Customers Submit Claims in Mt. Gox Bankruptcy

Bitcoin  •  International  •  Litigation

ScaleThousands of creditors may receive disbursements from the bankruptcy of MtGox, Co. Ltd., a Japanese corporation that once ran the world’s largest Bitcoin exchange.  The bankruptcy filing last year was a rude awakening to Mt. Gox account holders who believe they collectively owned 750,000 Bitcoin, worth nearly a half billion dollars at the time.

Fortunately, it was not a total loss. The bankruptcy trustee has gathered assets of ¥1.6 billion ($13.6 million) and 202,149 Bitcoins ($45 million at current rates), suggesting that creditors may receive some fraction of their claims.  For reference, fiat currency claims amount to ¥8.7 billion ($73 million), not including 750,000 Bitcoins that were held in customer accounts (currently valued at approximately $165 million).

That said, the bankruptcy trustee cautions that no decision has yet been made on distribution or even acceptance of Bitcoin creditor claims.  Decision on claims is not scheduled for decision until September 9.  Moreover, the trustee “is currently investigating the possibility of making bankruptcy distributions in Bitcoin and is consulting with the Tokyo District Court.”

Mt. Gox account holders have until May 29 (Japan time) to file their claim at: https://claims.mtgox.com

 

Background: Rise and Fall of Mt. Gox

Mt. Gox came to be the world’s largest Bitcoin exchange due to its excellent timing and seeming trustworthiness in the early Bitcoin ecosystem.  In reality, it was insolvent for years, which was exposed after business missteps precipitated a bank run and bankruptcy.

Mt. Gox began operations in July 2010, about 18 months after Satoshi Nakamura, the pseudonymous inventor of Bitcoin, released the open source client code and mined the first block of Bitcoins.  For the first year of its existence, Bitcoin was a non-commercial hobby.  Quantities of Bitcoins now worth millions were mined and given away for fun.  When Mt. Gox opened, each Bitcoin traded for pennies.

In these early days, Bitcoin was initially a wild west frontier.  Many sites disappeared, were hacked, or otherwise caused complete loss of their patrons’ Bitcoins.  Mt. Gox distinguished itself as a dependable counterparty.  Its reputation was cemented in June 2011 when Mt. Gox was hacked, but reopened a week later and continued paying out account holders—in both cash and Bitcoin.

As it turns out, recent analysis published by the security firm WizSec suggests that Mt. Gox became irrecoverably insolvent in 2011, with a shortfall of hundreds of thousands of Bitcoins (only valued at a few million dollars at the time).

In spite of the apparent hole in its balance sheet, Mt. Gox continued operating, even as the 2011 Bitcoin bubble popped.  As one of the first sites to facilitate exchange between fiat currency and Bitcoin, Mt. Gox grew to become the de facto price benchmark.  This gave it deeper order books, more volume, and market power.  At its peak, Mt. Gox accounted for about 70% of all cash-Bitcoin trades in the world, about the same time Wired published a famously premature November 2011 obituary for BitcoinWithin one year, Bitcoin climbed five-fold to $12.25.  In November 2013, the price broke $1000.

The frothy market was not good news for Mt. Gox, which suffered business setbacks.  Competing exchanges backed by VCs and hedge fund managers opened, including Coinbase and Bitstamp.  These exchanges offered superior rates and better fiat funding options.  Competitors became increasingly attractive in April 2013, when Mt. Gox suffered outages due to increased trade volume.  The price of Bitcoin plummeted from $180 to $65 after the site was temporarily shuttered.

More critically, in May and August 2013 the U.S. Department of Homeland security seized nearly $5 million from Mt. Gox’s US bank accounts, including $2.9 million from the electronic payment service Dwolla.  The apparent cause of the seizure related to statements Mt. Gox made upon opening a business bank account—where it stated it was not “a business engaged in money services.”  With these seizures, Mt. Gox was no longer able to easily pay or receive cash from Americans, who once constituted the majority of its user base.  Bitcoin investors who wished to liquidate cash from Bitcoin’s meteoric rise in late 2013 were forced to withdraw Bitcoins to other exchanges.  This exodus of Bitcoins led to a persistent disparity where Mt. Gox traded at an apparent dollar premium compared to other exchanges.  In fact, the premium reflected the difficulty of withdrawing cash, which eroded customer confidence in Mt. Gox.  Trade volume declined and capital flew from the site.

By January 2014, Mt. Gox began stalling large withdrawals of both Bitcoin and fiat cash.  Rumors of insolvency caused a bank run, and when the corporation filed for bankruptcy protection in February 2014, it surprised even skeptics by announcing that accounts for it 127,000 creditors were short nearly a half billion dollars in Bitcoin and fiat currency. (WSJ subscription link)

Neither the closure of Mt. Gox in 2014 nor the bankruptcy filing markedly changed the value of Bitcoin.  Within a year, Mt. Gox had gone from overwhelming market leader to an isolated backwater in the Bitcoin economy.  Bitcoin itself is as attractive as it ever was.

In my next post, I write about lessons that the Mt. Gox bankruptcy offers the burgeoning digital payment industry.

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