An Incredible Twist at Mt. Gox

It’s the beginning of the end of one of the most incredible bankruptcy stories in history…

And it began to unwind this past weekend – taking place over the holiday in the U.S.

It has been more than a decade in the making with an absolutely stunning outcome after a spectacular collapse.

While it is typically described as a singular event, the reality is that the fall of the Mt. Gox bitcoin exchange in Japan started in 2011. It began with a security breach that resulted in the loss of 25,000 bitcoin.

The amount wasn’t worth much at the time – just a few hundred thousand dollars. But today, those bitcoins are worth $1.4 billion.

Mt. Gox recovered from the security breach and continued to grow to the point where it was responsible for about 70% of the world’s bitcoin trades by the spring of 2013.

But by June of that year, Mt. Gox was forced to suspend withdrawals in U.S. dollars. It had received a warrant from the U.S. Department of Homeland Security, as it was considered to be operating as an unregistered money transmitter.

Making matters worse, its Japanese banking partner, Mizuho Bank, forced Mt. Gox to close its account.

Mt. Gox was caught in the regulatory crosshairs of the U.S. government at that time – which impacted U.S. dollar withdrawals, which often took weeks or months to receive. That’s never a good sign.

But the penny dropped in February 2014, when Mt. Gox revealed that it had been hacked and had lost about 950,000 bitcoins. The amount was massive. Equivalent to about $570 million worth at the time and roughly 7% of all bitcoins mined to date.

And the worst part about the news was that the theft of the bitcoin had been taking place over a period of years.

Mt. Gox was insolvent.

And this is where the story starts to get even more interesting.

An Incredible Twist

Mt. Gox was able to recover about 140,000 of the missing bitcoins – about 15% of what had been stolen. So that’s what the bankruptcy courts had to work with.

But this is Japan… and the process of dealing with bankruptcy is slow and painful.

The bankruptcy process valued the claims of Mt. Gox customers in Japanese Yen, converted at the price of bitcoin at the time of the bankruptcy.

But that’s not what the Mt. Gox customers wanted…

Between the declaration of bankruptcy in late 2017, bitcoin had risen to more than $19,000 a bitcoin, compared to around $600 around the time of the collapse. That’s about a 3,100% return.

Mt. Gox customers didn’t want Japanese Yen. They wanted their bitcoin back.

And the mind-numbingly slow process in Japan made matters worse…

It was an odd situation. One in which the creditors made a strong legal case to distribute the bitcoin, and not exchange it into Yen.

After all, the assets that were lost were bitcoin. And that’s what was held in possession by the trustee of remaining Mt. Gox assets.

And, in an incredible twist, the Tokyo District Court issued an order in June of 2018 to start a civil rehabilitation, under which creditor claims could be refiled with the provision that bitcoin would be returned rather than Japanese Yen. It was a major victory for those impacted by the Mt. Gox bankruptcy.

But it took the trustee the last six years to figure out which claims were legitimate and which ones were fraudulent. Of course, it should have taken months, not years, but this is Japan.

By June of last year, the Tokyo District Court finally approved the rehabilitation plan. And on Friday, July 5, some of those bitcoin payments began to flow back to past Mt. Gox customers, after a painful, decade-long wait.

But all is not what it seems…

The Beginning of the End

While the creditors will in fact be paid back in bitcoin, they will not receive the same amount of bitcoin that they originally held on the Mt. Gox exchange.

Due to the amount of bitcoin that was recovered, creditors will receive about 15% of the bitcoin that they had back in 2014.

It sounds awful. And it is. But as I think we all know, something extraordinary has happened with the price of bitcoin since 2017…

Bitcoin rose from around $600 to where it’s trading right now at around $56,000. That represents almost a 100 times increase in value since the Mt. Gox bankruptcy.

Someone who had 10 bitcoins on Mt. Gox in 2014 will receive about 1.5 bitcoin in the settlement. The 10 bitcoins were worth about $6,000 in 2014. And today, they’ll receive 1.5 bitcoin worth about $84,000. They’ll get back a $78,000 “profit” and 14 times their holdings in 2014.

They won’t be made whole in the sense that their 10 bitcoins, had they all been recovered, would now be worth $700,000. That has to hurt. But getting a payment back that is 14 times larger than their 2014 holdings is far better than getting a sharp poke in the eye…

Between now and October, those 140,000 bitcoins will be returned to creditors, bringing an end to one of the most interesting bankruptcy proceedings in history.

Which presents a problem for the price of bitcoin.

Wind Down Headwinds

At today’s prices, those bitcoins represent almost $8 billion.

And those creditors haven’t had any liquidity at all for a decade. We can be sure that we’ll see weakness in the price of bitcoin due to expected selling.

In fact, we already have. During the last three weeks, bitcoin has fallen from around $70,000 to $56,000. With $8 billion of potential sales, or even half of that, it presents a very large overhang on the market.

As a result, short-term sentiment for bitcoin is not strong at the moment. I expect we’ll see a sluggish two or three months where we won’t see any new all-time highs for bitcoin.

Next up is an even more comical bankruptcy wind-down, but this time it is happening in the U.S. The bankruptcy proceedings of one of the largest frauds in history – FTX and the “effective altruist” Sam Bankman-Fried – are coming to a close.

And while the bankruptcy proceedings have happened in less than two years – compared to the decade in Japan – there’s a hitch similar to what happened in Japan.

FTX has been proudly declaring that all creditors will have a full recovery. In fact, FTX is stating that its customers will be paid in full, with interest.

But again, the value of many of the underlying digital assets recovered by FTX since its November 2022 bankruptcy has appreciated significantly. While they may get their money back in dollars, they’re taking a bad haircut in terms of what their cryptocurrency holdings would actually be worth.

What a circus.

And it’s also a great reminder to hold core cryptocurrency holdings on the most credible digital asset exchanges. Or better yet, on a hard wallet that has zero risk of being negatively impacted by the kinds of shenanigans demonstrated by those at FTX or Mt. Gox.