trade and others) at different dates throughout the month, softening the likelihood of large concurrent selling.

The average exchange inflow per day over the last year has been roughly 32,000 bitcoin, and we have seen several days of over 100,000 bitcoin being sent to exchanges. The largest spike we saw was on the day of the launch of the Spot Bitcoin ETFs on the 11th of January, at just under 150,000 bitcoin. Given the distribution of the Mt. Gox bitcoin will not all occur on the same day (or the same exchange), even in an aggressive scenario, the hypothetical selling would not happen all at once, nor on the same platform. This distribution of liquidity and non-concurrent nature of the selling is very likely to facilitate the markets ability to absorb its impact.

With our bottom line of 75,000 bitcoin that could hit the market, we can break that down into a few scenarios and estimate the potential price impact using a simple Sigma Root Liquidity model. Assuming our estimate of US$8.74bn of daily traded volume on trusted bitcoin exchanges, in the worst case scenario US$2.8bn could be sold.

If this were to be sold all in one day, the market could cope with these volumes easily, and has already been tested by the substantial liquidations from the Grayscale ETF this year. We estimate this could push down price by 19%, although as mentioned earlier we think it is highly unlikely to happen, and happen over the course of the next few months. We have provided the daily impact this selling pressure would have on price over the course of the next 30 days and found it to have minimal price impact. Taken in combination with the chance for interest rate cuts this year, it will be likely offset by these price supportive events.

Overall, it would seem that the idea of the overhang has spooked markets more than the actual selling will.

Bitcoin Cash, on the other hand, is much more likely to suffer for two reasons:

If you would like to track Mt. Gox bitcoin wallet movements, it can be found here.

*Footnotes altered to comply with Medium ToS

[1] arxiv(dot)org/pdf/1403.6676

[2] Pastebin(dot)com

[3] https://cointelegraph(dot)com/news/mt-gox-bitcoin-dump-fear-concern-overblown-analysts

[4] https://www.coindesk(dot)com/business/2023/02/16/mt-goxs-2-largest-creditors-pick-payout-option-that-wont-force-bitcoin-selloff-sources/

[5] InfoSecurity

[6] https://www.bloomberg(dot)com/news/articles/2023-03-08/bankrupt-mt-gox-s-biggest-creditor-won-t-sell-returned-bitcoin-btc

[7] https://coinmarketcap(dot)com/currencies/bitcoin-cash/